U.S. Economic Sanctions and the Corporate Compliance of Foreign Banks

• Author: David Restrepo Amariles - Matteo Winkler
• Position: Assistant Professor, Law & Tax Department, HEC Paris, 1 rue de la Lib´ eration, 78351 Jouy-en-Josas, France, restrepo-amariles@hec.fr. - Assistant Professor, Law & Tax Department, HEC Paris, 1 rue de la Lib´ eration, 78351 Jouy-en-Josas, France, winkler@hec.fr. The Authors are grateful to Robert W. Emerson and Darren Rosenblum for their...
• Pages: 497-535

U.S. Economic Sanctions and the Corporate

Compliance of Foreign Banks

D

AVID

R

ESTREPO

A

MARILES

*

AND

M

ATTEO

M. W

INKLER

**

Introduction

This article links the economic sanctions enacted by the United States and

the internal compliance functions of non-American banks.

1

Whereas

scholars have recently investigated either aspect,

2

only a few have drawn a

connection between them.

3

At the moment of writing, and to our

knowledge, no scholar has proposed a comprehensive view of the corporate

compliance of banks operating outside the territory of the United States, and

in Europe especially, regarding the U.S. economic sanctions arsenal as a

whole, including the extraterritoriality problem.

4

* Assistant Professor, Law & Tax Department, HEC Paris, 1 rue de la Lib´eration, 78351

Jouy-en-Josas, France, restrepo-amariles@hec.fr.

** Assistant Professor, Law & Tax Department, HEC Paris, 1 rue de la Lib´eration, 78351

Jouy-en-Josas, France, winkler@hec.fr. The Authors are grateful to Robert W. Emerson and

Darren Rosenblum for their fruitful comments, and to Francesco Montanaro, Mike Videler,

and Tomas Manguel for their help in the drafting and review process. An early version of this

article was presented at research seminars in SciencesPo, Paris, and the Perelman Center at the

Universit´e Libre de Bruxelles.

1. For a general overview of the compliance-related aspects of U.S. economic sanctions, see

Paul L. Lee, Compliance Lessons from OFAC Case Studies—Part I, 131 B

ANKING

L. J. 657, 657

(2014), and Paul L. Lee, Compliance Lessons from OFAC Case Studies—Part II, 131 B

ANKING

L. J.

717, 717 (2014).

2. See in this respect Georges Affaki, L’Extraterritorialit´e en Droit Bancaire [Extraterritoriality

in Banking Law], R

EVUE DE

D

ROIT

B

ANCAIRE ET

F

INANCIER

90, 90 (2015), according to which,

“[t]he extraterritoriality of banking law raises complex questions of conflict of laws and

jurisdictions, public policy, mandatory rules and international management of banking

transactions.” Id. at 90. He does not mention the related implications for corporate

compliance. See id.

3. Actually, “[m]any financial institutions, mindful that U.S. federal and state banking

regulations mandate AML [anti-money laundering] compliance programs, focus nearly all of

their compliance attention in fighting money laundering, while leaving scant attention or

resources for other areas, such as sanctions, anti-boycott [and] export controls. . . .” Gregory

Husisian, U.S. Regulation of International Financial Institutions: It’s Time for an Integrated Approach

to Compliance, 127 B

ANKING

L. J. 195, 197 (2010). French jurists Garapon and Servant-

Schreiber have recently edited an excellent monograph on the hegemony of American law in

international business viewed from a French perspective. See A

NTOINE

G

ARAPON

& P

IERRE

S

ERVAN

-S

CHREIBER

, D

EALS DE

J

USTICE

: L

E

M

ARCH´

E

A

M´

ERICAIN DE L

’O

BEISSANCE

M

ONDIALIS´

EE

(2013).

4. An isolated exception to this statement might be identified with the work of the Parisian

independent and Harvard-educated attorney Laurent Cohen-Tanugi, who however does not

address the problem, dealt with in Part III of this article, of the reform of the compliance

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In the first place, a tension exists between the extraterritorial application

and enforcement of U.S. economic sanctions on the one hand, and corporate

compliance on the other. In fact, “[w]ith the penalties for non-compliance

[with such sanctions] high, and the potential sanctions severe, banks need to

exercise an abundance of caution in their dealings both at home and

abroad.”

5

This might not be an obvious task for non-U.S. compliance

officers, who usually operate in a predominantly domestic environment and

are typically not familiar with U.S. laws.

6

While most of them have studied

in the United States and preside over transactions with the United States on

a daily basis, they remain skeptic about the real reach of U.S. sanctions.

7

Also, because the economic sanctions of the kind enacted by the United

States and the powerful enforcement tools that support them find no

correspondence in Europe or elsewhere, such compliance officers remain

convinced that they commit no wrong in breaching such sanctions, creating

a loophole in their own firm’s compliance culture.

8

Disregarding them,

functions of non-U.S. banks. See L

AURENT

C

OHEN

-T

ANUGI

, T

HE

E

XTRATERRITORIAL

A

PPLICATION OF

A

MERICAN

L

AW

: M

YTHS AND

R

EALITIES

5 (2015), http://dx.doi.org/10.2139/

ssrn.2576678 (describing the links between the French bank BNP Paribas and the U.S. legal

system).

