Jul

24

Oh Noes! Another Post on UCC Article 4A and Blocked Wire Transfers


Posted by at 11:01 am on July 24, 2016
Category: OFAC

Industrial Bank Clock by Clif Burns via Flickr https://flickr.com/clif_burns [All Rights Reserved]

My apologies for yet another post arising out of Receivers of Sabena v. Deutsche Bank, but there is one more important point to be made if you’ll bear with me. (For background, here are links to the first post and the second post.)

Last week, in the second post on this subject, I talked about a transfer made by a hypothetical Sally Jones Heavy Machinery LLC which was blocked by the intermediary bank because of the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. In that hypothetical, the intermediary bank’s maximum damages to Sally Jones Heavy Machinery LLC were limited to interest on the blocked funds if the bank blocked when it should not have. On the other hand, penalties to OFAC would have been up to $1 million if the bank did not block and should have. In that light, it was easy to figure out why the intermediary bank had little interest in hearing whether Sally Jones’s company and Sakinah Hussain were related.

But what if the funds transfer had been initiated by Sally Jones as an individual consumer? Would things have been different? Section 4A-108 exempts from its coverage wires covered by the Electronic Fund Transfer Act of 1978, 15 U.S.C.§ 1693. This means that wires with an individual consumer on either end, with some exceptions such as wires initiated in person at a money transfer agency, are exempted from Article 4A and are covered by the EFTA instead. So in this instance, this would mean that the liability limitations set forth in section 4A-305 would not govern the liability of the intermediary bank.

But that’s not the end of the story. Section 1693h sets forth the liability of financial institutions, and it does provide for damages that are the proximate result of a financial institutions failure to execute properly instructions received from the consumer. That, however, doesn’t cover the intermediary bank because it has not received instructions from the consumer, just instructions from the consumer’s bank. So the EFTA neither establishes nor disclaims liability. And the limitation on liability doesn’t apply.

Or does it? Look at this in the Official Comment to section 4A-108

A court might, however, apply appropriate principles from Article 4A by analogy in analyzing any part of the funds transfer that is not subject to the provisions of EFTA or other law, such as the obligation of the intermediary bank to execute the payment order of the originator’s bank (Section 4A-302)

And, of course, if a court did that (as the banks and their lawyers that drafted Section 4A clearly hope), all that the intermediary bank owes to Sally is interest on the blocked account which conveniently is sitting in that account already. So once again, it may be better to be the bank than to be Sally Jones, which probably comes as no big surprise.

Photo Credit: Copyright Clif Burns 2013 (www.clifburns.net)

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Jul

21

Why Intermediary Banks Are More Scared Of OFAC Than You


Posted by at 11:17 pm on July 21, 2016
Category: GeneralOFAC

Right Twice A Day by Clif Burns [All Rights Reserved], via Flickr https://flic.kr/p/zDCVmvIn my post two days ago on the sad tale of Sabena Airlines and the blocked wire transfer, I focused on the rights (or lack thereof) of a beneficiary of wire that was blocked in mid-transit to recover those funds once unblocked by OFAC.  Now let’s look at the other side of the coin, which is a situation that I’m sure many readers may have encountered.

Consider this hypothetical:  Sally Jones, a U.S. citizen, owns Sally Jones Heavy Machinery, LLC.  She asks the company’s bank, Third National Bank of Quahog, to wire $500,000 to a company in France to purchase equipment needed to fulfill a contract.  Her bank initiates the wire which transits the First Bank of Paranoia in New York City.   That intermediary bank blocks the transfer because it considers Sally Jones in the name of the company a hit for the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. Because Sally Jones Heavy Machinery is unable to purchase the equipment in time, it winds up breaching the contract with its customer who then sues Sally Jones Heavy Machinery for a billion dollars and wins.  Can Sally Jones Heavy Machinery sue the First Bank of Paranoia for a billion dollars?

The logic in the Sabena case as applied to the beneficiary of the wire also applies to the sender of the wire.  The court there relied on UCC section 4A-212 which states that the “receiving bank” — in this case both the sender’s bank and the intermediary bank — has no obligation to either the sender or the beneficiary to accept a payment order without an express agreement and that no liability can arise until that payment order is accepted.   Quahog Bank had an account agreement with Sally Jones Heavy Machinery and therefore may have had an obligation to accept and execute the payment order by sending it on to the First Bank of Paranoia, which it did.  But the First Bank of Paranoia would not have any obligation to, or agreement with, Sally Jones Heavy Machinery and had no obligation to accept the payment order despite any protestations made by Sally Jones Heavy Equipment that it had no relation to Sakinah Hussain.  As far the bank was concerned, that was an issue for OFAC to sort out, not for the bank.

