French bank Société Générale has agreed to pay penalties totalling $1,340,165,000 to US federal and state prosecutors and regulators, having admitted to wilfully breaking US and New York State sanction laws between 2004 and 2010. SWIFT message-stripping was prevalent, according to the bank's own admission.

The bank has admitted to breaking the federal Trading With The Enemy Act and New York's statutes and ignoring regulations passed by the Treasury’s Office of Foreign Assets Control (OFAC) in a deferred prosecution agreement with the US Attorney’s Office for the Southern District of New York. It has promised to refrain from all future criminal conduct and implement remedial measures as required by its regulators. Its fine is the second largest penalty ever imposed on a financial institution for breaking US economic sanctions. It has already paid some $717 million out of the total as the result of a civil forfeiture action.

OFAC promulgates regulations - including the ones against Cuba and other countries that the bank circumvented - to administer and enforce US law governing economic sanctions, including regulations for sanctions related to specific countries, as well as sanctions related to so-called Specially Designated Nationals or SDNs, which are people and companies specifically designated by OFAC as having their assets blocked from the US financial system by virtue of being owned or controlled by, or acting for, targeted countries, people, groups and entities such as terrorists and drug traffickers. Banks, such as Société Générale, that break OFAC regulations are subject to a range of penalties. OFAC has recently updated its list of SDNs and 'blocked persons.'

Société Générale operated 21 US dollar-denominated credit facilities that moved large sums to Cuban banks, entities controlled by Cuba, and Cuban and foreign corporations for business conducted in Cuba - a sanctioned activity ever since President Kennedy decided that he could not tolerate the Cuban revolution in 1961. The payments were cleared through American financial institutions, breaking the TWEA and the OFAC's anti-Cuban regulations. In total, in 2004-10, the bank processed more than 9,000 "non-transparent" outgoing transactions that failed to disclose an ultimate sanctioned party sender or beneficiary, with a total value of more than $13 billion.

The bank accepts that its conduct broke New York State Penal Law sections 175.05 and 175.10, which make it a crime to, “with intent to defraud...cause a false entry in the business records of an enterprise.” It is a felony under section 175.10 if a violation under section 175.05 is committed and the person’s or entity’s “intent to defraud includes an intent to commit another crime or aid or conceal the commission thereof.”

The message strippers

Société Générale also engaged in a broader practice of processing US transfers on behalf of sanctioned entities while omitting information about those sanctioned entities from the accompanying payment messages to US financial institutions located in New York, in order to circumvent US sanctions. Most of this activity stopped in early 2007 and therefore benefited from the statute of limitations as it applies to infractions against the TWEA or the International Economic Emergency Powers Act 1977 (by which US presidents issue sanctions against countries) and for violations of New York State law.

Beginning in 2002, if not before, the French bank struggled to stop its sanction-breaking transactions from being detected and/or blocked in the United States by using cover payments. Whenever it did so, it sent one SWIFT payment message to the relevant New York bank, omitting the 'beneficiary' field and listing only the bank to which the funds should be sent. (Until November 2009, the applicable SWIFT protocols did not require a reference to the ordering party in Single Customer Transfers processed as MT103/202 cover messages.) It then sent a second SWIFT message to the non-US recipient bank, providing the name of the sanctioned party beneficiary to whom the funds should be remitted. The business lines that dealt with sanctioned entities included global investment, correspondent banking, money markets, coverage and investment banking, along with the forex and treasury departments, Banque de Détail en France (its retail subsidiary) and certain overseas branches.

One manager wrote: “We are going to receive transfer orders in USD in favor of certain suppliers in non-Cuban banks. In this case, the USD transfer must not in any case mention the name of the ordering party or its country of origin, Cuba. The clearing will indeed be carried out in NY. I have explicitly asked [the joint venture] to write on its transfer request the instructions to be included.”

Société Générale’s message-juggling procedure was memorialised in writing in 2003, as part of discussions among various departments regarding how to deal with US dollar payments that financial institutions in sanctioned countries. One senior investment banker wrote in favour of “a procedure and a common SG position that we will have to relay to the banks under embargo (Iran, Libya, etc.) for the issuance and receipt of transfers in USD.” Later in the year, a senior member of the treasury department’s back office drafted a document entitled “Scheme for international settlement” which applied where “the customer belongs to a country under OFAC embargo (Iran, Libya, ...)” and laid out the mechanics of the message-stripping procedure. The document noted that for payments by SocGen to the customer, “[r]egarding the OFAC rules there is no risk for SOCGEN except if we make a mistake in the MT202.”

SocGen's compliance people were aware of the concealing exercise and some actually promoted it early on. One senior member of the group compliance department encouraged others to 'repair' the messages. Starting in May 2004, after the US Federal Reserve took action against the Swiss Bank UBS for (among other things) engaging in US dollar banknote transactions with countries under US sanctions, SocGen’s various departments gradually abandoned message-stripping one by one.