United States: FinCEN Warns Of New Iranian Efforts To Launder Money Through Banks And Virtual Currencies

On October 11, 2018, the Financial Crimes Enforcement Network ("FinCEN") released an advisory to assist financial institutions – including banks, money services businesses, and any entity utilizing virtual currencies – with the identification of prohibited Iranian transactions and to enable appropriate measures to comply with U.S. sanctions and Anti-Money Laundering/Combating the Financing of Terrorism ("AML/CFT") and Bank Secrecy Act ("BSA") laws. As sanctions "snapback" into effect following the U.S. withdrawal from the Joint Comprehensive Plan of Action ("JCPOA"), FinCEN expects that the Iranian Government and related entities will return to historic methods of laundering funds to evade sanctions as well as explore new opportunities through virtual currencies.

Iran's Historic Use of Deceptive Practices to Evade Sanctions

In large part because of U.S. sanctions, Iran has sought access to the worldwide financial system through covert means. The Iranian Government has also often used money laundering techniques to fund the Islamic Revolutionary Guard Corps, the IRGC's Qods Force, Hizballah, Hamas, and other groups adverse to U.S. interests. As the country faces renewed sanctions pressure, FinCEN warns that Iran could return to many of these practices, including:

  • Regional Banks – Central Bank of Iran officials, many of whom are identified on the U.S. Specially Designated Nationals ("SDN") list of sanctioned parties and blocked from a substantial part of the worldwide financial system, often use regional financial institutions, which may lack the resources and capability to conduct appropriate screening, as intermediaries to conceal their role in a transaction.
  • Exchange Houses – Iran uses a network of couriers to carry currency out of Iran and exchange it for U.S. dollar-denominated cash in foreign countries, in particular the UAE, for the benefit of the Iranian Government or groups it wishes to fund.
  • Procurement Networks – Iran has an established network of shell companies that it uses to procure technology and services from around the world in order to evade sanctions. Recent procurement schemes discovered by U.S. authorities include the procurement of currency printing machinery from Europe, the procurement of dual-use goods from China for use in Iran's ballistic missile program, and the procurement of aviation parts from the Middle East, Europe, and Asia.
  • Shipping Companies – Iranian shipping companies have historically used deceptive practices to evade sanctions, including the use of falsified documents, the reflagging of vessels, and the use of brokers and trading companies to mask payment origins.
  • Precious Metals – Iran also has a history of trading in precious metals to evade U.S. sanctions. Section 1245 of the Iran Freedom and Counter-Proliferation Act of 2012 targets Iran's trade in precious metals.

New Risks to Virtual Currencies

While Iran's current estimated use of virtual currencies is small, FinCEN warns that "virtual currency is an emerging payment system that may provide potential avenues for individuals and entities to evade sanctions." Due to their decentralized nature, virtual currencies are widely available to Iranian nationals through the Internet. While the Central Bank of Iran has publicly banned domestic banks from handling virtual currencies, FinCEN warns that sanctioned Iranian parties may turn to them as a new way of converting and transferring funds.

The advisory recommends that financial institutions review blockchain ledgers for potential activity originating or terminating in Iran. Small peer-to-peer ("P2P") exchangers – individuals or companies that offer to exchange digital currency – are especially at risk for activity involving Iran, and the advisory warns that multiple, unexplained transfers into an account from P2P currency exchanges should be treated as a red flag.

Effect of the Advisory

The advisory makes clear that the U.S. government is anticipating increased attempts at laundering finances from the Iranian Government. In the coming months as snapback sanctions take effect, financial institutions and related businesses – including foreign financial institutions and companies that may be subject to U.S. jurisdiction – should be extra vigilant in this area, particularly with respect to virtual currencies, which FinCEN previously indicated would be an enforcement priority. (The last phase of snapback sanctions will take effect on November 5, 2018.)

Financial institutions should review their compliance programs to ensure they account for the risk of increased Iranian money laundering activity. While large and sophisticated institutions may already have robust safeguards in place, smaller and newer companies (such as virtual currency exchanges and related start-ups) should examine their policies and practices to ensure they are taking all appropriate steps to detect and report suspicious activity. (These entities may also be eligible to pool their compliance resources for more effective programs.) At a minimum, financial institutions should:

  • Conduct appropriate due diligence and careful screening of parties to identify potentially Iran-related entities;
  • Verify the identity of beneficial owners of legal entity customers to identify potential Iran shell companies;
  • Implement enhanced due diligence procedures for regional banks and correspondent accounts located in jurisdictions with strong geographical and economic ties to Iran; and
  • Reinforce reporting obligations for suspicious activity with the institution's personnel.

Originally published October 15, 2018

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