Steering Clear of the OFAC Black List: How Much Checking is Necessary?

Posted on January 6, 2014 by Farhad Alavi — Leave a comment

I was speaking to one of my [very diligent and thorough] individual clients the other day about his upcoming lawsuit in Iran and pending property sale, whereupon he asked me a fantastic question. Specifically, he asked “how do I know if the property buyer is fronting for a SDN [Specially Designated National]?” Exactly. How does one know?

Let’s step back a minute first. If you are new to this blog, you may not know what a Specially Designated National or SDN is. SDNs are basically black listed entities that are so designated for various reasons. They are all placed on the same list (the SDN list) but can be there for different reasons – such as narcotics trafficking, involvement in global terrorism (why Bank Saderat Iran is there), helping the proliferation of weapons of mass destruction (why Bank Melli is listed). You may not know that this is not an “Iranian” list – there are companies and individuals from around the world, even friendly countries. From Colombian drug kingpins to the Islamic Revolutionary Guards Corps (IRGC) to various financial institutions to trading companies in Dubai to certain African entities, the SDN list represents a motley crew of entities (interestingly, for those who have read Juan Zarate’s Treasury’s War, you will recall that many in Latin America used to call it “La Lista Clinton,” as many names were added on that list during Mr. Clinton’s presidency).

Being on the SDN list does not have a uniform meaning as entities are on the list for various reasons. The regulations giving way to those particular designations bring with them different restrictions. For example, there are many Iranian banks on the SDN list, but certain banks such as Melli, Mellat, Saderat, Sepah, and Tejarat are under much stricter restrictions for US persons. So, whereas a non-commercial remittance can generally come from Bank Parsian, which is on the list, such remittances almost always require specific licenses if coming from Bank Melli, Mellat, Saderat, Sepah, and Tejarat. The general rule of thumb is that SDNs are off limits for US entities, including individuals. Oftentimes, funds or property in which they have an interest can be blocked upon possession by a US person or entry into the United States (see my previous blog posting on bad banks).

So back to Iran. What can happen if you (intentionally or unintentionally) deal with a designated entity while engaging in a personal transaction, such as the sale of land? Let’s use the Islamic Revolutionary Guards Corps (IRGC) (or Sepah Pasdaran Enghelab Eslami or “Sepah” as it is known in Persian). Turns out the IRGC is designated under a number of different regulations, which means you would have to look at all the regulations. Note one is the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 CFR Part 544 (the “WMDPSR”). Turns out Section 201 states, in relevant part, that:

(b) The prohibitions in paragraph (a) of this section include, but are not limited to, prohibitions on the following transactions when engaged in by a United States person or within the United States:

(1) The making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to paragraph (a) of this section; …

There you go, generally no dealings with these folks without a specific license, save certain limited exceptions. Dealings with such entities largely have the impact of being null and void. (See Section 202).

So, back to the client’s question. Let’s say the buyer presents itself as somebody/something else, Company X, or John Doe. How can you know that this party is not a front? This is especially troublesome, given the use of many fronts in Iran (some even argue that the arrested Iranian billionaire Babak Zanjani, also on the SDN list, is a front for others – that’s a subject for a different post altogether).

The key rule of thumb is “reason to know.” In classical lawyer parlance, “it depends.” As with many areas of the law, reason to know is not defined and is vague. Do you have reason to know that the IRGC is involved? The IRGC probably does a large part of its business through it many front companies, both in Iran and beyond. So there can be reasons to know – such as the rumor mill in Iran, so-called common knowledge. So say Company X is out to buy your property and you have heard, or word on the street is that Company X is a Sepah entity. Sure, Company X is a separate legal entity from Sepah, but remember, the designation covers entities “owned or controlled” per the regulations. Therefore, you should stay away as you have reason to know. Even if you don’t know, the burden is should you have known?

Therefore, you’ll want to make sure the company not on the SDN list. Then comes the due diligence. Remember, “reason to know.” Does everybody say that Company X is a Sepah entity? Have you asked the right questions? Have you documented your inquiries? How much due diligence have you done? These are all used to (1) naturally prevent an illegal deal; and (2) help mitigate penalties with OFAC if in fact your counterparty does wind up being an SDN. The amount of homework you do naturally depends on some variable factors – how big the deal is (a $1 million deal will certainly require more due diligence than a $100,000 deal). Naturally, all this work should be documented to present to the government if an adverse situation was to arise. An attorney can help gauge this. Sufficient compliance beforehand can prevent much of these potentially very costly mishaps. In today’s environment of heightened compliance, individuals also have to make sure they are doing things professionally and diligently, particularly as transaction values can be relatively high (property cases in Iran exceeding $1 million, for example, are very common).

Oh and don’t forget, make sure that the transaction (even with a non-SDN) does not require an OFAC license and if it does, make sure you have that specific OFAC license in hand before starting anything in Iran!