5. Steven A. Meyerowitz, Compliance is Key, 131 B

ANKING

L. J. 655, 655 (2014).

6. Such corporate officers are of two kinds. On the one hand, there are “in-house lawyers

acting as corporate counsel [and] carry[ing] out a wide range of duties within and on behalf of

the firm.” Robert C. Bird & Stephen Kim Park, The Domains of Corporate Counsel in an Era of

Compliance, 53 A

M

. B

US

. L. J. 203, 203 (2016). In particular, “it is the in-house counsel who

must organize regular meetings to evaluate the company’s level of compliance, write up the

regular reports documenting the level of compliance, conduct interviews on a regular basis with

those responsible for the various corporate functions, and so it goes on.” U. D

RAETTA

, O

N THE

S

IDE OF

I

N

-H

OUSE

C

OUNSEL

30 (2012). These lawyers are “responsible to the CEO for the

company’s compliance with the laws governing its various business activities as well as

identifying and evaluating the legal risks facing the company as a whole.” Id. at 46. On the

other hand, there are compliance professionals [who] “design and implement compliance

processes, investigate misconduct, and serve as a neutral fact finder[s] whose duties transcend

the practice of law.” Bird & Park, supra, at 205.

For the purpose of this article, the distinction between the legal and the compliance functions

is left aside, based upon the consideration that, even if they remain separated in many firms’

structure, “[a] long history of collaboration between Legal and Compliance . . . [can] cultivate[ ]

and strengthen[ ] compliance risk management within the organization.” Thomas C. Baxter, Jr.

& Won B. Chai, Enterprise Risk Management: Where is Legal and Compliance?, 133 B

ANKING

L. J.

3, 13 (2016). Moreover, “[e]very organization is unique, and so is the role played in each by the

General Counsel and Chief Compliance Officer . . . [who] have already integrated themselves

into the organization’s risk management, whether or not a formal risk management framework

is in place.” Id. at 15.

7. See Jaclyn Jaeger, BNP Paribas Debacle Offers Lessons in Compliance, C

OMPLIANCE

W

EEK

(July 22, 2014), https://www.complianceweek.com/news/news-article/bnp-paribas-debacle-

offers-lessons-in-compliance#.WxbEhdMvyu4 (arguing that non-American compliance officers

“have their own cultural tendencies or skepticism about the reach of U.S. laws or the purpose of

U.S. sanctions.”).

8. See Thomas C. Baxter, Jr., Executive Vice President and General Counsel of the Federal

Reserve Bank of New York, Reflections on the new compliance landscape (July 23, 2014), http:/

/www.bis.org/review/r140731d.htm, “[s]ome European [firms] almost naturally adopted the

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2018] U.S. ECONOMIC SANCTIONS 499

however, may cost European banks hundreds of millions of dollars—perhaps

even billions—in fines and loss of reputation. As we will see, examples of

this sort abound in practice. Scholars have dubbed these violations

“spectacular failures” in compliance.

9

Remarkably, the banks that were accused of such “spectacular failures”

decided to settle with U.S. authorities, in some instances pleading guilty, and

committed to reform their compliance functions according to the standards

suggested by the U.S. government.

10

In fact, because compliance officers

proved crucial in triggering the investigations of the U.S. authorities, either

for being unable to change their practices or for complying with the

violators, they inevitably became part of the tools used to remedy the wrongs

committed.

11

On the other hand, the reform efforts put forward by foreign

banks can be seen as the sign of a broader need to rethink the compliance

functions with respect to the extraterritoriality of U.S. economic sanctions,

even in industries other than banking.

12

As a scholar argued in this regard,

“[g]iven the extensive nature of some of the economic sanctions programs

administered by the [U.S. government], the precise effect on those [banking]

interests may manifest itself in unexpected ways, thus constituting a

dangerous trap for the unwary.”

13

Compliance officers should not find

themselves unprepared.

This article addresses these problems in three parts. Part I describes the

legal background of the U.S. economic sanctions arsenal, with a focus on its

history and more recent enforcement by the U.S. government.

14

Part II

illustrates the failures in the compliance offices of the banks investigated by

U.S. authorities for violation of U.S. economic sanctions.

15

Finally, Part III

concludes with a “macro-compliance” analysis,

16

examining the reforms that

view that there was no value system underlying the technical American legal rule. They looked

at economic sanctions as technical ‘American’ rules that were not seen as consistent with the

organization’s and the home country’s larger value system . . . . In Europe, they found no

similar sanctions, and there it was perfectly legal at the time to do business with these

sanctioned jurisdictions.” Id. “This failure to correlate the rule with the value is root of real

mischief. It erodes what some commentators call the ‘culture of compliance’, and it tends to

foster an employee population that will be inclined to look for loopholes, to place toes on the

edge of the permissible, or even to turn a blind eye to a black letter compliance rule.” Id.

9. John L. Douglas, New Wine into Old Bottles: Fintech Meets the Bank Regulatory World, 20

N.C. B

ANKING

I

NST

. 17, 53 (2016).

10. Karen Freifeld, Aruna Viswanatha, & Steve Slater, BNP said to move compliance operations to

U.S. as settlement nears, R

EUTERS

: B

US

. N

EWS

(June 24, 2014), https://www.reuters.com/article/

us-bnp-paribas-compliance/exclusive-bnp-said-to-move-compliance-operations-to-u-s-as-settle

ment-nears-idUSKBN0EZ2S820140624.

11. See id.

12. See Michael P. Malloy, U.S. International Banking and Treasury’s Foreign Assets

Controls: Springing Traps for the Unwary, 8 A

NN

. R

EV

. B

ANKING

L. 181, 183 (1989).

13. Id. at 183.

14. See discussion infra Part I.

15. See discussion infra Part II.

16. While “micro-compliance” relates to “those technical, unambiguous regulatory

requirements and prohibitions that most people would instantly recognise as compliance issues

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