In a recent wave of activity, the Office of Foreign Assets Control (“OFAC”) has tightened sanctions on Iranian financial institutions and made previously licensed transactions with parties in Iran more difficult. Most significantly, financial institutions – both domestic and international – must now take additional steps to monitor previously authorized U.S. dollar transactions involving Iranian financial institutions – or subject themselves to significant monetary and reputational penalties.1 Further, international financial institutions conducting business with Iran face added pressure to decide whether to scale back U.S. dollar business involving Iran, or as the U.S. government may prefer, cease business in Iran altogether.
Most recently, on November 20, 2007, OFAC published a Notice for TSRA License Holders warning U.S. persons holding valid OFAC export licenses that certain Iranian banks are now off-limits. This notice follows a series of recent actions designed to increase pressure on the Government of Iran by denying it access to the U.S. financial system. OFAC’s November action designating, among others, Bank Melli and Bank Mellat, is especially significant because these banks are two of the largest and most influential banks in Iran—Bank Melli alone has over 3,200 branches worldwide. Many U.S. dollar funds transfers will undoubtedly be cancelled or delayed by this development.
The trend targeting Iranian financial institutions began last September when OFAC amended the Iranian Transactions Regulations (“ITR”) to except Bank Saderat from the U-Turn general license. Pursuant to the U-Turn exception, U.S. financial institutions have been generally authorized to process transfers of funds involving an Iranian bank where the transfer (1) is by order of a foreign bank; (2) the underlying transaction is permissible; and (3) the appropriate chain of banks is present so no Iranian account on the books of a U.S. financial institution is credited or debited. 31 C.F.R. Section 560.516. As of September 8, 2006, Bank Saderat was no longer eligible for this exception. On January 9, 2007, OFAC identified Bank Sepah and Bank Sepah PLC as Specially Designated Nationals (“SDNs”) for their role in supporting the proliferators of weapons of mass destruction, removing them from U-Turn eligibility as well.2 Most recently, on October 25, 2007, OFAC identified several more Iranian financial institutions as SDNs.
As a result of OFAC’s cumulative actions, the following Iranian financial institutions are SDNs and are cut off from access to the U.S. financial system:
- Bank Sepah
- Bank Saderat (aka Iran Export Bank, Bank Saderat PLC)
- Bank Melli Iran Zao
- Bank Kargoshaee (aka Kargosa’i Bank)
- Bank Melli
- Melli Bank PLC
- Arian Bank (aka Aryan Bank)
- Bank Mellat
- Mellat Bank SB CJSC (aka Mellat Bank DB AOZT)
- Persia International Bank PLC
U.S. persons (including OFAC license holders and U.S. financial institutions) are prohibited from engaging in any transactions (including U-Turns) involving these SDNs. Further, property or interests in property of these SDNs that comes within U.S. jurisdiction or the control of a U.S. person must be (1) frozen in an interest bearing blocked account; and (2) reported to OFAC. Previously, where the transaction was not authorized, a U.S. bank needed only to reject a transaction between itself and one of these Iranian entities. U.S. exporters with TSRA licenses for exports to Iran were typically free to engage in certain banking relationships with these entities, unless the exporter’s license specified otherwise.
Implications for the Future
Persistently frustrated with the lack of meaningful multilateral action against Iran, U.S. law enforcement, national security and anti-terrorism agencies are trying to deny Iranian entities direct or indirect access to the U.S. financial system. Moreover, the United States is increasingly willing to penalize third country financial institutions for continuing to deal with Iran or Iranian businesses. In a recent press release, Treasury Secretary Paulson stated that “many banks around the world have decided as a matter of prudence and integrity that Iran’s business is simply not worth the risk. It is plain and simple: reputable institutions do not want to be the bankers for this dangerous regime.”3 Until there is appreciable harm to the international financial system or progress on multilateral sanctions against Iran’s uranium enrichment program, we expect the Treasury Department to continue looking for opportunities to keep raising the risk of doing business with Iran.