IFSR & CISADA Explained

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Federal Register / Vol. 75, No. 157 / Monday, August 16, 2010 / Rules and Regulations - IFSR & CISADA

Iranian Financial Sanctions Regulations

A major focus of CISADA was to extend U.S. sanctions to foreign banks that engaged in transactions that assisted the nuclear proliferation efforts of the Iranian Government. The IFSR implement Sections 104(c) and 104(d) of the Comprehensive Iran Sanctions, Accountability and Divestment Act ("CISADA"), which President Obama signed into law on July 1, 2010. At Section 104(c), the CISADA requires US Treasury/OFAC to impose sanctions on non-US financial institutions engaged in any of a detailed list of proscribed activities involving certain Iranian entities and individuals, including Iran's Islamic Revolutionary Guard Corps ("IRGC") and Iranian banks designated under US anti-terror and non-proliferation sanctions ("Proscribed Banking Activity").

Neither the CISADA nor the IFSR expressly prohibit non-US financial institutions from transacting with Iranian banks, but rather expose non-US financial institutions to a possible designation by OFAC if they engage in Proscribed Banking Activity, with financial institutions so designated subject under the IFSR to a range of potential sanctions including, effectively, expulsion from the US financial system. Because recent UN resolutions and implementing measures by the EU and other UN member states already require non-US financial institutions located in major jurisdictions to refrain from most forms of Proscribed Banking Activity, compliance with the anti-money-laundering requirements of such jurisdictions is a strong defence against becoming a sanctions target under the IFSR.

The IFSR confirm that sanctions apply to non-US financial institutions under Section 104(c) of CISADA only if OFAC designates them under that Section. As of today, OFAC has not made any such designations. The IFSR also clarify that OFAC has the option of either prohibiting all US correspondent and payable-through banking activity by designated non-US financial institutions or imposing lesser forms of restrictions, such as limiting the type or size of US correspondent banking transactions permitted by designated financial institutions.

Effective immediately, the IFSR also prohibit any person that is owned or controlled by a US financial institution from knowingly engaging in transactions with or for the benefit of the IRGC or any of its agents or affiliates designated as such by OFAC, as well as any entity owned 50% or more, directly or indirectly, by the IRGC. The IFSR also hold US financial institutions responsible for preventing such violations by their non-US affiliates; including, by implication, the non-US portfolio companies of any private equity funds that a US financial institution might own or control.

More generally, the IFSR apply to "any person" globally in regard to any conduct that might assist IFSR-designated financial institutions (as and when OFAC designates them) to engage in prohibited US correspondent or payable-through banking activity. OFAC likely would regard any such conduct as a serious enforcement matter. IFSR and Correspondent or Payable-trough accounts.

The IFSR do not address the question of what, if any, actions, US financial institutions must take to prevent the use of correspondent or payable-through accounts in connection with Proscribed Banking Activity, other than to comply with restrictions that OFAC may impose on transactions with any future IFSR-designated financial institutions. Section 561.201(c) provides that no U.S. financial institution shall open or maintain a correspondent account for foreign banks providing such assistance. OFAC plans to list all such foreign banks subject to this condition in Appendix A to the new regulations. No bank is currently listed in Appendix A.

Compliance with section 561.201(c) should not cause any particular heartburn for U.S. financial institutions, because it is simply another list that banks must check when opening new accounts and when scrubbing existing accounts for compliance. Another portion of CISADA, however, was the subject of much speculation and concern that it would pose complex and laborious due diligence obligations on U.S. financial institutions doing business with foreign financial institutions. Section 104(e) of CISADA requires OFAC to promulgate regulations requiring U.S. financial institutions with foreign bank correspondent accounts to undertake one or more of four activities designed to determine whether the foreign banks are providing services to Iran in aid of its proliferation goals. These include audits and “due diligence” on the foreign banks.

Treasury's Strategic Objective and Tactical Approach

US Treasury officials appear to have briefed the press in advance of August 2010 publication of the IFSR and also to have used the press to direct pressure against financial institutions in the Middle East in particular. Under Secretary Levey is currently visiting financial institutions and regulators in that region and likely using the threat of an IFSR designation as a deterrent against conduct that US Treasury opposes, such as commercial contact with Iranian banks designated under US anti-terror and non-proliferation sanctions. The IFSR provides for designation of non-US financial institutions in response to "significant" transactions with such Iranian banks, including direct customer relationships and any form of deceptive conduct on their behalf.

US Treasury officials made a similar visit to Japan and also appear to have also leaked information to the press before that trip.

By all indications, US Treasury would much prefer to use the threat of an IFSR designation rather than actual IFSR designations to achieve progress in the continuing US campaign to isolate Iran from the world financial system. As noted above, for financial institutions that maintain effective AML compliance programs intended to prevent their involvement in activity contrary to domestic law and UN sanctions, the risk of exposure to Proscribed Banking Activity is substantially mitigated. Further mitigation can be achieved by exiting all customer relationships and avoiding transactions of any potential significance with Iranian banks designated under US anti-terror and non-proliferation sanctions.

Finally, to the extent that US Treasury believes that a non-US financial institution has engaged in Proscribed Banking Activity and in the absence of a serious provocation by that financial institution, it seems likely that a warning and an opportunity to remediate would be provided in advance of an OFAC designation.

Proscribed Banking Activity

Under the Section 201(a) of the IFSR, Proscribed Banking Activity includes one or more of the following activities by a financial institution:

  1. Facilitating the efforts of the Government of Iran (including efforts of the IRGC or any of its agents or affiliates):
  1. Facilitating the activities of a person subject to financial sanctions pursuant to [past or future] United National Security Council Resolutions imposing sanctions on Iran;
  2. Engaging in money laundering to carry out an activity in (1) and (2) above;
  3. Facilitating efforts by the Central Bank of Iran or any other Iranian financial institution to carry out an activity described in (1) and (2) above; or
  4. Facilitating a significant transaction or transactions or providing significant financial services for

Source: Clifford Chance LLP – August 2010

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