Beyond OFAC: Your Financial Institution

Posted on December 28, 2011 by Farhad Alavi — Leave a comment

Many individuals who deal with sanctioned countries know there is maze of regulations they have to navigate. Indeed, in the simple case of money transfers there are many steps that must be undertaken to ensure the legality of a task that would be otherwise simple if with most other countries. However, what many fail to realize is that beyond OFAC and other regulations, your bank in the US can be another barrier between you and your money.

Legal Transactions Subject to Barriers

Back to the money transfer example. Your grandmother in Iran wants to send you a gift to say, pay your college tuition, or buy you a house. Generally speaking, this usually does not require OFAC authorization, so long as there are no sanctioned, Specially Designated Nationals (SDNs) involved and so long as the funds clear through a non-sanctioned, non-Iranian, non-US bank in a third country (say, Dubai or Turkey) en route to your account in the U.S. Therefore, assuming you ensure all these are the case, no problem, right? Not quite.

Banks are increasingly taking very conservative positions towards international transactions, including legal ones. This is not just with Iran but arguably overseas. Accounts have been closed for reasons such as the holder receiving too many wires and therefore being deemed high-risk. There can be many reasons, such as a fear that the customer is engaging in money laundering or is trading with an enemy state (don’t forget, thanks to sanctions, grandmother’s birthday gift from Iran could come in the form of a wire from a general trading company in Dubai!). Or take the example of food exports to Iran – now no longer requiring licenses. Do you think the compliance divisions at your banks know about every nuance of the various OFAC regulations, much less every change that happens? OFAC is but one component of the compliance divisions’ mandate and OFAC is obviously much more than just Iran.

So what happens in such cases? Accounts can be closed, and wires can be sent back to the originating bank in the third country. Once the US bank rejects the wire it also has to notify OFAC, which in turn may likely send you a nice administrative subpoena (generally within some months) asking you to answer some questions. Arguably even if you have done nothing wrong, simply having to answer OFAC is a time-consuming, costly venture.

What to do?

(1) Make sure your transaction is elegant. What is an elegant transaction? In addition to filing an affidavit with your bank (as discused below), you should make sure the wire instruction that comes in for you is accurate. I have seen wires with all kinds of strange descriptions. One client was once transferring some personal funds through a currency exchanger in Dubai who then wrote something to the effect of “works in Iran for xyz” in the payment instruction – which most likely was the reason the funds got rejected on their way to the client’s account. Make sure that you tell them to be clear – and when an OFAC license is at issue, the payment description should reference the OFAC license. If you are dealing in business (assuming the business is authorized), you should let the bank know that you are engaging in lawful activity.

(2) Educate your bank. As I have stated before, before any transfer originating from Iran, you should make sure to provide your bank an affidavit. This basically gives the bank notice that if money is sent to your account from a third country it is legitimate and lawful. Therefore your bank will be arguably less likely to reject it. Also, if your case goes beyond just one or two wires, and say you receive wires regularly, you should make sure your bank knows your profile. Say you do business with foreign countries (beyond Iran). You should inform your bank in writing about the nature of your work, why you are receiving the wires. That way your bank will realize what is going on. When your activity requires OFAC authorization you should present the bank with the relevant documentation.

Requirements and concerns are numerous, but it is simply best practices and therefore smart to make sure you do more than just ensure the legality of your transaction. It is critical that you make sure that everybody is on the same page with respect to what you are doing and there are no misunderstandings. That will help make things much easier.