Sudan Sanctions [Almost] Repealed

OFAC announced on Friday that the prohibitions in the Sudanese Sanctions Regulations, 31 CFR Part 538 (the “SSR”) will be effectively narrowed (not repealed!) via a Final Rule issued Tuesday, January 17 in the Federal Register.  This is in response to certain behavior by the Sudanese government viewed favorable and cooperative by the outgoing Obama administration.

By adding a new section, § 560.538, OFAC effectively unblocked Government of Sudan property and issued a general license allowing most transactions with Sudan previously prohibited by the SSR and Executive Orders 13067 (November 5, 1997) and 13412 (October 6, 2006).   These include previous bars on the importation and exportation of goods and services to and from Sudan.

What is interesting is that the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”) which governs agricultural, medical device/supply and medicinal exports to Sudan is still in place.

Furthermore, note that this is a general license, not a repeal, and as such all other OFAC regulations generally apply, including bars on dealing with blocked individuals, as well as document retention requirements, etc. Furthermore, the US Export Administration Regulations (the “EAR”) governing dual-use items is still in place as well.  This means that items having dual use that are subject to the EAR will still require licenses in many instances if the end-use of the technology is in Sudan.

These are key points as oftentimes many confuse general license topics with exceptions. These are not exceptions and therefore, one must still exercise proper care to ensure compliance with certain requirements that continue to govern dealings with that country.

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OFAC Sanctions and Personal Affairs in Iran

2017 has started and a new administration will be in the White House in less than three weeks. January 16 will mark exactly a year since implementation of the Joint Comprehensive Plan of Action (the “JCPOA”, also referred to commonly as the nuclear deal) between Iran and the “P5+1” (the United States, United Kingdom, France, Russia, China, and Germany).  I notice that many still read my blog post on our sister blog MENALawyer.com titled Do you need a license to bring money from Iran? which I wrote in May 2011! It’s time to revisit this topic given that so much has changed and the sheer amount of confusion that still exists.  This post is not a summary of all regulations impacting the personal affairs of Iranian-Americans, nor even the recent changes. It may be useful in illustrating what issues are still concerns, however.

Understand what a “U.S. person” is.

The Iranian Transactions and Sanctions Regulations, 31 Part 560 (the “ITSR“), which is one of the main bodies of U.S. sanctions laws that impact Iranian-Americans, primarily covers “United States persons.” This means any U.S. citizen or Permanent Resident (Green Card holder) wherever they are (including Iran), but also means anybody physically in the United States (such as on a tourist visa).  There are no exceptions for also having Iranian citizenship or Canadian or UK citizenship for that matter. If you are a U.S. citizen or Permanent Resident or if you are physically in the U.S., you are a U.S. person and are under the same restrictions as all other U.S. persons.

Transactions versus Amounts

While the amount of funds to be transferred from Iran to the United States is important for OFAC purposes, it is key to address each “type” of funds differently – the rules on selling certain property are in some ways different from the rules on selling shares of stock, or receiving a family gift or inheritance, depending on the facts. These nuances must be recognized.

Selling Property in Iran – Seller Beware!

This remains a pressing issue.  If you are a U.S. person under the ITSR you will need a specific license from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) for many property sales and related services.  There are certain limited cases in which real property (i.e., real estate) can be sold under general license (i.e., you will not need to apply to OFAC for a specific license) so long as the transaction conforms to OFAC’s many regulations, such as not dealing with certain parties, transferring the funds the right way. This does not cover sales of things that are not real property, like household items, shares of stock, businesses, etc.

Iranian Bank Accounts

Again, many still do not realize this, but as a U.S. person, you cannot open or maintain a bank account in any Iranian financial institution, whether that financial institution is on the OFAC Specially Designated Nationals (SDN) list or not, unless you have a specific license.   Further, you cannot cause anybody else to open a bank account for you, for example, under that person’s name.  The transfer of funds from Iran to the United States is highly regulated and must be done in a legally compliant way.

