It was reported in Dubai-based Gulf News today that British banking giant HSBC will be closing many accounts belonging to Iranian, Syrian, or Sudanese nationals.  A similar report was featured in the New York times several days ago, detailing how certain banks in Persian Gulf states such as HSBC and Barclays were closing certain accounts. Notably, there are exceptions for certain types of accounts and larger deposits, etc.

What is interesting about this is that it is part of a growing trend where (1)  banks are arguably more vigilant than what U.S. laws provide; and (2) banks are taking more drastic positions in the GCC than even United States banks are doing here.  In the U.S., the OFAC regulations place limitations on accounts held by individuals “ordinarily resident in Iran.” In other words, if an individual primarily lives in Iran, the U.S. depository institution is forced to keep this account in a semi-limbo state, even if the depositor is a U.S. citizen.  Interestingly, the banks often take logging in from Iran or Syria as a sign that the individual is in Iran, freezing the account and asking questions until they unfreeze. It has also created a nightmare for individuals who reside in Iran and want to keep their money out of the country. However, save certain recent examples where student accounts have come under attack, if you live  in the United States (even on a non-immigrant visa), being Iranian or Syrian does not necessarily taint your likelihood of successfully opening a bank account the way that it does for some in third countries.

It will be interesting to see if OFAC resolves to provide more clarity to enable banks to separate the good from the bad.  In a way, this dovetails mounting complaints that U.S. sanctions have hindered the flow of medicine to Iran.  The U.S.’ common retort is that medical supplies, pharmaceuticals, and food are in part carved out of the sanctions regime. However, what is often not explained is that the Treasury Department has been pushing third country banks for years to dissuade them from dealing with Iran, leading to a cascading effect in shipping, insurance, and logistics.  This has arguably created a view where anything remotely related to Iran is often viewed as toxic, leaving supply chain players to all but abandon Iran business.  OFAC recently issued some guidance on this issue, but will it do more to educate businesses around the world as to how they can comply with the sanctions regimes without arguably hurting unintended players? Being  in the U.S. arguably requires American entities to invest heavily in compliance, but  banks in Europe, the Middle East and Asia may more hesitant and constrained to hire U.S. compliance counsel, leaving them to make less nuanced distinctions in their compliance methods – throwing the legal out with the illegal.

Dovetailing last week’s decision by the European General Court that Iran’s Bank Mellat be removed from the European Union’s sanctions list (see last week’s entry on this blog), the court on Tuesday declared that Bank Saderat should similarly be removed. Reports emerged today that the Court opined that the EU did not have enough evidence to support the position that Bank Saderat is involved in Iran’s alleged pursuit of nuclear weapons.  Notably Bank Saderat is considered Iran’s largest bank.

Is everything back to normal? No.  Saderat is not off the hook. Reports say that the EU have two months to appeal, and it remains whether there any over-arching EU regulations prohibiting the actions of Iranian banks would still put a damper on Saderat’s ability to transact business in the European Union. That said, if for some reason Bank Saderat is allowed to once again operate effectively in Europe it could enable Iran to purchase necessary goods and can also fuel personal transfers to and from Iran, such as family remittances, etc.  By removing a barrier to entry for funds transfer in Iran the EU could also be indirectly fueling the rapid decline of the Rial’s value.

In other news, the Office of Foreign Assets Control (OFAC) today announced that a number of Iranian entities such as the Islamic Republic of Iran Broadcasting (IRIB), the head of the IRIB, and the Iranian Cyber Police were added to the Specially Designated Nationals (SDN) list.  OFAC also published a guideline on issues related to rendering humanitarian assistance to Iran. This is arguably a very necessary document as the industry is wrought with misunderstanding about what laws do and do permit, preventing a number of [legally authorized] transactions from taking place due to overly cautious private sector entities who either don’t know the law, don’t care to parse through the law, or are just afraid of anything related to Iran.

