State Street OFAC Settlement: $7.5M (2024)

Charles River Systems, Inc. maintained business relationships with subsidiaries owned 50 percent or more by Sberbank and VTB Bank, both Russian financial institutions listed by OFAC under Directive 1 of Executive Order 13662 in 2014, whose majority-owned subsidiaries (the "SSI customers") are subject to Directive 1 prohibitions. As part of these relationships, Charles River sold continuous access to a proprietary "point-to-point" communications network (the "FIX Network") that allowed customers to privately exchange trade information with their brokers. For purposes of Directive 1, issuance of an invoice represents a dealing in debt, and as a U.S. person, Charles River was prohibited from accepting payments from SSI customers outside the applicable 90-, 30-, or 14-day debt tenor of a given invoice.

By at least 2016, a U.S. financial institution had rejected two payments remitted by SSI customers outside applicable debt tenors based on Charles River's invoice dates. At least one SSI customer asked Charles River to redate invoices more than 30 days old to prevent associated payments from being rejected when they reached correspondent and beneficiary financial institutions in the United States. Following internal deliberation, Charles River staff began regularly redating or reissuing "old" invoices, redating at least one invoice as many as six times, which disguised their original dates of issuance and made them appear more recent. Manually created "new" invoices were submitted to the U.S. financial institution to prevent rejection of late payments. As a collections manager stated on one occasion, she would "do whatever it takes to get this invoice paid." Charles River also accepted multiple late payments from SSI customers outside applicable Directive 1 payment windows throughout this period.

At least 18 staff members from multiple internal offices, including accounting, collections, and client management, were involved in, or aware of, the redating or reissuance of invoices. Despite providing finance-related technology services to clients in more than 30 countries, Charles River maintained minimal compliance procedures prior to its 2018 acquisition by State Street, and staff demonstrated a varying but limited understanding of Charles River's sanctions-related obligations. The apparently violative activity ran from December 2016 through May 2020, including 19 months after Charles River's acquisition by State Street in October 2018. Although State Street's post-acquisition onboarding analysis correctly identified certain Charles River clients as subject to Directive 1, it did not consider the Directive's applicability to late invoice payments; subsequent screening alerts concerning payments from SSI customers were manually dismissed without accounting for these restrictions. This conduct resulted in 38 apparent violations of the URRSR, 31 C.F.R. § 589.202.

The statutory maximum civil monetary penalty applicable in this matter is $13,550,002. OFAC determined that neither State Street nor Charles River voluntarily self-disclosed the Apparent Violations and that the Apparent Violations constitute an egregious case. Accordingly, under OFAC's Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501, app. A, the base civil monetary penalty equals the statutory maximum of $13,550,002. The settlement amount of $7,452,501 reflects OFAC's consideration of the General Factors under the Enforcement Guidelines, including State Street's cooperation with OFAC's investigation (including its proactive notification to OFAC of its internal findings) and the remedial measures implemented by State Street upon discovery of the apparent violations.

This enforcement action highlights the importance of establishing and maintaining effective sanctions compliance policies, procedures, and controls that are commensurate with a company's business operations and customer base. In addition to accounting for blocking, jurisdictional, and other standard prohibitions, these policies should convey the importance of and institute controls for examining clients and activities that may be subject to "less-than-blocking" sectoral sanctions, including debt- and equity-related limitations. Comprehensive compliance policies and training can also help foster an internal culture of compliance to assist staff in effectively responding to warning signs regarding potential violations, including transactions that have been blocked or rejected by their financial institutions in accordance with OFAC regulations.

Companies should consider any compliance needs that may arise when new clients are onboarded following mergers or acquisitions. Even after onboarding is complete, companies should closely monitor their new business relationships for sanctions-related issues that may require preventative or remedial measures.

Companies should also be prepared to adequately address scenarios where the activities of certain customers (including entities subject to sectoral sanctions) may trigger internal compliance concerns. Such scenarios could include instances where counterparties routinely fail to pay invoices within applicable payment windows, resulting in the rejection of payments by U.S. financial institutions. As noted in OFAC Frequently Asked Question 419, if a U.S. person believes that it may not receive payment in full by the end of the relevant payment period, the U.S. person should contact OFAC. Companies should exercise extreme caution if entities subject to sectoral sanctions ask U.S. parties to engage in deceptive or unorthodox business practices, particularly those involving accounting and recordkeeping standards. Companies should never falsify payment-related supporting documentation to facilitate the processing of transactions that would otherwise be prohibited by U.S. sanctions.

Companies that onboard or otherwise do business with non-blocked entities subject to sectoral sanctions, including entities owned more than 50 percent by SSI entities under E.O. 13662, must ensure that they comply with all aspects of these sanctions.

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