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U.S. sanctions net snares the innocent, burdens business

By Anna Yukhananov and Warren Strobel

WASHINGTON (Reuters) - On a Friday afternoon in March, Jose Luis Zamora pulled into a Lexus dealership in Dallas to test-drive a new car with his wife. Ready to pay, Zamora instead waited more than two hours before being informed his name had popped up on a government watchlist that blocks those linked to money launderers, groups alleged to have committed terrorist acts and other enemies of the United States from doing business in the country.

    A routine credit check matched him to Jose Hernan Zamora, a Colombian who is no relation to the Texas resident and was added to the Treasury Department's sanctions list around 1997 for his ties to narcotics traffickers.

    Zamora, of Dallas, had never been to Colombia. It took him two days of digging, phone calls to the Federal Bureau of Investigation and Department of Homeland Security, and letters to his elected representatives to learn he was far from the only one who has been accidentally snared.

    "I'm a citizen of the United States. I was raised in this country," said Zamora, who is 58 and immigrated from Cuba nearly half a century ago. "And I'm treated like a terrorist."

    Yet there was nothing he could do to permanently clear his name, leaving him at risk of being tagged again.

    Zamora's case is one of hundreds that have come up since businesses started regularly scanning the Office of Foreign Assets Control's (OFAC) list of blocked people and companies. The businesses are seeking to avoid fines that can reach $10 million per criminal violation.

OFAC sanctions drug traffickers, terrorists, Iranian banks and others under more than 30 different programs, freezing their assets and prohibiting U.S. firms from doing business with them. It relies on the private sector to ensure the sanctions work in practice.

    The crackdown by U.S. authorities on money laundering in recent years has already ensured compliance by banks, but the growing importance of sanctions to U.S. foreign policy and the greater familiarity with sanctions has now roped in mortgage providers, apartment rental companies and even casinos as regulators broaden the definition of "financial institutions" that could be liable to penalties.

    Seven years after a legal group highlighted the issue of false matches, the issue is likely to only get worse as more businesses feel compelled to screen customers, according to interviews with nearly two dozen lenders, lawyers and consumer activists familiar with the system.

    Lawyers call people like Zamora "collateral victims" of the sanctions war: those with common names, often of Middle Eastern or Hispanic origin, who may not even realize their car or home loan was rejected or their apartment application denied because someone mistook them for a foreign militant.

A cottage legal industry has sprung up to defend people incorrectly flagged by credit reporting agencies, which small business rely on for credit-worthiness assessments.

    Others blame OFAC, which at times provides no information beyond a name and country of residence - and has no permanent way to clear people wrongly tagged. Further, there is no system for tracking complaints, making it difficult to determine the scale of the problem.

    Treasury officials say they go to extraordinary lengths to make sure every name comes with a birthday, passport number and place of residence. "We're not just putting Enrique Gomez on the list (and saying) 'OK, good luck world, figure out who that is,'" a senior U.S. official said.

   

    POLICING 12,000 HITS A DAY

    The Specially Designated Nationals List contains the names of nearly 6,000 people and organizations. Companies can face fines even if they do business by accident with anyone on it.

    Large banks spend millions of dollars and hundreds of hours a year devising complex automated systems to scan the list and avoid false positives.

    Bank employees then have to determine whether a potential customer named, say, Daniel Garcia - one of the most common names on the list - is the same person as a blacklisted Garcia with an address in Mexico. That is challenging, given minimal identification details provided by OFAC.

    In a sign of the burden the system places on the financial industry, one bank had 12,000 hits each day that got caught in the OFAC filter, according to a former OFAC official who now works with financial institutions.

    "I don't think my former colleagues understand how often that happens, I don't think they appreciate that," said the former official, who spoke on condition of anonymity because of his dealings with clients.

