This month the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) updated its ‘Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day’ (FAQs). While the updated FAQs do not contain any new measures that ease sanctions against Iran, they do provide some much needed clarity, which is likely to have a positive impact on business transactions with Iran.
U.S. Dollar Payments
One of the more consequential pieces of guidance OFAC added to the FAQs is its clarification on the extent to which payments for authorised transactions can be made in U.S. dollars. OFAC made clear that foreign financial institutions (FFIs) (including foreign incorporated subsidiaries, but not branches, of U.S. financial institutions) are permitted to “process transactions denominated in U.S. dollars or maintain U.S. dollar-denominated accounts that involve Iran or persons ordinarily resident in Iran, or in which there is an interest of a person whose property and interests in property are blocked solely pursuant to Executive Order 13599 and section 560.211 of the ITSR, including NIOC, the CBI, and other individuals and entities that meet the definition of the Government of Iran or an Iranian financial institution, provided that such transactions or account activities do not involve, directly or indirectly, the United States financial system or any United States person, and do not involve any person on the SDN List or conduct described in FAQ A.3.ii-iii.”1
Accordingly, non-U.S. persons engaging in transactions with or involving Iran are permitted to arrange for payment in U.S. dollars, provided: (1) they use an FFI to process payment outside the U.S. financial system; and (2) no Specially Designated Nationals (SDNs) are involved.
In theory, FFIs have the ability to set up U.S. dollar-denominated vostro accounts for Iranian banks. In this way the Iranian banks can process dollar payments without clearing them through the U.S. financial system. The fact that foreign subsidiaries of U.S. banks can engage in this offshore processing is a function of General Licence H. (Refer to our client alert on Iran and GL-H.)
It remains to be seen whether many FFIs will be willing to engage in this kind of business because there are still risks. First, FFIs have to ensure they are not inadvertently clearing payments through U.S. financial institutions. Second, they have to ensure they are not dealing with SDNs, although the FAQs state2 that FFIs do not have to duplicate the due diligence conducted by their customers, unless they have reason to believe the due diligence was insufficient. From a practical point of view, however, it is unlikely that an FFI would rely on someone else’s due diligence in these circumstances. Third, engaging in this kind of business could have adverse effects on an FFI’s relationship with U.S. financial institutions. U.S. banks, for example, may be hesitant to maintain correspondent banking relationships with FFIs that process U.S. dollar payments offshore for Iranian banks.
SDN Due Diligence
OFAC added a new FAQ that addresses due diligence with regard to SDNs. Specifically, in FAQ M. 10, OFAC explained that non-U.S. persons will not necessarily be subject to sanctions if they engage in transactions with entities that are minority owned or controlled in whole or in part by an Iranian national or Iran-related person on the SDN list. However, as OFAC has made clear, such dealings call for special caution to ensure SDNs are not involved and receiving what might amount to “significant” services or support contrary to U.S. secondary sanctions. As a practical matter, minority SDN ownership or control might constitute a ‘red flag’ and warrant investigation.
In a new FAQ, M. 11, OFAC suggests that the screening of party names on the SDN List may not be sufficient in this context. OFAC did not outline specific measures that non-U.S. persons should undertake except to recommend that due diligence procedures should be consistent with local legal standards, industry best practices and company procedures for compliance and risk assessment. For many companies, the scope of due diligence will be guided by EU standards, which require companies to ensure they do not provide funds and economic resources to any person designated by the EU (directly or indirectly). This typically requires an enquiry into the details of the relevant transaction and all parties involved.
In short, while OFAC’s most recent guidance provides some clarity on the extent to which secondary sanctions have been eased for non-U.S. persons, the agency has reaffirmed the need for caution in transactions that may have a nexus with designated nationals.