Funds Transfers out of Iran and U.S. Bank Accounts

The language of the JCPOA technically enables foreign, non-U.S. banks to work with their Iranian counterparts. In other words, there is no real legal bar on an Iranian bank being able to wire funds to say a European bank, which could in turn send those funds to an individual’s account in the United States.  This, however, has not really happened as many banks around the world are afraid of dealing with Iran.  As such, the vast majority of personal transfers out of Iran use exchange houses (so called “Sarrafis”).  This is not necessarily illegal, provided one deals with the right parties, and that the transfer otherwise complies with U.S. regulations.   Furthermore, banks in the United States increasingly want to be assured that the funds that are coming into your account are compliant, and as such, they often ask us for supporting documentation, like affidavits, etc. to prevent account closure or sending the wire back to the transmitter (e.g., in Dubai, Turkey, Kuwait, Hong Kong, etc.).

Conclusion

In sum, it is key to make sure you have a correct grasp of the regulations. First off, understand that U.S. unilateral sanctions on Iran continue to exist, and that these regulations continue to have a ripple effect on even third country businesses.  Your status as a U.S. person still substantially limits the scope of what you can lawfully do with Iran.  While U.S. policy generally favors the divestment from Iran by U.S. persons, one must make sure the transfer complies with all aspects of the law, and this does not stop at just OFAC regulations.  The regulations remain complex and they are not a place for guesswork.  This is especially key given the very vigilant enforcement of sanctions violations, which shows no sign of subsiding even with the new administration.

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New Revisions to OFAC’s Iran Sanctions Impact Humanitarian Exports and Flow of Goods

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) yesterday announced a series of key revisions to the Iranian Transactions and Sanctions Regulations (the “ITSR”), one of the key bodies of regulations implementing the still far-reaching U.S. sanctions infrastructure in place against Iran.  Most specifically, OFAC has made key changes to existing regulations allowing the exportation to Iran of many humanitarian items that make such exporters in some ways more commercially feasible to U.S. persons. It also has substantially revised the definition of what constitutes goods of Iranian origin.

shutterstock_101051161These recent changes are consistent with a general trend towards clarifying the complex U.S. sanctions framework and loosening restrictions on transactions that have traditionally been licensable.

Iran Sanctions Generally

Iran remains subject to a very comprehensive unilateral U.S. embargo.  The January 2016 implementation of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the so-called “P5+1” states (the United States, United Kingdom, France, Russia, China, and Germany) over Iran’s nuclear program removed many so-called “secondary sanctions” limiting third country commercial activity with Iran across a wide spectrum, but left the unilateral U.S. embargo intact. The ITSR is perhaps the cornerstone of these sanctions, impacting “United States persons” and barring their ability to export or import most goods, services, and technologies to and from Iran.

TSRA Revisions Impacting Medical and Agricultural Exports to Iran

Yesterday’s changes continue the Obama Administration’s ongoing trajectory of easing restrictions on the flow of humanitarian goods to Iran, for which there has been a licensing scheme for nearly two decades.  The Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) covers three key areas with respect to Iran – specifically medicine, medical supplies, and agricultural commodities.

In the medical field, OFAC has announced that it will be replacing its list of authorized medical supplies, which was a list of items that could be exported to Iran by U.S. persons under general license – meaning, so long ascertain parameters were adhered to, specific licensing from OFAC was unnecessary.  This effective “white list” is being replaced with a List of Medical Devices Requiring Specific Authorization, which will be published in the Federal Register today.  If a given item is named on the List of Medical Devices Requiring Specific Authorization, a specific license will still be needed to export the item to Iran.  This presumably widens the scope of items that can be exported to certain parties and end-users in Iran without having to first obtain an OFAC license.

With respect to agriculture, the scope of general license commodities is also being expanded somewhat, albeit more narrowly.

Most notably, OFAC is also allowing the exportation of software needed to operate, maintain, or repair such medical items, so long as the item is EAR99 or would be EAR99 if in the United States.

Very importantly, OFAC has added a general license authorizing training related to medicines, medical products and agricultural commodities exported to Iran. The re-importations of such exported goods to the United States for repair and safety purposes (such as product recalls). Training previously required specific licensing.