But wait, can the First National Bank of Paranoia get away with this despite its arguably obvious negligence here, particularly if it refused to consider Sally Jones Heavy Equipments evidence that it was not the Sally Jones on the SDN List?  Again, the court in Sabena makes clear that tort actions for negligence would not be possible and that Article 4A was intended “to be the exclusive means of determining the rights, duties and liabilities” of parties to the funds transfer.

Suppose in our example that the First National Bank of Paranoia actually accepted the payment order but then decided to block it.  Would there be liability?  Section 4A-305 says that there is liability for consequential damages for the failure to execute the payment order only if it agreed to pay such damages which, of course, it will not have done.  Instead, the maximum liability it will have to anyone under section 4A-305(a) is to pay interest on the delay.  So when OFAC ultimately decides that Sally Jones Heavy Machinery is not Sakinah Hussain, the First Bank of Paranoia will owe interest to Sally Jones Heavy Machinery.  Given that blocked funds are required in any event to be in an interest bearing account this is, as they say, no skin off of Paranoia’s back.

So it’s now easy to see why the First National Bank of Paranoia was more scared of OFAC than Sally Jones.  OFAC could fine the Bank one million dollars (twice the value of the transfer) if Sally Jones was Sakinah Hussain.   If the bank was wrong, then its damages are equal to the amount of interest accrued on the blocked funds, interest which conveniently will be sitting in the account with the funds.

Photo Credit: Right Twice A Day by Clif Burns [All Rights Reserved], via Flickr https://flic.kr/p/zDCVmv. Copyright 2015 Clif Burns

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Jul

19

The Little Airline That Couldn’t


Posted by at 9:49 pm on July 19, 2016
Category: OFAC

Sabena Airbus A321-211 by Aero Icarus [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8PJXJn [cropped and color processed]

Remember Sabena, the ill-fated Belgian airline that declared bankruptcy in 2001? Well, to quote Ford Madox Ford, this is the saddest story I have ever heard.

One of the things that Sabena did, other than fly people back and forth to Brussels, was to provide repair and technical services to other airlines. One of those was Sudan Airways, which originated a wire transfer of $360,500 to pay Sabena. One day before the wire transfer, on November 3, 1997, President Clinton blocked the assets of the government of Sudan, including those of Sudan Airways. So when the wire from Sudan Airway’s bank hit Bankers Trust in New York on November 4 on its way to Sabena’s bank in Belgium, Banker’s Trust blocked the transfer and put the funds in a blocked account where they sat for more than a decade.

In 2009 Sabena requested that OFAC unblock the funds. In 2012, OFAC issued a license to Banker’s Trust (by then Deutsche Bank) to release the funds. The receivers for Sabena were doing a happy dance over getting the license from OFAC when their celebration was abruptly cut short. Deutsche Bank relied on the license Sabena obtained and sent the funds not to Sabena’s bank but to Sudan Airways bank. It’s something like renting a hall and a band for a party and then not being allowed to attend but rather forced to watch through the windows as your guests eat all your food and drink all your champagne.

So the receivers for Sabena decided to get even: they sued Deutsche Bank for not sending the money to them. But poor Sabena just can’t get a break. On July 14, a New York appeals court dismissed the Sabena complaint and upheld the return of the unblocked funds to Sudan Airways.

To get there, the appeals court relied on Article 4A of the Uniform Commercial Code that governs fund transfers. Specifically the court relied on two provisions. First, it relied on section 4A-212, which says that an intermediary bank, like Bankers Trust, has no liability to the beneficiary of the funds transfer. Second, it relied on section 4A-402 which requires the intermediary bank to return to the sender any uncompleted funds transfer. Once the funds were blocked, then the transfer order was cancelled under section 4A-211(d) five days after the intermediary bank received a transfer request and did not execute it. And once cancelled, then section 4A-402(d) requires the funds to go back to the sender.

The moral of the story is this: intended recipients of blocked fund transfers should not waste their time trying to get an unblocking license.

