Davis Polk & Wardwell LLP

Davis Polk Webcast: U.S. Enforcement & Investigations Issues for Financial Institutions Presented by Carey R. Dunne Jennifer G. Newstead Luigi L. De Ghenghi John B. Reynolds III September 13, 2012

CLE CREDIT WILL BE AVAILABLE FOR THIS PROGRAM – 1.0 FOR NEW YORK AND CALIFORNIA

Presenters

Carey R. Dunne – Davis Polk Partner Mr. Dunne is Chair of Davis Polk’s litigation practice and a member of the firm’s three-person Management Committee. He represents clients in a wide variety of criminal, civil and regulatory matters, including grand jury inquiries, internal investigations, enforcement actions by state and federal agencies, and complex commercial disputes. Most of the cases that he handles involve “parallel proceedings”: competing actions and investigations that must be defended simultaneously in multiple forums. His white collar criminal and regulatory matters have involved allegations of securities fraud, insider trading, foreign corrupt practices, money laundering and other financial crimes. He also has extensive experience advising companies, boards and audit committees on compliance and corporate governance issues. Jennifer G. Newstead – Davis Polk Partner Ms. Newstead is a member of Davis Polk’s Litigation Department. She has an international practice representing multinational corporations and financial institutions in a wide range of regulatory, criminal and civil matters. She concentrates in regulatory and white collar-criminal investigations involving the FCPA, OFAC sanctions, securities fraud, tax and antitrust issues, and provides related governance and compliance advice. She regularly conducts confidential board-level investigations and provides strategic advice for clients across a range of industries, including financial services, pharmaceutical/life sciences, defense, natural resources and hospitality. Her civil practice includes commercial litigation matters involving securities, M&A and contract issues in federal and state courts.

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Presenters (cont.)

Luigi L. De Ghenghi – Davis Polk Partner Mr. De Ghenghi is a member of Davis Polk’s Financial Institutions Group. His practice focuses on bank regulatory advice, including Dodd-Frank Act regulatory implementation and M&A and capital markets transactions for U.S. and non-U.S. banks and other financial institutions. In the area of regulatory implementation, he is experienced in advising on regulatory capital issues, including Basel III, and the preparation of living wills. He is also experienced in advising banks and other financial institutions on corporate governance and compliance matters, bank insolvency issues, government investigations and enforcement actions, cross-border collateral transactions, and clearance and settlement systems. John B. Reynolds III – Davis Polk Partner Mr. Reynolds is a member of Davis Polk’s Corporate Department in Washington DC. He advises U.S. and foreign corporations, financial institutions, defense, technology and consumer products companies, government-owned corporations and sovereign wealth funds on trade, privacy, security and regulatory issues. He frequently represents clients before the U.S. Departments of State, Treasury, Commerce, Defense and Homeland Security and the Office of the U.S. Trade Representative. With over 20 years of experience in export controls and economic sanctions, he counsels across industry sectors concerning all types of international compliance and enforcement issues, especially matters involving U.S. national security.

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Overview

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Recent Significant Developments in the U.S. Enforcement Landscape* Standard Chartered HSBC

The Broader Context: Overview and Key Trends in Sanctions Investigations Barclays ABN AMRO Credit Suisse Lloyds ING

Potential Penalties and Outcomes

Looking Ahead: Future Trends in Sanctions & BSA/AML Investigations

Practical Tips for Managing Risk and Handling Investigations

Appendix: Summary of Key Statutes and Regulations * Based on publicly available information

Recent Developments: Standard Chartered

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August 6, 2012 order of the NY Department of Financial Services (“DFS”) relating to Standard Chartered, alleging: Misconduct in the processing of $250 billion in payments on behalf of Iranian entities from 2001 to

2007 Inaccurate statements to regulators about such conduct Failure to promptly report misconduct Ongoing investigation in connection with Libya, Cuba and Myanmar

Historical context: 1996 action by DFS’s predecessor agency against Daiwa’s U.S. banking operations; guilty plea,

$340 million fine to the Department of Justice ("DOJ")

Recent Developments: Standard Chartered (cont.)

August 7, 2012 statement by Standard Chartered “strongly reject[s]” portrayal of facts in the DFS order Notes that “99.9% of transactions relating to Iran complied with U-Turn regulations”

August 14, 2012, Standard Chartered reached a settlement with the DFS Key terms include: Payment of $340 million civil fine to DFS Appointment of monitor chosen by DFS to oversee international transactions Appointment of auditors in New York to oversee compliance with U.S. money-laundering laws

Public reports indicate ongoing investigations by other agencies Federal Reserve Board, the Treasury Department (OFAC), DOJ, Manhattan District Attorney’s

office

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Recent Developments: Standard Chartered (cont.)