Iranian-Origin Goods

The second key area of OFAC’s revisions to the ITSR is the revision of the definition of what constitutes “goods of Iranian origin.” The new changes do not allow more “Iranian” goods to enter the United States but insead clarifies that this term does not include items that have transited through Iranian waters or were unloaded and reloaded in Iran. It also excludes goods lawfully exported to Iran under the ITSR (for example, lawful medical supplies) that are then taken out of Iran.  The limitation on goods that have entered Iranian commerce remains, and therefore the exclusions of this clarified definition do not cover foreign, non-U.S. goods that have been traded in Iran.  This revised definition can help reduce some of the confusion that may exist with respect to goods that have transited through Iran and their position vis-à-vis the United States and U.S. persons.

What can we make of these revisions?

The significance of the changes announced yesterday are twofold.  On one hand, the most apparent impact is that they somewhat broaden the scope of goods and services that can be exported to OFAC without having to first obtain specific authorization. Most of these activities were arguably licensable before, meaning OFAC would issue a license for them if one applied for such authorization.  Secondly, and arguably more importantly, these revisions render the business aspect of exporting TSRA categories of items more aligned with those of non-sanctioned countries.  In other words, this makes the export of such items much easier and practical – instead of merely allowing the export of certain goods, ancillary and necessary products and services can also be exported to Iran. This may give U.S. companies substantially more comfort In addition to having more scenarios under which certain goods and services can be exported to Iran without obtaining specific licensing. Placing the engagement of ancillary activities such as training, repairs, and recalls can help alleviate the reservations some U.S. companies in the medical and agricultural space may have with regarding to exporting to Iran as it can help dramatically reduce transactions costs.

Notably, the ITSR continues to remain a web of very complex laws, and professional guidance is always highly recommended. Even lawful, general license and exempt transactions often have many legal caveats, requiring diligent, painstaking attention to the nuances of applicable laws and regulations. Furthermore, given the continued reservation of many U.S. and global businesses to deal with Iran, explanation of the legalities of TSRA and other lawful transactions with Iran to U.S. vendors, banks, and shippers remains imperative.

Posted in Compliance, Iran, OFAC, Personal, Sanctions

Are Melli and Sepah ascending towards global compliance standards?

Very interesting reports emerged this long weekend about a very unique and curious “crisis” in Iranian politics.  Specifically, it was reported that Bank Melli and Bank Sepah, two of Iran’s largest financial institutions, had recently rejected business related to the country’s Islamic Revolutionary Guard Corps (IRGC, commonly referred to as the Sepah).  The reason presented was the issues facing the IRGC, which still remains on the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list.  The Iranian banks’ decisions show a readily-apparent desire to rejoin the international banking community – a significant challenge for financial institutions in Iran even after the Joint Comprehensive Plan of Action (JCPOA, the so-called nuclear deal) was implemented in January 2016 as part of sanctions relief afforded Iran. This has certainly not pleased certain elements in Iran’s political system. But why?

Being on the SDN list effectively means the IRGC is banned from dollar transactions and still cannot deal with foreign entities owned or controlled by U.S. persons.  The Guards, which control large swaths of Iran’s economy, face much bigger problems, however.  Given the de-risking trends we have seen in banks in recent years, the sanctions have indeed led to a cascading effect – the positions embraced by international banks on matters concerning designated entities, sanctions, and anti-money laundering, among other compliance concerns, is often far more conservative than what may be required by law.  For example, despite the vast majority of banking restrictions on Iran being lifted in the wake of the JCPOA and U.S. Secretary of State John Kerry and U.S. Treasury officials explicitly stating non-U.S. banks can engage in legitimate, lawful business with Iran, no major global financial institutions have yet taken the plunge.

How does this relate to the IRGC and what’s going on now? Many banks around the world will not work with the IRGC even if their national laws do not necessarily ban it. However, as Iran seeks to reengage the world and accede to standards called for by the Action Task Force (FATF), a multilateral group that calls for increased transparency to counter international money laundering, it will need to start playing by the rules of international banking and finance.  And that’s what it’s come to with Bank Melli and Bank Sepah.

