Settlements in relation to violation of economic sanctions
The U.S. Department of Justice (DoJ) announced on 30 June 2014 that BNP Paribas S.A. (BNPP) had agreed, as part of a settlement, to plead guilty to federal and state criminal charges of conspiracy to violate US sanctions laws by doing business with Cuba, Iran and Sudan. BNPP agreed to pay USD 8.9 billion to federal and state government agencies. According to the statement of facts, from 2004 to 2012, BNPP allegedly conspired with banks and other entities located in or controlled by countries subject to US sanctions, including Sudan, Iran and Cuba, other financial institutions from other (unsanctioned) countries, and other known and unknown parties. BNPP allegedly moved at least USD 8.8 billion through the US financial system on behalf of the sanctioned entities, in violation of US sanctions laws. More than USD 4.3 billion in transactions involved Specifically Designated Nationals (SDNs), according to the statement of facts.
BNPP reportedly used payment messages (cover payments) to conceal the involvement of the sanctioned entities in US dollar transactions processed through BNPP New York and other financial institutions in the US. In addition, it allegedly used complicated schemes to conceal the involvement of sanctioned entities in order to prevent illicit transactions from being blocked. Other financial institutions were instructed by BNPP not to mention the names of the sanctioned entities in payments sent through the US.
The U.S. Attorney General Eric H. Holder said in a statement that “BNP Paris went to elaborate lengths to conceal prohibited transactions, cover its tracks, and deceive U.S. authorities”, and that BNPP’s conduct “represent a serious breach of U.S. law”. The IRC-CI Chief Weber emphasised that “BNNP had many opportunities to take corrective action and abide by the law, and yet, despite warnings from American regulators and other banks, consciously chose to ignore those warnings and commit literally thousands of flagrant violations. IRS-CI, and our domestic and internal law enforcement partners, will continue to pursue these cases and follow the money trail – wherever it may lead.”
The combined settlement of USD 8.9 billion includes a settlement between BNPP and the U.S. Office of Foreign Assets Control (OFAC). BNPP agreed to pay OFAC approximately USD 963 million to settle its potential liability for apparent violations of US sanctions regulations. This is the largest ever sanctions-related settlement.
Bank of America
Bank of America agreed on 25 July 2014 to pay approximately USD 16.6 million in the context of a settlement with OFAC, resolving potential liability for violations of US narcotics sanctions programs.
According to the factual statement in the settlement agreement, Bank of America allegedly violated the U.S. Foreign Narcotics Kingpin Sanctions Regulations (FNKSR) by processing approximately 208 transactions for a group of individuals that were listed as Specially Designated Narcotics Traffickers (SDNTs) from September 2005 to March 2009. In addition, Bank of America reportedly violated the FNKSR, the Narcotics Trafficking Sanctions Regulations and the Reporting, Procedures and Penalties Regulations by failing to timely block five accounts owned by certain SDNTs.
OFAC considered that violations by Bank of America prior to 6 October 2006 were not “egregious“, and that it had no evidence that Bank of America’s staff or management had actual knowledge of the filter deficiency prior to that date. OFAC found, however, that the violations on or after 6 October 2006 were egregious. The main arguments for this conclusion were that (i) Bank of America failed for more than two years to adequately address a known deficiency in its OFAC screening tool, (ii) an OFAC-compliance official was aware of the deficiency in October 2006, but Bank of America did not take action until February 2009, (iii) the potential harm to the US sanction program objectives were considered to be significant, in view of the number of transactions, the benefit conferred to the SDNTs and the length of time over which the violations occurred, and (iv) Bank of America appeared to have processed additional violations after it had reported taking remedial actions to OFAC in 2006 and 2008. The OFAC also took into account several mitigating circumstances, such as Bank of America’s cooperation with OFAC’s investigation and the institution’s substantial remedial action.
Settlements in cases involving residential mortgage-backed securities (RMBS)
Bank of America
Yet another settlement with Bank of America was announced on 21 August 2014. Bank of America agreed to a settlement of USD 16.65 billion with the DoJ. This settlement is the largest civil settlement ever made with a single entity. The settlement resolves, among other things, federal and state civil claims by various entities related to RMBS, CDOs and other types of financial instruments.
