Timothy A. Westrick: "Risk Is Expanding Under The Kingpin Act"


Law360
March 9, 2017
Timothy A. Westrick

There is a common misperception that only financial institutions such as banks are subject to economic sanctions compliance. However, companies in other markets can also find themselves at risk and unintentionally in violation of established sanctions, including the Foreign Narcotics Kingpin Designation Act. Recent Kingpin Act enforcement actions against insurance companies send a cautionary signal.

Sanctions in General

Sanctions compliance issues often go hand-in-hand with anti-money laundering issues. The U.S. Treasury Department’s Office of Foreign Assets Control administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. OFAC administers a variety of sanctions programs by blocking the assets of, and restricting trade with, countries, entities and individuals designated for sanctions.

OFAC’s range of programs underscores its ability to target a wide spectrum of countries, entities and individuals. From the Balkans to Burma, and Cuba to Zimbabwe, the global map is speckled with states and regions currently or previously subject to OFAC sanctions.[1] As for entities and individuals, OFAC publishes searchable lists of sanctioned parties, referred to as Specially Designated Nationals, so that due diligence can be conducted.[2] Typically, U.S. companies are prohibited from engaging in transactions or otherwise dealing with SDNs, whose assets under U.S. jurisdiction can also be frozen.

In addition, there is an array of arguable “bad guys” against whom sanctions may be brought. These include terrorist organizations and their state sponsors, despots and war criminals, proliferators of weapons of mass destructions, transnational criminal organizations, violators of certain weapons conventions and international agreements, and regimes found to be violators of human rights. This list also includes significant narcotics traffickers, for whom OFAC may establish sanctions to prevent transactions with or on behalf of, as well as blocking their assets. Examples of these types of targets of OFAC sanctions can readily be found in the press releases posted on the U.S. Treasury Department’s website.

The purposes of sanctions can be both punitive and prophylactic, designed to penalize activity, encourage a change in behavior or prevent other activity. In theory, sanctions can keep organizations or nations from funding terrorist or criminal pursuits (financial) and can stop the supply of materiel (guns, explosives or other armaments).

It is important to note that not just those designated as targets of sanctions can run afoul of the OFAC sanctions regime, subject to penalties. The entire stream of commerce, and those industry participants present in that chain, can be affected by sanctions — from the sale of products (manufacturers), to their movement and delivery (shippers), and obviously to the financial transactions involved (banks and other financial institutions). Servicing a client designated as an SDN, shipping products via ports in sanctioned countries, or banking an SDN are all examples (and certainly not exhaustive) of potentially running afoul of OFAC sanctions.

Kingpin Act

In the mid to late 1990s, the U.S. government, through executive order, laws and regulations, took action responding to threats posed by narcotics traffickers south of the border.

In October 1995, Executive Order 12978 was issued in response to the violence and corruption arising from large-scale traffickers, primarily at that time in Columbia.[3] The Narcotics Trafficking Sanctions Regulations were issued by OFAC in 1997, bringing sanctions to bear against parties determined to be specially designated narcotics traffickers (SDNTs).[4] Those who play a significant role in international narcotics trafficking activities, materially assist or provide support to traffickers, or are owned or controlled by traffickers may be considered to be SDNTs.

This first set of regulations was followed in 1999 by the Kingpin Act,[5] which authorized the imposition of economic sanctions on certain foreign persons engaging in, or otherwise involved in, international narcotics trafficking. In July 2000, the Kingpin Act was then implemented in OFAC’s Foreign Narcotics Kingpin Sanctions Regulations.[6] Parties who are designated pursuant to this act are included in the SDN list and Kingpin Act-specific lists.[7] Violations of the act include civil and criminal penalties.

Sanctions under this program have been brought against the obvious target individuals and institutions, namely, large-scale narcotics traffickers and their affiliates, such as the following:

An alleged key narcotics trafficker and a chief money launderer affiliated with a Mexican cartel;[8]
A former foreign military official who allegedly used his position and connections to facilitate the transport of cocaine to Mexico;[9] and
A major international drug kingpin from Tanzania who allegedly smuggled multiton shipments of heroin and cocaine to Africa, Asia, Europe and North America via his East Africa-based drug trafficking organization.[10]

Beyond Kingpins

The circle of sanctions designations and enforcement has expanded beyond such “classic” targets, rippling out to alleged intentional and unintentional facilitators of SDNTs.

The former category has included the “money men” for the narcotics kingpins and government officials accused of “playing a significant role in international narcotics trafficking.”[11] These fall into a category of parties who blur the line between facilitating and trafficking.

Financial institutions can also be found to be in violation if they are banking Kingpin Act SDNs. Relatively recently, a large bank in the U.S. was found in violation for maintaining accounts of parties on the SDN list, with enforcers citing the root cause to be “a deficiency in the bank’s sanctions screening software.” If companies are viewed as “large and commercially sophisticated financial institution[s]” by OFAC, as was the case with this bank, expectations are that they maintain active and robust sanctions compliance programs, including training and monitoring/screening.

There have also been findings of violations of the Kingpin Act by entities one might not immediately believe subject to this particular compliance risk. One of the largest U.S. health insurance companies received such a finding as the parent of a subsidiary that had failed to screen policyholders. The subsidiary, serving as a third-party administrator responsible for servicing policies, collecting premiums and maintaining records, was cited for failing to detect and block the insurance policies and premium payments of SDNs. In addition, a large U.S. provider of life insurance and annuity products was cited for failing to screen, identify and block the policies and premium payments of these same SDNs, and was penalized. As in unrelated cases, fault was found with each company “as a large and commercially sophisticated company [that] failed to implement controls and measures to ensure it could identify, block and report insurance policies, premiums or claims payments relating to OFAC-sanctioned policyholders.”

The Final Analysis

The potential reach of Kingpin Act-related sanctions, and documented enforcement actions, should give pause — not only to those in the financial services industry, but also to those individuals and entities operating outside of this business sector. Doing business in a targeted country or having a potential connection to a sanctioned party can be an active risk for those in a variety of marketplaces and industries. As such, companies should consider performing risk assessments, providing employee training, and implementing screening regimes where appropriate for OFAC sanctions, including those on “kingpins.”

[1] OFAC administers sanctions programs involving the Balkans, Belarus, Burma, the Central African Republic, Cote d’Ivoire, Cuba, Democratic Republic of the Congo, Rough Diamond Trading (Kimberley Process), Iran, Iraq, Lebanon, Liberia, Libya, the Magnitsky Act, North Korea, South Sudan, Sudan, Syria, Ukraine, Yemen and Zimbabwe, as well, persons who commit, threaten to commit or support terrorism, international narcotics traffickers, Foreign Terrorist Organizations, Terrorism List Governments, transnational criminal organizations, cyber-related activities and proliferators of weapons of mass destruction and their supporters.

[2] https://sanctionssearch.ofac.treas.gov/

[3] Blocking Assets and Prohibiting Transactions with Significant Narcotics Traffickers

[4] 31 C.F.R. Part 536

[5] 21 U.S.C. §§ 1901-1908 and 8 U.S.C. § 1182

[6] 31 C.F.R. Part 598

[7] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/narco_sanctions_kingpin.pdf

[8] https://www.treasury.gov/press-center/press-releases/Pages/jl0537.aspx

[9] https://www.treasury.gov/press-center/press-releases/Pages/jl2146.aspx

[10] https://www.treasury.gov/press-center/press-releases/Pages/jl0378.aspx

[11] https://www.treasury.gov/press-center/press-releases/Pages/as0005.aspx