Recent Congressional and Financial Crimes Enforcement Network (FinCEN) actions represent a coordinated effort by the legislative and executive branches to isolate Iran by making it more difficult for Iran to engage in transactions with the global financial system.
Specifically, on December 31, 2011, President Obama signed into law the National Defense Authorization Act for Fiscal Year 2012 (Defense Bill). Section 1245(b) of the Defense Bill1 designates Iran’s financial sector as a primary money laundering concern.2 Section 1245(c) of the Defense Bill grants the President immediate authority to order the freezing of Iranian financial institution assets subject to U.S. jurisdiction, and President Obama exercised this authority via executive order on February 5, 2012.3 Section 1245(d) directs the President to impose sanctions on foreign financial institutions that engage in significant financial transactions with the Central Bank of Iran (CBI) or an Iranian financial institution found on the Treasury Department’s List of Specially Designated Nationals and Blocked Persons (SDN List). The President may begin imposing sanctions on foreign financial institutions engaged in significant financial transactions in non-oil products beginning on February 29, 2012 and in oil-related products on June 28, 2012.
Section 1245(d) of the Defense Bill has particular impact on financial institutions. Pursuant to this section, the President is required to prohibit or restrict a private, foreign financial institution from maintaining a correspondent or payable-through account in the U.S. if the foreign financial institution knowingly conducts or facilitates any “significant financial transaction” with the CBI or an Iranian financial institution listed on the SDN List. While the term “significant financial transaction” is not defined in Section 1245, Treasury has indicated that it will consider the facts and circumstances of each transaction to determine “significance” as well as apply a broad definition of “financial transaction.” Sales transactions for food, medicine, or medical devices to Iran will not subject a financial institution to sanctions.
Additionally, Section 1245(d) of the Defense Bill contains provisions governing transactions in oil with Iran. All foreign financial institutions, including central banks or state-owned or -controlled banks, that knowingly conduct or facilitate significant financial transactions for the purchase of Iranian oil or related products on or after June 28, 2012 with the CBI or an Iranian financial institution listed on the SDN List may be prohibited or restricted from maintaining a correspondent or payable-through account in the U.S.4
Section 1245 of the Defense Bill has significant implications for any bank that engages in transactions with links to Iran. Such banks may have to cease engaging in these transactions if they wish to maintain ties to the U.S. financial system. Particular caution also is warranted because the potential civil and criminal penalties are significant. Made pursuant to the International Emergency Economic Powers Act (IEEP Act),5 persons that violate, attempt to violate, conspire to violate or cause a violation of Section 1245 of the Defense Bill may be subject to a maximum civil penalty of the greater of $250,000 per transaction or double the transaction value. For criminal violations, a $1 million fine and 20-year jail term per violation is possible.
Further, the President’s recently proposed budget for fiscal year 2013 calls for cutting FinCEN’s budget by $6.2 million. It remains to be seen whether such cuts, if passed, will result in altered enforcement of sanctions by the executive branch and potentially even greater dependence on private sector monitoring of transactions tied to Iran.
Also of note is the Senate Banking Committee’s recent passage - with significant bipartisan support - of the Iran Sanctions, Accountability and Human Rights Act, which, among other things, broadens the list of available sanctions, requires U.S. publicly traded companies to disclose Iran-related activity to the Securities and Exchange Commission, penalizes U.S. corporate parents for certain Iran-related activities of their foreign subsidiaries and authorizes the President to impose the penalties pursuant to the IEEP Act referenced above on global wire transfer services, such as the Society for Worldwide International Financial Telecommunication (SWIFT), that provide wire transfer services to Iran.6 Given the current Congressional climate, if Congress managed to pass the Defense Bill, and if the Iran Sanctions, Accountability and Human Rights Act is on the fast-track for approval with support from both Senate Republicans and Democrats, then it appears that Congress considers sanctioning companies that do business with Iran a top priority. That the House of Representatives also is considering a bill that threatens IEEP Act penalties on SWIFT underscores the importance that Congress is placing on the issue.
1 Section 1245 is available at http://www.pepperlaw.com/pdfs/Iran_Sanctions_Bill_Text.pdf.
2 This designation by Congress codifies a November 2011 designation by FinCEN of Iran as a primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act. Finding That the Islamic Republic of Iran Is a Jurisdiction of Primary Money Laundering Concern, 76 Fed. Reg. 72,756 (Nov. 25, 2011). Additionally, FinCEN last year proposed a rule that would require U.S. financial institutions to take measures to prevent their correspondent accounts from being used to benefit Iranian financial institutions. Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations—Imposition of Special Measure Against the Islamic Republic of Iran as a Jurisdiction of Primary Money Laundering Concern, 76 Fed. Reg. 72,878 (Nov. 28, 2011).
3 See Executive Order No. 13599, February 5, 2011, available at http://www.whitehouse.gov/the-press-office/2012/02/06/executive-order-blocking-property-government-iran-and-iranian-financial- (blocking all property and interests in property of the Iranian government (including the Central Bank of Iran), all Iranian financial institutions, and all persons that the Secretary of the Treasury, in consultation with the Secretary of State, determines are owned or controlled by, or act or purport to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the order). The order was effective as of 12:01 a.m. Eastern Standard Time on February 6, 2012. The President issued the executive order pursuant to authority granted under International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), the National Emergencies Act (50 U.S.C. 1601 et seq.), and 3 U.S.C. § 301, in addition to that granted under Section 1245(c) of the Defense Bill.
4 In order to impose these sanctions, the President must determine by March 30, 2012, and then every 180 days, that the price of oil and the quantity of oil produced in other countries is sufficient to allow oil purchasers to reduce their level of purchases from Iran. Sanctions will not be imposed if the President reports to Congress within 90 days of making this price and supply determination, and then every 180 days, that the country with primary jurisdiction over the foreign financial institution has significantly reduced its volume of crude oil purchases from Iran. The President also may waive imposing sanctions for 180 days if the President determines that doing so is in the national security interest and submits a related report to Congress.
5 50 U.S.C. § 1705.
6 The Iran Sanctions, Accountability and Human Rights Act also provides for IEEP Act penalties to be imposed on the directors and significant shareholders of such global wire transfer services.
Timothy R. McTaggart and David W. Freese