As part of the settlement the bank agreed to pay a USD 5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act and provide several billions of dollars of relief to homeowners, including funds that will help defray tax liability as a result of mortgage modification. The settlement does not discharge individuals from civil charges and it does not release Bank of America from potential criminal prosecution.
The settlement includes a statement of facts, in which the bank has admitted that it, or entities that became part of the bank during the crisis, sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitised loans. The bank also acknowledged that it, or the related entities, initiated risky mortgage loans and made false statements with regard to the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration.
An independent monitor will be appointed to determine whether Bank of America is satisfying its obligations.
Citigroup Inc. entered into a comprehensive USD 7 billion settlement with the DoJ to resolve several federal and state civil claims.
The settlement relates to the packaging, securitisation, marketing, sale and issuance of residential mortgage-backed securities (RMBS) in the run-up to the financial crisis. The settlement agreement reveals that the DoJ conducted an investigation into the sale, structuring, arrangement and issuance of RMBS and collateralised debt obligations (CDOs) by Citigroup between 2006 and 2007. As part of the settlement, Citigroup acknowledged that it had made serious misrepresentations to the public, including the investment public, about the mortgage loans it securitised in RMBS.
The statement of facts in the settlement agreement between Citigroup and the DoJ indicates that Citigroup made representations to RMBS investors about the quality of securitised mortgage loans that were sold to investors. These representations appeared to be incorrect however, because Citigroup securitised and sold RMBS with underlying mortgage loans which Citigroup knew had material defects. On a number of occasions, it appeared that employees of Citigroup were aware of these material defects on the basis of due diligence review. Nevertheless, Citgroup securitised the loan pools, which included the defective loans, and sold the “end product” – RMBS – to investors. The settlement stipulates that claims of criminal liability and individual liability are excluded from the settlement, which means that Citigroup and/or its employees may face criminal charges.
Of the settlement amount of USD 7 billion, USD 4.5 billion will be paid by Citigroup to settle federal and state civil claims by various entities related to RMBS. The remaining amount will be used to provide relief to underwater homeowners, distressed borrowers and affected communities. To that end, Citigroup will have to take a variety of measures, including the financing of affordable rental housing developments for low-income families in high cost areas.
The DoJ has adopted the view that Citigroup, by its conduct, contributed “mightily” to the financial crisis, together with other banks that bundled defective and toxic loans into securities and misled investors purchasing those securities. The DoJ has indicated that the “historic penalty” is appropriate in view of the evidence of Citigroup’s wrongdoing. The DoJ has stressed that other financial institutions have already been held accountable by the DoJ, and that Citigroup “will certainly not be the last“.
In another matter related to residential mortgage-backed securities (RMBS), Morgan Stanley, an American international bank, agreed on 24 July 2014 to settle with the Securities and Exchange Commission by paying USD 275 million, to be returned to affected investors.
Three Morgan Stanley entities were charged with misleading investors in a pair of RMBS securitisations which were underwritten, sponsored or issued by these entities. US federal regulations and securities laws require the disclosure of delinquency information for mortgage loans serving as collateral. According to the SEC, Morgan Stanley understated the number of delinquent loans behind the RMBS securitisations in 2007 and denied investors all the facts necessary to make informed investment decisions. The SEC concluded in its investigation that Morgan Stanley misrepresented the current and historical delinquency status of loans “against the backdrop of rising borrower delinquencies and unprecedented distress in the subprime market“. According to the SEC order, the investors involved in the RMBS-transactions have incurred losses.
The SEC charged Morgan Stanley with violations of certain sections of the U.S. Securities Act of 1993. Morgan Stanley, without admission or denial of the allegations, agreed to settle the case under the condition of a payment of USD 160,627,852 in disgorgement, USD 17,995,437 in prejudgment interest and a penalty of USD 96,376,711. The SEC order indicates that a “Fair Fund” will be created for the disgorgement, interest and penalties in the case, in order to compensate investors who were harmed in the securitisations.