OFAC Clarifies its Position on a Foreign Bank: What this Says about 3rd Country Actors

Posted on October 11, 2015 by Farhad Alavi — Leave a comment

While email notifications from OFAC are fairly regular to those of us who practice in the field, I don’t think I’ve ever received one on a Sunday night, particularly not a Sunday night preceding a federal holiday. Tonight’s interestingly timed notification was about Banco Continental, S.A., a Honduran financial institution you may likely have never heard about. So why did OFAC notify us on Sunday night and what did it notify us about?

OFAC was giving guidance on the liquidation of a foreign bank. Huh? Well, it turns out that this past Wednesday (October 7), OFAC designated Banco Continental and a number of related businesses and individuals on its Specially Designated Nationals (SDN) list for its alleged role in money laundering and drug trafficking (hence the designation under the Foreign Narcotics Kingpin Designation Act, commonly known as the “Kingpin Act”). This came in tandem with efforts by the U.S. Drug Enforcement Agency (DEA) and the Office of the U.S. Attorney in the Southern District of New York (SDNY) to pursue the Rosenthal family, who is behind this bank and its upstream parent, Inversiones Continental (Panama) S.A. de C.V., which does business as Grupo Continental. This company is the parent of a number of entities operating in Honduras. The Honduran government then stepped in and ordered the liquidation of Banco Continental.

So what did OFAC say? OFAC has declared that non-U.S. persons can generally work towards the liquidation of Banco Continental without fear of being designated on the SDN list themselves, provided, among other things, that they do not confer benefit onto the bank or the designated entity. U.S. persons will of course require licensing from OFAC to be involved in such activities.

So why is this important for those who did or do not do business with Grupo Continental or any of its affiliates or fellow designated entities? Why do non-Americans need assurances from OFAC that they will not be penalized by the Office? OFAC’s declaration says a lot about the increasing extraterritorial impact of its regulations. Broadly speaking, OFAC’s regulations generally cover U.S. persons, and arguably rarely cover non-U.S. persons (there are obviously many U.S. sanctions covering non-U.S. persons but those are often handled by the Departments of State or Commerce). However, due to the increasing number of investigations by OFAC (along with the U.S. Department of Justice) and the increasingly extra-territorial approach of Treasury officials, many foreigners are afraid to touch transactions that are limited or prohibited for U.S. persons. In other words, even if a foreign entity can engage in certain business, if that business is sensitive for U.S. persons because of OFAC regulations, then oftentimes the foreign entity will want nothing to do with the transaction.

This touches on an issue that has become increasingly visible in recent months and years to some of us practicing in this field. A lot of our time has to be spent comforting foreign entities that they will not get in to trouble for engaging in transactions that, while involving a sanctioned country, for example, are exempt or permissible under U.S. law. By exempt or permissible I do not mean for the foreign entity, but for U.S. persons. The best example is food and medical sales to Iran, which are largely permitted by General License by OFAC. Financial institutions in third countries often want assurances from OFAC that a certain type of transaction is lawful, and OFAC has had to make public pronouncements on this type of thing before. Therefore, OFAC’s statement on Sunday night follows a similar theme – surely there are some Hondurans and others in the region afraid to even touch Banco Continental, even though the reach of U.S. law may not necessarily extend to those individuals.

Thinking back to my Iran example, this highlights the ignorance of the scope of OFAC laws among many in various industries, especially outside the United States. It does not just affect Iran, as you can see it can affect many countries under U.S. sanctions, such as Cuba. People do not know the laws and often draw unnecessary red lines that limit U.S. persons on transactions they are authorized to engage in. More often than not, we have to petition OFAC with a request to provide interpretive guidance on a stated pattern – to give us its legal position on something we already know its legal position. The more knowledge empowered everybody is – the less likely the chances of violating the law and the less likely that U.S. persons will have to face unduly high legal costs and delays in their lawful activities.