Farhad Alavi was quoted today in an article on international sanctions in the online and print versions of Dubai-based Arabian Business. This article describes the more salient, emerging issues in Iran and Syria business for entities in the Persian Gulf region.

The U.S. Department of State is expected to announce sanctions waivers this week for certain countries importing Iranian oil.  These waivers are in follow-up to the Central Bank sanctions signed by President Obama on January 1 as part of the National Defense Authorization Act for Fiscal 2012 (HR 1540) (you may remember a posting on the MENA Lawyer blog  on this topic in January). That  act calls on certain sanctions to be placed on third country financial institutions (including central banks) deemed to be used for facilitating the purchase of Iranian oil.

The U.S. has stated that it will provide waivers to entities that significantly reduce purchases of Iranian oil.  Japan was issued one earlier this year.  As mentioned above, it is expected that some countries will receive waivers in exchange for commitments to reduce oil purchases.

Will these sanctions affect average businesses conducting trade with Iran?  Probably not.  It will naturally push Iranian supply out of the market for many countries, including even those in Asia, a number of which have already cut their purchases of Iranian oil.  This of course can have more significant repercussions on the global economy.  It should not, however, significantly affect issues such as permitted exports to Iran or transfers of personal remittances.

An increasing issue I am seeing with Iranian-American clients is banks in the United States closing their bank accounts. Why? Reasons can vary, but perhaps the sanctions and anti-money laundering (AML) regulations have a role in this. Indeed from national banks to small banks, we have seen a number of people receive notice from their bank that their account will be shut down. Believe it or not, OFAC regulations on Iran, Cuba, Syria, and other countries could have a role here. Clearly it does not happen for everybody, but it does happen. In the past, the fear was mainly that your bank may reject an innocuous incoming wire coming into your account. That concern is still very, very real, but fear not, there are ways to help reduce the risk of account closure happening to you.

Why is my bank closing my account?

There can be a number of reasons here, but we’re only going to focus on the sanctions issues. Due to many regulations aimed at preventing money laundering and sanctions violations, many banks appear to be taking increasingly conservative positions and more carefully scrutinizing account activity. Each bank has its own criteria as to what constitutes “high risk” in a given bank account and discretion over what accounts they will close. Reasons can vary – too many foreign wires coming into your account (for example, from Kuwait, Hong Kong, Dubai, etc.) or perhaps transactions that are not consistent with your financial profile (say receiving $200,000 in cash over 5 months when your annual salary is $120,000).

It’s obviously not per se illegal to receive a lot of money in your bank account or receive money from overseas, but don’t forget that the private sector has often taken a much more conservative position that what may be required by the applicable sanctions regulations and laws (I once had a case where a client’s bank in the US had no issue with a licensed transfer, but the same bank’s UAE subsidiary did!). This means a lot of legitimate activities can face issues. You should really put yourself in the bank’s position – they have responsibilities and they don’t know you that well. So that inheritance from Iran or that gift mom and dad are sending you could look like money laundering to somebody else’s eyes. Why have you (an engineer in Orange County, for example) been receiving wires from Kuwait, Hong Kong, and Turkey in recent months?

How can I prevent a closure from happening?

Each bank has its own standards and criteria in determining what accounts to close and there’s no straight formula. However, there are things one can do to make sure the funds don’t cause problems (don’t forget, another possibility is your bank holding your funds and/or sending the money back to the currency exchange or “sarraf” that sent the funds!).

1. Communicating with the bank. I often tell clients that it’s safe to say that their branch managers generally don’t make the calls on their account. It’s necessary to talk to the higher ups. I have found many bank officials to be very accommodating and friendly after a conversation and/or correspondence with them explaining the outstanding logistics issues. In fact, even I have been presently surprised at the willingness of a number of them to handle legitimate transactions once the conversation or correspondence exchange occurs.

2. Giving your bank written assurances. Preparing affidavits and other supporting documents (depending on the situation) are steps I generally take to help our clients from facing problems. “Papering the transaction” is a way to show the bank that the transaction is authorized, as sometimes an OFAC license might not be enough.

3. If necessary, get a license! It’s amazing how many people muster the bravado to engage in transactions in Iran that require OFAC licenses, well, without a license. Then they try to send the funds. Be they profits from a family business you have had no role in, or the proceeds of a house you sold in Iran, some transactions definitely need license. I will note, however, that not all transactions require a specific OFAC license. You should make sure of the status of your transaction – is it generally licensed or does it require specific authorization? An OFAC license can help move things quicker (and help you in a potential enforcement issue – remember, rejected funds result in reports to OFAC, which can then follow-up with you through an Administrative Subpoena).

