Financial Regulatory Forum

New Iran sanctions most threaten non-U.S. banks

By Guest Contributor
January 20, 2012

* U.S. Treasury under pressure to draft tough Iran sanctions

* New law targets banks including central banks

* Impact seen strongest on non-U.S. banks

 

By Brett Wolf

ST. LOUIS, Jan 20 (Thomson Reuters Accelus) – The U.S. Treasury Department is under bipartisan pressure to draft tough rules implementing an Iranian sanctions law enacted in December. While the effect on U.S. financial institutions is likely to be minimal, foreign financial institutions may take a hit.

“To me, the important question is the extent to which we’ll see non-U.S. banks cut off from the U.S. financial system because of continued processing of transactions involving Iran, particularly Iran’s energy sector, and whether petroleum trading will be pushed into other currencies by Iran,” a former Treasury official told Thomson Reuters. “Watch for changes one to six months from now when more of the law is required to be implemented.”

U.S. lawmakers crafted Section 1245 of the National Defense Authorization Act for fiscal year 2012 to reduce Iran’s oil revenue as punishment for what the United States says is a program to develop a nuclear-weapon capability. Among other things, it prohibits financial institutions from dealing with Iran’s central bank, which acts as the clearinghouse for OPEC’s second-largest oil exporter.

Section 1245 states that U.S. financial institutions should be prohibited from opening or maintaining correspondent or payable-through accounts for any foreign financial institution that has “knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran.”

The new U.S. measures target both private and government-controlled banks, including central banks, and would come into force after a two- to six-month warning period depending on the transactions.

The law allows U.S. President Barack Obama to exempt institutions in countries that have “significantly” reduced their dealings with Iran, and permits him to grant waivers to protect national security interests and energy market stability.

But two U.S. senators on Thursday warned Treasury Secretary Timothy Geithner not to weaken the law by writing rules ridden with loopholes.

DETAIL WORK

Treasury is struggling to work out the details. It must decide a number of issues, such as what U.S. financial institutions will be required to do to implement the sanctions and what would constitute a “significant” reduction in business with Iran prompting an exemption.

“As far as specifics on implementation, we are working on it,” U.S. Treasury Department spokesman John Sullivan stated inan email to Thomson Reuters.

Sullivan was unable to say when the rules will be issued.

Sources familiar with the law say its impact on U.S. financial institutions is likely to be limited, due to previously issued prohibitions on doing business with Iranian banks. For instance, the U.S. Treasury Department in October ordered U.S. banks to keep closer tabs on the links to Iran of their foreign correspondent banks under a final rule implementing section 104(e) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA).

CISADA and other previously issued sanctions, as well as massive fines levied against foreign financial institutions that clandestinely processed US dollar payments on behalf of Iranian banks, may already have convinced many non-U.S. financial institutions to steer clear of Iran, sources say.

“It’s not clear to me that we’ll see a huge impact on U.S. financial institutions given the impacts that sanctions from prior periods have already had,” the former Treasury official said. “We haven’t had much in the way of Iranian central bank transactions passing through our financial institutions since November 2008.”

OSTRACIZED CENTRAL BANK

While Iran’s central bank was not previously blacklisted,U.S. financial institutions have been effectively banned from processing its transactions since May 1995 thanks to the Iranian Transactions Regulations, which prohibited the provision of services to the government of Iran.

However, Treasury’s Office of Foreign Assets Control (OFAC) issued a general license that permitted U.S. financial institutions to clear so-called “U-turn” transactions, Iran-related payments that only passed through the U.S. financial system on their way from one foreign, non-Iranian financial institution to another. OFAC revoked that general license in November 2008 as it began tightening the financial noose around Tehran.

Anti-money laundering compliance officers interviewed for this article also said they do not expect Section 1245 to significantly affect U.S. financial institutions.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

 

 

 

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