In recent years, US enforcement agencies have levied multibillion-dollar criminal penalties against non-US banks that used their US correspondent accounts to clear US dollar transactions in violation of US sanctions laws. But US prosecutors have brought comparatively few actions against non-US individuals and companies (i.e. the banks’ customers) for similar conduct. A pending action in a New York federal district court marks an exception to that trend and highlights the potential risk that non-US companies and individuals face when conducting business in US-sanctioned countries like Iran where the only nexus to the United States is US dollar clearing.
In United States of America v. Reza Zarrab (SDNY October 17, 2016), defendant Reza Zarrab, a Turkish-Iranian businessman, conducted numerous transactions on behalf of sanctioned Iranian entities using Turkish and Emirati money services companies. Zarrab himself was not physically in the United States, and none of the companies or banks that he faced in executing the transactions were US entities. The transactions that formed the basis of his criminal charges, however, were conducted in US dollars and cleared through US correspondent accounts after Zarrab and his employees allegedly stripped information from the transaction documents to conceal the identities of their Iranian clients.
Following Zarrab’s indictment for violating the Iranian Transactions and Sanctions Regulations (ITSR) for (i) exporting services from the United States to Iran, and (ii) “causing” a violation of US sanctions (as well as for various other offenses), Zarrab moved to dismiss his indictment, arguing that the United States did not have jurisdiction over him because all of his conduct occurred outside of the United States. In the District Court’s decision denying Zarrab’s motion to dismiss, two significant points emerge:
- a transaction clearing through a US correspondent account constitutes an “export of a service” under US sanctions laws, and
- non-US persons can be criminally liable where the only US nexus is clearing a transaction through a US correspondent account because the non-US person has “caused” a US person (the bank where the correspondent account is held) to conduct a transaction prohibited by US law.
Exporting US financial services
The first ITSR provision at issue in Zarrab, 31 C.F.R. § 560.204, prohibits the export of “goods, technology, or services” from the United States or by US persons. Zarrab argued in his motion to dismiss that US dollar clearing through a correspondent account standing alone did not constitute an exported “service” under the ITSR because nothing had been “exported” and, in any case, the transit of funds through a correspondent account did not transform payments originating and terminating at non-US banks, without any involvement by Zarrab, into US exports by him. US prosecutors responded that Zarrab caused US banks to “export” and supply financial “services” within the meaning of the ITSR, and the District Court agreed that such transactions constituted an exportation of services from the United States.
US enforcement agencies have previously taken the position that a transfer through a US correspondent account is an “exportation of services from the United States” under the ITSR, but it is a noteworthy development to see them applying that expansive interpretation in a criminal case against an individual in which the only nexus to the United States is US dollar clearing. Two similar previous cases involving UAE and Turkish trading companies that also stripped information from documents resulted in the imposition by OFAC of only civil penalties.
Causing US persons to engage in a prohibited act
The second ITSR provision at issue in Zarrab, 31 C.F.R. § 560.203, prohibits “causing” a US person to violate US sanctions laws. In its holding, the District Court accepted the US Government’s argument that, in addition to directing a US person to violate US sanctions laws, the ITSR prohibition encompasses conduct that has an indirect causal effect. So long as the defendant’s actions eventually cause conduct and effects within the United States, it does not matter whether or not the defendant ever had any contact with a US person or entity.
The practical implications are that any transaction that touches the US financial system may trigger criminal liability under US sanctions laws, even where non-US persons and non-US companies have no direct dealings with a US bank. OFAC also stressed this point in its updated FAQs on Iran earlier in October, stating that although non-US financial institutions may process transactions denominated in US dollars that involve Iran, “foreign financial institutions, including foreign-incorporated subsidiaries of US financial institutions, need to continue to ensure they do not process US dollar-denominated transactions involving Iran through the US financial system or otherwise involve US financial institutions (including their foreign branches), given that US persons continue to be prohibited from exporting goods [and] services (including financial services).” This advisory should be heeded by non-US companies and individuals engaging in such transactions as well.
Finally, we note that although the transactions in this case preceded the recent changes to US Iran sanctions laws under the Joint Comprehensive Plan of Action (JCPOA), the outcome would be the same post-JCPOA because these particular substantive provisions have not changed or been repealed: US sanctions laws still prohibit the export of financial services from the United States to Iran.