4. Use the OFAC License Number! As specific licenses issued by OFAC often tend to state, you should use the OFAC License number in the payment description. This will help the bank see that the incoming transfer is licensed, likely helping reduce potential red flags. Even when a transaction does not need an OFAC license (as not all transfers do) it is still important to make sure you have crossed all your t’s and dotted all your i’s.

Naturally, these are just some of the steps that can be done. You still have the natural requirements that you ensure that no Specially Designated Nationals (SDNs) are involved in the transfer and that the funds from Iran are processed through a non-U.S., non-Iranian bank in a third country. While there is no guaranteed way to prevent problems, the above steps could potentially help you a great bit.

Will Sanctions Cost You Your Bank Account?

I’ve often joked that many people in the U.S., particularly within the Iranian-American community, engage in business with Iran with a lack of knowledge about the sanctions and in a matter as if they are dealing with a non-sanctioned country like Switzerland or Japan.  Some of this is understandable – U.S. sanctions with Iran are very complicated and there are many laws one could never assume exist based on simple common sense.  For example, who would have thought that a U.S. citizen or Permanent Resident generally cannot sell his or her own property in Iran without a license from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), or that he or she cannot even work in most jobs in Iran without an OFAC license?.   Today’s posting is about doing business with Iran and what you should know.

Most Business By U.S. Persons with Iran is Prohibited

Before we get into what is permitted and prohibited, let’s first determine whether you meet the definition of a “U.S. person.”  The Iranian Transactions Regulations, 31 CFR Part 560 (2011) (the “ITR”) define “U.S. Person” as any individual with U.S. citizenship or permanent residency wherever they live or work (including Iran) and U.S. companies around the world. It also includes individuals physically in the United States (such as people here on work and student visas, or even tourist visas!).  It is irrelevant if you also hold an Iranian passport, a Canadian passport, a French passport, or any other nationality. If you meet the above criteria, you are a U.S. person, and this status does not magically disappear when you set foot on Iranian soil.

What types of activities are U.S. Persons prohibited from engaging in with Iran?  Most business by U.S. persons with Iran is prohibited, including dealings with non-U.S. goods.  But let’s first start with what is allowed.

What type of business can be done by U.S. persons in Iran?

As a U.S. person, you generally can:

1. Engage in certain dealings in informational materials, such as exporting books, movies, music and art from the U.S. to Iran, and importing such products from Iran to the U.S.;
2. Export certain limited types of free communications software;
3. Export most types of food products to Iran;
4. Obtain a specific license from OFAC to export or deal in medical supplies, medical equipment, and pharmaceuticals for use in Iran;
5. Obtain a specific license from OFAC to rent out property you may have owned from before you came to the U.S. (as an example);
6. Engage in certain travel related business with Iran (such as sell plane tickets to Iran);
7. Provide certain legal services to people in Iran;
8. Register U.S. intellectual property such as patents and trademarks  in Iran (or Iranian IP here in the United States); and
9. Apply for a license for most other transactions – although OFAC will review and accept on a case-by-case basis (note OFAC is not bound by precedent and is generally not fond of most activities that will promote U.S.-Iran trade ties)

A fairly narrow window of activities I would say!

What can you not do with Iran?

As a U.S. person, unless you have a specific license from OFAC, you cannot, among other things:

1. Sell most goods to Iran from the U.S. or from any third country jurisdiction, like Germany or Dubai;
2. Facilitate trade with Iran, such as arrange for a shipment of Chinese goods from China to Iran, provide credit to enable such a transaction, work for a Korean company on most deals related to Iran, or work in a Dubai company on reexport transactions with Iran;
3. Invest in Iran, such as building an apartment building, opening a factory, running a factory, etc. (bear in mind one Iranian American was fined $30,000 in late 2010 for a “non-egregious” investment in a family catering business);
4. Run a business in Iran such as a bookstore, or an engineering firm;
5. Work in Iran or for Iranian companies, whether you are sitting in your house in the United States and working remotely for a company in Iran, or whether you move to Iran and work for a company there, or even work for an Iranian company in London, Istanbul, or Dubai;
6. Deposit and maintain money in banks in Iran, even in non-sanctioned private banks; and
7. Import most goods from Iran, even through a third country like Australia or India.

