CSE sanctions breaches: the long arm of US sanctions

Last year, the Singapore listed company CSE Global Limited (CSE Global) and its wholly-owned Singaporean subsidiary CSE TransTel Pte. Ltd. (CSE TransTel) (collectively referred to as “CSE”) entered into a settlement agreement with the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) requiring CSE to pay a settlement of US$12 million.

This penalty was imposed on CSE in response to its apparent violations of US sanctions by using US dollar accounts with its Singapore bank to make payments to various entities in relation to Iranian related contracts.

The action taken by OFAC is significant in that it appears to be an indication that the US is now actively enforcing sanctions more broadly, even against non-US, non-financial companies operating outside the US. The case also illustrates how the use of USD in transactions may expose non-US entities to the risk of running afoul of US sanctions regulations.    

Dealing with sanctioned entities

From around June 2012 to March 2013, CSE Transtel had apparently violated the International Emergency Economic Powers Act (the IEEPA) and the Iranian Transactions and Sanctions Regulations (the ITSR) by its dealings with Iranian entities through an Iranian subsidiary TransTel Engineering Kish Co Ltd.

Specifically, CSE Transtel had:

  • Entered into contracts with, and received purchase orders from, multiple Iranian companies to deliver and install telecommunications equipment for the South Pars Gas Field in the Persian Gulf, the South Pars Power Plant in Assalouyeh, Iran, and the Reshadat Oil Field in the Persian Gulf between August 25 2010 and November 5 2011.
  • Hired and engaged various third-party vendors – including several Iranian companies – to provide goods and services on its behalf in connection with the contracts and purchase orders set out above.

The Iranian entities which CSE TransTel had conducted business with included Petropars, which OFAC had identified as a sanctioned entity owned or controlled by the government of Iran, and the Iran Maritime Industrial Company SADRA, which was an entity on the SDN list.

Causing US financial institutions to breach sanctions regulations

CSE Global and CSE TransTel had maintained separate USD and Singaporean Dollar (SGD) accounts with a non-U.S. financial institution in Singapore (the Bank). Prior to entering into the various transactions with Iranian entities, CSE had given an undertaking signed by CSE TransTel’s Managing Director and CSE Global’s Group CEO undertaking “not to route any transactions related to Iran through the Bank, whether in Singapore or elsewhere.”

However, within two months of executing this undertaking, CSE TransTel breached the undertaking by making USD transfers from its USD-denominated account with the bank relating to its Iranian business. The relevant transactions were processed through the United States and US financial institutions, and involved various third-party vendors supplying goods and/or services to energy projects in Iran.

CSE TransTel continued to engage in Iranian business between 4 June 2012 and 27 March 2013, originating 104 funds transfers totalling US$11,111,812 from its USD account at the bank which related to prohibited transactions with Iranian entities. These funds transfers violated section 1705(a) of the IEEPA and section 560.203 of the ITSR by causing multiple financial institutions, including US financial institutions, to engage in the exportation or re-exportation of financial services from the United States to Iran, which is an activity prohibited under the ITSR. This activity is separate from and additional to CSE’s direct breaches of sanctions regulations by dealing with Iranian entities on the SDN List.

Settlement agreement

OFAC found CSE TransTel’s violations of its sanctions regulations to be egregious in nature, given their extent of the violations and the fact CSE TransTel had failed to make any voluntary self-disclosures of these violations despite having ample opportunity to do so at any time.

As such, if CSE TransTel had disputed the charges, OFAC would have claimed the maximum civil monetary penalty that could have been levied against them, which in this case, totalled US$38,181,161.

While CSE TransTel had maintained that the funds transfers were payments for non-US goods and services which were lawfully provided by CSR TransTel to Iran or Iranian entities via non-US third party vendors, CSE Global released a statement setting out that CSE would settle the matter with OFAC. This is understood to be mainly because CSE noted that the alternative to settling would entail “costly and lengthy litigation in the US”, which would require CSE to dedicate a great deal of time and resources towards an uncertain outcome.

The net result was that CSE agreed, amongst other things, to agree to pay a sum of US$12,027,066 to the US Department of the Treasury in settlement. 

The significance of the CSE settlement

The CSE settlement has far reaching implications and is significant in a number of respects. Four of the more immediately obvious implications are discussed below:

  • OFAC is extending its reach

This is apparently the first time that OFAC has used its statutory authority to target a non -US, non-financial institution which had caused US financial institutions to process USD transactions involving a sanctioned jurisdiction. It appears that the US is becoming increasingly willing to extend its reach.

