The saga of the over-reaching New York Department of Financial Services (“NYDFS”) and Standard Chartered Bank, chronicled on this blog here, here, and here, is the blogging gift that just keeps on giving. Standard Chartered Bank hired Promontory Financial Group to help investigate transactions that the bank conducted with countries subject to U.S. economic sanctions. Today the NYDFS announced that it was restricting Promontory’s access to certain confidential reports necessary for it to provide consulting services to banks because its final report on the Standard Chartered investigation “exhibited a lack of independent judgment.” Apparently, Promontory, at the behest of Standard Chartered’s outside counsel, changed some words in the investigative report, for example, changing a description of transactions “that should be called to the attention of authorities” to transactions that “may be of interest to the authorities.” Seriously.

But that’s not the worst of it. What really got the NYDFS to clutch its pearls and fall on the fainting couch was that Promontory had the unmitigated gall to engage in a legal analysis to determine whether certain transactions were actually OFAC violations or not.

While Promontory was preparing reports for the Department, Promontory was also providing arguments to the Bank’s counsel to help it assert that certain transactions should not be considered violations. On September 16, 2011, a Senior Analyst suggested some “fresh thinking” about emphasizing categories of transactions that were potentially exempt from OFAC sanctions. Several days later, on September 19, 2011, a Managing Director replied, “[g]ood points on fresh thinking although I think that fresh thinking about reducing the number of violations is more likely to command attention for obvious reasons.” The Senior Analyst replied about the value that Promontory might add, stating that “big wins” will come from payments that Promontory “might be able to drop off.” Regarding this email exchange, the Senior Analyst testified that Promontory provided information to the Bank’s counsel to help reduce the number of violations and a Managing Director testified that the Bank and its counsel asked Promontory if they had observed anything that “might have an impact on reducing the amount of violations.”

That’s right. Promontory was punished for actually trying to analyze whether certain transactions violated OFAC’s rules or not rather than just assuming that everything the bank did was a violation. This takes particular significance when you recall that NYDFS punished Standard Chartered for U-Turn transactions with Iran that were legal under OFAC’s rules on the ground that, no matter what OFAC itself said, these transactions violated OFAC’s rules.

Promontory, not surprisingly, has said that it will seek a stay of NYDFS’s action against it.

Today the Office of Foreign Assets Control (“OFAC”) announced that it fined Production Products, Inc., a small family-run business in Maryland, the sum of $78,500 in connection with charges that the company exported HVAC duct manufacturing equipment to a company in China on the Specially Designated Nationals and Blocked Persons List. OFAC noted that, because the equipment was valued at $500,000, it could have fined the company $1 million and touted its own beneficence in imposing such a reduced fine. Given that the maximum fine would likely have been a death blow to the company, this is somewhat equivalent to claiming that someone should be grateful because, although you could have killed them, you decided only to cut off a few fingers.

OFAC noted a number of “aggravating factors” that had gotten its dander up, all of which boil down to the fact that PPI had no idea that there was an SDN List and had no idea that it needed to check it or have a — gasp! — compliance program. Apparently not having an OFAC compliance program is the new Eighth Deadly Sin, ranking only slightly behind sloth and lust.

Rather than being an opportunity to add to the Federal coffers, this case should have been an opportunity for governmental self-reflection. Shouldn’t OFAC ask itself why this company — like millions of other small companies — has never heard of OFAC or its SDN List? These companies almost certainly know that there are certain things — guns, explosives and the like — that they can’t export but would be shocked (and justifiably so) to learn that you can’t ship so much as a pencil to a company in China on the mysterious list without suffering grievous consequences.

But instead of wondering why so many people have not heard of OFAC or its rules, OFAC gets its feelings hurt and lashes out with penalties. It seems to me that the efforts used to punish people for not knowing about OFAC might be better shifted to educational efforts to deal with the fact that so few small companies are aware of their obligations with respect to the SDN List.

The Office of Foreign Assets Control (“OFAC”) recently announced a fine of $391,500 agreed to by John Bean Technologies, a maker of aircraft ground support equipment, to settle charges that it violated the U.S. economic sanctions against the Islamic Republic of Iran Shipping Lines (“IRISL”). The announcement, however, or at least its description of the underlying facts, is a little odd.

The violation is described like this:

[F]rom on or about April 8 to April 17, 2009, JBT appears to have violated E.O. 13382 and § 544.201(a) of the Regulations when goods that JBT sold to a Chinese company were shipped by Islamic Republic of Iran Shipping Lines (IRISL) aboard a blocked vessel from Spain to China, and trade documents related to the shipment were presented to a U.S. bank for payment pursuant to a letter of credit (“L/C”) in the amount of $2,897,936 …

Notice first that the violation alleged here is not a violation of the Iran sanctions caused by shipping goods with IRISL; rather the violation is dealing in property blocked under the WMD sanctions, namely, the letter of credit.  Later in the announcement, OFAC notes that JBT reimbursed its Spanish subsidiary for payments it made to its freight forwarder in connection with the shipment, meaning it is likely the sale was made by the foreign subsidiary. Given OFAC’s apparently accidental reference later to “CSA” instead of  the “Chinese Company,” it is also likely that the sale is the one announced here involving the shipment of airport ground equipment, including cargo loaders, to China Southern Airlines. This means that the shipment of these EAR99 goods by a foreign subsidiary, which occurred before the restrictions on foreign subsidiaries imposed by the Iran Threat Reduction and Syria Human Rights Act of 2012, would not have been  a violation of the Iran Sanctions. Hence, the violation occurred here when the U.S. company presented the blocked letter of credit, along with the required bill of lading from IRISL, to a U.S. bank.

Now look what happens next:

[F]rom on or about May 8 to May 19, 2009, JBT appears to have violated E.O. 13382 and § 544.201(a) of the Regulations when it presented trade documents related to the IRISL shipment to Banco Santander, a Spanish bank, in the amount of $2,897,936, in order to receive payment for the goods sold to CSA, after the U.S. bank declined to advise the L/C and the trade documents had been returned to JBT pursuant to an OFAC license.

Notice anything unusual here? The U.S. bank, of course, could not return the letter of credit, which was blocked property, to JBT without a license, and in 3-4 weeks it received a license from OFAC to do just that. OFAC almost never grants licenses to release blocked property and almost never issues any license that quickly. Obviously, the unnamed bank and OFAC were setting up JBT, which promptly scurried off to a Spanish bank with the returned letter of credit to get its money. Oops.

OFAC further noted that JBT did not voluntarily disclose the matter to the agency. In reply, JBT told Samuel Rubenfeld at the Wall Street Journal that it did disclose the violation as soon as it knew about it, but the bank had disclosed the violation first. This story does not quite hold up. JBT obviously knew of the violation when the U.S. bank returned the letter of credit and explained its reasons for doing so. It would appear, then, that JBT went to the Spanish bank to get its money with what it knew to be a blocked letter of credit before it disclosed the issue to OFAC.

Also, notice the set-up here. When the bank notified OFAC of its blocking of the letter of credit, OFAC then gave the bank a license to return the blocked property to JBT. The purpose of this was to make it clear, if JBT again tried to negotiate the letter of credit, that JBT knew of the violation and could not claim that it had not examined the shipping documents to see the reference in the bill of lading to IRISL. And the bank was willing to cooperate to get future brownie points from OFAC. Game. Set. Match.

Moral of the story: beware of Greeks bearing gifts and banks bearing blocked letters of credit.