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Barclays, beneficiary of what judge calls "sweetheart deal," agrees to pay $298 million to settle prosecution for "trading with the enemy"

So Barclays Bank PLC, the "major global financial services provider," is in the news this week, and it's not because the company has committed more than $200 million to plaster its name on the in-construction Atlantic Yards arena, aka the Barclays Center.

Nor is it because Forest City Ratner has promised $4 million to add the Barclays Center name to the Atlantic Avenue/Pacific Street transit hub.

Rather, it's because Barclays has committed, as part of deferred prosecution agreements, "to forfeit $298 million to the United States and to the New York County District Attorney’s Office in connection with violations of the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA)," according to the Department of Justice (DOJ).

Essentially, the bank used subterfuge to let banks from Cuba, Iran, Libya, Sudan, and Burma, as well as prohibited persons, move money through the U.S. financial system.

The tab for Barclays might have been more, since it agreed to pay $176 million for other violations, but the DOJ press release described that as "concurrent," which means that the violator's obligations are satisfied via the $298 million. (The exact calculations of fines is ambiguous.)

An AY connection?

None of the coverage, as far as I can tell, connected the Barclays prosecution with the firm's effort to establish a foothold in the United States via the Brooklyn arena.

However, Barclays voluntarily disclosed its long-running violations only eight months before the naming rights deal was announced--and likely during or just before the deal was being negotiated.

And this certainly casts doubts on Barclays as a "good corporate citizen," a term the Empire State Development Corporation used for Forest City Ratner, which has an murky role--with no charged wrongdoing--in the Ridge Hill corruption case.

The "sweetheart deal"

While the settlement was approved yesterday by U.S. District Judge Emmet Sullivan, it came after Sullivan a day earlier criticized it as "a sweetheart deal"

"Why isn't the government getting rough with these banks?" the judge asked, according to the Wall Street Journal. He called it "an accommodation to a foreign bank, and that concerns me."

However, a DOJ lawyer said the $298 million settlement was much more than what Barclays earned by processing the payments at issue.

Similarly, Columbia Law Professor John Coffee, a specialist in securities law, told Bloomberg that the settlement seemed fair because the bank's profits were a small fraction of that sum.

The question, though, is whether the settlement merely recoups some multiple of profits or serves as a significant deterrent. And it certainly looks like a nice deal, given than Barclays avoids an additional $176 million fine.

After all, according to the settlement (also embedded below), "Barclays failed to heed concerns raised by employees as early as 2001," five years before Barclays, on 5/22/06, voluntarily disclosed its violations.

That time period, interestingly enough, was likely around the time it had begun discussing the naming rights deal in Brooklyn. Barclays surely wanted clean hands.

The other sweetheart deals

The naming rights agreement is surely a good deal for Barclays; it gets a platform to splash its brand around the country and world.

But it's a much better deal for Forest City Ratner, since the state gave away the naming rights, and never counted it as a benefit to the developer. The $200 million-plus simply doesn't exist on a balance sheet. It's found money.

And the subway naming rights agreement looks like a pretty good deal for Forest City Ratner--$4 million is pocket change compared to the concessions FCR got from the Metropolitan Transportation Authority--and a great deal for Barclays, which apparently isn't paying for it at all.

Why is FCR paying? That hasn't been publicly explained, but it looks like that was part of FCR's renegotiation of the naming rights agreement with Barclays, which originally committed a reported (though never formally confirmed) $400 million for a Frank Gehry arena surrounded by four towers.

Now Gehry's gone, and the signature tower is long in the future, if ever to be built, so three towers on the arena block may be the maximum.

The details of the violations

From the DOJ:
According to court documents, from as early as the mid-1990s until September 2006, Barclays knowingly and willfully moved or permitted to be moved hundreds of millions of dollars through the U.S. financial system on behalf of banks from Cuba, Iran, Libya, Sudan and Burma, and persons listed as parties or jurisdictions sanctioned by OFAC in violation of U.S. economic sanctions.