One can effectively sum up U.S. policy on this issue as follows: outside the spread of informational materials which promote the free flow of ideas between the countries and the sale of humanitarian goods such as most foods, medicines and medical supplies, the United States generally does not want U.S. persons to do business with Iran.  As such, once you become a U.S. person you effectively have to sever business ties with Iran. It may be very fashionable or convenient to live in the United States but live on money you make in Iran, but realize this can lead to exceptional civil and criminal liabilities under U.S. law.  Note that you can apply for a specific license from Iran to sell your commercial interests in Iran (be it a company you owned, shares of stock, rental property, or inherited interests in a business venture, etc.).

Despite the many economic problems in Iran, the reality is that Iran is a very rich country with high liquidity and plenty of business opportunities.  However, the more significant reality, arguably, is that Iran is under comprehensive U.S., and increasingly European Union (EU) sanctions.   Given the hostilities between the United States and Iran, it should be expected that commercial relations are very limited.  There’s a reason you don’t see direct flights, banking relations, Starbucks Coffee, the Gap, McDonald’s, Wells Fargo, Accenture, General Motors dealerships, or Crate & Barrel etc. in Iran (further, it’s not so odd that you do see many non-U.S. chains like Benetton, Mango, and Carrefour, which are not limited by U.S. sanctions).  Be sure that it has already occurred to most U.S. giants that Iran could be profitable.  Many people have already wanted (and already have, when relations were better) thought of exporting Caterpillar bulldozers and Levi’s jeans to Iran.  (I should note some of these types of goods are in Iran legally, but there is an exceptionally complex story behind that).  The sanctions are not a government-to-government matter, and having dual citizenship does not give you special rights.

What if you have committed a violation?

It is critical that one evaluate any history of violations, and if you are a business in the U.S. doing international work, you should seriously consider implementing a compliance program. I have seen certain U.S. businesses that have a heavy risk factor with respect to Iran – employees shuttling back and forth (or even moonlighting on projects in Iran!), or in one case a business where the owner also owned ongoing businesses in Iran. I even heard of one case where a gentleman in the U.S. was monitoring his factory in Iran via webcam! These are all exceptionally prohibited activities and one should take an abundance of caution.

The ITR and related regulations tend to be incredibly nuanced.  Therefore, when in doubt always seek the advice of an expert.  Business activities with sanctioned countries (not just Iran but others such as Cuba and Syria) is not a place for guesswork.

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.

The United States Senate voted today 100-0 to sanction the Central Bank of Iran (CBI) in what is deemed as a further step in ramping up pressure on Iran for its continued defiance in the light of United Nations Security Council (UNSC) resolutions calling for it to suspend uranium enrichment.   The administration opposed this move and it remains as to whether this will become law.

The theory is that by sanctioning the CBI, Iran would no longer be able to receive payments for oil exports to third countries.  How would this work unilaterally? Effectively the US would impose strict restrictions and prohibitions on third country banks that deal with the CBI. It would be interesting to know how many banks indeed still work with the CBI given that it is reportedly nearly impossible to wire money out of Iran through the Swift banking system, and it has been years since most of the major banks in the world stopped accepting Iranian–origin letters of credit.  There will likely always be banks willing to work with Iran and there will be buyers, but some argue the thought is that the CBI’s (and subsequently the Islamic Republic’s) isolation would in fact cause Iran to sell its oil cheap, in large part due to the narrowed slate of potential buyers of Iranian oil.  In a country where little if anything has been done to diversify from oil since 31 years ago, this could be disastrous.

The United States’ concerted effort over the past 5-6 years to shut Iran off the world financial system has arguably been one of its most successful actions in terms of sanctioning Iran.  Financing business with Iran has become exceptionally difficult and this will increasingly bear pressure on the Iranian government.  Although it is very unlikely that the United Nations (or even the European Union) will sanction the CBI, any unilateral action by the US could potentially have a substantial impact on Iran.  What remains to be seen is what position the Obama Administration ultimately takes.

Sunrise Technologies and Trading Corporation, a New York based business and its owner Jay Shih pleaded guilty in the District Court of the District of Columbia  to conspiracy to export high technology computer equipment to Iran through Dubai, UAE.  According to this report by the Department of Commerce’s Bureau of Industry and Security (BIS), Sunrise sent over 400 computer units to Dubai with the intention of reexport to Iran. Notably the purchaser was a company with operations in Dubai and Iran.  The parties have settled on a forfeiture of a money judgment for $1.25 million, and have agreed to the loss of export privileges for 10 years, according to the report issued by the BIS.   This enforcement action involves a number of players, including the BIS Immigration and Customs Enforcement (ICE), and the Office of Foreign Assets Control (OFAC).

