Clearstream to pay $152 million to U.S. over Iran

Export Controls and Economic Sanctions Alert | Nixon Peabody LLP
January 31, 2014
Clearstream to pay $152 million to U.S. over
Iran sanctions claim
By Alexandra López-Casero
On January 23, 2014, the U.S. Department of the Treasury published a “landmark” settlement
agreement between its Office of Foreign Assets Control (OFAC) and Clearstream Banking, S.A.
(Clearstream), an international central securities depository and subsidiary of Deutsche Börse. The
agreement settles Clearstream’s potential civil liability for apparent violations surrounding
Clearstream’s use of its omnibus account with a U.S. financial institution as a conduit to hold
securities on behalf of the Central Bank of Iran (CBI).
The settlement agreement provides valuable background on this case, which follows other highprofile settlements involving U.S. sanctions violations, such as the $375 million settlement
agreement OFAC reached with HSBC and the recent $33 million settlement between OFAC and
the Royal Bank of Scotland. Other enforcement cases from last year involve Wells Fargo Bank,
Toyota Motor Credit Corp. and Deutsche Bank Trust Company Americas.
The Clearstream case began in late 2007 when OFAC officials and Clearstream met to discuss
accounts Clearstream maintained for Iranian customers. One of the customers was the CBI, which
is also blacklisted on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) list. At the
time, Clearstream maintained an account at a U.S. financial institution in New York through which
the CBI held a beneficial ownership interest in securities with a total nominal value of $2.813
billion. According to the settlement agreement, Clearstream, as intermediary, served as the channel
through which the CBI was able to hold an interest in these securities in the United States.
According to the settlement agreement, Clearstream stated during its 2007 meeting with OFAC
that its Executive Board had made the decision to close all accounts that Clearstream maintained
for Iranian customers, regardless of whether the accounts involved securities held in custody in the
United States. Clearstream and OFAC also discussed how Clearstream would wind down its Iranian
business.
However, Clearstream, acting on instructions from the CBI, then transferred the securities
entitlements from the CBI’s account to a new custody account held by a European commercial
bank at Clearstream according to the settlement agreement. This transfer allowed the CBI to keep
its beneficial ownership in the securities. Apparently, the transfers were made free-of-payment
(FOP) to the European bank. Consequently, no cash or other payment was exchanged within
Clearstream’s settlement to move the securities entitlement from one account to another.
Clearstream changed the record of ownership on its books through internal accounting entries, but
the CBI’s beneficial ownership did not change. According to the settlement agreement, it was
simply “buried one layer deeper in the custodian chain.”
The settlement agreement also indicates that based on internal e-mail correspondence “a number of
[Clearstream] employees—including at least one supervisor and one senior executive—knew or
should have known that the beneficial ownership of the securities entitlements would not change
with their FOP transfer.” For example, in an e-mail from 2008, one Clearstream employee
apparently wrote to a member of Clearstream’s Executive Management about the possibility of
transferring additional, non-U.S. Dollar denominated securities that were still in the CBI’s account
at Clearstream to the European bank’s custody account: “I asked [CBI employee] to transfer more
to the account to which they transferred but he does not want to take more credit exposure.” The
settlement agreement notes that “[t]he CBI would not have had any credit exposure related to the
securities if beneficial ownership had actually passed to another entity.”
OFAC determined that the apparent violations of the Iranian Transactions and Sanctions
Regulations were reckless and constituted an egregious case. This was a deciding factor why the
proposed penalty was so high ($151.9 million). Whether a violation is deemed “egregious” generally
is based on several factors, such as whether the conduct was willful or reckless, the level of
awareness within the company and the level of harm done to the U.S. sanctions program. In this
case, OFAC also claimed that Clearstream’s actions caused significant harm to U.S. sanctions
program objectives. Interestingly, OFAC also determined that the violations “were not voluntarily
self-disclosed to OFAC within the meaning of OFAC’s Economic Sanctions Enforcement
Guidelines.” While voluntary self-disclosures are generally not publicly available, this could indicate
that Clearstream did submit a voluntary self-disclosure, but that OFAC refused to give the
company credit for it. This usually happens when OFAC learns of a violation before a company
submits its self-disclosure or if OFAC learns of material information that was not contained in the
self-disclosure and thus considers the self-disclosure to be incomplete.
The following were considered mitigating factors:

Clearstream strengthened its sanctions compliance controls and implemented enhanced
policies and procedures, customer due diligence, automated transaction screening and
employee training. According to the settlement agreement, Clearstream now conducts
enhanced customer due diligence as well as account and transaction monitoring to increase
its understanding about the beneficial ownership of securities in its system—including, for
example, requiring information about customers’ relationships with any sanctioned
persons or countries;

Clearstream cooperated with OFAC by engaging outside firms to conduct a comprehensive
investigation into the facts surrounding the violations and provided substantial and wellorganized information regarding the violations;

Clearstream agreed to toll the statute of limitations with respect to the violations and
responded to multiple additional inquiries and requests for information; and

OFAC had not issued a penalty notice or finding of violation against Clearstream in the
previous five years.
Under the settlement agreement, Clearstream agreed to pay $151,902,000 for potential civil liability
arising out of the apparent violations.
This case highlights that the financial sector continues to be at high risk for OFAC enforcement
cases. It also underscores the need for a robust compliance program, the high compliance
expectations placed on firms, the benefit of timely and complete voluntary self-disclosures (which
generally cut a potential OFAC penalty in half) and the extraterritorial reach of the U.S. sanctions
programs.
For more information about the U.S. sanctions against Iran, please contact your Nixon Peabody
attorney or:
— Alexandra López-Casero at [email protected] or 202-585-8372
This newsletter is intended as an information source for the clients and friends of Nixon Peabody LLP. The content should not be construed
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