Banks braced for fines

Campaign News | Wednesday, 29 August 2007

By Stephanie Kirchgaessner in Washington for the Financial Times

When regulators in 2005 slapped ABN Amro with an $80m (€59m, £40m) penalty for violations of US sanctions against Libya and Iran, it sent seismic waves through the international banking system.

The reverberations are still being felt today.

People close to several European banks say that US regulators and criminal investigators have broadened the scope of a probe that began with the Dutch bank.

They are now examining whether a handful of banks similarly violated laws by processing US dollar payments through US counterparts for clients in Iran, Cuba, Libya and Sudan, countries that - with the exception of Libya after 2004 - are still subject to US sanctions programmes.

Some legal experts say the case against ABN Amro, which promised in April to set aside hundreds of millions of euros to resolve a criminal investigation by the US justice department into its US dollar clearing practices, clarified for the first time the Bush administration’s position and interpretation of sanctions rules and their application to the financial services industry.

Namely, that US banks and individuals are not allowed to facilitate banking activity abroad in which they could not engage directly.

“The ABN Amro case is a very high-profile indication of the intention of the Office of Foreign Assets Control [at the US Treasury] and other agencies to enforce that position.

“As a result, it is a wake-up call for the financial community with respect to the handling of wire transfers by foreign banks that ultimately touch on US-embargoed states,” says Wynn Segall, a partner at law firm Akin Gump in Washington.

Another Washington attorney said it remained to be seen whether the investigations that were under way would result in penalties as large as the one facing ABN Amro, or whether they were part of a broader strategy by regulators to put pressure on European banks to cut ties with Iran.

The US Treasury has warned more than 40 banks across the world that it would follow a strict interpretation of US and United Nations restrictions on doing business with Tehran as part of its campaign to persuade financial institutions to break ties with Iran.

Some people familiar with the investigations, who asked not to be named, say that the looming possibility of financial penalties raises questions about the authority of US regulators to penalise banks for conduct that went unchecked for years.

“This is an issue where the legal lines are not clear. It is the kind of thing that banks around the world engaged in.

“The bottom line is, name a major bank in Europe that didn’t do dollar payments for Iran or Sudan. A large number of them did it for Cuba - and right there is the issue,” said one person familiar with the matter.

But if the ABN Amro case represents a model for the kinds of cases that US authorities may be bringing against other banks in the future, as some legal experts believe, then the US government would have a strong case to argue that the violations under scrutiny were not just routine technical blunders.

In the case of the Dutch bank, regulators found that one of ABN Amro’s foreign branches was able to develop and implement “special procedures” for certain fund transfers and other operations “designed and used” to circumvent compliance systems established to comply with US laws.

James Freis, director of the Financial Crimes Enforcement Network (FinCen), a division of the Treasury that investigates money laundering, said last month that “myths” about big penalties for minor lapses in banking requirements should be dispelled and that federal financial regulators were making “great efforts” to eliminate uncertainty about what they expect in a “solid, risk-based”, anti-money laundering programme.

Banks seeking to come to grips with the potential regulatory issues they face for previous activity are, in the meantime, moving ahead with voluntary changes to international wire transfer practices.

Two international banking associations in April said they anticipated that an “enhanced system” of message formats would be developed that would “protect the integrity” and “enhance the transparency” of international wire transfers.

Copyright The Financial Times Limited 2007

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