Photo Credit: Sabena Airbus A321-211 by Aero Icarus [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8PJXJn [cropped and color processed]. Copyright 2010 Aero Icarus

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Jul

12

Catfish Row


Posted by at 9:47 pm on July 12, 2016
Category: Criminal PenaltiesDDTCITAR

Jason Bourne [Fair Use]The affidavit in support of the criminal complaint filed against Gregory Allen Justice for passing allegedly export-controlled data to an undercover FBI agent is a lurid potboiler, a train wreck that you can’t stop watching, a bizarre mashup of David Lynch and Austin Powers. Worse, you don’t know whether to laugh at the defendant, feel sorry for him or recoil in horror.

The tawdry affair starts with Justice, with an extremely ill, housebound wife, getting “catfished” by a woman who aroused his interests by sending him pictures, allegedly of herself, but in fact pictures of an Eastern European model. Justice, in hopes of replacing his sickly wife with a trophy wife, started sending “Chay” (the catfisher’s nom de doom or screen name) boxes of cash and gifts from Amazon including a $900 iPhone, a flat panel television, a charcoal grill and other goodies. Soon Justice was short of cash and, apparently enamored with James Bond, Jason Bourne and the be-wigged Russian spies on the television series The Americans (honestly, I’m not making that up) decided to become a Russian spy and sell everything he could lay his hands on about the satellites made by his employer.

Being a real-life spy is much harder than being one on TV or in the movies, and Justice screwed things up before he even got started. In November 2015, he stuck a thumb drive in his computer. Game over. This set off alarm bells at his employer and everything he did on his computer after that was monitored, recorded, saved, analyzed and handed over to the feds in a neat box with a pretty bow on top. As a result, the closest Justice ever got to a real Russian was when he stood in line at Starbucks behind a guy (from Kansas) reading Tolstoy.

In January his car was surreptitiously searched, and a handwritten note with the address of the Russian Embassy in Washington, DC, was found. One month later an undercover agent, pretending to be a Russian spy, called Justice and negotiated the purchase of documents and information from Justice. For the next three months, there were numerous phone calls and five in-person meetings between Justice and the undercover agent posing as a Russian spy. You can’t help but wonder if the sting stretched out so long because the FBI was having fun with this guy. He was low hanging fruit who liked to discuss recent episodes of The Americans and express his admiration of James Bond and Jason Bourne.

None of this was necessary because he signed a receipt for the money he was given by the undercover agent for the first drop of documents. Yes, you read that right. He signed a receipt for the money. Seriously. I’m not even a spy, nor have I pretended to be one, in my spare time, on TV, or otherwise, and even I know that you don’t sign receipts for the money that the Russkies pay you for spying.

Above and beyond all this, the affidavit says that Justice asked the fake spy to help him buy drugs that, it appeared, he planned on using to get his wife out of the way and close the deal with “Chay.” And he was also apparently supplementing his spy payments by dealing GHB, a controlled substance, on the side.

The real question, of course, in this: how much time and money was spent in building the case against a guy who makes Austin Powers look like Albert Einstein and who, apparently, never sold any documents to anyone other than the FBI? I’m sure that the FBI relished all the giggling over war stories that this case would yield but, frankly, I would imagine there are better uses of investigative time, money and resources. The minute he signed that first receipt, it was time to break out the cuffs.

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Jul

7

OFAC Cancels Nork Dictator’s Trip to Disneyland; Norks Declare War on US


Posted by at 8:33 pm on July 7, 2016
Category: General

Kim Jong Un Smoking via KCNA [Fair Use]Yesterday, the Office of Foreign Assets Control (“OFAC”) added the over-fed Nork dictator, Kim Jong Un, to the List of Specially Designated Nationals and Blocked Persons. Adding heads of state to the SDN List is not only unusual but also largely symbolic and pointless. The effect of putting the Norktator on that list means that no U.S. persons can engage in any transactions with him and that any property or interest in property by him that comes into the control of a U.S. person must be blocked. So, yeah, all of Kim Jong Un’s bank accounts in the U.S. (all zero of them) are blocked. And if Kim Jong Un had plans to visit Disneyland (and get a new coif at Star Cuts on the way), those plans now have to be put in hold.

The largely ineffectual nature of the U.S. move, of course, did nothing to moderate the hysterical overreaction of the Nork Government, which immediately characterized the designation as “a declaration of war” and a “hideous crime.” Uh huh. Right. Arbitrary imprisonment, slave labor, torture, extrajudicial executions are harmless local Nork customs; interfering with Kim Jong Un’s trip to Disneyland and access to Netflix is a “hideous crime.”

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