In its order, DFS identified payments as violations despite “U-Turn” exception previously available for Iranian-linked payments Contemporaneous news accounts raised question whether regulators had taken potentially

inconsistent views with respect to requirements of U-Turn license Notably, a number of other factors were identified in the DFS order which may have influenced the

agency’s approach to the matter

Outcome raises interesting questions, including: Approach by regulators to coordination in multiple-agency investigations Handling potentially different views among regulators about the nature of potential violations or

other factors, and responding to potentially different outcomes

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Recent Developments: HSBC

Public reports indicate ongoing investigations by various U.S. civil and criminal agencies of historical issues at HSBC A July 2012 report from the Senate PSI raised issues regarding historical HSBC conduct,

including: weaknesses in historical BSA/AML compliance program activities of a Mexican subsidiary raising AML risks

Using HSBC as a “case study,” PSI identified five key AML/compliance risks in correspondent banking activities, focusing on the need for: adequate diligence of correspondent accounts for “high-risk” affiliates robust, effective AML compliance procedures, policies, training and monitoring

OFAC is also reportedly investigating HSBC for issues relating to U.S. economic sanctions programs HSBC has set aside $700 million to cover the cost of potential fines

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Overview and Key Trends in Sanctions Investigations INTRODUCTION

Origins of industry-wide U.S. sanctions investigations 2005 SEC outreach to SEC-registered foreign banks on disclosure of risks relating to dealings

with sanctioned countries ABN AMRO fine announced in December 2005 U.S. designation of Iranian financial institutions beginning in 2006 as part of broader U.S. efforts

to cut off Iran from the international financial system Unilateral action at the time; later reinforced with new EU sanctions As of 2012, six major international banks have settled charges with U.S. regulators relating to

alleged violations of U.S. sanctions on Iran, Libya, Cuba, Sudan, and others At least four other financial institutions are reportedly still under investigation

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Overview and Key Trends in Sanctions Investigations INTRODUCTION (cont.)

Overview of sanctions-related cases 2005-2012: Substantial fines and criminal penalties imposed – aggregating $2.7 billion to date Multi-year, worldwide investigations and comprehensive analysis of USD payments with links to

sanctioned jurisdictions Scrutiny by multiple federal and state civil and criminal regulators U.S. Treasury: Office of Foreign Assets Control ("OFAC") U.S. Department of Justice Manhattan District Attorney’s Office Federal Reserve Bank New York State Department of Financial Services / New York State Banking Department Office of the Comptroller of the Currency ("OCC") Senate Permanent Subcommittee on Investigations

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Outcomes of Recent U.S. Investigations

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*The ABN AMRO settlement was first announced in April 2007.

Bank Date Agency Aggregate Fine

ABN AMRO Dec. 20, 2005

OFAC

$580,000,000 Federal and State Banking Regulators

May 10, 2010* Department of Justice

Lloyds

Jan. 9, 2009 New York County DA

$350,000,000 Jan. 9, 2009 Department of Justice

Dec. 22, 2009 OFAC

Credit Suisse Dec. 16, 2009

New York County DA

$536,000,000 Department of Justice

OFAC

Barclays

Aug. 16, 2010 Department of Justice

$298,000,000 Aug. 17, 2010 New York County DA

Aug. 18, 2010 OFAC

ING June 12, 2012

OFAC

$619,000,000 New York County DA

Department of Justice

Standard Chartered August 14, 2012 New York Department of Financial Services $340,000,000

Overview and Key Trends in Sanctions Investigations ALLEGATIONS

All settling institutions were charged with alleged “stripping” practice occurring outside the U.S. “Stripping” refers to removing or altering sanctioned-country identifiers, or inserting misleading

information, in payment messages

Examples of alleged “stripping” practices: Use of a special ex-U.S.-based internal payment processing unit to manually review messages

from sanctioned-country banks and remove country references Marketing to clients in sanctioned countries the capability to manually alter payment messages Creating a special manual to instruct employees to remove references Routing payments through internal account to hide connection to sanctioned entities

These facts all involved acts outside of the United States—with impact on transaction activity in the United States All of the banks had U.S. offices; only three used their own branches to clear payments on behalf

of sanctioned entities

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Overview and Key Trends in Sanctions Investigations COMMON FEATURES OF SETTLEMENTS TO DATE