It is possible that the CSE settlement is an indication that the Trump administration may be taking a harder stance against sanctioned states such as Iran. Whilst President Trump has recently indicated that the US would “waive” oil and banking sanctions against Iran until May 2018, he has indicated that this may be the last time that the US will agree to such “waivers”. The stance taken is of course not entirely surprising given that President Trump had consistently described the Joint Comprehensive Plan of Action, which was struck between the US, the United Kingdom, Germany, France and Iran and involved lifting sanctions on the latter in return of the latter’s abandonment of its nuclear weapons programme as the “worst deal ever”.

  • Non-US entities transacting in USD may be affected by US sanctions regulations 

While OFAC has stated that the use of USD in itself does not create a jurisdictional nexus, all wire transfers in USD are routed through the US and its financial systems, and would necessarily involve US financial institutions. This case highlights how the making of USD payments could potentially cause a non-US company operating outside the US to be in breach of OFAC’s sanctions regulations due to the involvement of US financial institutions- even where the company is dealing with a non-US bank.

Companies should pay extra attention to sanctions compliance issues when originating USD transfers where the underlying transaction may involve countries or entities that may be subject to US sanctions. This case illustrates that even a non-US company operating outside the US can easily be in breach of US sanctions by causing US financial institutions to “engage in the exportation or re-exportation of financial services from the United States to Iran”. It is not unknown (or surprising) that some non-US companies operating outside the US chose to transact in other (non-USD) denominations such as the Euro or Renminbi where possible, to minimize the involvement of US financial institutions and accordingly to minimize the risk of US sanctions being breached.

Although the current action was brought against a company that made payments in USD, going forward, OFAC could also seek to enforce US sanctions to situations where non-U.S. companies receive USD payments involving OFAC sanctioned jurisdictions and parties. It would therefore be prudent for non-US companies to take a cautious approach where any payments are being made or received in USD – even if the transaction does not otherwise involve any US entities – apart from US financial institutions. 

  • OFAC may also levy criminal penalties on violators of its sanctions regulations

Apart from OFAC’s ability to impose civil monetary penalties, entities originating funds transfers in USD involving OFAC-sanctioned jurisdictions or parties may also potentially be subject to criminal liability. Depending on the facts of the case, the US authorities may proceed on either civil or criminal actions, or even both.

  • Companies must adhere to undertakings which they provide

A feature of this case, which in our experience is becoming increasingly common, is that the company had given an express written undertaking to its bank that it would not route any transactions to Iran through the bank.

A company providing such undertakings to its bank must take the undertakings seriously and should have internal compliance procedures in place to ensure that the undertakings are adhered to. The breach of the undertaking by CSE in the present case, may have made CSE’s conduct appear more culpable in that they could be taken as an indication that CSE had negligently (or intentionally) misled its bank or concealed the fact that CSE was conducting potentially sanctioned business through the bank.

Financial institutions will not consider the provision of such undertakings to be a mere box-checking exercise when setting up accounts. Banks are well aware of the risks of possible sanctions breaches, and obtaining such undertakings from customers are part of their own sanctions compliance and risk mitigation procedures. As the present case illustrates, if the transaction turns out to be in breach of sanctions, the banks will rely on the undertaking given by the customer and OFAC will take the undertaking into consideration as a factor when determining the company’s culpability and the level of penalty to impose.

The wording of the undertakings requested by banks do vary. If a company is not confident that it will be able to comply with the terms of an undertaking required by its bank, the company does generally have the right to negotiate the terms so that they are not overly onerous.

About the team

Kennedys Legal Solutions’ sanctions and compliance practice group is part of a wider global offering. In Singapore, we specialise in assisting clients in the shipping, international trade and insurance sectors, with issues relating to trade sanctions, anti-money laundering and anti-bribery regulations.

As these regulations continue to change and evolve in both Singapore and globally, we recognise the importance of monitoring key developments and assessing the potential impact on our clients’ businesses. This enables our clients to make appropriate commercial decisions and to ensure their businesses and employees always comply with international trade sanctions and applicable regulations.

Together with lawyers from our offices across the globe, we are able to provide our clients with comprehensive, all-encompassing compliance and regulatory advice in relation to global sanctions, anti-money laundering and anti-bribery regimes.