On January 9, 2007, Treasury announced that it has identified Bank Sepah, a state-owned Iranian financial institution, as a Specially Designated National because of its role in the proliferation of weapons of mass destruction. Treasury acted pursuant to its authority under Executive Order 13382 which prohibits all transactions between designated persons and any U.S. person, and imposes a “freeze” on all assets that those designated persons may have or bring into U.S. jurisdiction. As a result, U.S. persons are no longer permitted to conduct any transactions in which Bank Sepah has an interest and must place into a blocked interest bearing account any funds which come within their control.
Treasury states that it took this action because of Bank Sepah’s role in (1) providing financial services to two Iranian missile firms listed in the annex to United Nations Security Council Resolution 1737; (2) providing financial services to Iran’s Aerospace Industries Organization (“IAO”), recently itself designated as a proliferator by the United States; (3) facilitating business between IAO and North Korea’s chief ballistic missile-related exporter, KOMID—also previously designated by Treasury; and (4) engaging in a range of deceptive practices in an effort to avoid detection while processing transactions through the international financial system.
This action comes on the heels of OFAC’s less drastic action on September 8, 2006 against Bank Saderat. On that date, OFAC amended the Iranian Transactions Regulations (“ITR”), 31 C.F.R. Part 560 to exclude Bank Saderat from the general license allowing for so-called “U-Turn” payments and from transactions ordinarily incident to licensed or exempt transactions. OFAC identified Bank Saderat as a significant facilitator of Hizballah’s financial activities, claiming that Saderat was a conduit between the Government of Iran and Hizballah, Hamas, the Popular Front for the Liberation of Palestine-General Command, and the Palestinian Islamic Jihad.
Practical Implications for International Financial Institutions
Until today’s action, U.S. financial institutions could engage in transactions that involved Bank Sepah if certain conditions were met. Specifically, under the ITR General License permitting “U-Turn” transactions, a U.S. financial institution could process transfers of funds involving Bank Sepah if the transfer (1) was by order of a foreign bank (but not from an Iranian bank from its own account) to an account held by a domestic bank for a second foreign bank (which is not an Iranian bank); (2) arises from an underlying transaction that has been authorized by a general or specific license or is otherwise exempt; or (3) arises from an underlying transaction that is not itself prohibited. 31 C.F.R. Part 560.516. As a result, international financial institutions were free to conduct US dollar transactions with Iranian banks (except Bank Saderat) knowing that if the U-Turn exception did not apply, funds would be rejected by U.S. correspondents and returned to the originator.
As of January 9, any transaction that traverses the U.S. financial system in which Bank Sepah has an interest must be blocked—rather than rejected. International financial institutions conducting business with Iran now face difficult policy decisions including whether (1) to continue doing business in US dollars in Iran while avoiding the growing list of restricted entities in Iran; (2) to cease conducting US dollar business with Iran; or, as the U.S. Government may prefer, (3) to cease conducting business with Iran altogether. 1