OFAC Enters into Settlement Agreement with State Street Bank and Trust Company and its subsidiary, Charles River Systems, Inc.

On July, 26, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) entered a settlement agreement State Street Bank and Trust Company (“State Street”), a Massachusetts-based financial institution, on behalf of itself and its subsidiary, Charles River Systems, Inc. (“Charles River”) (collectively referred to hereafter as “Respondent”). According to a press release, State Street agreed to pay $7,452,501 to settle its potential civil liability for 38 apparent violations of OFAC’s Ukraine-Related Sanctions Regulations, 31 C.F.R. part 589, and specifically Directive 1 issued pursuant to Executive Order (“E.O.”) 13662 originally issued on September 12, 2014, and was subsequently amended twice- first on July 16, 2014, and again on September 29, 2017. The apparent violations involved invoices that were redated or reissued by Charles River between 2016 and 2020 for certain customers who were subject to Directive 1 of Executive Order 13662, as well as certain payments outside of the applicable debt term accepted by Charles River from these customers (the “Apparent Violations”).

This settlement agreement serves as a reminder that companies cannot skirt the “new debt” restrictions imposed under E.O. 13662 (which treat payment terms for goods and services as “new debt” subject to limits on the term) by simply reissuing and re-dating older, unpaid invoices. More generally, it underscores the importance of sanctions-related compliance training and procedures, particularly when doing business with entities on OFAC’s Sectorial Sanctions Identification (“SSI”) List.

Apparent Violations

According to OFAC beginning in approximately 2008, Charles River established and maintained business relationships with subsidiaries owned 50 percent or more by Sberbank or VTB Bank, both being Russian financial institutions that OFAC listed under Directive 1 in 2014, and whose majority owned subsidiaries (the “SSI customers”) are also subject to the Directive 1 prohibition.

Charles River entered into multilayered contracts with SSI entities, (“Master Service Agreements”) that established the overarching service terms between each SSI entity and Charles River (together “the parties”).

Charles River issued invoices to the SSI entities pursuant to the Master Service Agreements while Directive 1 was in force. Importantly, under OFAC guidance FAQ 370 and FAQ 419 an extension of “new debt” in excess of the permitted term – 30 days – may occur if an invoice is not paid within such a time after it is rendered. However, Charles River’s invoices remained unpaid after this date, and in order to obtain payment, Charles River then redated unpaid invoices and reissued other invoices under new identifiers to prevent U.S. financial institution from rejecting late payment from SSI customers. Charles River also accepted invoice payments from SSI entities after the relevant Directive 1 debt term had expired.

The activity as discussed above occurred over the course of four years between December 2016 and May 2020, including 19 months following Charles River’s acquisition by State Street in October 2018. Although State Street performed a post-acquisition onboarding analysis in which it identified certain Charles River clients as entities subject to Directive 1, State Street failed to consider the Directive’s applicability to late invoice payments.

The Penalty Analysis

The statutory maximum civil monetary penalty was $13,550,002. OFAC determined that neither State Street nor Charles River voluntarily self-disclosed the Apparent Violations and that the Apparent Violations constitute an egregious case. Accordingly, under OFAC’s Economic Sanctions Enforcement Guidelines (“Enforcement Guidelines”), the base civil monetary penalty applicable in this matter equals the statutory maximum, which is $13,550,002. Ultimately the settlement amount of $7,452,501 reflected OFAC’s consideration of the General Factors under the Enforcement Guidelines.

In particular, OFAC determined the following to be aggravating factors:

• Charles River appeared to recklessly violate U.S. sanctions regulations by reissuing or redating invoices and accepting invoice payments outside of applicable Directive 1 debt tenors, and was aware that its conduct would violate U.S. sanctions regulations. Charles River failed to institute or conduct internal compliance procedures to address the risks posed by its relationships with its clients. Instead, Charles River staff sought payments by reissuing and redating invoices.
• Charles River continued its apparently violative activity despite: (i) multiple rejection notices from a U.S. financial institution, both U.S. sanctions authorities generally and OFAC specifically; and (ii) guidance from financial institutions.
• Charles River staff members from multiple internal offices were involves in, or aware of, the reissuance or redating of invoices for SSI customers. State Street’s staff post-acquisition dismissed multiple automatic screening alerts concerning payments from Charles River’s SSI customers without considering the application of Directive 1.
• Charles River is a commercially sophisticated company and State Street is a large and sophisticated global financial institution.

OFAC also determined the following to be mitigating factors:

• Neither State Street nor Charles River have received a penalty notice from OFAC in the preceding five years.
• State Street implemented remedial measures including:
  • amendments to its global sanctions policies;
  • onboarding prohibitions for all Directive 1 and Directive 1-owned entities;
  • updating its alert disposition processes;
  • training for certain Charles River staff members; and
  • increasing monitoring of sanctions issues within State Street management.
• Although Charles River U.S. financial institution did not cooperate, State Street cooperated with OFAC during the course of the investigation.

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