Reports are trickling from Europe that the European General Court has ordered the European Union Council to annul sanctions against Bank Mellat. The sanctions were imposed in 2010 following allegations that the bank was associated with Iran’s alleged nuclear weapons program.  The opinion is not yet published on the ECJ’s website.  Notably, the EU still has broader limits in place against the activities of Iranian banks in general, so it remains to be seen what the impact of this decision will be. If Bank Mellat is able to resume its activities in the EU it will be a huge coup for the bank and for the Iranian government.

Read the Reuters report here.

The U.S. Department of the Treasury’s Office of Foreign Assets Control entered into a $132 million settlement with the UK’s Standard Chartered Bank (SCB) over alleged violations of U.S. sanctions laws.  The case was the subject of much media scrutiny this past August when the New York Department of Financial Services issued an order regarding SCB’s activities with sanctioned entities.

A reporter with the BBC’s Persian service spoke with me today regarding the significance of the penalty OFAC has imposed. I came up with three:

1. Financial Cost to SCB. This appears pretty obvious one, but as I pointed out, with the monetary penalty comes naturally legal costs as well as the time of SCB’s staff and particularly legal and compliance departments which were presumably usurped by the investigation.

2. Reputational Cost to SCB. This exposure is clearly not something SCB would like and it highlights the extra-legal dangers of violating the laws.

3. Continuation of a Theme.  Again we see another major bank (and again, another foreign bank) penalized for violating the sanctions laws. Last summer, OFAC imposed a $600m+ penalty on ING bank for all types of dealings with sanctioned entities (in that case, particularly Cuba), and this is the latest of a string of these cases.

The challenge that these cases pose is that while they probably go a long way in scaring many from violating the sanctions laws, they may give off the impression that OFAC and other governmental authorities only pursue the big fish.  This is not true.

Companies large and small get penalized from OFAC, as do individuals.  Criminal penalties can arise.  Also, even if a civil or criminal penalty is not imposed, entangling oneself into a civil OFAC investigation can be a very costly process. As I often tell clients and others, it’s not a matter of paying [what is usually] a sizable legal fee, but it also takes substantial time to handle the back and forth that can arise from an OFAC investigation.

So how do we avoid these types of risks? Step one: Know the law. How does that happen? By instituting a sanctions compliance program. Compliance programs are not just reserved for Fortune 100 companies – even the smallest companies that are exposed to potential violations should strongly consider implementing a compliance program.  Step two: Take steps to prevent violations.  Compliance programs are not a luxury only for the largest.   Naturally such programs (which often include training for employees, screening names, using the right language in a contract, etc.) can vary based on various factors, including the size of the company.Even small companies should consider implementing more modest but nonetheless critical compliance methods. This will not only reduce the risk of illegal behavior, but it is also viewed favorably by OFAC if a violation occurs.

In response to steps taken by the Burmese government to broaden the political space and improve human rights conditions in the country, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has relaxed certain restrictions in the sanctions regime against that country.

The Treasury Department recently released a new general license authorizing the importation of certain goods of Burmese origin into the United States. Pursuant to General License No. 18, published by OFAC on November 16, 2012, the importation of Burmese origin goods into the United States is now generally authorized, subject to two critical limitations. First, the general license does not authorize importation of jadeite and rubies mined or extracted from Burma, including articles of jewelry that contain such precious stones. Second, the license does not authorize transactions with any individuals or entities that are included on the Specially Designated Nationals (SDN) list, or other persons as determined by the State Department and Treasury Department. Furthermore, dealings with entities that are owned or controlled by individuals on the SDN list are also prohibited.

Although certain transactions with respect to imports from Burma are now authorized, certain activities continue to be prohibited, and if violated, may result in significant penalties. Notably, Burmese-related designations continue to be added to the SDN list. Businesses would be well served it is prudent to seek advice from trade counsel well-versed in the U.S. sanctions regime against Burma before doing business with that country.