These old, large institutions, both state-owned, now find themselves in a political “catch-22” situation – on one hand, the Iranian government has not traditionally prioritized foreign direct investment or trade, seeking instead to bolster its ideological agenda even if at the expense of growth and economic development – on the other hand, Iran’s decision to enter nuclear talks and reach an agreement signals its need for its economy to be reconnected with the rest of the world.  What we are seeing now may signal an eventual bifurcation of the Iranian economy – one group seeking to do business considered transparent and clean under international best practices and standards established by groups like the FATF or laws like the UK Bribery Act and U.S. Foreign Corrupt Practices Act (FCPA), and then a second group that will conduct business as usual.  Reconnecting with the world requires playing by the international order’s rules, an action that many centers of power in Iran may oppose due to such behavior’s ramifications.  It remains to be seen if Iranian entities will follow on Melli and Sepah’s actions and begin turning their back on business that will close their door to the world economy, and whether designated groups will themselves begin to lift the rogue status granted them by global political and financial circles.

Posted in Compliance, Iran, OFAC, Sanctions

What’s Holding Up Iran’s Banking?

Much has been said lately about the lack of sufficient banking channels between Iran and the rest of the world, and the spillover effects it is having on Iran’s international economic re-engagement.  The Joint Comprehensive Plan of Action (JCPOA), the so-called “nuclear deal,” was implemented in January 2016 and now nearly 6 months have passed since many of the banking-related sanctions on Iran were eased.  U.S. Secretary of State John Kerry has been emphatic that there is nothing prohibiting legitimate business with Iran, effectively singling out international banks. Nonetheless, there is still very little electronic wiring taking place in or with Iran. So what’s holding things up?

The reason can be limited to primarily two issues – the hesitation of foreign, non-Iranian banks due to past enforcement of sanctions violations as well as self-evident deficiencies in Iran’s banking system.

IranMoney

Past Violations

One commonly-cited reason for the lack of desire by foreign banks to deal with Iran is heavy penalties imposed on such financial institutions by U.S. government authorities, like the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Justice, for sanctions breaches over the years. The relatively recent cases of BNP Paribas ($8.9 billion), HSBC ($1.9 billion), and ING ($619 million)  point to this. These numbers can be terrifying, right? Well, maybe.  These penalties were not, by most objective standards, imposed capriciously – the United States has been able to prove intent to violate the law in these cases.  Stories abound of “wire stripping” (where references to sanctioned countries and entities were removed from payment instructions to avoid flagging in New York, where most transactions involving U.S. dollars are cleared).

One Chief Sanctions Compliance Counsel at a major European bank that was fined by OFAC told me recently that his employer declined a meeting with Secretary Kerry -due in part to the fact that there is no assurance as to who will be in charge in the United States next year, and that Secretary Kerry’s words are in effect not binding or assuring.  Some financial institutions entered into so-called “Deferred Prosecution Agreements” or DPAs whereby they agreed not to deal with Iran for a certain number of years.  A number of these financial institutions are evidently still bound by these DPAs.

Although foreign, non-U.S. banks can now deal with Iran within certain parameters, U.S. counterparts generally cannot, unless the underlying transaction is lawful under U.S. law (for example, the sale of certain laptop computers from the United States to Iran).  Some experts now say that banks will not deal with Iran until the unilateral U.S. embargo on Iran is repealed. Seeing Cuba as an example, it could easily be years before that happens.

Iran’s Banking System

So assuming that OFAC and the U.S. Department of Justice were to give reliable assurances somehow that they would not punish lawful business with Iran, that would be a green light to non-U.S. banks to deal with the Iranians, right? Probably not. An additional reason for the reluctance of international financial institutions’ reluctance to deal with Iran has been Iran’ own internal banking system. Iran’s banks, it is said, simply lack proper Antimoney Laundering (AML) policies.  Indeed, Consumer Due Diligence (CDD) (also known as Know Your Customer or “KYC”) policies are considered nearly non-existent in Iran and the Financial Action Task Force (FATF), a multinational organization aimed at fighting money laundering and terrorist financing has included Iran in its list of “high-risk and non-cooperative jurisdictions,” although in late June it decided to suspend counter-measures against it due to positive steps taken by Iran to combat AML.

Beyond this, even certain Iranian officials have admitted the inadequacies and obsolete nature of Iran’s banking system. More will need to be done, everybody seems to admit.  Some in the United States have argued that U.S. experts should be allowed to help the Iranians bolster their compliance policy and adherence to international banking norms.  It seems unlikely for now, but could very well happen as transparency and compliance by Iranian banks could certainly help keep the international financial system cleaner, a benefit to all western countries, and many others as well.

