The US$1.92 billion settlement reached between HSBC and the U.S. Department of Justice this past December over allegations of money laundering by the global bank served as a stark reminder to all financial institutions: The penalty for breaking sanctions against Iran and other blacklisted nations would not only be severe, but even the biggest institutions would be held accountable.

The aggressive stance is the result of a shift in priorities and particular changes in the way U.S. authorities are interpreting laws, say Eric Volkman and Robert Sims, attorneys with international law firm Latham & Watkins.

Successes against large financial institutions have only emboldened authorities, they note, and businesses anywhere in the world, but especially in the Middle East, have to ensure they are in compliance with Iranian sanctions, as even normal transactions can result in criminal proceedings if deemed to be breaking U.S. strictures. "Any transaction that touches the U.S. can trigger prosecution," Volkman says.

Expansive Sanctions

The attorneys note that statutes regarding transactions with Iran have been in place since 1996, but these laws were first expanded in 2010, and then saw an acceleration in 2012, both in terms of prosecutorial focus and application.

The statutes implemented in 2012, Volkman says, are "the most far reaching sanctions we’ve seen," pushing countries to demonstrate that they had already reduced their Iranian oil imports, and now were cutting off Iranian imports entirely.

In turn, financial institutions increasingly found themselves liable to prosecution, even if there were no U.S. citizens involved in a transaction, or even if it did not take place in the U.S., Volkman says. U.S. companies even with non-U.S. operations could not do business with Iran, and were given 100 days to divest those operations or face sanctions.

Sims adds routine financial transactions such as wire transfers and letters of credit now fall under the realm of increased scrutiny. "Not what you would normally associate with felony activity in the United States," he notes.

"Prior to 9/11, it was very hard for [Department of Commerce] agents to get the attention of federal prosecutors in the U.S.," says Sims, who formerly served in the Clinton Administration as the Senior Adviser for the U.S. Department of State’s Bureau of International Narcotics and Law Enforcement Affairs. "Post 9/11, the view of the U.S. Department of Justice treats these more like national security violations."

Another change, Sims adds, is the involvement of state authorities, including state bank regulators in New York and U.S. District Attorneys, in these cases that were "formally the province of the federal government." It is a development that is likely permanent, he says, and for companies it means an entirely differently set of government officials to negotiate with.

Heavy fines

With its billion-dollar settlement, HSBC became the latest institution to pay heavy fines to avoid prosecution. Earlier in June, ING Bank settled for $US619 million when faced with claims it had transferred billions for Cuba and Iran. Standard Chartered paid US$327 million for serving Iranian and Sudanese clients.

A February report on the effect of U.S. sanctions on Iran released by the U.S. Government Accountability Office (GAO) notes that "from 2005 through 2012, The Office of Foreign Assets Control imposed 45 civil penalties against banks for facilitating transactions in apparent violation of Iran sanctions regulations."

The major reason why the U.S. government has been able to get such payouts, Volkman noted, is because few institutions have chosen to contest claims, weighing the cost of paying an agreed upon fine versus taking their chances in court, where they could still end up paying astronomical fines, but also see their reputations irreparably damaged by an indictment.

"It’s a law made up of settlements," he notes. "The government is free to take the most aggressive and expansive interpretation of statutes."

Sims agrees. "There’s been more interest in these cases, coinciding with a much more aggressive view of the statutes themselves."

U.S. authorities have wielded the threat of cutting banks off from the U.S. financial system with efficiency. In 2011, Dubai-based Noor Islamic Bank agreed to end ties with Iranian banks and customers following U.S. government pressure.

Banks in the United Arab Emirates cite this pressure as a reason why they have virtually blocked Iranian citizens or businesses from opening accounts, even for legitimate trade. HSBC, for instance, allows accounts to be opened by individuals from certain countries only if they can afford higher bank balances.

"We must apply enhanced oversight on any customer with connections to sanctioned countries. Where we are unable to maintain sufficiently detailed information about such a customer through a relationship managed account, we are having to discontinue that relationship," HSBC said in a statement.

Compliance a must

There is added reason for financial institutions to consider the ongoing sanctions against Iran and the impact it will have on their businesses. This past September, a number of websites belonging to U.S. financial institutions — including Wells Fargo, Bank of America, U.S. Bancorp and JPMorgan Chase — were disrupted, and customers were blocked from using their services. It was later alleged that Iranian-supported hackers were behind the attacks, largely in response to the ongoing financial and trade sanctions against the country.

For its part, the U.S. government has made efforts to inform financial institutions about its increased sanctions. The GAO report notes that since 2010, "Treasury officials have conducted outreach to more than 145 foreign financial institutions in more than 60 countries as well as to foreign governments, regulators, and other trade groups and associations." Treasury officials, it notes, "have made several trips to the United Arab Emirates to conduct outreach with financial institutions."

Strictures are expected to increase even further. This month, U.S. lawmakers have introduced legislation, The Nuclear Iran Prevention Act of 2013, to grant the President more authority to go after strategic imports that Iran could use in its nuclear program.

For companies, the advice that Volkman and Sims have is straightforward: financial institutions have to make every effort to be in compliance with the law. "Know your customer, and know your customer’s customer," Volkman says, noting that penalties have varied from one institution to another.

"There is an emphasis on compliance coming from the top," he notes, that institutions that investigated infractions early, and did a thorough internal investigation are better positioned to deal with the government than institutions found to have facilitated illegal transactions with little oversight.