Why you should care

Even if you are not dealing with Iran (or similarly sensitive countries, like Syria) you should always make sure who your end users are. To some extent export-controlled goods require certain end use declarations (such as the BIS Form 711). However, businesses, should take extra care when trading high tech goods.

1. Is what you are exporting controlled by the Export Administration Regulations (EAR)? 

The EAR is different from the OFAC regulations. The EAR govern a whole host of dual-use technologies (goods that have both civilian and military application, such as certain airplanes, computer chips, fertilizers).  They are not just controlled for Iran and Syria, but even in some cases states friendly to the United States.  Don’t forget – the jurisdiction follows the goods.

2. Do you have foreign nationals in your company? 

It is especially important all access of export-controlled goods, designs, plans and technologies by certain foreign national employees and contractors in the United States and abroad be authorized.  Even if you do not export, having a foreign engineer see the plans can result in a deemed export. In other words, that person seeing the plans or receiving them by e-mail is effectively the same as if you had exported the technology to the individual’s home country. If that needs a license, so does sharing it with the individual, even if in the United States.

3. Do you have a compliance program? 

How are you going to prevent violations?   It is imperative that companies trading such technologies implement a compliance program. These are not just for large companies, but can be scaled to fit the nature of your business.  A solid compliance program can include:

• an internal control system creating a mechanism for the reporting of potential problem transactions to company officers, compliance chiefs, etc.
• a written handbook educating employees on the nature of OFAC, BIS and other violations, what is covered, what isn’t, etc.
• a system to screen counterparties’ names.  Remember, even if you are not dealing with companies that are off limits or require licensing, you should make sure the companies you are selling to are legitimate and not going to reexport your technologies to critical jurisdictions.

Much more can be written on this issue and this is just a sample.  The key lesson from this example is that compliance with export control laws is critical.

OFAC on Tuesday issued two more general licenses with respect to Syria, specifically General License No. 11 and 12.  A brief summary of both are below:

General License No. 11:  This allows for certain charitable activity related to Syria and related payments.  Specifically, activities encouraging political development, combating illiteracy and even providing refuge are permitted, as are direct payments. Naturally there are conditions, including the stipulation that payments cannot be made through the Government of Syria or certain blocked entities.

General License No. 12:  This general license permits payments for diplomatic and consular expenses in Syria by third countries through US financial institutions.  The same type of conditions exist as above.

These new general licenses, particularly General License No. 11 will both help US entities take a more active role in Syria’s much-anticipated transition to democracy.  Furthermore, it will most likely help lighten the workload at OFAC’s Licensing Division, where there are notable backlogs on some  submissions.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) on Friday issued four general licenses arising from its new sanctions on Syria.  These are, specifically:

1. General License No. 7  (Winding Down Contracts Involving the Government of Syria; Divestiture of a U.S. Person’s Investments or Winding Down of Contracts Involving Syria).  This permits the engagement by U.S. persons of wind-down activities to divest from investments in Syria related to Syria, including the export of services.  All such transactions are authorized up through November 25, 2011 and those making use of this General License should submit necessary documentation to OFAC.

2. General License No. 8 (Official Activities of International Organizations).  This general license allows U.S. persons working with the United Nations, its affiliates and contractors to engage in official business in Syria related to their work. Note that there are certain reporting requirements for U.S. persons.

3. General License No. 9 (Transactions Related To U.S. persons residing in Syria). This general license allows individuals to engage in normal living expenses (e.g., paying for rent, food, government taxes, etc.) in Syria.

4. General License No. 10 (Operation of Accounts).  This allows individuals ordinarily resident in Syria to maintain bank accounts at U.S. financial institutions, provided that transfers are not meant to fund businesses and do not involve blocked individuals or accounts.

The text of these general licenses highlight a requirement that is arguably a central theme in most OFAC-regulated areas and transactions – record-keeping.  Even when not required, best practices dictate keeping complete and accurate records relating to such transactions as they can later come under scrutiny.

Dubai-based Arabian Business quoted me this morning in an article on how US pressure on Dubai is affecting trade between the Emirate and Iran. Read the article here.  Arabian Business is a widely-circulated, Dubai-based publication covering business in the Middle East and beyond, with particular emphasis on the Gulf Cooperation Council (GCC) states.