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.