Prasad Chintamaneni is a Managing Director in Treliant’s Global Financial Crimes Compliance practice. He has over 25 years of experience in financial systems, data analytics, model validation, compliance, governance, and risk management. At Treliant, he has led data analytic teams on several engagements including independent consultancies involving Office of Foreign…
In May 2018, President Trump announced his decision to cease the United States’ participation in the Joint Comprehensive Plan of Action (JCPOA), a multilateral negotiation addressing Iran’s nuclear program. U.S. sanctions that were lifted to effectuate JCPOA sanctions relief will be re-imposed, following a wind-down period.
While U.S. financial services companies had still been subject to complying with other sanctions outside of the JCPOA since 2015, the decision to withdraw from the agreement will force many non-U.S. banks to once again be diligent in bringing any potential business involving Iran to an end. Foreign firms that do business with Iran will be barred from accessing the entire US banking and financial system. In addition, companies that violate the sanctions risk huge fines.
Companies that have initiated business involving Iran since the 2015 JCPOA should now assess how they plan to remain compliant, in order to avoid enforcement action and the loss of their U.S. correspondent banking relationships. They should evaluate their business to find if there are any areas that need to be scaled down. Companies should also be mindful of customers with high-risk profiles, using both customer due diligence (CDD) and know your customer (KYC) processes. In addition, it is recommended that bank executives and management be aware of planned business transactions or initiatives that could be problematic.
Reimplementing Iran Sanctions
The Treasury Department’s Office of Foreign Assets Control (OFAC) has published guidelines for the financial services industry to better understand the reimplementation of these sanctions. The process has been segmented into 90-day and 180-day phases, and companies will have this time to wind down various activities involving Iran. The wind-down periods are structured as follows:
- After August 6, 2018, sanctions will be imposed on: the Iranian government’s ability to purchase U.S. banknotes, the trade of Iran’s gold and precious metals, the direct or indirect sale of semi-finished metals, the purchase of Iranian rials, the purchase of Iranian sovereign debt, and Iran’s automotive industry.
- After November 4, 2018, additional sanctions will be placed on: Iranian shipping and port operators, transactions by foreign companies involving the Central Bank of Iran, and transactions related to petroleum and the larger Iranian energy sector.
Much of these provisions apply to foreign companies that operate in the U.S., since U.S. companies were still largely prohibited from conducting business with Iran over the past couple years due to other sanctions. However, some U.S. companies had received an OFAC License H or License I that allowed them to conduct business directly with Iran. These companies are expected to gradually end their business activity with Iran, since OFAC plans to revoke these licenses at the earliest opportunity. Those at the managerial level should review their business lines to ensure that activities involving Iran are scaled down during these stages.
Screening New Business
Companies must not only focus on past business dealings, but they should also be mindful of any newly initiated business that takes place during the coming wind-down periods. Guidance from OFAC states that the agency will “evaluate efforts and steps taken to wind down activities and will assess whether any new business was entered into involving Iran during the applicable wind-down period.”1 In order to avoid OFAC scrutiny or possibly an enforcement action, financial services companies should be careful not to initiate any new business with Iran. For transactions agreed to prior to May 8, 2018, non-U.S. and non-Iranian businesses may still make or receive payment during the wind-down periods.
As of November 5, 2018, OFAC expects to have once again added the Iranian government and Iranian financial institutions to the Specially Designated Nationals (SDN) list of sanctioned individuals and entities. This will mean that non-U.S. persons who engage in activities with these entities will—as of November 5, 2018, run the risk of infringing U.S. secondary sanctions. Foreign entities that violate the above provisions might be penalized. Financial services companies should maintain strong screening tools and updated watchlists to ensure that sanctioned entities, if any, are identified during screening of customers and potential customers.
The situation is delicate for international companies, since China, France, Germany, Russia, and the United Kingdom are still committed to the JCPOA. It is vital for financial services companies to exercise CDD and KYC processes and transaction screening processes to ensure that they conduct business in a way that allows them to remain compliant with U.S. law. In a largely international industry, these companies should make every effort to be aware of the Ultimate Beneficial Owner (UBO, for example, a large shareholder) in a financial transaction.
The status quo following the withdrawal from the JCPOA may only be temporary. Following the president’s announcement, Treasury Secretary Steven Mnuchin responded that “we will continue to work with our allies to build an agreement that is truly in the best interest of our long-term national security.” This indicates that there is still the potential for future sanctions relief related to Iran. On the other hand, the administration has maintained an aggressive stance toward the Iranian government and there remains the possibility of further restrictions on any interactions with Iran. It is recommended that executives at financial services companies stay agile in developing policies and procedures that comply with U.S. anti-money laundering and sanctions rules.
OFAC, “Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018, National Security President Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA),” 8 May 2018.
U.S. Department of the Treasury, “Statement by Secretary Steven T. Mnuchin on Iran Decision,” 8 May 2018.
1 “Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA),” Treasury Department; https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf