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Iran Sanctions Deal Poses Myriad Risks for Banks - Constandino Papagiannis

Constandino Papagiannis
New Coordinates
Spring 2016

Many US and European financial institutions are seen taking a wait-and-see approach to doing business in Iran, in the wake of January's lifting of some-but certainly not all-Iranian economic sanctions.

Implementation of the political change is riddled with practical complexity and gray areas, increasing compliance risk. Among the issues for the financial services industry:

Which sanctions are lifted and which still apply?

Exactly who is on and off the sanctions lists, particularly the Specially Designated Nationals and Blocked Persons (SON) List?

How are US and non-US banks and employees covered by continuing restrictions?

How might US, European, and United Nations (UN) sanctions provisions conflict?

Ultimately, what is the possibility that domestic politics and/or international security concerns could even overturn the changes that took effect in January?

Compliance officers should work with their financial institutions' strategy and operations executives to develop a deep understanding of the situation, its risks, and its cost/benefit implications.

January 16 marked "Implementation Day" of a multilateral Joint Comprehensive Plan of Action (JCPOA) aimed at ensuring Iran's nuclear program is "exclusively peaceful" Sanctions waived that day were described in extensive detail by the US Treasury Department's Office of Foreign Assets Control (OFAC), while the European Union (EU) and UN also eased sanctions.

Among the top-level changes: The US has lifted nuclear-related secondary, but not primary, sanctions on banking and certain other industries (generally involving non-US persons, companies, and territories, as described below). Generally, US persons and companies continue to be broadly prohibited from engaging in transactions or dealings with Iran and the government of Iran unless such activities are exempt from regulation or authorized by OFAC. While the US has lifted nuclear-related sanctions, it has retained certain sanctions including, but not limited to, support for terrorism, proliferation of weapons of mass destruction (WMD), and human rights abuses. As a result, the US has removed the names of some, but not all, individuals and entities from OFAC's SON List.

The complexity of implementation is in these details and also in the potential for US and EU provisions to conflict. While the media is reporting that Iran is open for conducting business, there are in fact notable differences between the current US and EU sanctions regimes. There will continue to be key differences between the US and EU sanctions regimes going forward. Compliance officers should resist any temptation to interpret this political milestone as one that sweeps aside all Iran sanctions, because the reality is to the contrary. The US domestic trade embargo on Iran remains largely in place for US banks, and compliance lies in the balance.

Complexity Inhibits Bank Embrace
The complexity of the new rules is having a chilling effect on financial institutions' inclination to support business with this big, oil-rich economy of some 75 million people. Consider the position of European banks, most of which have US operations and transactions and some of which have already paid the US government billions of dollars in fines related to Iran sanctions. As British Bankers Association Chief Executive Anthony Browne recently wrote, "International banks need much more clarity from US authorities about the regulatory hurdles they need to meet before engaging in dealings with Iran. At the moment there is too much ambiguity, which leaves banks in a difficult position of trying to fulfill their financial crime obligations while simultaneously supporting the political rapprochement with Iran."

The development is also unfolding in a highly charged US political environment in which some politicians are already projecting that they would overturn the agreement, whose provisions were implemented by executive order. Adding to the uncertainty, in congressional testimony in February, OFAC Acting Director John Smith said that, "the deal gives us the necessary flexibility to respond to Iran if it fails to comply with its JCPOA commitments, including the ability to fully snap-back international and domestic sanctions."

Who Can Transact What. . .

A clear distinction has been drawn between primary and secondary sanctions-in other words, involving US versus non-US individuals, entities, and activities. Specifically, the lifting of secondary sanctions would apply to non-US banks or employees doing business with Iran that occurs entirely outside of US jurisdiction and does not involve US parties, as OFAC describes in its "Guidance Relating to the Lifting of Certain US Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day.

There is an exception, under which non-US entities owned or controlled by a US individual or company can do business with Iranian counterparts, but must get a license to do so. However, this General License H would not be granted for such activities as transferring funds to, from, or through the US financial system. 

Apart from this exception, two other narrow exemptions, and some longstanding general licensing of certain agricultural and medical products, OFAC underscores that primary sanctions remain in place. In other words, the agency says, "none of the sanctions-related commitments outlined in this guidance apply to US persons ... US persons, including US companies, continue to be broadly prohibited from engaging in transactions or dealings with Iran and the Government of Iran." Notably, US branches of foreign banks would also be prohibited.

For non-US actors conducting financial and banking transactions, a specific list of business partners that are no longer sanctionable includes the government of Iran, Central Bank of Iran, Iranian financial institutions, and other Iranian persons removed from OFAC's SDN List. Permissible types of transactions include loans, transfers, accounts (including the opening and maintenance of correspondent and payable-through accounts at non-US financial institutions), investments, securities, guarantees, foreign exchange (including transactions related to Iranian currency), letters of credit, commodity futures or options, specialized financial messaging services, the acquisition by the government of Iran of US bank notes, and the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt.

Finally, to be clear, OFAC reiterates that non-US persons continue to be prohibited from knowingly engaging in conduct that seeks to evade US restrictions.

. . .And With Whom
Banks will also want to be sure exactly who is now on or off the sanctions lists, for screening and compliance purposes. And again, it's complicated.

More than 400 Iranian individuals and entities have been removed from OFAC's SDN List. That said, half of these (identified as part of government or financial institutions) will be placed on a new "Executive Order 13599" list that will only allow transactions with non-US individuals or entities. US banks are still obliged to block property in which anyone in this group has an interest.

Yet another 200 individuals and entities will remain on the SON List, declared by the US to be sponsors of terrorism or participants in Iran's ballistic missile program. Among these are the Islamic Revolutionary Guard Corps (IRGC) and any of its designated officials, agents, or affiliates-a group that reportedly controls much of the Iranian economy.

Not to be Overlooked
In a situation rife with potential pitfalls, one could be a bank's failure to remove names that have now been officially cleared from its own list of blocked parties. Think of the many well­ publicized glitches with air travel "do not fly" lists, and it becomes apparent how ineffective list management processes could create issues. Compliance officers should ensure that data integrity and change management controls are adequate with respect to updating lists in its customer and payment screening systems.

Conclusion: It'll All Take Time

The next major milestone in the JCPOA process is Transition Day, which is slated for October
2023 (the eighth anniversary of Adoption Day, October 18, 2015). Alternatively, official nuclear watchdogs could give the green light sooner.

One report suggested that banks will wait at least a year beyond January's Implementation Day to engage in Iran business opportunities. As they deliberate their strategies, they should be sure that their compliance officers are in the room.

The US and EU sanctions regimes against Iran will remain fluid for years to come. At least for the time being, some existing routines will simply continue, such as the need to regularly consult the OFAC website to make sure bank systems are effectively screening against all prohibited counterparties.

Compliance officers will certainly need to remain vigilant because, as OFAC Acting Director Smith also said in February, "We believe it is crucial to continue to implement and enforce the sanctions that remain." 

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Treliant Risk Advisors, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the Spring 2016 issue. To subscribe to our quarterly newsletter, please Contact Us.