The New York State Department of Financial Services (DFS) continues to aggressively pursue economic sanctions enforcement, as evidenced by the $420 million fine recently levied on Société Générale for sanctions violations and anti-money laundering deficiencies. As New York's top financial regulator, DFS oversees state-chartered banks, foreign bank branches and representative offices, insurance companies, money transmitters, and many other financial institutions.

DFS has historically taken the lead in bringing enforcement actions against regulated entities, many of which include foreign banks, for payment processing practices that the Department determines to be “non-transparent.” In recent years, large banks such as Deutsche Bank AG, Standard Chartered Bank, BNP Paribas, S.A., Commerzbank AG, Intesa Sanpaolo S.p.A, Agricultural Bank of China, and Habib Bank Limited have paid significant monetary fines for such violations. DFS's recent enforcement action and fine against Société Générale further demonstrates its commitment to aggressive enforcement. In short, DFS is not slowing down.

This article will provide an overview of how DFS enforces international sanctions, focusing on the type of conduct that DFS deems to be “non-transparent.” Additionally, we will discuss the statutory authority underpinning these actions and DFS jurisdiction, which is broad. Specifically, DFS does not limit liability to the New York branch of a regulated entity, but rather pursues sanctions violations committed by the home office as well, even if they are located outside the United States. Foreign financial institutions with New York branches regulated by DFS or other New York nexus should take caution in their dealings with sanctioned entities and countries.

Statutory Authority

The statutory authority underpinning DFS's economic sanctions enforcement actions is largely based on DFS's authority to supervise and examine the “safety and soundness” of the financial institutions that it regulates. As such, institutions subject to DFS regulation are expected to uphold certain standards in order to operate in a safe and sound manner. That includes maintaining effective and compliant anti-money laundering and sanctions compliance programs. 3 N.Y.C.R.R. §116.2. Further, institutions regulated by DFS must maintain and make available true and accurate books, accounts, and records reflecting all transactions and actions. N.Y. Banking Law §200-c. Additionally, regulated institutions must submit a report to the Superintendent of Financial Services (i.e., the head of DFS) “immediately” upon discovering fraud, dishonesty, making of false entries and omission of true entries, and other misconduct. 3 N.Y.C.R.R. §300.1. This last provision can be a difficult one for regulated entities, since they must detect a violation in order to report it. Such failures to detect can often be actionable, since undetected violations naturally are not reported.

'Non-Transparent Payment Practices'

Historically, DFS has focused enforcement on what are referred to as “non-transparent” payment practices and internal control failures. Payment practices can be deemed “non-transparent,” for example, where the true nature of the transaction is hidden or deceptive. In the context of international sanctions, this can occur where a financial institution processes transactions for a sanctioned entity yet does not reveal the true originator of the payments, thereby disguising or hiding the payments from detection. Intermediary banks, for example, should ensure that they are not misrepresenting the true nature of transactions when processing them.

Furthermore, financial institutions should ensure that they have proper screening mechanisms in place and a robust compliance program. A proper screening mechanism will increase the likelihood that illegal transactions are detected quickly, thereby ensuring that the financial institution is not placed in a position where it is regularly processing improper payments. A robust culture of compliance is also essential in ensuring that violations are dealt with thoroughly and expeditiously once discovered.

Enforcement and Remediation

As discussed, DFS has consistently levied significant monetary penalties on institutions that fail to operate in a “safe and sound” manner, especially those that fail to adopt and implement strong internal controls. As discussed above, DFS does not limit liability to violations incurred by the New York branch of a regulated financial institution—rather, DFS will pursue sanctions violations committed by the home office as well, even if certain of the misconduct originated outside the United States.

DFS has several remediation options available for enforcement, including assessing civil penalties. In addition to monetary fines, DFS has the authority to revoke the licenses of institutions that engage in particularly malicious behavior, thereby precluding them from doing business in New York, which is a substantial penalty. Further, DFS will often require that the regulated institution retain an independent monitor to ensure that future violations do not occur. The latitude for a monitor is fairly broad. DFS will typically have the discretion to choose the monitor and the monitoring period, which can extend for several years, during which the monitor is tasked with providing periodic reports to DFS. In some instances, the monitor will detect additional compliance violations, resulting in additional enforcement proceedings and monetary penalties. See Standard Chartered Matter.

Finally, DFS has historically focused on holding individual wrongdoers accountable for violations incurred by and within the company. Employees singled out for discipline have included relationship managers, compliance officers, and members of senior management. DFS's renewed focus on individual misconduct can often place a bullseye on a financial institution's culture of compliance.

Conclusion

In short, financial institutions with business operations in New York should ensure that they have robust sanctions and AML detection systems, policies, and procedures. Additionally, members of senior management should be knowledgeable about and involved in the firm's compliance program, promoting a strong tone from the top and culture of compliance. As DFS has demonstrated in the past, failing to detect a violation is not an adequate excuse and regulated entities are expected to affirmatively and effectively root out misconduct within their institutions.

Bruce Paulsen is a partner and co-chair of the litigation department at Seward & Kissel. Andrew Jacobson is an associate at the firm and former enforcement attorney with the New York State Department of Financial Services. Both are members of the firm's sanctions practice group.