OFAC Issues Iran Financial Sanctions Regulations - Final Rule Implements New Statutory Requirements for U.S. Financial Institutions Co
International Trade & Customs Update
Date: September 01, 2010
On August 16, 2010, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) published a final rule in the Federal Register issuing the Iranian Financial Sanctions Regulations (31 CFR Part 561). These regulations implement certain parts of the financial sections of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), which President Obama signed into law July 1, 2010.
Under Section 104(c) of CISADA, a U.S.-owned or controlled financial institution is prohibited from engaging in transactions with foreign banks that the U.S. financial institution knows or should have known to benefit (a) the government of Iran in relation to its development of weapons of mass destruction, (b) its support of international terrorism, or (c) Iran's Revolutionary Guard.
The Iranian Financial Sanctions Regulations implement Section 104(c) of CISADA by specifying the conditions that Treasury may impose on U.S. financial institutions regarding the opening and maintenance of "correspondent" and "payable-through" accounts with foreign financial institutions that engage in the prohibited activities noted above. When Treasury determines that a foreign financial institution has knowingly engaged in the prohibited activities, it may either (a) impose certain stringent conditions set forth in the regulations, or (b) list the offending foreign financial institution in Appendix A of the regulations.
The strict conditions Treasury may impose on the opening or maintenance of correspondent and payable through accounts include:
(a) prohibiting the provision of trade finance through such accounts;
(b) restricting the types of transactions that may be provided;
(c) placing monetary limits on transactions; and
(d) requiring pre-approval from the U.S. financial institution to open or maintain these accounts.
If Treasury does not impose one or more of these conditions, but instead lists the foreign financial institution in Appendix A, a U.S. financial institution may not open or maintain a correspondent or payable-through account for that foreign financial institution.
Violation of the Iran Financial Sanction Regulations may result in civil penalties up to $250,000 per violation, or an amount twice the value of the actual transaction, and criminal penalties up to $1 million per transaction and 20 years imprisonment.
With the publication of these regulations, it appears that compliance with these financial provisions of CISADA may not be as burdensome as initially feared by many domestic financial institutions. Concerns had been expressed that OFAC would impose rigorous due diligence and audit requirements on transactions with foreign financial institutions. The new regulations simply require U.S. financial institutions to conduct reasonable due diligence by reviewing Appendix A of the Iranian Financial Sanctions (once completed), along with other denied party lists, and to adhere to any orders or regulations issued by the Secretary of the Treasury imposing conditions on the accounts of particular foreign financial institutions. However, OFAC has yet to issue regulations to implement another section of CISADA, Section 104(e). When issued, those additional regulations could impose more extensive audit requirements.
These new regulations became effective on August 16, 2010, but provided a 10-day period for financial institutions to conduct transactions necessary to close accounts prohibited by the regulations.