The departments of the Treasury and Justice, along with the Federal Reserve, have imposed ever-increasing fines against financial institutions for violating U.S. economic sanctions programs against countries such as Iran, but without apparent effect. Almost each month brings another revelation and fine.
These violations, and resultant fines, flow directly from breakdowns in the financial institutions' internal controls.
Investors should be concerned with the impact that repeated failure by financial institutions to address the risks — financial, operational, regulatory and reputational, and attendant management and board failures — might have on valuation and investor portfolios. Investor due diligence on targeted companies should include a specific focus on economic sanctions compliance as well as close attention to increased regulatory enforcement.
According to Sen. Carl Levin at a July 17 hearing, HSBC Holdings PLC conducted approximately 25,000 transactions totaling $19 billion connected to Iran from 2001 to 2007. Eighty-five percent of the transactions were expunged of references to Iran to avoid scrutiny. In June, ING Bank N.V. paid $619 million in settlement for “apparent” violations of U.S. sanctions against Cuba, Iran, Burma, Sudan and Libya.
If you are Thomas J. Curry, comptroller of the currency, who endured some hard questioning concerning the ability of his office to regulate HSBC, what would you be thinking? If you are Adam J. Szubin, director of the Office of Foreign Assets Control, the agency of the Treasury Department responsible for administering economic sanctions programs, what are you thinking to avoid being a witness at the next hearing?
It seems to me you would begin by looking to see if the fines and penalties assessed have been effective. Perhaps the first thing you would find is that the HSBC and ING cases are not unique. These events follow: