A raft of new US sanctions guidance and designations made 2020 a challenging year for banks involved in trade finance, yet the overall value of financial penalties handed out was low. GTR speaks to legal experts about recent enforcement trends, the challenges facing trade finance lenders, and the likely impact of the incoming Biden administration.

The total value of settlements and fines paid to the Office of Foreign Assets Control (OFAC), the US’ fearsome sanctions regulator, was US$23.6mn last year – a substantial drop from 2019’s figure of nearly US$1.3bn.

But according to Evelyn Sheehan, a lawyer at Kobre & Kim and a former Department of Justice prosecutor, financial institutions and trading companies should not interpret that as a policy decision to relax enforcement.

“It’s important to keep in mind that the total settlement amounts in previous years were largely influenced by a small number of massive settlements with large financial institutions, including settlements of over US$600mn in 2019 with both UniCredit and Standard Chartered and a US$53mn settlement with Société Générale in 2018,” she tells GTR.

“If we exclude those outlier settlements, the total settlement amount in 2019 would be US$20.9mn and in 2018 would be US$17.5mn. We saw a similar dynamic in 2017, where the overall amount of fines was US$119mn, but US$100mn of which was due to the settlement with Chinese telecom giant ZTE.”

Part of the reason there were no high-value settlements last year, Sheehan suggests, could be due to “logistical complications” as a result of the Covid-19 pandemic.

She says settlements with large institutions typically involve lengthy investigations, significant remediation efforts and negotiations with OFAC’s enforcement officials, and so virus containment measures could understandably slow that process down.

Washington DC-based Brian Fleming, a lawyer at Miller & Chevalier and a former counsel within the US Department of Justice, adds that the timing of when large penalties hit can be “pretty random, quite frankly”.

“At any given time, there are typically a handful of those in the pipeline, and when they get resolved is a bit arbitrary and depends on many different factors,” he tells GTR. “The fact there were none in 2020 is not necessarily significant.”


Trade finance in the crosshairs

OFAC’s enforcement actions during 2020 covered a range of different company types, from banks and fintech firms through to shipping companies, manufacturers and retailers.

Breaches related to sanctions restrictions against several jurisdictions or regimes, including Iran, North Korea, Syria, Sudan, Ukraine, Cuba and Somalia, with individual fines ranging between US$5,000 against an individual US Embassy staffer in Bogota and US$7.8mn against Swiss air transport provider SITA.

Trade finance has not escaped attention. Earlier this month, Union de Banques Arabes et Françaises (UBAF) – a French bank specialising in trade finance – agreed to pay US$8.5mn to settle allegations of sanctions breaches related to Syria, including on letter of credit-based transactions.

Andrew Jacobson, an associate at Seward & Kissel, says other banks have historically found themselves in trouble for trade finance-based violations of OFAC sanctions, particularly where transactions are cleared through the US financial system.

“So for example, you might have a transaction between a bank and a sanctioned entity. That might not be prohibited if there’s no US nexus, but if that transaction is cleared through the US then that brings it within OFAC’s jurisdiction,” he tells GTR.

“I think trade finance is a focus, and always has been. Over the past 10 years, there have been numerous cases, and it’s certainly on OFAC’s radar.”

The lawyer says the UBAF case should therefore be taken more as a demonstration of OFAC’s extraterritorial approach to enforcement, rather than a sign of renewed attention to trade finance.

“The primary transactions did not go through the US, but the clearing of those transactions did, and that was enough for it to be deemed a sanctions violation,” he says.

That said, the maritime trade sector became a more explicit priority for the authority during 2020, with the publication in May of a major advisory targeting financial institutions, shipping companies, insurers and other entities.

Bruce Paulsen, a partner at Seward & Kissel, says that advisory generally packaged up existing OFAC measures rather than introduced new ones, but “certainly did get the attention of financial institutions”.

“That included those that lend to shipping companies or finance trade carried on vessels, as well as those that hold stakes in vessels for some kind of collateral arrangement,” he says.

One impact has been an uptick in interest in behavioural analytics technology, which can be used to track and analyse ship movements to detect potentially suspicious or illicit activity.


A new administration

A great deal of new sanctions designations during 2020 were the result of decisions taken by President Donald Trump since his election in 2016, notably the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA) – a historic agreement to lift restrictions on trade with Iran reached under his predecessor Barack Obama.

As of press time, President-elect Joe Biden is due to be inaugurated in under a week, which has prompted speculation that agreement could be revived.

“President-elect Biden has indicated he is interested in getting the US back into the JCPOA, and if that were to happen then obviously we would tilt much closer to the Iran policy at OFAC that we saw under the Obama administration – but that won’t happen overnight,” says Miller & Chevalier’s Fleming.

Beyond Iran, the lawyer says, Biden is likely to take a programme-by-programme approach to sanctions regimes, which could see relaxations in some jurisdictions but a tightening of restrictions in others.

“Cuba is an area where there has been speculation Biden could tack more closely to the Obama approach, rather than the rolling back of relaxations that the Trump administration put in place,” he says.

“On the other hand, with respect to Russia – which a lot of people accused the Trump administration of treating with kid gloves – there’s every reason to think that the incoming administration is going to be harder around enforcement and possibly even expansion of sanctions.”

Generally, for Seward & Kissel’s Paulsen, the imminent change in administration is unlikely to signal “a downward trend in sanctions activity or enforcement, at least not in the near term”.

“What Trump demonstrated in this space is that OFAC sanctions are a powerful foreign policy tool, if a bit of a blunt instrument,” he says. “There will probably be changes in tone and emphasis, but we’re not sure exactly how those are going to fall out yet.”