There has been some speculation following President Obama’s reelection as to what he will do regarding Cuba. Notably, there have not been any notable changes in the sanctions regime following the first couple years of the President’s first term. A recharged President Obama relieved of having to run for reelection again coupled with limited reforms in Cuba by Raul Castro may mean big changes to the decades long U.S. embargo of Cuba in the President’s second term. But what shape could those reforms take?  An article in yesterday’s New York Times may present some insight, talking about a new talk of helping Cuba’s recent move towards more free market economics.

The Cuban Assets Control Regulations, 31 CFR Part 515 (CACR) trace their roots to the early 1960s, when the U.S. first imposed sanctions on Cuba following the rise of Fidel Castro to power in the island country.  President Clinton loosened certain regulations which were then tightened again by President Bush, only to be once again reformed somewhat by President Obama.

Certain new initiatives have allowed more generous remittance transfers to Cuba as well as the sale of certain telecommunications equipment by U.S. persons. However, certain stricter aspects of the regulations (such as the blocking of funds transfers) remain in effect. Here are some changes we may see in the coming years:

1. Relaxed travel regulations.  Travel to Cuba has become substantially easier in recent years. Eventually the regulations may be removed, and as in the case with Iran, it may be completely free for U.S. persons to travel there. Unlike Iran, however, Cuba’s economy is largely propped up by tourism, and the U.S. may not want to lend a lifeline to the communist island state. That said, we may see more liberal interpretations by the government of the certain travel exceptions and licensing requirements.

2. Eased Exports.  There may be a continuation of the gradual “peeling away” of U.S. sanctions on the sale of goods to Cuba. Now that the sale of certain telecommunications equipment is permitted, we may gradually see other classes of products legalized, such as consumer electronics, etc. that could assist in promoting the spread of information. As the Times article reflected and alluded, relieving the embargo could help fuel Cuba’s move towards a capitalist economy. As such it could be sold as a win-win situation.

Whatever happens with the sanctions regime, it is difficult to foresee a scenario whereby sanctions are tightened.  Cuba is arguably becoming an ever-more tired subject in the U.S. foreign policy conversation and it would be fair to assume that support for the embargo is waning. It will be interesting to see how such reforms will take form and if they will be in concert with reforms enacted in Cuba. At this point one can only sit back and watch.

I just got a very funny call from a lady in the Los Angeles area tonight. She asked if it is true that “OFAC has been repealed?” What was more odd was that she had hired somebody to file for an OFAC license on her behalf who did so today (it was not me). Indeed, OFAC did drastically revamp the Iranian Transactions Regulations (renamed the Iranian Transactions and Sanctions Regulations) last week (see the last post on this blog), but OFAC still very much exists and in full force.

The amount of misinformation in the Iranian-American community about US sanctions regulations is purely fantastic. Ironically, it appears this mainly comes from California, which is odd as Southern California has the largest population of Iranians outside Iran, so you’d think that the right word would spread. Here are some basic truths to debunk the myths:

1. The sanctions were not repealed. Indeed, OFAC is still open for business (well not today as Washington was shut down for Hurricane Sandy). OFAC did revise part of the Iran sanctions and created certain general licenses – meaning certain transactions no longer need specific authorization. But this does not mean you can go open a business in Iran, deposit money in a bank in Iran, empty and send your late relative’s Bank Melli bank account and sell whatever assets you have over there. You really need to look at each of your intended transactions and determine whether or not they fall under the exceptions. The laws have simplified some things but they have made certain things harder – there are still ambiguities about the channels by which you send money and very, very fine lines. Also, even if a transaction is exempt, the burden falls on you to take the right steps to make sure everything moves smoothly (arguably easier when you would get a license from OFAC). Make sure you do not get caught up in a mess by taking an overly-brave attitude that is undeserved.

