United States: FinCEN Warns Banks On Iran's Illicit Financial Activities And "Red Flags" To Consider

US and non-US persons risk monetary fines and secondary sanctions, as well as negative commercial and reputational consequences, if they engage in prohibited transactions involving Iran. On October 11, 2018, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, issued a 19-page advisory to help US financial institutions better detect and report potentially illicit transactions involving Iran. FinCEN said the advisory is also intended to assist foreign financial institutions in better understanding the obligations of their US correspondents, avoiding exposure to US sanctions and addressing the anti–money laundering/combating the financing of terrorism (AML/CFT) risks Iran poses to the global financial system. FinCEN's advisory does not merely provide information and guidance - it places financial institutions on notice of the types of deceptive practices that may be employed in transactions involving Iran.

FinCEN details several "typologies" (i.e., schemes) that the Iranian regime uses to access the international financial system while obscuring its activities. FinCEN cautions that Iran uses these illicit means to exploit "financial systems around the world to generate revenues and transfer funds in support of malign conduct" such as human rights abuses, support for terrorist groups and the Syrian regime, ballistic missile development and "other destabilizing actions targeted by US sanctions."1

As the full array of US sanctions comes back into force on November 5, 2018, FinCEN expects Iran to increase its engagement in money laundering and other activities to evade the sanctions. Accordingly, financial institutions, such as banks, broker dealers, and other money services businesses, should implement robust screening processes to detect deceptive schemes in transactions that involve Iran, regions with strong economic or geographic ties to Iran, or other Iran-related risk factors.

Methods by which Iran exploits the international financial system

The Iranian regime attempts to obtain access to the international financial system "to further its malign activities" using a variety of methods.2 These include masking illicit transactions through senior Central Bank of Iran (CBI) officials, misusing exchange houses and trading companies, running procurement networks that use front or shell companies, engaging in deceptive shipping practices and using precious metals and virtual currency to evade US sanctions.

The advisory provides background and additional information on these "typologies":

  1. Illicit activity by the CBI and its officials

Senior officials of the CBI have obtained currency and conducted transactions for the benefit of the Islamic Revolutionary Guard Corps-Quds Force (IRGC-QF) and Hizballah. For example, in May 2018, the US sanctioned then-CBI Governor Valiollah Saif and assistant director of CBI's International Department, Ali Tarzali, for transferring funds through an Iraqi bank for the IRGC-QF's benefit. FinCEN warns that some counterparty financial institutions may not be equipped to identify or address CBI officials' deceptive transactions,3 which have employed personal accounts and individuals with no affiliation with the CBI or the Iranian government. Additionally, front companies of the IRGC-QF are known to retrieve funds in various currencies from CBI's accounts in foreign banks and then transfer those funds back to Iran.

  1. Third-country exchange houses and trading companies to conceal the origin of funds and acquire foreign currency for the IRGC-QF

When monitoring payments involving third-country exchange houses or trading companies, financial institutions should consider: (1) requesting additional information on the parties involved and nature of such transactions; (2) conducting "account and transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate US sanctions against Iran"; and (3) contacting their "correspondents that maintain accounts for, or facilitate transactions on behalf of, third-country exchange houses or trading companies" engaging in Iran-related activities to request additional information and alert them on Iran's use of such practices.4

  1. Front companies and shell companies to obtain counterfeit currency, dual-use items and commercial aviation goods

FinCEN explains that "as part of a risk-based approach, financial institutions should familiarize themselves with these deceptive practices and take steps to avoid direct or indirect facilitation of them."5

Financial institutions that provide services to the commercial aviation industry "should be aware of prior actions by designated Iranian airlines to evade sanctions," and should exercise "appropriate due diligence to ensure compliance with legal requirements."6 Foreign financial institutions may be subject to US sanctions for knowingly conducting significant transactions for, or providing material support to, designated Iranian airlines.

  1. Deceptive practices by shipping companies to evade US sanctions, including use of falsified documents, and re-flagging of vessels

As the sanctions lifted under the Joint Comprehensive Plan of Action (JCPOA) come back into effect, Iranian companies may return to the use of such deceptive practices, and that financial institutions "may see indications of these deceptive shipping practices in the information contained in international wires, payment requests, and letters of credit."7 Financial institutions should report any changes regarding the issuance or writing of letters of credit and other trade-related financial transactions in their Suspicious Activity Report (SAR) filings if the changes appear to be related to malign activity.