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Broad theory of jurisdiction for conduct occurring outside the U.S. In several settlements, no allegations of misconduct by U.S. branch, U.S. nationals or U.S.–based

personnel Charges brought even where financial institution processed USD payments through other

institutions Consistent with U.S. criminal approach in other areas, including the Foreign Corrupt Practices Act

(“FCPA”)

Nature of criminal charges settled: Federal: “knowing and willful violation” of federal law (IEEPA, Trading with the Enemy Act) and

OFAC regulations State: intentional falsification of business records of a NY financial institution ABN AMRO settlement also includes charge of willful failure to establish an adequate AML

program in violation of the BSA

Overview and Key Trends in Sanctions Investigations COMMON FEATURES OF SETTLEMENTS TO DATE (cont.)

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Focus on alleged deficiencies in global sanctions compliance procedures Allegations of inadequate sanctions screening, policies and procedures, training and other

controls across worldwide operations Requirement of prompt, effective remediation of deficiencies through enhancement of compliance

programs In some cases, banks required to appoint an independent monitor

Continuing uncertainty about historic obligation to review U-Turn transactions

Emphasis in agreements on banks’ cooperation and candor Voluntary decision to terminate business with sanctioned countries pre-investigation also a

notable feature of several settlements ABN AMRO agreement also required the bank to cooperate with the DOJ in other investigations

Some investigations also involved exploration of potential AML issues

Potential Penalties and Outcomes Facing Financial Institutions

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Potential criminal penalties Non-prosecution Agreement / Deferred Prosecution Agreement Fines Commitment to enhanced compliance Monitoring by third party Charges against corporation or individuals Conviction and collateral consequences, including potential debarment from government contracts

Potential regulatory penalties Fines Commitment to enhanced compliance Monitoring by third party

Potential Defenses

Compliance with U-Turn general license requirement Iranian Transactions Regulations restrict U.S. persons from carrying out most financial

transactions involving Iranian parties Pre-November 2008, U.S. depository institutions permitted to process “U-Turn” transactions—

transfers involving Iran that both originated and ended with non-Iranian foreign banks. 31 C.F.R. § 560.516(a)(1) (2008)

Statute of limitations Violations of IEEPA and Falsification of Business Records in the First Degree subject to a five-

year statute of limitations

Potential defense: jurisdiction Questions about jurisdiction remain To date, no successful challenge to enforcement based upon jurisdiction

Action of rogue or low-level employee, notwithstanding robust compliance program

Good faith

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What to Expect

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Sanctions: sustained U.S. focus on financial dealings with Iran and other countries At least four investigations of European-based financial institutions outstanding Potential expansion of focus to Asia/Pacific, Latin/South America

A new focus on BSA/AML compliance investigations? Reports that the Department of Justice has shifted its focus to potential charges for deficient

BSA/AML compliance programs.

Enhanced criminal enforcement against financial institutions in other areas LIBOR investigations FCPA: Morgan Stanley “rogue” employee charged in March 2012 with FCPA violations Regulators publicly praised bank’s FCPA compliance program in declining to bring any

charges against the bank

Practical Guidance

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Pre-investigation Consider benefits of proactively reviewing global compliance practices relating to sanctions and

BSA/AML before any investigation is commenced Focus on conduct of non-U.S. subsidiaries who originate or receive USD payments Investigate and remediate as necessary Be aware of self-reporting options and obligations Post-investigation Cooperate early and fully, including with respect to the provision of information; candor is key As appropriate, legal advocacy around historical regulatory issues and expectations To the extent not already in place, adopt forceful and effective compliance remediation steps as

needed in parallel with ongoing investigation, so that a fully effective program can be demonstrated at the time of settlement Ensure that all agencies are briefed on findings of investigation Consider appropriate discipline for relevant employees

Appendix: Background on the U.S. Enforcement Framework

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U.S. Regulatory Framework: Statutes & Regulations OFAC

The Office of Foreign Assets Control (“OFAC”): of the U.S. Department of the Treasury administers and enforces economic and trade

sanctions targeted against foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction

OFAC’s sanctions regimes are created pursuant to numerous authorities, usually including the International Emergency Economic Powers Act (“IEEPA”) Sanctions programs promulgated under IEEPA include Iran and Sudan Sanctions against Cuba are promulgated under the Trading With the Enemy Act

Sanctions regimes generally prohibit U.S. persons from Direct or indirect dealings with targeted individuals and entities, including trade and financial

transactions and/or blocking of the target's property and property interests Example: Iranian Transaction Regulations (“ITR”) Prohibit U.S. persons from, among other things, engaging in transactions relating to goods

and services of Iranian origin or controlled by the Government of Iran Prohibit depository institutions from servicing accounts of the Government of Iran, including

banks owned or controlled by the Government of Iran or persons in Iran, or persons in Iran

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U.S. Regulatory Framework: Statutes & Regulations OFAC (cont.)