2. There is arguably no such thing as a generic “permit to bring money” allowing you to bring any kind of money from Iran. I don’t know where this comes from but it is a very, very common misunderstanding. You do need a permit to bring certain types of funds, but it is not like the OFAC license equivalent of a blank check.   The focus on the regulations in some part is arguably the transaction(s) involved. The sanctions laws treat different types of money, well, differently. Money that your grandfather left in a vault in his house in Iran is different from money you earned from selling your house in Iran from money that you have earned from the sale of food to Iran. In other words, a “permit to bring $500,000” is arguably, well, likely to be nonsensical, unless you have say, exactly $500,000 in earnings from your family business which you are indirectly related that you want to bring to the U.S. Asking for a permit for $5k or $50k or $500k is a bit silly – it does not allow you to scrape up $500k from multiple sources (parental gift, shares of a business you own, sale of your land, bank interest) – OFAC cares where each dollar comes from and treats each dollar differently.  There are certain times when you do not even need a license from OFAC, and certain cases which you definitely do.

You should check if each type of money needs a license and plan accordingly. If you want to sell your family business, OFAC wants to know that.. Whether the business’ value goes up 500% when you sell it or drops by half (or if something similar happens with the Rial) that is in part irrelevant if you have a license. You do not get a permit to sell a business for what you think it is (or a little extra) – if you are licensed to sell your business and the value at the sale skyrockets, that is fine. You have been authorized to sell your business, not to bring $x to the United States from Iran.

3. Ask an Expert. OFAC regulations are very detailed, intricate and sophisticated. Excepting a break of about 8-9 months, I have been practicing OFAC continually since 2005, yet even I find myself having to review the regulations. The laws change constantly and as I always say, following regulations on the sanctions is not a matter of just a matter of complying with the law and avoiding a fine, it’s also a matter of minimizing your own risk, making sure your money doesn’t get turned back and that your bank account doesn’t get closed. So, in short, be careful, don’t second guess, educate yourself, and beware of rumors and misinformation.

It’s been a long time since my last post.  People often come up and ask what has been going on recently with respect to sanctions matters.  This of course is an open-ended question.  Syria has been in the news as have other countries, but of course given that Iran has been the topic du jour for over the past year now (only to heighten in importance these coming weeks), I figured I’d post this quick rehash of what has been going on.

1. The Iran laws have stayed the same.  Indeed the value of the Iranian Rial has absolutely plummeted, but that really cannot possibly be due to any new sanctions issues, right? Exactly, the legal landscape is still the same. What is constantly changing is the logistical landscape – activities that are legal become increasingly challenging. It’s amazing how much banks and other companies have to learn in terms of what types of transactions are possible and which ones are not. A lot of “good” gets weeded out with the “bad,” and that’s where folks like yours truly come in, explaining the laws to those who don’t know them. 

2. General License C for the Iranian earthquake. Late in August, OFAC issued a general license allowing certain charitable organizations in the U.S. to each raise and transfer up to $300,000 for victims of the August earthquake in Iranian Azerbaijan. This general license is aimed at making the transfer of humanitarian aid easier, although there are certain strings attached, including a reporting requirement.

Basically, the licensing regimes for basic dealings in Iran and certain types of funds transfer (remember, not all funds transfers necessarily require specific licenses from OFAC) remain the same. Turnover time at OFAC seems to be increasing, however, and while I used to tell clients they’d likely have to wait 2.5-4 months, I’m finding myself giving longer estimates now. 

Farhad Alavi has appeared twice on BBC Persian this past week discussing pressing topics related to sanctions.

The first appearance on June 21 was with regards to the policy practiced by certain Apple stores to refrain from selling to individuals of Iranian descent in an effort to comply with U.S. sanctions and export control laws.  Specifically, in addition to the sanctions regime, the Export Administration Regulations (EAR) prohibit the export of most goods with dual-use (i.e., military and civilian application) to countries to Iran. This can cover products like Apple’s popular iPad and iPhone. This issue was followed-up by BBC’s English website in an article which also quoted Mr. Alavi.

The second clip was broadcast this morning. This was with respect to the implementation of U.S. regulations that could lead to limitations and sanctions on the central banks and private banks of certain third countries that are involved in certain types of Iran trade, including but not limited to oil purchases through the Central Bank of Iran.These regulations arise from the Defense Authorization Act which President Obama signed on December 31, 2011.

Banks and other financial institutions around the world should exercise increasing caution and ensure that they are not exposed to these types of violating activities.