$1.1 Million OFAC Penalty for Personal Investment in Iran

You may have read that the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) on November 15  announced the issuance of a $1.1 million penalty, in a [so far] rare instance of enforcement against an individual for U.S. sanctions violations.  This case is very important because it is based on activity which may be more common than we think – small scale commercial transactions between a US person (presumably of Iranian origin) with Iran. This is a relatively significant fine imposed on an individual and only the third fine by OFAC on an individual since 2020, illustrating the potential reach of U.S. sanctions. It also highlights that individuals are not immune just because a transaction may be comparatively small, and hopefully it will cause many to take these sanctions more seriously.

Facts

Here the individual used an informal value transfer system to remit funds between the U.S. and Iran in order to purchase, renovate, and operate a 19-suite hotel on the Caspian Sea. The conduct described above resulted in 75 distinct violations of the Iranian Transactions and Sanctions Regulations (ITSR), including:

–  Engaging in transactions related to services of Iranian origin (individual sold real property previously acquired in Iran to help finance project)

–  Making a new investment in Iran

–  Engaging in transactions that evade or avoid the Iranian Transactions and Sanctions Regulations, 31 CFR Part 560 (the “ITSR,” arguably the main body of U.S. sanctions impacting most day to day transactions involving Iran or persons in Iran) – noting the individual transferred separate funds from the U.S. to Iran, using foreign money services businesses in Iran and Canada to evade U.S. sanctions

–  Engaging in transactions that involve blocked property (Individual maintained personal and business accounts at Bank Melli Iran and Bank Keshavarzi Iran, both of which are blocked entities on OFAC’s Specially Designated Nationals and Blocked Persons Lists (SDN)).

–  Approving or facilitating a transaction by a foreign person that would be prohibited if performed by a U.S. person

–  Transferring ownership of property of services of Iran-origin to U.S. – person children without authorization

The very significant penalty amount reflects OFAC’s determination that the violations were egregious and not voluntarily self-disclosed. The statutory maximum civil monetary penalty applicable in this matter was over $27 million. However, based on the individual’s limited involvement with sanctions-related cases prior to this case as well as the individual’s financial condition, the final penalty amount was lowered to $1.1 million.  This case should be of interest to not only individuals interacting with sanctions jurisdictions, but perhaps more importantly to financial institutions.

Individuals should realize that almost all commercial activities with Iran are prohibited for U.S. persons (defined to include U.S. citizens and permanent residents, wherever located, as well as others who are not citizens or permanent residents but are physically in the U.S.), and that there is no exception for those who may for example, be of Iranian origin and also have Iranian nationality. There are limited exemptions or general licenses authorizing activities in or with Iran.  Also note that while the facts here may suggest one transaction to lay persons (e.g., fund raising to buy, renovate, and operate a hotel), in reality, OFAC considered it to be over 70 separate transactions. Each of those transactions can be subject to the maximum civil money penalty (CMP), which is currently at $368,136 (it is adjusted annually) or twice the transaction value, whichever is greater.

The risk is not limited to individuals – this case highlights a problem for financial institutions as they also need to be cautious about such individual transactions that trigger many of the red flags (e.g., customers providing old/inconsistent contact information, customers operating joint accounts from remote locations) that OFAC spells out on its website.  When these institutions begin interacting with Iranian American clients, they should recognize that some such individuals in certain instances may have much greater interactions with their country of origin and with family, friends, business partners, and/or other individuals there and that those risk points may differ from those customers with backgrounds from other countries that are heavily sanctioned by the U.S. These expanded financial ties to Iran can also come from previously-held properties and businesses.  As a result, sanctions violations for banks can be elevated in certain cases. This obviously does not mean all persons of such backgrounds are risks, but banks should be aware of each individual customer’s particular touchpoints. They should also be aware of the unique risks that these embargoed jurisdictions bear (e.g., outward versus inbound remittances, commercial transactions, etc.).

In total, 558 individuals and entities have been fined for U.S. sanctions violations on Iran for a total of more than $20 million since 1979, but November’s action may herald a new pattern at the agency that could expand beyond just Iran sanctions.

Readers may wish to look at this: https://www.unitedagainstnucleariran.com/violations-penalty-tracker

This penalty in particular stands out not only because of the very significant fine imposed on an individual, due to the illegal activity valued at approximately $560,000, but also the fact that it was only the third individual that has faced a civil penalty from OFAC since 2020.  In August 2020, one individual agreed to pay OFAC $5,000 to settle a potential civil liability for engaging in at least 24 transactions for the benefit of a foreign narcotics trafficker on the SDN List.  In December 2021, another individual agreed to pay around $133,000 to settle a potential civil liability for accepting payment in the U.S. on behalf of an Iran-based company selling Iran-origin products to another company for a project in a third country.

Key takeaways:

• U.S. sanctions cover seemingly most “minor” personal transactions by U.S. persons (as defined in the regulations) involving jurisdictions like Iran
• Penalties can be steep, and can be imposed for every single violation (not just the totality of the violative conduct)
• This action may signal a tougher line by OFAC on future enforcement
• While not all transactions can be licensed by OFAC as they may contravene the agency’s licensing policy, some can
• Financial institutions should be alert to the risks presented by particular individuals given their personal circumstances