Violations of OFAC-administered sanctions programs imposed pursuant to IEEPA are punishable by civil and criminal fines, as well as imprisonment

Civil penalties OFAC has a “strict liability” standard for U.S. persons Liability for actual or constructive knowledge

Criminal penalties IEEPA: Criminal penalties may be imposed only on a person who “willfully” violates economic

sanctions programs

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U.S. Regulatory Framework: Statutes & Regulations BANK SECRECY ACT

Bank Secrecy Act of 1970 (the “BSA”): Contains a number of provisions requiring financial institutions to keep a “paper trail” of customer

transactions and, under certain circumstances, report to the government certain transactions that are of particular interest to regulatory agencies Amendment to BSA: Great expansion of provisions after September 11, 2011 with passage of Title

III of the USA Patriot Act

Requirements of BSA on financial institutions BSA Compliance: Must establish and maintain procedures reasonably designed to assure and

monitor compliance with BSA and implementing Treasury regulations Suspicious activity reporting: Requires every bank to file with Treasury a SAR of a transaction

if the bank knows, suspects or has reason to suspect that The transaction involves funds from illegal activities or is meant to disguise funds from illegal

activities as part of a plan to violate or evade federal law or a reporting requirement The transaction is designed to evade any regulations promulgated under the BSA The transaction has no business or apparent lawful purpose

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U.S. Regulatory Framework: Statutes & Regulations BANK SECRECY ACT (cont.)

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Potential BSA violations Failure to file SAR Willfulness of the violation is required

Structuring: purposely designing transactions to avoid a reporting requirement Willfulness is not required; need specific intent to evade the reporting requirement

Special measures: Section 311 of Patriot Act expanded scope of BSA to grant the Secretary of the Treasury the authority to find that a foreign jurisdiction, institution, class of transactions, or type of account is of “primary money laundering concern’” and to require certain “special measures” be taken FinCEN designates entity as “primary money laundering concern” and can impose variety

of special measures Example: Since April 14, 2006, FinCEN imposed special measure on the Commercial

Bank of Syria to prohibit covered financial institutions from directly or indirectly using correspondent accounts for, or on behalf of, the covered entity

Criminal and Civil Penalties for violations of Special Measures

U.S. Regulatory Framework: Statutes & Regulations MONEY LAUNDERING

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Money laundering under federal law Financial transaction money laundering Requires actual, subjective knowledge that underlying activity was unlawful under state,

federal, or foreign law. 18 U.S.C. Section 1956(a)(1) Transportation money laundering Criminalizes the transportation of funds with the intent to promote unlawful activity or with

the intent to launder the funds. 18 U.S.C. Section 1956(a)(2) Unlike 1956(a)(1), transportation money laundering does not require funds to be proceeds

of unlawful activity or that the defendant knows that they constitute criminal proceeds Money laundering under Section 1957: defines criminal elements of money laundering in a

different way than Section 1956 Money laundering under New York law Penal Law Article 470 tracks federal money laundering statutes Four degrees of money laundering, all felonies

U.S. Regulatory Framework: Statutes & Regulations FALSIFICATION OF BOOKS & RECORDS

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Falsification of books & records under federal law 18 USC Section 1001: Criminalizes false statements made “in any manner within the

jurisdiction of a federal department or agency” 18 USC Section 1005: Criminalizes the making of false entries in the records of a financial

institution with the intent to deceive officers of the institution Falsification of books & records under New York law Section 175.05 of penal law: Criminalizes falsifying business records Crime to “make or cause a false entry in the business records of an enterprise” or to

“prevent the making of a true entry or cause the omission thereof in the business records of an enterprise” with the intent to defraud

Section 672 of banking law: Criminalizes falsification of books, reports, or statements of private bankers or corporations subject to banking law

Each USD payment processed by a bank could give rise to separate violation under federal or New York law, as long as all elements are proven for each transaction