According to court documents, Barclays followed instructions, principally from banks in Cuba, Iran, Libya, Sudan and Burma, not to mention their names in U.S. dollar payment messages sent to Barclays’ branch in New York and to other financial institutions located in the United States. Barclays routed U.S. dollar payments through an internal Barclays account to hide the payments’ connection to OFAC-sanctioned entities and amended and reformatted the U.S dollar payment messages to remove information identifying the sanctioned entities. Barclays also deliberately used a less transparent method of payment messages, known as cover payments, as another way of hiding the sanctioned entities identifying information.
$176 million more? Not quite

The DOJ press release also noted:
OFAC has also entered into a settlement agreement with Barclays for IEEPA violations that will require Barclays to pay $176 million, which is concurrent with the forfeiture paid as a result of the deferred prosecution agreements. The Federal Reserve Board and the New York State Banking Department announced today the issuance of a consent order to cease and desist against Barclays. The order requires Barclays to improve its program for compliance with U.S. economic sanctions requirements on a global basis.
So, what does that mean--does Barclays have to pay $176 more? No.

According to OFAC:
The bank agreed to settle with OFAC the alleged violations of OFAC regulations for $176,000,000, with the obligation deemed satisfied by a payment of $298,000,000 to the Department of Justice and the New York County District Attorney’s Office. The Board of Governors of the Federal Reserve System and the New York State Banking Department have taken regulatory action against the bank through the issuance of a consent Cease and Desist Order. The British Financial Services Authority, as the home country regulator of Barclays, will be assisting OFAC and the U.S. bank supervisors in assuring proactive remediation.
What did Barclays do?

OFAC explains:
Barclays’ apparent violations arose out of practices designed to circumvent filters at U.S. banks installed to detect transactions in violation of OFAC regulations. This was done using cover payments to avoid referencing parties targeted by U.S. sanctions and omitting or removing information in payment messages in order to conceal the identities of U.S. sanctions targets – most notably Sudan – in electronic funds transfer instructions executed through the United States. In addition, Barclays sometimes processed payments involving sanctioned persons through a Barclays sundry account, making it appear as though Barclays was the remitting bank. Based on OFAC’s analysis of information provided by Barclays, from August 2002 through September 2006, Barclays routed at least 1,285 electronic funds transfers, with an aggregate value of approximately $112,695,000, through Barclays New York and third-party banks located in the United States, in apparent violation of IEEPA or TWEA and the OFAC regulations related to the sanctions programs cited above.

Barclays has terminated the practices that led to the alleged illegal activities, has cooperated fully with OFAC, and has put in place policies and procedures that are designed to minimize the risk of the recurrence of similar conduct in the future. Barclays voluntarily self-disclosed the apparent violations under the terms of OFAC’s Economic Sanctions Enforcement Guidelines (“the Guidelines”). The total base penalty amount under the Guidelines for all apparent violations was approximately $218,971,000. OFAC mitigated the total potential penalty based on Barclays’ substantial cooperation, its remediation, the fact that OFAC had not issued a penalty notice or Finding of Violation against Barclays in the five years preceding the transactions at issue, and Barclays’ willingness to enter into tolling agreements with OFAC. Mitigation was also extended because a number of the Sudan transactions involved the export of agricultural products. At the same time, aggravating circumstances – including the recklessness of the apparent violations, awareness of the conduct by relevant managers within the bank, and sophistication of the institution – partially offset the amount of mitigation.
How calculate total?

It's unclear to me how the total fine was calculated. If the penalty was $176 million for some of the violations, the rest of the violations would then generate penalties of $122 million. However, I've seen no explanation of the latter number.

City and state split half the take

According to the Daily News, half of the settlement that will go to New York, in turn to be split in half, so the city will get $74.5 million, as will the state.

In both cases, that's a lot less than Forest City Ratner will get from Barclays.

The Barclays press release

In a press release from Barclays, the firm expressed no remorse but stated:
Barclays is committed to the highest levels of integrity and regulatory compliance across all of its operations. Barclays has taken significant steps to enhance further its compliance programmes including:
  • The further development and implementation of its Sanctions Policy which includes a prohibition of transactions with entities on the UN, EU, UK and US sanctions lists;
  • Substantial investment in market-leading payment and customer screening technology; and
  • The delivery of mandatory sanctions training for more than 100,000 staff around the world.

Barclays Settlement Department of Justice August 18, 2010