Newest Iranian Sanction Developments
US Treasury Advisory: Iran and the Use of Exchange Houses and Trading Companies to Evade U.S. Economic Sanctions against Iran.
On January 10, 2013, the U.S. Treasury’s Office of Foreign Asset Control [OFAC] issued an advisory concerning some of the practices that Iran is using in attempts to circumvent sanctions, through greater reliance upon third-country exchange houses and trading companies to move funds. The international community has increasingly barred or restricted Iranian financial institutions from accessing the international financial system. These transactions, according to OFAC, are likely to involve the use of third-country exchange houses or trading companies that are acting as money transmitters to process funds transfers through the United States in support of business with Iran that is not exempt or otherwise recognized by OFAC. Such entities frequently lack their own U.S. correspondent accounts and instead rely on their banks’ correspondent accounts to access the U.S. financial system. They are often located in jurisdictions considered to be high-risk for transactions implicating OFAC sanctions and appear to process primarily commercial transactions rather than personal remittances.
Some of the following scenarios highlight practices used to circumvent the system or risk factors to be aware of:
The evasive practices identified by OFAC involve transactions omitting references to Iranian addresses, omitting the names of Iranian persons or entities in the originator or beneficiary fields, and transmitting funds from an exchange house or trading company located in a third country to or through the United States on behalf of an individual or company located in Iran or on behalf of a U.S.-designated person without referencing the involvement of Iran or the designated persons.
The advisory goes on to provide some examples of ways that financial institutions might identify this type of activity.
A trading company attempts to send a payment through the United States on behalf of Company ‘X’ with an address located in Iran. The payment is stopped for review by the U.S. financial institution’s filter due to the Iranian address on the payment, and is ultimately blocked or rejected in accordance with U.S. sanctions. The trading company later resends the funds in a payment of identical or similar value on behalf of Company X, only this time the company’s address has been altered to reflect a non-sanctioned jurisdiction.
The volume or frequency of payments involving an individual exchange house or trading company indicates an uncharacteristic spike in activity, or is inconsistent with the type of business and/or anticipated volume of sales the exchange house or trading company generally conducts.
A specific exchange house or trading company repeatedly attempts to send payments through the United States in apparent violation of U.S. sanctions against Iran, and/or repeatedly conceals or obscures the involvement of individuals or companies located in Iran or U.S.-designated persons in payments routed to or through the United States.
U.S. financial institutions may be able to mitigate the risks associated with processing such transactions by taking the following measures with respect to an exchange house or trading company that appears to have engaged in transactions related to Iran:
Monitor payments involving the third-country exchange house or trading companies with given their risk profiles related to Iran and/or Iranian persons, and request, as appropriate, additional information from correspondents on the nature of such transactions and the parties involved; and Conducting account and/or transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate U.S. sanctions against Iran; and Contacting their correspondents that maintain accounts for, or facilitate transactions on behalf of, a third-country exchange house or trading company that engages in one of the above-referenced examples in order to request additional information and/or to alert them to the use of these practices.
These caveats should not come as a news flash to those who operate daily in the trenches of OFAC or Global Sanctions Compliance because the vast majority of people who are working in the world of OFAC, sanctions and anti-money laundering compliance already know this – or should. Indeed, use of exchange houses and trading companies is one of the few ways funds leave and enter Iran. Issues to keep in mind, according to Erich Ferrari (an attorney in Washington D.C. whose practice is heavily focused on various aspects of US and Global Sanctions and their impact on individuals, businesses and other organizations), are as follows:
“First, due to restrictions on transferring funds into and out of Iran, the overwhelming majority of legitimate, licensed transactions are conducted by saraaf (money exchangers in Iran) who also utilize exchange houses and trading companies outside of Iran to wire funds to the United States”, recently opined.
“Second, this guidance may well have the effect of sending foreign financial institutions on a witch hunt to shut down the accounts of exchange houses and trading companies they believe to be facilitating transactions between Iran and the United States. While that could help shut off illicit transactions between Iran and the U.S., it also has the potential to impact the ability to transfer funds to the United States for legitimate purposes.”
While we do not advocate a ready, fire, aim approach to sanctions compliance, either in shutting down accounts of clients without PROOF of a problem or by approaching sanctions screening and related due diligence like the sky is falling when it is clearly not, we do recognize the importance of making you aware of this most recent update so that you may accommodate this issue within your day-to-day compliance screening processes as may be important – assuming that you may not have already done so.
If your organization would like help deciphering the complexity of US Sanctions, such as those in place through OFAC and/or the US Department of Commerce, or global sanctions issued by any number of other regulatory bodies or governments, please let us know and we will endeavor to put you in touch with the right people who can help you optimize your compliance processes.