OFAC Compliance Update: OFAC Settlement with Cartier Highlights Need for Robust Due Diligence by Retailers to Ensure Compliance With OFAC Regulations
On September 26, 2017, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced a $344,800 settlement with Richemont North America, Inc. d/b/a Cartier (“Cartier”) to settle Cartier’s potential civil liability for four alleged violations of the Foreign Narcotics Kingpin Sanctions Regulations (“FNKSR”) found at 31 C.F.R Part 598. The settlement is an important reminder to retailers that, although retailers of goods which are at a high risk of use in trade-based money laundering may not be specifically required to maintain an Anti-Money Laundering (“AML”) compliance program to prevent money laundering, they may still be required to conduct due diligence on their customers to ensure that they are not engaging in business with prohibited persons or entities and committing violations of US law in the process. A copy of the settlement announcement can be read here.
Generally speaking, pursuant to the FNKSR, US persons (which include corporations) are prohibited from engaging in business transactions with persons and entities identified as “Specifically Designated Narcotics Traffickers.” 31 C.F.R. § 598.203. As explained in 31 C.F.R. § 598.314, the names of persons identified as Specifically Designated Narcotics Traffickers are incorporated into OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) which is available for review on OFAC’s website here.
According to OFAC, Cartier violated 31 C.F.R. § 598.203 when it exported four shipments of jewelry to Shuen Wai Holdings Limited in Hong Kong, an entity which has appeared on the SDN List since November 13, 2008. As explained by OFAC, on four separate occasions, an individual purchased jewelry from a Cartier boutique in California or Nevada and provided Shuen Wai’s name and mailing address as the ship-to party. Although the information provided to Cartier included the same name, address, and country location for Shuen Wai as appears on the SDN List, Cartier did not identify any sanctions-related issues prior to exporting the goods. In short, had Cartier taken steps to verify whether the entity to which it was asked to ship goods to was on the SDN List, it would have identified Shuen Wai and determined that such transactions were impermissible under the OFAC sanctions regime. In determining the settlement amount, OFAC considered this lack of minimal due diligence in light of the fact that Cartier deals in goods (jewels) that have long been at high risk of being used for trade-based money laundering.
The Cartier settlement highlights the importance of US retailers who export goods or conduct international business to implement basic due diligence programs to ensure OFAC sanction regime compliance. This is particularly true in industries whose products are at a high risk of use in trade-based money laundering. While the full scope of trade-based money laundering is beyond the scope of this article, generally speaking, trade-based money laundering occurs where: 1) a party attempts to launder narcotics proceeds by purchasing items (such as jewels or electronics) in the United States using US Dollars obtained through the sale of drugs, 2) exports those items overseas to the overseas supplier of narcotics or a shell company owned by the supplier, and 3) the overseas narcotics supplier then resells the goods for local currency. In this way the proceeds of the illicit sale of narcotics are not only moved overseas to the supplier but are also converted into local currency at the time of the goods’ eventual sale.
Additionally, the Cartier settlement demonstrates how OFAC sanctions compliance is separate and distinct from other obligations, or lack of obligations, under the Bank Secrecy Act. Put simply, the Bank Secrecy Act’s implementing regulations found at 31 C.F.R. Chapter X require certain industries to maintain robust AML compliance programs in order to reduce money laundering risks. However, most US retailers either do not fall under the scope of the BSA or, as in the case of Cartier, are specifically exempted. See 31 C.F.R. § 1027.100(b)(2). Thus, although not mandated by federal law to maintain such programs, US retailers which engage in international transactions should develop policies and procedures to identify prohibited transactions in order to ensure compliance with OFAC regulations, and avoid being unwittingly used in money laundering transactions.
Fuerst Ittleman David & Joseph’s Anti-Money Laundering practice covers a wide range of businesses and legal issues. Our AML attorneys advise a wide variety of financial institutions regarding their licensing and anti-money laundering requirements as set forth by the Bank Secrecy Act and individual state laws. The anti-money laundering law firm of Fuerst Ittleman David & Joseph has represented a wide array of financial services providers in IRS-BSA audits, OFAC licensing issues, grand jury investigations, state investigations, criminal and civil litigation, and commercial transactions. For more information regarding the Bank Secrecy Act or if you seek further information regarding the steps which your business must take to become or remain compliant, you can reach an attorney by emailing us at firstname.lastname@example.org or by calling us at 305.350.5690.