  1. Illicit use of precious metals

With US sanctions coming back into full force, financial institutions "should be aware of prior schemes used by entities with a nexus to Iran to evade sanctions using gold and other commodities."8

  1. Virtual currency

FinCEN recommends that institutions "should consider reviewing block-chain ledgers for activity that may originate or terminate in Iran," and "should be aware that the international virtual currency industry is highly dynamic," and that "new virtual currency businesses may incorporate or operate in Iran with little notice or footprint."9

Financial institutions and virtual currency providers that have obligations under US sanctions and the Bank Secrecy Act (BSA) should be "aware of and have the appropriate systems to comply with all relevant sanctions and AML/CFT requirements."10 A non–US based virtual currency provider or exchanger transacting substantial business in the US is "subject to AML/CFT obligations" and the jurisdiction of the US Treasury Department's Office of Foreign Assets Control (OFAC), which administers and enforces US sanctions.11

Red flags

FinCEN outlines certain red flags that could help financial institutions identify suspicious activity involving the activities described above. However, "no single transactional red flag necessarily indicates suspicious activity."12 Rather, FinCEN says that financial institutions should consider taking into account additional indicators and the surrounding facts and circumstances, such as a customer's financial history and the presence of other red flags, before concluding that a transaction is suspicious.

The specific red flags listed in the advisory are as follows:

Conduct

Red Flag

Description

Illicit activity by the CBI or its officials

Use of personal accounts

The CBI or its officials route transactions to personal accounts instead of central bank or government accounts.

Unusual wire transfers

The CBI engages in multiple wire transfers to financial institutions that are unusual for the CBI's financial history or that are not related to traditional central bank functions.

Use of forged documents

Front companies that are acting on behalf of designated persons use forged documents to mask the identities of the parties involved in the transaction.

Illicit activity through exchange houses

Use of multiple exchange houses

Customers may have transactions moving through multiple exchange houses, and the fee, the number of transactions and the pattern is not typical of standard commercial practices.

Multiple depositors

Account holders may receive deposits that do not appear to match the documentation provided or the customer's profile from numerous parties.

Use of procurement networks

Shell or front companies

Transactions involving companies that originate with, or are directed to, entities that are shell or front corporations, general "trading companies" or companies that have a link to Iran.

Suspicious declarations

Declarations of information that are contradictory to or inconsistent with other information, such as the nature of the business or transaction history.

Unrelated business

Transactions that are directed to companies operating in unrelated businesses, and that do not correspond to data collected during the customer onboarding process.

Use of front companies and trans-shipment hubs to source aircraft parts

Facilitation of commercial aviation–related transactions where there is no knowledge of the counterparty's beneficial owner, and for which the delivery destination is a common trans-shipment point for onward shipment to Iran.

Misrepresentation of sanctions

Misrepresentation to third parties, such as brokers, suppliers and other intermediaries, that sanctions against Iran have been lifted or that an OFAC license has been obtained.

Iran-related shipping companies' access to the US financial system

Incomplete and falsified documentation

Transactions and wire transfers that involve bills of lading with no consignees or vessels that have been previously linked to suspicious activities.

Inconsistent documentation for vessels using key parts

Inconsistencies between maritime database entries and shipping-related documents that are used for conducting due diligence.

Previous ship registration to sanctioned entities

Vessels whose ownership or operation is transferred to another person, following OFAC's designation of its owner or operator, but in which the designated person continues to have an interest.

Illicit use of precious metals and suspicious fund transfers

Gold

Given that Iran has previously used gold as a substitute for cash to evade US sanctions, financial institutions should consider conducting additional due diligence on transactions related to precious metals, especially in regions that are close to Iran, such as Turkey, and those involving the purchase of unusually high volumes of gold.

Lack of information regarding origin of funds

Wire transfers or deposits that do not contain any information or contain incomplete information about the source of funds, or that do not match the customer's line of business.

Unusual or unexplainable wire transfers

Multiple unexplained wire transfers, and transfers that have no apparent connection to the customer's profile.

Using funnel accounts

Third parties from across the US who deposit funds into the accounts of US-based individuals with ties to Iran, where such deposits and associated transactions do not match the account holder's regular geographical footprint, and where the source of the funds is unclear or unknown.

