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Banco Do Brasil’s New York Branch Learns the Hard Way to Beware of the “Good Guy Exception List”
11.20.2015
The following guest post is from Timothy O’Toole, a Member of Miller & Chevalier who focuses on sanctions, export controls, and other international regulatory and compliance issues.
Earlier this month, Banco Do Brasil’s (BDB) New York branch agreed to pay a $139,500 civil penalty arising out of what the U.S. Treasury’s Office of Foreign Assets Control (OFAC) labeled as BDB’s “apparent violations” of the Iranian Transactions and Sanctions Regulations (the Iran sanctions). A careful review of what happened (or at least what the settlement suggests happened) can help other companies and financial institutions learn from BNB’s situation, especially when it comes to the handling of what is commonly referred to as the “good guy exception list.”
To understand where the “good guy exception list” fits into the U.S. sanctions compliance regime requires a bit of an understanding of how the Iran sanctions work. These sanctions impose a virtually complete embargo on Iran. In terms of imports, the basic rule is that goods or services of Iranian origin may not be imported into the United States, either directly or through third countries. In terms of exports, the general rule is that, a person may not export from the U.S. any goods, technology or services, if that person knows or has reason to know such items are intended specifically for shipment, either directly or indirectly, to Iran. The scope of the embargo is extremely broad and even reaches financial transactions conducted through the U.S., to the extent those transactions involve the sale or purchase of most Iranian goods or services.
The BDB settlement involves this last prohibition – the Iran sanctions’ prohibition on financial transactions that involve the sale or purchase of most Iranian goods or services. To comply with this requirement, many financial institutions have screening software designed to identify and prevent transactions involving Iranians or Iranian goods and services. In 2010, BDB’s sanctions screening software started generating alerts involving transactions through its New York branch by a company called Isfahan Internacional Importadora Ltda. (Isfahan), which imported carpets into Brazil from various countries. The alerts likely occurred because “Isfahan” is a location in Iran. To determine whether the alerts had flagged transactions in violation of the embargo, BDB representatives apparently spoke with Isfahan representatives, and were told that Isfahan did not export products to or import products from Iran. As a result, BDB put Isfahan on its “good guy exception list” – that is, a list that financial institutions can create when they determine, after looking into the situation, that companies or people who are generating alerts are actually “good guys,” and not sanctions violators. Getting on to this list makes it easier for companies to do legitimate business going forward.
After putting Isfahan on its “good guy” list, BDB began processing transactions from Isfahan. A short time later, BDB received a request from a different U.S. intermediary financial institution also involved in a multi-bank transaction with Isfahan for more detailed information about the transaction. In response, BDB obtained a “poor quality” copy of invoices related to the transaction, from which BDB’s compliance department concluded that that invoice did not mention Iran. In light of this determination, and in light of its previous conclusion that Isfahan belonged on the “good guy exception list,” BDB decided that the transaction was permissible. BDB did so without requesting a more legible copy of the invoice or attempting to confirm with Isfahan whether the transaction involved Iran. BDB then relayed its conclusions about the invoice and the invoice itself to the intermediary financial institution, which itself undertook to review the “poor quality” copy of the invoice. The intermediate financial institution, however, determined that the invoice did mention Iran and rejected the transaction, returning the funds to BDB because of “Iran involvement.”
Upon learning this information, BDB did not review its previous determination that Isfahan belonged on the “good guy list” and in fact continued to process transactions involving Isfahan. Ultimately, OFAC learned of the transactions and began an investigation, determining that BDB had processed $310,000 worth of improper transactions involving Isfahan and that a number of those transactions had violated the Iran embargo.
On November 4, 2015, OFAC and BDB entered into a settlement resolving the “apparent violations.” As one can imagine, OFAC was especially critical of BDB’s handling of its “good guy exception list,” faulting BDB for “failing to review multiple OFAC warning signs with respect to a particular customer – including transactions blocked or rejected by other financial institutions specifically due to OFAC sanctions – as well as the risks posed by relying on incomplete information when assessing a potential OFAC alert or match.” OFAC did note, however, that BDB had mitigated the violations by taking appropriate remedial action, cooperating with the investigation, and in fact identifying four of the apparent violations. As a result, the amount of the ultimate penalty ($139,000) was considerably lower than it might otherwise have been.
Probably the most important lesson to be drawn from the BDB settlement is that while companies must be careful when adding entities or individuals to the “good guy” list, they must be especially careful when keeping entities or individuals on the “good guy list.” Although the point of the list is to prevent the considerable costs inherent in multiple false alerts, a company cannot put an entity or individual on the “good guy exception list” and assume the matter is finished. Each piece of significant new information learned by compliance officials must prompt a reassessment of the original determination. Because sometimes a “good guy” is really a “good guy.” And sometimes what seems to be a “good guy” is not really a “good guy” after all.
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