All this said, there has been talk of a number of smaller banks, in certain European jurisdictions as well as countries like Turkey and India, initiating transactions relying on the international SWIFT bank messaging system.  One western journalist based in the Middle East told me that a recent transaction in Iran was handled electronically through a web of transactions and at a 10% commission.  Compare that to the 3% and $15-20 most of us in the United States have to pay for sending money from our computers – a process that generally takes less than about 10 minutes to input!

One theory, which may be the most accurate, is that Iran’s engagement with the global economy will require it to adhere to international standards in a wide array of areas, banking included.  This, along with added sanctions relief, can increase the “upside” of western banks dealing with Iran. In other words, the more they can deal with Iran, the more potential profits they would be missing out on if they choose not to deal with it. The question, however, is how much is enough for a major Tier 1 bank to be willing to comb through transactions with Iran to determine whether to facilitate a lawful one, as opposed to a blanket position of universally refusing to deal with that country?

 

 

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The virtual export and import

I was interviewed earlier this month by Al Jazeera Arabic on a particularly interesting issue concerning U.S. sanctions on Syria.  The question was whether a Skype appearance by a Syrian government official designated on the OFAC Specially Designated Nationals (SDN) list at a Washington, DC conference violated U.S. sanctions.  My answer was, yes, of course! For those who speak Arabic, the interview is below:

So what exactly happened? Bouthaina Shaaban, Syrian President Bashar Al-Assad’s Political & Media Adviser (herself, like Assad, on the SDN list) spoke via Skype at a conference hosted at the National Press Club in Washington.  My take on this was simple – it was a violation on two fronts.  For one, the group inviting her was effectively “importing” a service from Ms. Shaaban (she is in Syria, after all), and arguably “exporting” a service to her by providing her a platform.

Notably, Ms. Shaaban was designated by OFAC on August 30, 2011 pursuant to Executive Order 13573 (May 20, 2011). This Executive Order allows the President to designate, among other entities, any person deemed “to be a senior official of the Government of Syria.” This enables an asset freeze of such persons’ assets if they come into the possession of a U.S. person, and generally U.S. persons cannot deal with such persons absent specific OFAC authorization.  But that’s not why it was really prohibited – the applicable language in the Syrian Sanctions Regulations, 31 CFR Part 542 (the “SSR”) applies to a much broader range of entities than those particularly singled out by OFAC and placed on the list.  Notably, 31 CFR §§ 542.207 and 542.208 of the SSR bar most imports and exports between Syria and the United States.  Now, if Ms. Shaaban had been in a third country, say Switzerland, it would still be an issue for other reasons, including the fact that she is an SDN.

Beyond the world of SDNs and even just Syria, and perhaps more importantly for every day matters, the case brings to light OFAC’s traditional position on the definition of “import” and “export.” In common-day parlance, these terms imply the explicit movement of actual, tangible goods.  But not quite according to OFAC.  For example, OFAC has deemed certain employment of U.S. persons in Iran to be the prohibited “exportation” of prohibited services to Iran requiring OFAC licenses.  Conversely, holding a bank account in a sanctioned country can constitute the prohibited “importation” of services.  Ms. Shaaban’s speaking is much the same.  This is important to consider for compliance purposes and why simply reading the regulations is often not enough to understand their purpose and OFAC’s position on the issue(s).

 

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Discussing the Iran Deal on Al Jazeera English

I was on Al Jazeera English tonight discussing the announcement of the implementation day of the Joint Comprehensive Plan of Action (JCPOA), the nuclear deal reached between Iran and the P5+1 (United States, United Kingdom, France, China, Russia, and Germany) and the nature of the limited sanctions relief granted Iran.

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This website aims to provide notes and commentary on international legal, business, and political developments in economic and other sanctions. It is intended solely for information and entertainment purposes and should in no way be construed as legal advice. If you have any questions or are unclear on any of the subject matters addressed or discussed on this site, please consult a licensed legal professional. Views presented in the comments and outside links do not necessarily reflect those of the website author. All external links on this website to articles and documents are external and provided for informational purposes only. They have no relation to the author of this website unless specified otherwise.

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