Global Dispute of the Year, Investigations: Intesa Sanpaolo
Honorees: Intesa Sanpaolo SpA, Davis Polk
In recent years, the U.S. has steadily ratcheted up pressure on states such as Iran, Syria, Sudan, and Cuba, by imposing ever more stringent economic sanctions. Exporters and banks increasingly need to be mindful of with whom they are transacting and where.
A slew of sanctions settlements underscores the perils. Five European banks have paid over a half billion dollars apiece—including ING Bank ($619 million) and Standard Chartered ($667 million) in 2012—to regulators including the Office of Foreign Assets Control (OFAC) and the New York State Department of Finance. At risk also is reputation—and more critically still, a coveted U.S. banking license.
Typically, there’s a degree of inevitability about sanctions investigations. Once the authorities begin compiling a case, few entities have the nerve to challenge it. But things turned out differently for Italian bank Intesa Sanpaolo, after local law enforcement raided its Milan offices, at the request of the U.S. Department of Justice.
A subpoena disclosed that Intesa Sanpaolo was alleged by Justice to have illegally processed transactions relating to a number of sanctioned regimes, including Iran, having stripped out the “identifiers” linking them to those countries.
From the outset, Intesa engaged Davis Polk & Wardwell to assist with the investigation. The firm’s strategy was to cooperate fully with the authorities while advancing the argument that a processing of payments without Iran identifiers through U.S. banks is not necessarily a violation of U.S. criminal law.
First, it argued that a U-Turn exception to the OFAC Iran regulations, which otherwise restricted U.S. persons from carrying out most financial transactions involving Iranian parties, did not require banks—with a U.S. license—processing such payments to independently investigate the parties.
It also argued that “cover payments” were a widely accepted banking practice, and that because the U-Turn regulations did not require U.S. banks to carry out diligence on the transaction, such payments could be made without violating U.S. law. A “cover payment” refers to the instruction to the US clearing bank to transfer the funds from one account to another.
Finally, it argued that this interpretation was consistent with OFAC’s own public guidance to banks, and that whatever had happened in other cases, banks were entitled to rely on published statements and straightforward interpretations of the relevant federal statutes.
This, indeed, was the first time that a bank’s lawyers had challenged a number of fundamental premises regarding the omission of identifiers and the processing of payments “in cover.” And it worked. Four years later almost to the day, the Justice Department announced that it would not be bringing criminal charges. The Manhattan district attorney’s office, which had also been pursuing the case, reached the same conclusion.