On October 7, 2016, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) updated the Frequently Asked Questions (FAQs) Relating to the Lifting of Certain U.S. Sanctions under the Joint Comprehensive Plan of Action (JCPOA).
Although these updates did not involve any change to current law or regulation, they did provide clarification regarding OFAC’s interpretations of its existing requirements. Specifically, OFAC updated three existing questions and added three more, the main aspects of which are summarized below:
- Use of U.S. Dollars by non-U.S. Financial Institutions
OFAC updated FAQ C.7 to affirmatively state (previously it only implied) that foreign financial institutions, including foreign incorporated subsidiaries of U.S. financial institutions, can process transactions denominated in U.S. dollars and maintain U.S. dollar-denominated accounts involving Iran, persons ordinarily resident in Iran, or the Iranian government, provided that there are no U.S. persons or financial institutions involved in the transaction. In other words, OFAC would not prohibit a non-U.S. financial institution to conduct U.S. dollar transactions involving Iran if those transactions were cleared locally outside the United States. If the transaction involved or required the involvement of a U.S. correspondent, then it would be prohibited unless authorized by a specific or general license.
- Transactions with Entities Minority Owned by SDNs
In FAQ M.10, OFAC clarified that it does not consider it sanctionable (pursuant to the remaining secondary sanctions) for a non-U.S. person to engage in a transaction with an entity that is “minority owned, or that is controlled in whole or in part, by an Iranian or Iran-related person on the SDN List;” if the entity was 50 percent or more owned by an SDN, it would be considered blocked by operation of law pursuant to OFAC’s 50 percent rule. When transacting with minority-owned and/or controlled entities, OFAC recommends that the non-U.S. person exercise caution to ensure the non-U.S. person is not transacting with the persons on the SDN list directly or indirectly.
- Due Diligence Obligations for Non-U.S. Persons
OFAC published two new FAQs related to its expectations of the due diligence obligations for non-U.S. persons and non-U.S. financial institutions doing business with Iran. First, in FAQ M-11, OFAC clarified that it does not view it as “necessarily sufficient” for non-U.S. persons conducting business in Iran to only screen names against the SDN List. In addition to screening, OFAC recommends non-U.S. persons consult with their local regulators to comply with due diligence expectations under local law. In particular, OFAC recommends that the non-U.S. person undertake diligence that conforms to its internal risk assessment and compliance policies which should be based on the best practices within its industry and jurisdiction.
In FAQ M.12, OFAC clarified that it did not expect non-U.S. financial institutions to “repeat the due diligence its customers have performed on an Iranian customer” unless it has reason to believe that the due diligence is insufficient. The appropriate level of due diligence should be tailored to the institution’s role in a transaction and should also take into account the expectations of local regulators in their local domestic jurisdictions.