On October 25, 2019, the US unveiled two new measures that it said were intended to help facilitate legitimate humanitarian trade with Iran while strengthening protections against Iran's illicit financial activities. First, the Treasury Department and State Department announced what they called "a new humanitarian mechanism to ensure unprecedented transparency into humanitarian trade with Iran." Second, nearly eight years after first issuing a draft rule to do so, the Financial Crimes Enforcement Network (FinCEN) finalized its designation of Iran as a jurisdiction of primary money-laundering concern under Section 311 of the USA PATRIOT Act. These actions highlight the broad scope and continued pursuit of a policy of "maximum pressure" on Iran—while attempting to preserve space for legitimate humanitarian trade and, potentially, providing a clearer pathway to enable it.

The new humanitarian trade "mechanism"

The Treasury Department's Office of Foreign Assets Control (OFAC) announced the establishment of a new humanitarian trade "mechanism" with Iran. The "mechanism" will enable foreign (i.e., non-US) governments, foreign financial institutions and persons (both US and non-US) to receive written confirmation from OFAC that they will not be subject to US sanctions for engaging in certain humanitarian trade with Iran, in exchange for providing information to OFAC each month. For purposes of the mechanism, "humanitarian" trade generally includes agricultural commodities, food, medicine and medical devices, subject to certain terms and conditions (e.g., trade involving persons designated in connection with Iran's proliferation of weapons of mass destruction, or Iran's support for international terrorism).

In announcing the mechanism, OFAC stated, "[t]he humanitarian mechanism will require foreign governments and financial institutions that choose to participate in the mechanism to conduct enhanced due diligence and provide to Treasury a substantial and unprecedented amount of information, with appropriate disclosure and use restrictions, on a monthly basis." Those partaking in the mechanism will be expected to collect, maintain and report to OFAC the following:

  • The information used to identify the Iranian customers of the humanitarian trade and to verify their identities and beneficial ownership
  • The information used by financial institutions to understand the purpose and intended nature of business relationships between the seller and the customer in Iran
  • A monthly balance statement of any account of an Iranian financial institution
  • A list of Iranian Specially Designated Nationals (SDNs) with which the Iranian customer indicates it has current business relations
  • Detailed information as to the commercial terms and logistics of the transaction, including information about the ultimate customer, all intermediaries involved in the transaction, and the financial arrangements and shipping and transportation logistics underlying the transaction
  • Written confirmation that the Iranian distributor will not allow the goods to be sold or resold to Iranian SDNs
  • Additional information regularly obtained by the foreign financial institution in connection with its ongoing due diligence measures to verify the consistency of the transaction with the purposes of the humanitarian channel, among other things.


OFAC has stated it may require additional information beyond those outlined in the guidance on a case-by-case. Furthermore, it has instructed parties interested in utilizing the mechanism to contact OFAC for additional information on how to participate.

Section 311 primary money-laundering concern

In conjunction with the OFAC action, FinCEN announced that it has finalized Iran's designation as a jurisdiction of primary money-laundering concern under Section 311 of the USA PATRIOT Act. The rule, which goes into effect on November 4, 2019, prohibits "covered financial institutions"1 from opening or maintaining correspondent accounts in the United States for, or on behalf of, Iranian financial institutions2—not only those that are SDNs. In addition, the measure requires that "[a] covered financial institution . . . take reasonable steps to not process a transaction for the correspondent account of a foreign bank in the United States if such a transaction involves an Iranian financial institution."3

Section 311 allows FinCEN to make a determination that a jurisdiction outside of the United States is of primary money-laundering concern. Upon such a finding, Section 311 authorizes the Secretary of Treasury to take one or more of five available "special measures" against the identified foreign jurisdiction. The first four measures impose heightened recordkeeping, information collection and reporting requirements on covered US financial institutions. The fifth special measure grants FinCEN the authority to prohibit or strictly limit the opening or maintaining in the US of correspondent or payable-through accounts for, or on behalf of, a foreign bank, if such correspondent account or payable-through account "involves" the foreign jurisdiction of primary money-laundering concern.4 FinCEN imposed the fifth special measure with respect to Iranian financial institutions.

The rule issued by FinCEN on October 25 finalized a proposed notice of rulemaking published on November 28, 2011, but which had not been finalized. FinCEN's action, now that it has been finalized, further restricts Iranian financial institutions' access to foreign financial markets, which had already been subject to significant limits as a result of OFAC designating the Central Bank of Iran as a Specially Designated Global Terrorist (in addition to broad prohibitions on US financial institutions from exporting any goods or services to, or importing any goods or services from, Iran, as well as several other sanctions targeting Iranian financial institutions). The FinCEN action imposes new practical limits on all Iranian banks' ability to maintain overseas accounts and access foreign currency.

Implications

Going forward, those engaging in humanitarian trade with Iran should review their transactions to determine whether engagement with OFAC on the use of the new mechanism is appropriate. Additionally, foreign financial institutions that maintain or seek US correspondent or payable-through accounts will need to review accounts and transactions involving Iranian financial institutions to determine whether such accounts or transactions run afoul of compliance obligations as a result of the FinCEN action.

Footnotes

1. The final rule defines a "covered financial institution" as any of the following:

  • An insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 USC § 1813(h)))
  • A commercial bank
  • an agency or branch of a foreign bank in the United States;
  • A federally insured credit union
  • A savings association
  • A corporation acting under section 25A of the Federal Reserve Act (12 USC § 611)
  • A trust bank or trust company
  • A broker or dealer in securities
  • A futures commission merchant or an introducing broker-commodities
  • A mutual fund.


2. The final rule defines "Iranian financial institution" as any foreign financial institution, as defined at 31 CFR § 1010.605(f), organized under Iranian law wherever located, including any agency, branch, office or subsidiary of such a financial institution operating in any jurisdiction, and any branch or office within Iran of any foreign financial institution.

3. See Final Rule, to be codified at 31 CFR § 1010.661(b)(2).

4. The fifth special measure is codified at 31 USC § 5318A(b)(5), which provides:

(5) Prohibitions or conditions on opening or maintaining certain correspondent or payable-through accounts.—

If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money-laundering concern, the Secretary, in consultation with the Secretary of State, the Attorney General, and the Chairman of the Board of Governors of the Federal Reserve System, may prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution, if such correspondent account or payable-through account involves any such jurisdiction or institution, or if any such transaction may be conducted through such correspondent account or payable-through account."

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