OFAC adopted the Iranian Financial Sanctions Regulations (the “IFSR”), 31 C.F.R. Part 561, which impose restrictions on the opening and maintaining of correspondent accounts and payable-through accounts by U.S. financial institutions for foreign financial institutions designated as having engaged in certain specified activities, such as facilitation of Iran’s pursuit of weapons of mass destruction or support for terrorist organizations. The IFSR also prohibit persons owned or controlled by U.S. financial institutions from engaging in transactions with Iran’s Islamic Revolutionary Guard Corps (“IRGC”) or its agents or affiliates, and makes U.S. financial institutions potentially responsible for such prohibited transactions by persons that they own or control. The ISFR implement Sections 104(c) and 104(d) of the Comprehensive Iran Sanctions, Accountability and Divestment Act (“CISADA”), which was signed into law by President Obama on July 1, 2010 to strengthen the U.S. sanctions regime against Iran.
The ISFR apply to a broad range of “U.S. financial institutions,” which are defined in the ISFR to include “any U.S. entity that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent.” As specified in the ISFR, such institutions include but are not limited to “depository institutions, banks, savings banks, money services businesses, trust companies, insurance companies, securities brokers and dealers, commodity futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodity exchanges, clearing corporations, investment companies, employee benefit plans, and U.S. holding companies, U.S. affiliates, or U.S. subsidiaries of any of the foregoing.” The term “foreign financial institution” is defined with similar breadth.
Prohibitions or Strict Conditions on Opening or Maintaining Correspondent Accounts or Payable-Through Accounts for Designated Foreign Financial Institutions
Pursuant to Section 104(c) of CISADA, the ISFR authorize the Treasury Secretary to prohibit or place strict conditions on the opening or maintaining of correspondent accounts or payable-through accounts in the United States by U.S financial institutions for any foreign financial institution that the Treasury Secretary determines knowingly:
Facilitates the efforts of the Government of Iran (including efforts of the IRGC or any of its agents or affiliates) (i) to acquire or develop weapons of mass destruction or delivery systems for weapons of mass destruction or (ii) to provide support for organizations designated as foreign terrorist organizations;
Facilitates the activities of a person subject to financial sanctions pursuant to United Nations Security Council Resolutions 1737, 1747, 1803, or 1929, or any other resolution adopted by the Security Council that imposes sanctions with respect to Iran (which includes individuals and entities designated by the Security Council as being engaged in, directly associated with or providing support for Iran’s proliferation sensitive nuclear activities, or the development of nuclear weapon deliver systems);
Engages in money laundering or facilitates efforts by the Central Bank of Iran or any other Iranian financial institution to carry out any of the activities described above; or
Facilitates a significant transaction or transactions or provides significant financial services for (i) the IRGC or any of its agents or affiliates designated as such by OFAC or (ii) a financial institution whose property and interests are blocked by OFAC in connection with Iran’s proliferation of weapons of mass destruction or delivery systems for weapons of mass destruction or Iran’s support for international terrorism.
The restrictions that the Treasury Secretary may impose on U.S. financial institutions with respect to the correspondent or payable-through accounts of such foreign institutions may include, but are not limited to:
Prohibiting the provision of trade finance through the accounts;
Restricting the types of transactions that may be processed through the accounts to certain types of transactions, such as personal remittances;
Placing monetary limits on the transactions that may be processed through the accounts; or
Requiring pre-approval from the U.S. financial institution for all transactions processed through the accounts.
Alternatively, the Treasury Secretary may impose a complete prohibition on the opening or maintaining of correspondent accounts or payable-through accounts by U.S. financial institutions for the designated foreign financial institution.
Any person who violates, attempts to violate, conspires to violate, or causes a violation of these prohibitions may be subject to civil penalties of up to the greater of $250,000 or twice the amount of the transaction that forms the basis of the violation. In addition, willful violations may be punishable by criminal penalties of up to $1,000,000, or, for individuals, imprisonment of up to 20 years, or both.
Under a general license provided in the ISFR, a U.S. financial institution may engage in certain limited transactions related to winding down and closing of a correspondent account or a payable-through account that the U.S. financial institution may no longer maintain for a designated foreign financial institution for ten days after the effective date of the prohibition with respect to that foreign financial institution. U.S. financial institutions that require more time or need to engage in a broader range of transactions with respect to such accounts must obtain a specific license from OFAC prior to engaging in any otherwise prohibited transactions.
Prohibition on Transactions with the IRGC or Its Agents or Affiliates
Pursuant to Section 104(d) of CISADA, the ISFR prohibit any U.S. person that is owned or controlled by a U.S. financial institution from knowingly engaging in any transaction with or benefiting 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.
A U.S. financial institution may be subject to civil penalties if any person that it owns or controls violates, attempts to violate, conspires to violate or causes a violation of this prohibition and the U.S. financial institution knew or should have known of the prohibited action by the person. The civil penalties assessed to the U.S. financial institution may amount to the greater of $250,000 or twice the amount of the transaction that forms the basis of the violation.
Effective Date and Further Related Rulemaking
The ISFR went into effect on August 16, 2010. The effective date of any prohibition or condition on the opening or maintaining of a correspondent account or payable-through account for a particular foreign financial institution is the earlier of the date the U.S. financial institution receives actual or constructive notice of the prohibition or condition. The prohibition on transactions with or benefiting the IRGC is effective August 16, 2010, except that the effective date with respect to transactions with or benefiting agents or affiliates of the IRGC is August 16, 2010 for agents or affiliates designated as such prior to that date and the date of actual or constructive notice of such designation for agents or affiliates designated after August 16, 2010.
Section 104(e) of CISADA directs the Secretary of the Treasury to adopt regulations that require U.S. financial institutions which maintain correspondent accounts or payable-through accounts in the United States for foreign financial institutions to conduct audits and report to Treasury regarding accounts maintained by the U.S. financial institutions for foreign institutions that may be engaged in transactions that would make them subject to designation under the ISFR. While Treasury was required to adopt the ISFR’s provisions within 90 days of the enactment of CISADA, there is no specific deadline for the adoption of these additional regulations.