PYPL PayPal Holdings Inc

By Mengqi Sun and Mark Maurer 

The Securities and Exchange Commission is increasingly questioning public companies about compliance with U.S. sanctions as the nation's blacklist of individuals and entities grows.

The regulator has slowly ramped up comment letters to companies seeking more details about disclosures related to dealings in countries targeted by U.S. sanctions, according to a Wall Street Journal analysis of regulatory filings and data compiled by consulting firm Audit Analytics Inc.

At least 42 companies received letters from the SEC last year regarding activity in areas subject to sanctions enforced by the Treasury Department's Office of Foreign Assets Control. That matches the 2017 total, which is up from an average of about 33 during the three years ending in 2016, according to Audit Analytics.

In recent months, the SEC has sent letters to companies such as PayPal Holdings Inc., Bank of New York Mellon Corp. and Chinese travel-services provider Ctrip.com International Ltd. with sanctions-related questions.

The SEC doesn't play an active role in penalizing companies for potential sanctions violations, but it does police companies' disclosures to ensure adequate reporting on business risks, said Scott Flicker, a partner at law firm Paul Hastings LLP in Washington, D.C.

"Companies make disclosures when they deem that information would be material for investment decisions, by current or potential investors," Mr. Flicker said. "Financial materiality is an important touchstone for disclosure, but it's not the only one."

The SEC regularly sends comment letters to companies with questions about disclosures made in securities filings. The letters usually focus on accounting practices, and can result in additional disclosures in future filings, revisions to previously filed disclosures, or a simple response with extra details that help the SEC better understand a disclosure. The back-and-forth between a company and the SEC stops once the regulator deems the matter resolved. The letters are typically made public about 20 days after a matter is resolved.

Sanctions-related letters comprise just a fraction of the SEC's comment letters, but the proportion of companies receiving them grew from 1.5% in 2014 to 4.5% in 2018, according to Audit Analytics. "They're interested in any possible violation of trade restrictions," said Don Whalen, the firm's director of research. "They probably want to make sure sanctions being placed on the countries are actually being honored."

The uptick coincides with a surge in U.S. sanctions, which have been used by the Trump administration to increase pressure on geopolitical issues or target suspected criminal behavior.

In 2018, almost 1,500 individuals or entities were added to the designation list, according to data compiled by Adam M. Smith, a partner at law firm Gibson, Dunn & Crutcher LLP. That is more than twice the annual average over the previous 10 years.

BNY Mellon declined to comment on its SEC correspondence. Ctrip.com didn't respond to a request for comment.

PayPal, the San Jose, Calif.-based financial technology company, received a comment letter in July about its 2018 annual report, in which PayPal disclosed that it self-reported to OFAC suspicious transactions that might have violated U.S. sanctions.

The SEC asked PayPal to detail the countries related to the transactions and the extent of the company's contact with the countries. The regulator also asked PayPal to specify whether those contacts posed a material risk to investors. The correspondence was made public last week.

The SEC declined to comment beyond the letters.

The SEC said in its letters to PayPal that many investors, particularly institutional investors, have proposed divestments from companies that do business with U.S.-designated state sponsors of terrorism, and that PayPal should address the potential impact on the investor sentiment, including reputational harm.

Aaron Anderson, PayPal's chief accounting officer, responded to the SEC, writing that the transactions in question, which occurred between 2013 and 2016, were related to North Korea, Iran, Sudan and Syria -- countries that were under U.S. sanctions at the time of processing. He said in the letter that the revenue from the transactions and their volume were negligible to the company and that OFAC hasn't made a decision about whether it would treat the flagged transactions as potential violations, according to the response sent to the SEC by the company.

A Treasury Department spokeswoman declined to comment, saying the department doesn't speculate on possible sanctions violations or comment on possible or pending investigations.

"PayPal makes every effort to comply with laws and regulations in the markets where we do business around the world," a company spokesman said in an email for this article. "As exhibited by the company's track record of self-reporting and work to satisfy clarifying questions posed by the SEC, PayPal takes its regulatory and compliance obligations seriously."

The regulator and the company had a similar exchange in 2016 related to disclosures in PayPal's 2015 annual report, in which the company said it paid $7.7 million to OFAC in March 2015 to settle allegations that it processed transactions worth about $44,000 between 2009 and 2013 and had continued to cooperate with OFAC on additional self-reported transactions.

The SEC is looking closely at potential security risks, particularly those related to money-transfer and peer-to-peer payment businesses, said Moshe Katri, an analyst at Wedbush Securities Inc. who follows PayPal.

"These are risks that come when you're processing billions of transactions," Mr. Katri said. "This is going to be a consistent pain point for all of these companies."

Write to Mengqi Sun at mengqi.sun@wsj.com and Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

August 28, 2019 15:05 ET (19:05 GMT)

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