On August 27, 2015, UBS AG (UBS) and OFAC agreed to settle 222 apparent violations of §594.201 of the Global Terrorism Sanctions Regulations, 31 C.F.R. part 594. Per the terms of the settlement agreement, UBS will remit a total of $1,700,100 to settle those apparent violations. The apparent violations are the result of “222 transactions related to securities held in custody in the United States for or on behalf of an individual customer (“Client”) of UBS in Zurich, Switzerland” designated by OFAC in October 2001 pursuant to Executive Order 13224. The Client had opened accounts with UBS in 1993 and 1994, many years prior to the designation. The accounts, which were denominated in multiple different currencies, included one tied to the U.S. Dollar.

In October 2001, the same month in which OFAC designated the Client, Switzerland, and a number of other countries also targeted the Client. In response to the Client’s designation, UBS “placed blocks and restrictions on the Clients accounts to comply with the Swiss law restrictions and prevent the Client from withdrawing or transferring any funds or assets outside of the bank.” Despite undertaking these measures, UBS continued to provide investment services in U.S. Dollars on behalf of the Client. Although UBS upholds a global sanctions policy requiring compliance with OFAC sanctions programs, the bank considered the aforementioned investment transactions to be “internal transfers since they did not involve external parties.” As a result of characterizing such transactions as “internal transfers”, the transactions did not produce any alerts related to potential OFAC program violations.

OFAC’s enforcement announcement listed a number of aggravating factors that were used to justify the settlement amount. These factors included:

1) Failure to implement adequate controls to prevent the apparent violations despite receiving numerous warning signs that such transactions could lead to violations of U.S. sanctions;

2) Multiple business lines and personnel within UBS, including supervisory and management staff within the bank’s Compliance department, had actual knowledge of the conduct that led to the apparent violations;

3) The volume of transactions (222) and their amount ($2,466,196.01) resulted in harm to the GTSR and its associated policy objectives by conferring a benefit to a Specially Designated Global Terrorist;

4) UBS is a large and commercially sophisticated international financial institution; and

5) Despite multiple personnel within UBS’ Compliance Department being aware of the Client’s OFAC designation, including the most senior-level manager at UBS Switzerland responsible for sanctions compliance, the bank failed to implement any steps or measures to prevent UBS from processing transactions for the Client to or through the United States.”

A lot of articles analyzing the UBS settlement have highlighted the fact that the Client’s name was kept a secret from OFAC, despite the fact that UBS disclosed the conduct to OFAC. In protecting the disclosure of the name of the designated Client, UBS relied upon Swiss law. This is not an uncommon position to take, and one in which an experienced OFAC lawyer representing foreign financial institutions must always consider, particularly when representing those foreign financial institutions in OFAC investigations. Local law in many jurisdictions affords the party responding to a third party’s inquiry a certain degree of protection, which may not necessarily be afforded to those in the U.S. That is why it is of the utmost importance to have local counsel involved at the earliest stages of an OFAC investigation to ensure that any disclosures made to OFAC comply with the law in the jurisdiction where the information and the respondent are located.

In many instances, local law may prevent the respondent from turning over information responsive to OFAC’s investigation. This can cut both ways as in certain scenarios problematic evidence can be shielded from disclosure by local law, while information that may be mitigating could also potentially be barred from disclosure. When using local law as a shield against disclosure, foreign financial institutions should not be overly concerned with drawing OFAC’s suspicions as I have personally found OFAC to be very understanding of such legal obligations, and indeed have had them more than once highlight the fact they do not desire to have local law violated by a response to their inquiries.

As such, when representing a foreign financial institution or other foreign entity in an OFAC investigation—whether it is initiated through the issuance of an administrative subpoena or a request for information—it is vital to understand the legal obligations under which the client is operating in their home jurisdiction, and obtaining local counsel to assist navigate those obligations should be done at the very onset of the case in order to properly prepare the strategy for the case. As these protections are an advantage that foreign targets of OFAC investigations, have over U.S. targets, it is one that they should avail themselves of.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.