Structuring transactions

US persons who send or receive money to or from Iran by structuring the transactions in a way to avoid the currency transaction reporting threshold of $10,000.

Virtual currency

Logins from Iranian IP addresses or with Iranian email

IP login activity from entities in Iran or using an Iranian email service in order to transact virtual currencies through a virtual currency exchange.

Payments to/from an Iranian virtual currency exchange

A customer or correspondent payment to or from virtual currency exchanges that appear to be operating in Iran.

Peer-to-peer (P2P) exchangers

Unexplained transfers into a customer account from multiple individual customers, combined with transfers to or from virtual currency exchanges.

Obligations under US sanctions

US sanctions against Iran prohibit US financial institutions from opening or maintaining correspondent accounts on behalf of Iranian financial institutions. Additionally, absent an exemption or authorization, US sanctions prohibit foreign persons, including foreign financial institutions, from processing Iran-related transactions to or through the US, including "transactions through US correspondent accounts for or on behalf of Iranian financial institutions, other Iranian persons, or where the benefit is otherwise received in Iran."13

Furthermore, pursuant to certain authorities, foreign financial institutions may be subject to sanctions for knowingly conducting significant transactions for or with certain Iran-related persons, or for providing material support to designated persons. Accordingly, US and non-US financial institutions should be cognizant of their obligations under US sanctions "to prevent any use (both direct and indirect) of their US correspondent accounts for transactions involving an Iranian financial institution,"14 and should continue to develop "controls designed to curtail indirect involvement of Iranian persons in transactions that transit through or otherwise involve the US financial system."15

US and non-US financial institutions should continue to implement "robust and multi-tiered levels"16 of screening and review for transactions that originate from or involve jurisdictions that are in close proximity to Iran, or with strong geographical and economic ties to Iran.

Other regulatory obligations for US financial institutions

US financial institutions are subject to compliance with the below-listed AML and regulatory obligations. Consistent with these obligations, US financial institutions should take practical, risk-based steps to identify individuals and entities involved in money laundering and sanctions evasion activities.

  1. Enhanced due diligence obligations for private banking accounts held for non-US persons that are designed to detect and report money laundering or other suspicious activities.
  2. Customer due diligence and identification of beneficial owners of new legal entity accounts.
  3. General obligations for correspondent account due diligence and AML programs, such as including "appropriate, specific, risk-based, and where necessary, enhanced policies, procedures and controls"17 that can reasonably detect and report suspicious activities conducted through or involving a correspondent account in the US.
  4. Reporting requirements under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) whereby, upon a written request from FinCEN, a US bank that maintains a correspondent account for a foreign bank shall inquire about whether the foreign bank has engaged in business with a designated Iranian institution, and whether the foreign bank has processed fund transfers for the Islamic Revolutionary Guard Corps, or any of its agents or affiliates.
  5. Requirement for a financial institution to file an SAR if it suspects illegal activity, or an attempt to evade the BSA or US sanctions.

Looking ahead

Once all the secondary sanctions come back into force on November 5, 2018, Iranian financial institutions, the Iranian regime and its officials are likely to "increase their efforts to evade US sanctions to fund malign activities and secure hard currency for the Government of Iran."18 As such, US and foreign financial institutions must be careful in detecting the transactional red flags described above and reporting any suspicious or illicit activities. FinCEN also sets forth regulatory expectations in the advisory that financial institutions should consult for Iran-related transactions to avoid violating US sanctions and financial regulations.

Footnotes

1. Advisory on the Iranian Regime's Illicit and Malign Activities and Attempts to Exploit the Financial System, Fin-2018-A006 (Oct. 11, 2018) Fin. Crimes Enforcement Network, https://www.fincen.gov/news/news-releases/fincen-issues-advisory-iranian-regimes-illicit-and-malign-activities-and

2. FinCEN Advisory FIN-2018-A006, Advisory on the Iranian Regime's Illicit and Malign Activities and Attempts to Exploit the Financial System, available at https://www.fincen.gov/sites/default/files/advisory/2018-10-11/Iran Advisory FINAL 508.pdf

3. Id.

4. Id.

5. Id.

6. Id.

7. Id.

9. Id.

10. Id.

11. Id.

12. Id.

13. Id.

14. Id.

15. Id.

16. Id.

17. Id.

18. Id.

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