    "It's pretty tough being a guy named Muhammad Saleh in America right now for a lot of reasons, but one that might be under appreciated is that you're probably more likely to be late with your mortgage payment because it's held up by a compliance officer who's looking at this,” he said. Saleh is a common Arabic last name shared by a fighter for the militant group Hezbollah, who is on the list. A customer paying a mortgage for the first time might face a delay as a bank confirms which ‘Saleh’ it’s dealing with.

   

    'VERY SHODDY PRACTICES'

    Smaller companies without dedicated compliance staff, such as auto dealers, may need to pay for add-on services from a big credit bureau to ensure they do not sell a car to a potential drug trafficker.

    Services like "OFAC Advisor," from the credit reporting company TransUnion, generate alerts whenever a customer's name appears to match a name on the list. But auto dealers may not know how to deal with apparent matches other than by denying service.

    At the same time, customers may not know their names have been flagged. That happened to Sandra Cortez, whose OFAC alert did not appear on her credit report before going to buy a Subaru in Colorado.

    In a landmark 2007 case, an appeals court ruled TransUnion violated the Fair Credit Reporting Act by not sharing its OFAC alert with Cortez and not ensuring the information was reliable.

    James Francis of the Philadelphia-based law firm Francis & Mailman represented Cortez and has several other cases pending that challenge TransUnion's OFAC matching practices.

    "What I can tell you is we have not seen any improvement at all in the accuracy standards for the consumer reporting agencies," Francis said. "It's perilous matching, and very shoddy practices."

    TransUnion said customers can contact the company to remove any erroneous matches. In another of Francis’s cases now pending in California, Sergio Ramirez alleges that it took him multiple calls and two letters to learn of an OFAC alert on his credit report and remove it.

TransUnion spokesman Clifton O'Neal referred other questions to the Consumer Data Industry Association, a trade group for credit agencies.

TransUnion spokesman Clifton O'Neal referred other questions to the Consumer Data Industry Association, a trade group for credit agencies.

    Norm Magnuson, a spokesman for the group, said it is up to lenders to validate the information themselves. Credit agencies also are likely to scan for "partial names" or alternate spellings to avoid missing potential criminals, leading to a greater number of false matches.

   

    WHITE CARD

    The San Francisco-based Lawyers' Committee for Civil Rights drew widespread attention to the problem of false matches in its 2007 report, "The OFAC List: How a Treasury Department Terrorist Watchlist Ensnares Everyday Consumers."

     Government officials say one problem is employees at smaller lenders like auto dealerships not knowing how to tell if they have a real match. Partly in response to the Lawyers' Committee report, the government created a five-step checklist for guidance, which includes checking that any hit is not just based on a last name or first name, and calling the OFAC hotline with more questions.

Particularly problematic are names that were put on the list before the Patriot Act in the wake of the Sept. 11, 2001 terror attack, before cross-checking became regular practice, and those that were added en masse just after the attacks, initially without birthdays attached to them.

     "Fortunately it hasn't gotten to the point where if you're going to a Giant or Safeway (grocery store), they're going to be screening you," said Doug Jacobson, a Washington-based sanctions attorney. "But who knows where will it end?"

    Jacobson said online sales, which provide services around the world, are likely to come under more scrutiny in the future.            

    Clif Burns at Bryan Cave LLP in Washington suggested the Treasury provide a "white card" to people who often get mistaken for someone on the list so they do not have to prove their identity each time they seek a loan or try to make a major purchase.

    Other lawyers point to a similar system from the Transportation Security Administration, which provides redress control numbers for those frequently mistaken for someone on the "do not fly" list, a seven-digit code that allows the government and airlines to identify someone previously cleared.

    Treasury officials say such a card could by abused by people wanting to avoid sanctions for future illegal behavior.

    Meanwhile, Zamora caught an unlikely break when he discovered he had gone to the same elementary and high school as the auto salesman who pulled his credit report.

    "He knew about me," Zamora said, "so I walked out of there with a car that night."

(Editing by Tim Ahmann, Martin Howell, Prudence Crowther and Alden Bentley)

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