On October 25, 2019, the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a final rule identifying Iran as a jurisdiction of primary money laundering concern (“Final Rule”) under Section 311 of the USA PATRIOT ACT, seeking to further isolate Iran from the global financial system. Concurrently, the US Treasury and State Departments announced a new humanitarian mechanism to ensure that funds associated with permissible trade in support of the Iranian people are not diverted by the Iranian regime to develop ballistic missiles, support terrorism, or finance other malign activities. These measures build upon the US Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) additional sanctions against the Central Bank of Iran discussed in our prior blog post here.
Section 311 Primary Money-Laundering Concern
The Final Rule, which became effective on November 4, 2019, amends Part 1010 of the FinCEN regulations at 31 C.F.R. Chapter X and prohibits US financial institutions from opening or maintaining correspondent or payable-through accounts for or on behalf of Iranian financial institutions. The Final Rule requires US financial institutions to apply special due diligence to correspondent accounts in the US held by foreign banks to ensure that such correspondent accounts are not used to process transactions involving Iranian financial institutions that are not otherwise permissible under US law. At a minimum, the special due diligence must include a notification to correspondent account holders that the US financial institution knows or has reason to believe are using their correspondent accounts to process transactions involving Iranian financial institutions that such prohibited transactions may not take place. US financial institutions must also take reasonable steps to identify any use of their foreign correspondent accounts for transactions involving Iranian financial institutions. Violations of the Final Rule could expose US financial institutions to penalties under the Bank Secrecy Act. These restrictions apply with respect to all Iranian financial institutions and not just those designated on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”).
According to the Treasury Department’s press release, FinCEN’s action is based on its finding that international terrorists and entities involved in missile proliferation have transacted business in Iran, and that Iran is a jurisdiction characterized by a high level of institutional corruption and weak AML/CFT laws. The Final Rule aims to apply “maximum pressure” to shut off the Iranian regime’s illicit sources of revenue. In line with these goals, the Final Rule will limit Iranian banks’ ability to maintain overseas accounts and access foreign currency.
Since sanctions against Iran already largely prohibit US financial institutions from facilitating transactions by Iranian financial institutions, the practical impact of the Final Rule will be limited. As a general matter, US financial institutions have already paid special attention to foreign correspondent accounts to ensure that such accounts do not give rise to sanctions compliance risk. For example, most US financial institutions who maintain accounts for foreign financial institutions require such account holders to represent or certify that they will not use the accounts to process transactions involving US sanctions targets, including Iranian financial institutions. Employment of such a compliance measure was already an expectation of bank regulators, even before the imposition of the Final Rule, in recognition of the significant sanctions compliance risk posed by correspondent account holders who use their accounts with US financial institutions to facilitate US dollar payment activity on behalf of their (non-US) customers.
New Humanitarian Trade Mechanism
Under OFAC’s new humanitarian trade “mechanism,” foreign financial institutions can receive written confirmation from OFAC that they will not be subject to US sanctions for engaging in certain humanitarian trade with Iran, including agricultural commodities, food, medicine and medical devices, if they agree to conduct enhanced due diligence on such transactions and provide the information obtained through the enhanced due diligence to the Treasury Department. An “illustrative” list of the information foreign financial institutions choosing to participate in the mechanism may need to provide to the US Government includes:
- The information used to identify the Iranian customers of the humanitarian trade and to verify their identities and beneficial ownership
- The information used by financial institutions to understand the purpose and intended nature of business relationships between the seller and the customer in Iran
- A monthly balance statement of any account of an Iranian financial institution
- A list of Iranian SDNs (designated for reasons other than just [IRAN]) with which the Iranian customer indicates it has current business relations
- Detailed information as to the commercial terms and logistics of the transaction, including information about the ultimate customer, all intermediaries involved in the transaction, and the financial arrangements and shipping and transportation logistics underlying the transaction
- Written confirmation that the Iranian distributor will not allow the goods to be sold or resold to Iranian SDNs (again, designated for reasons other than just [IRAN])
- Additional information regularly obtained by the foreign financial institution in connection with its ongoing due diligence measures to verify the consistency of the transaction with the purposes of the humanitarian channel, among other things
- Any additional information OFAC may require on a case-by-case basis
The stated purpose of the “mechanism” is to restrict the role of the Central Bank of Iran (the “CBI”) in facilitating humanitarian trade to prevent the CBI from diverting funds relating to such trade for illicit purposes. The CBI plays multiple roles in relation to humanitarian exports into Iran – e.g., ranging from actual funds transfers to approval of the allocation and award of foreign exchange for humanitarian purchases by Iranian entities – and it is not entirely clear whether some of those roles are less troubling to OFAC than others. Notably, the announcement does not provide any guidance on suggested payment channels not involving the CBI.
The announcement by the US Treasury and State Departments states that the mechanism may also be used by US persons and US-owned or -controlled foreign entities, while noting that US persons must continue to comply with the existing requirements under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”) for humanitarian exports to Iran.
There is no indication in the announcement as to how the mechanism will operate in practice. As an initial matter, it is not clear with whom at the US Treasury Department parties interested in taking advantage of the mechanism should engage. In addition, the announcement does not address the length of time it might take the US Treasury Department (OFAC, presumably, although this is not entirely clear) to render a decision.
Although details on the proposed mechanism are scarce, the initiative by the US government to work with private parties to facilitate humanitarian trade with Iran is consistent with the US government’s overall policy to punish the Iranian government through the use of economic sanctions and not the Iranian people. However, the initiative seems to have only added to the compliance burden associated with US sanctions compliance faced by those engaged in humanitarian trade with US sanctions targets.