The SEC’s Office of Global Security Risk adds an extra layer of teeth against sanctions violations

Date: September 1, 2016
By: Anna Sayre, Legal Content Writer,

 The global risk environment has changed dramatically in recent times, and continues to change almost daily as we learn of new or possible global threats of terrorist activity. The regulator of the securities industry, the US Securities and Exchange Commission ((SEC) plays an important role to protect against a possible terrorist attack. The SEC’s Office of Global Security Risk (OGSR), in operation since 2005, provides an extra layer of protection against such risks by monitoring disclosures related to business activities involving US sanctioned countries, as well as prompting further information regarding those disclosures (or lack thereof) from companies in the US and abroad.

Through this increased monitoring by the OGSR, the SEC has strongly enhanced its scrutiny of disclosures made by companies about their business dealings with countries either sanctioned or “disfavoured” by the US Government. Notably, both US and non-US companies are subject to this extra level of scrutiny, mirroring OFAC’s long-arm jurisdiction regarding sanctions violations. In the past decade, the OGSR has provided an important extra layer of protection against sanctions violations and has regularly and proactively identified companies with dealings in sanctioned countries. As such, the growing impact of the OGSR should be sharply noted by all companies carrying out international transactions.

Birth of the OGSR

The OGSR was created by the SEC, at the urging of Congress, with a mission to monitor and then seek disclosure from companies that appear to be doing business in sanctioned countries. The federal securities laws, on which the SEC relies, are premised on the idea that a company must disclose information that a reasonable investor would think is material, in light of the circumstances under which the disclosures are made, in assessing a potential investment in that company. This standard for disclosure based on “materiality” has long been the foundation of the Commission’s work. The OGSR also works on this premise by assessing the materiality of a transaction.

In the Congressional report recommending the creation of the OGSR, it was declared that “a company’s association with sponsors of terrorism and human rights abuses, no matter how large or small, can have a material adverse effect on a public company’s operations, financial condition, earnings, and stock prices, all of which can negatively affect the value of an investment.” This broad mandate not only includes financially material transactions involving state sponsors of terrorism, but can also include transactions that are financially immaterial as long as they could be material to a reasonable investor for any other reason.

Today, OGSR’s website states that it works closely with the Division of Corporation Finance to “monitor whether the documents public companies file with the SEC include disclosure of material information regarding global security risk-related issues.”

How the OGSR Monitors

The OGSR proceeds mainly through questions and so-called “comment letters” to companies that have already mentioned a sanctioned country in a filed disclosure document or on their website. To date, a number of big name companies have received letters from OGSR, asking the companies to detail contacts with sanctioned countries, and essentially, to justify the prior lack of disclosure by explaining why those contacts were not material.

The OGSR regularly uses its own initiative to proactively identify potential non-disclosures of business dealings with sanctioned countries. This is most often identified through either a company’s SEC filings for that year, wording on a company’s website, as well as news articles and other publicly available information. In 2010, St. Jude Medical Inc. received a comment letter in 2010 stating, “It appears from information on page 13 [of your Form 10-K for 2010] that you have operations in the Middle East and Africa, regions generally understood to include Iran, Syria, and Sudan.” As this example shows, even conducting business on certain continents or in a certain region can invite an OGSR inquiry if that business is not specifically described in a company’s SEC filings. In 2011, TripAdvisor, Inc.’s also received a letter commenting on the company’s Form 10-K. The comment letter stated “We note that your website enables visitors to book flights to and from Iran, Sudan, and Syria”. The letter asked TripAdvisor to describe the nature and extent of the company’s past, present, and anticipated contacts with each of the three countries. It also asked TripAdvisor to discuss whether those contacts “constitute a material investment risk for your security holders.”

Based on these sources of information, the OGSR will typically ask a company to explain their past, present, and anticipated contacts with the sanctioned countries implicated. The letters then ask for a discussion of why those contacts were not sufficiently material to include in an SEC Form 10-Q or 10-K.

Securities Firms subject to recent OFAC penalties

Apart from requiring a further explanation as to an institution’s dealings with a sanctioned country, the OGSR also has the power to inform OFAC and other US regulators if it feels a violation is particularly egregious. In the past few years, financial and securities institutions have paid large fines to OFAC for failing to disclose sanction violating transactions.

In 2014, Clearstream Banking, S.A. (“Clearstream”), a financial institution based in Luxembourg, agreed to remit $151,902,000 to settle potential civil liability for apparent violations of  Iranian sanctions against Iran. Clearstream, as intermediary to the Central Bank of Iran (CBI), served as the channel through which the CBI maintained a beneficial ownership interest in 26 securities, with a nominal value of $2.813 billion, held in custody at a central securities depository in the United States.  Clearstream exported custody and related services from the United States to the CBI in apparent violation of Iranian sanction law.

Also in 2014, Zulutrade, Inc., a Delaware-incorporated entity registered with the Commodities Futures Trading Commission (CFTC), agreed to pay $200,000 to settle potential civil liability for apparent violations of sanctions against Iran, Sudan, and Syria.

Future Developments

Though the OGSR is now over 10 years old, it is still a relatively new office and, as such, that continues to evolve its focus and practices. Its focus and practices could be affected by changes in world events, such as updates to currently imposed sanctions, Congressional interest in OGSR’s mission, as well as new leadership at the SEC. Companies that regularly engage in international business, especially if that business has any material link to a country sanctioned by the US government, should remain alert to developments in the OGSR as they prepare disclosures, the wording of their website, and other correspondence with the SEC.

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