The National Defense Authorization Act for the Fiscal Year 2012 (NDAA), which was passed on December 15, 2011, by the U.S. Congress and signed by President Obama on December 31, 2011, provides for important new sanctions against Iran. These sanctions expand upon prior sanctions and proposed sanctions, including financial sector sanctions imposed by the Financial Crimes Enforcement Network (“FinCEN”), a constituent of the U.S. Department of Treasury, in October, and proposed new regulations published by FinCEN in November. The new NDAA sanctions:
The NDAA includes exceptions, waivers and other conditions that could limit application of these new sanctions.
As we reported in our Alert dated December 5, 20112, in late November 2011, the Obama Administration issued a notice of proposed rule making (“Proposed Rule”) for possible imposition of new sanctions targeting the Iranian financial sector. In addition, the Obama Administration issued new sanctions at that time targeting the Iranian petroleum, refined petroleum and petrochemical sectors. Despite these actions by the Obama Administration in November, the U.S. Congress less than one month later passed legislation providing for even tougher sanctions against the Iranian financial sector. These tougher sanctions were contained in an amendment that was attached to the NDAA as it moved through Congress. The Obama Administration reportedly resisted Congress’ efforts in respect of these tougher new sanctions, but finally, after some negotiation, the President agreed to sign the NDAA in a form that included the sanctions amendment.
Under the existing FinCEN regulations, which were issued as final rules in October 2011, U.S. financial institutions maintaining correspondent accounts for a foreign bank are mandated to require certifications from the foreign bank and report to FinCEN certain information with respect to transactions or accounts relating to certain Iranian-linked persons or financial institutions. These Iranian-linked persons or financial institutions were limited to those persons or institutions already identified as specially designated persons or entities (“Specially Designated Nationals”) under the IEEPA. Upon receipt of a request from FinCEN, the U.S. financial institution is required to inquire of its foreign correspondent and seek a certification from the foreign bank as to whether or not the foreign correspondent maintains a correspondent account for a designated Iranian-linked financial institution and report on certain transactions with such Iranian-linked financial institution and other designated Iranian linked persons. The U.S. financial institution providing the report must also certify that, “to the best of its knowledge‚” it has no information inconsistent with the information provided by the foreign correspondent. Notably, these rules did not require U.S. financial institutions to make any reports to FinCEN‚ except in response to a written request from FinCEN, nor do these rules nominally require the U.S. financial institutions to take any other measures, except as may otherwise be required by law (such as for other Bank Secrecy Act compliance purposes).
Under the Proposed Rule, if adopted, new rules would prohibit U.S. financial institutions from opening and maintaining correspondent accounts for, or on behalf of, Iranian banking institutions. In addition, U.S. financial institutions would be required to take reasonable steps to apply special due diligence to all of their correspondent accounts to help ensure that no such account is being used indirectly to provide services to an Iranian banking institution.
The contemplated enhanced due diligence would require U.S. financial institutions to notify their correspondent account holders that the U.S. financial institution knows, or has reason to know, provide services to Iranian banking institutions that such correspondents may not provide Iranian banking institutions with access to the correspondent account maintained at the U.S. financial institution. The U.S. financial institutions would have to take reasonable steps to identify any indirect use of their correspondent accounts by Iranian banking institutions to the extent that such indirect use can be determined from transactional records maintained by the U.S. financial institutions. Finally, the U.S. financial institutions would be expected to “take a risk-based approach” when determining what other due diligence steps to take to protect against improper use of correspondent accounts by Iranian banking institutions. Where U.S. financial institutions identify indirect access to their correspondent accounts by Iranian banking institutions, the U.S. institutions would be expected to take steps to prevent such access, including, where necessary, terminating the account.
With the sanctions amendment to the NDAA, Congress seeks to increase the economic pressure on Iran by enacting tougher sanctions than those imposed by the October FinCEN rules and those that are proposed in the notice of proposed rule making. How, in practice, the current sanctions enforcement will change depends in large measure on how the President elects to exercise the waiver and other restraints left to the President under the new NDAA sanctions provisions.
NDAA Asset Freeze
As noted, pursuant to the Asset Freeze provisions of the NDAA, the President is required to block and prohibit all transactions in property and interests in property of Iranian financial institutions if the property or interests are in the United States, come within the United States, or are or come within the possession of a United States person. For this purpose, United States person is defined to mean citizens or residents of the United States, nationals of the United States, entities organized under the laws of the United States, and entities organized under laws of a jurisdiction within the United States3.
NDAA Sanctions With Respect to the Central Bank of Iran and Other Iranian Financial Institutions
Subject to certain exceptions and waivers that may prove to be significant in the implementation of the new NDAA sanctions, the new NDAA sanctions go much farther than the sanctions contemplated in the notice of proposed rule making. Whereas the Proposed Rule would only affect access to correspondent accounts maintained at U.S. financial institutions by, or on behalf of, Iranian banking institutions, the NDAA sanctions mandate that the President shall prohibit the opening, and prohibit or impose “strict conditions” on the maintaining, in the U.S. of a correspondent account or payable-through account by a foreign financial institution that the President determines has knowingly conducted or facilitated any significant financial transaction with the CBI or with another Iranian financial institution designated by the Secretary of Treasury as a Specially Designated National. Hence, the NDAA would penalize foreign financial institutions by forcing them to choose between doing business with U.S. financial institutions or doing business with the CBI or with Iranian Specially Designated Nationals4.
The NDAA also provides that the President “may” impose sanctions pursuant to the IEEPA “with respect to the Central Bank of Iran.”
Exceptions to, Waivers of, and Limitations on NDAA Sanctions
As noted, the NDAA has exceptions, waiver authorities and limitations on application of the sanctions. These exceptions, waiver authorities and limitations include:
Violations of the sanctions are subject to the civil and criminal penalties set forth in IEEPA, which can include substantial fines and incarceration.
Effective Date for Imposition of Sanctions
The Asset Freeze sanctions do not provide for a transition period prior to their effectiveness.
So, it would appear that the President is required to implement the Asset Freeze sanctions as of the date of enactment of the NDAA.
The other sanctions directed at the CBI and Iranian financial institutions, in particular those relating to opening and maintenance of correspondent and payable-through accounts, do not take effect until 60 days following the date of enactment of NDAA, except that the sanction based on availability of non-Iranian sources of petroleum or petroleum products only applies to covered financial transactions that are conducted or facilitated more than 180 days after the date of enactment. The date of enactment is December 31, 2011, which is the date the President signed the legislation.
The new sanctions created by the NDAA could result in much tougher restraints on trade with Iran, including what would be tantamount to an international embargo against Iranian oil exports. While it seems unlikely that certain countries that are major customers for Iranian oil exports will stop purchasing oil from Iran, these sanctions, if fully implemented, could have a significant impact on financial institutions engaging in financial transactions with the CBI and other Iranian financial institutions. In this respect, recent press reports have indicated that the United States Government has been working with non-Iranian oil suppliers to try to boost oil supplies in order to make it more feasible for other countries to join in what would effectively be an economic boycott of Iranian oil exports.
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This article was originally published by Bingham McCutchen LLP.