Subject to Inquiry: White Collar, Congressional, SEC, Energy Enforcement & Other Government Inquiries

In recent years, the U.S. government has vigorously pursued financial institutions that knowingly violated sanctions targeting rogue regimes.  Since January 2009, the Department of Justice and the Treasury’s Office of Foreign Assets Controls (“OFAC”) have brought a series of actions against European banks for violating U.S. financial sanctions.  Four banks have paid criminal penalties totaling over 1.6 billion dollars after acknowledging moving money through the U.S. from sanctioned countries.  The U.S. is now imposing tough new sanctions against businesses that aid Iran.  In light of the seriousness of the Iranian threat, one can expect that any business that ignores the sanctions will be subject to harsh treatment by the government’s enforcement agencies.

 On July 1, 2010, President Obama signed into law H.R. 2194, the “Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010” (“CISADA” or “the Act”).    CISADA follows and builds upon the recently-passed United Nations Security Council Resolution 1929, which imposed sanctions upon Iran for its ongoing illicit nuclear activities.  CISADA amends the Iran Sanctions Act and strengthens the sanctions regulations targeting Iran that are administered by OFAC.

 While U.S. companies have been prohibited from providing goods or services to Iran for some time, recently there has been increased attention focused on foreign companies, including overseas subsidiaries of U.S. companies, with substantial business ties to Iran’s energy sector.  The revenue from energy exports drives Iran’s economy and its ability to fund its nuclear program.  Deterring investments in Iran’s energy sector is therefore considered an important part of U.S. efforts to prevent Iran from acquiring nuclear weapons. 

Legislation passed in 1996 authorized the President to impose sanctions on any foreign entity that invested $20 million or more in Iran’s energy sector, but no Administration has used the power.  CISADA ratchets up the pressure on those doing business in Iran in several ways.  First, the Act now requires the imposition of sanctions and broadens the categories of transactions that trigger sanctions, focusing on companies that sell refined petroleum to Iran or assist Iran in developing its own domestic refining capacity.  While the President continues to have the power to waive the imposition of sanctions on foreign companies, there must be a determination that the waiver is “necessary to the U.S. national interest,” a higher standard than previously existed.  The Act also includes a waiver mechanism that the President may use to avoid sanctioning an overseas business if the government with primary jurisdiction over the business is “closely cooperating” with the United States in its efforts against Iran.

In response to the attention focused on foreign companies with substantial business ties to Iran, a number of state and local governments, universities, and pension and mutual funds have decided to divest from companies with significant operations in Iran.   The Act provides a legal framework by which state and local governments and certain other investors can carry out divestment.  Among other things, the Act recognizes the authority of state and local governments to divest from companies involved in investments of $20 million or more in Iran’s energy sector and sets standards for them to do so.  The Act also provides a safe harbor for changes of investment policies by private asset managers, and it expresses the sense of Congress that divestments do not constitute a breach of fiduciary duties under ERISA.

In addition to targeting the Iranian energy sector, the Act imposes significant new obligations and restrictions on financial institutions.  Pursuant to the Act, the Treasury Department has now issued regulations that prohibit, or impose strict conditions on, the opening or maintenance in the U.S. of a correspondent or payable-through account by a foreign financial institution that Treasury finds knowingly assists key Iranian banks or the Islamic Revolutionary Guard Corps (“IRGC”).  In a sign of the urgency felt within the government on all matters Iran-related, Treasury completed the regulations within half the time allotted under the Act.  They were released on August 16, 2010 and can be found here: http://edocket.access.gpo.gov/2010/2010-20238.htm.  Treasury intends to publish the names of the foreign financial institution subject to the prohibition in an appendix to the regulations.  A domestic bank that opens a prohibited account and the foreign bank that “attempts,” or “causes” the account to be opened both face substantial civil and criminal penalties. The regulations also make clear that foreign subsidiaries of U.S. financial institutions may not engage in any transaction with Specially Designated Nationals (http://www.treas.gov/offices/enforcement/ofac/sdn/) that are agents or affiliates of the IRGC. 

There is another set of regulations still to come:  Under the Act, Treasury must issue regulations that will require U.S. banks that maintain correspondent or payable-through accounts in the U.S. for foreign banks to take steps to ensure that the foreign banks are not engaging in prohibited activities through the accounts.  The Act does not set a time within which this set of regulations is to be issued, but one assumes they will be out soon.  Given the circumstances, banks subject to these regulations should pay close attention.

It’s been more than several weeks since the Administration indicated that a decision on whether Khalid Sheikh Mohammed will be tried in a federal court or military commission was weeks away. Of course, this will be the second decision on the issue – Attorney General Eric Holder first announced that KSM and his 9/11 co-conspirators would be tried in federal court in Manhattan back on November 13.  The opposition to that announcement grew and grew, until the Administration acknowledged it was reconsidering in early February.  More recently, in testimony before the Senate Judiciary Committee on April14, Attorney General Holder again repeated that a decision would come in "a number of weeks." 

The Administration still intends to go forward with a trial, but it appears that the trial decision has become ensnared in complex negotiations with the Hill.  Politico recently reported that the White House is bargaining with Senator Lindsey Grahamin an attempt to forge a comprehensive deal on detainee policy. According to the article, in return for military trials for the 9/11 plotters, Graham would support congressional funding to establish a detention facility in Illinois for some current Guantanamo prisoners, reform of laws as to who is an enemy combatant, and a preventive detention statute.

According to press reports, the President initially asked Attorney General Holder to choose the site of the trial in an effort to maintain an independent Justice Department.  So a decision that was originally intended to be insulated from politics has now become entirely entangled in politics. The detainee issues that are being negotiated are extremely difficult to resolve (they have been under discussion for years), and there is no reason to think that a grand deal can be achieved with Senator Graham, let alone the whole Congress, anytime soon.  If the KSM trial decision won’t come until the other detainee issues are worked out, we are in for a long wait.

DOJ has traditionally resisted any political intrusion into its charging decisions.  Indeed, as part of that resistance, the staff in the Main Justice building spends lots of time and energy fighting off Congressional requests for information concerning pending investigations and prosecutions.  To be sure, the KSM case is different than the ordinary federal prosecution in lots of important ways and the trial decision deserves a full discussion.  But the current uncertain status of the KSM prosecution is another demonstration of the utility of the traditional DOJ approach.

With any luck, the trial question will be decoupled from the rest of the detainee issues and decided soon.  Whether the prosecution is in a military or civilian courtroom, it will take a long time to complete.  And however the KSM decision is resolved, I hope it yields a consensus on the way forward that will permit prosecutors to move in other terrorism cases without delay.