October 25, 2019: Iran now a PMLC, and humanitarian assistance mechanism announced

On Friday, Treasury imposed Special Measure 5 (i.e. no correspondent banking accounts allowed) on Iran, but announced how Iran could still get humanitarian assistance:

PRESS RELEASES

Treasury and State Announce New Humanitarian Mechanism to Increase Transparency of Permissible Trade Supporting the Iranian People

FinCEN identifies Iran as jurisdiction of primary money laundering concern

WASHINGTON – Today, the U.S. Departments of the Treasury and State announced a new humanitarian mechanism to ensure unprecedented transparency into humanitarian trade with Iran.  This mechanism will help the international community perform enhanced due diligence on humanitarian trade to ensure that funds associated with permissible trade in support of the Iranian people are not diverted by the Iranian regime to develop ballistic missiles, support terrorism, or finance other malign activities.  Concurrently, Treasury’s Financial Crimes Enforcement Network (FinCEN) identified Iran as a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act, and issued a new rulemaking to protect the U.S. financial system from malign Iranian financial activities.  

“This administration remains committed to the unfettered flow of humanitarian aid to the Iranian people, who have suffered for forty years under the mismanagement of this corrupt regime. This new humanitarian mechanism will help international companies that seek to engage in permissible humanitarian trade with Iran to ensure that they do not run afoul of sanctions,” said Treasury Secretary Steven T. Mnuchin.  “Iran is a jurisdiction of primary money laundering concern that deliberately ensures that there is no transparency in their economy so they can export terrorism around the world.  FinCEN’s action further exposes the characteristics of Iran’s deceptive financial conduct to the international community as part of our maximum pressure campaign to shut off the Iranian regime’s illicit sources of revenue.”

PROCESS FOR NEW HUMANITARIAN MECHANISM

Treasury and State will establish a process to help ensure that participating governments and financial institutions commit to conducting enhanced due diligence to mitigate the higher risks associated with Iran-related transactions.  A stringent framework is crucial given that Iran continues to be the world’s largest state sponsor of terrorism and the regime continues to fail to implement key anti-money laundering and countering the financing of terror (AML/CFT) safeguards, as set by the Financial Action Task Force (FATF), the global standard-setting body for combating money laundering and terrorist financing.

“FinCEN’s action designating Iran as a jurisdiction of primary money laundering concern underscores the need for enhanced due diligence in a country that has systematically obfuscated its support for terrorism and ignored international anti-money laundering standards.  This humanitarian mechanism offers a process for enhanced due diligence to help mitigate the high risk of doing business in a country whose repressive leaders remain intent on diverting resources to fund terrorism,” said Sigal Mandelker, Treasury Under Secretary for Terrorism and Financial Intelligence. “Through this new mechanism, no revenue or payment may flow to the Iranian regime. This framework will provide unprecedented transparency to help ensure that humanitarian goods entering Iran actually reach the Iranian people.”

“The Iranian regime oversees a vast network of corruption designed to evade sanctions, generate money for terrorists, and enrich Iran’s clerics,” said Brian Hook, State Department Special Envoy to Iran. “A new humanitarian channel will make it easier for foreign governments, financial institutions, and private companies to engage in legitimate humanitarian trade on behalf of the Iranian people while reducing the risk that money ends up in the wrong hands. The U.S. will continue to stand with the Iranian people.”

While the U.S. has consistently maintained broad exceptions and authorizations to support humanitarian transactions with Iran, this new mechanism will assist foreign governments and foreign financial institutions that conduct appropriate enhanced due diligence to establish payment mechanisms for legitimate humanitarian exports.

The humanitarian mechanism will require foreign governments and financial institutions that choose to participate in the mechanism to conduct enhanced due diligence and provide to Treasury a substantial and unprecedented amount of information, with appropriate disclosure and use restrictions, on a monthly basis, as described in guidance provided by OFAC outlining specific requirements.

This mechanism includes a number of safeguards to prevent any sanctionable dealings with persons on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List) that have been designated in connection with Iran’s support for terrorism or WMD proliferation.

If foreign governments or financial institutions detect potential abuse of this mechanism, pursuant to the requirements of the humanitarian mechanism, they must immediately restrict any suspicious transactions and provide relevant information to Treasury.  Provided that financial institutions commit to implement these stringent requirements, the humanitarian mechanism will enable them to seek written confirmation from Treasury and State regarding sanctions compliance.

This mechanism, designed solely for the purpose of commercial exports of humanitarian goods to Iran, can be used by U.S. persons and U.S.-owned or -controlled foreign entities, as well as non-U.S. entities.  Of course, U.S. persons and U.S.-owned or -controlled entities must still comply with existing requirements under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), as implemented in OFAC’s regulations. In line with the United States’ long standing policy of allowing for the sale of agricultural commodities, food, medicine, and medical devices to Iran, OFAC will also continue to consider other requests related to humanitarian trade with Iran as appropriate. Treasury encourages interested parties to reach out to OFAC for more detailed consultations. 

IMPLICATIONS OF SECTION 311 ON IRANIAN FINANCIAL INSTITUTIONS

Pursuant to Section 311 of the USA PATRIOT Act, FinCEN issued a final ruleprohibiting the opening or maintaining of a correspondent account in the United States for or on behalf of an Iranian financial institution.  The rule also prohibits foreign financial institutions’ correspondent accounts at covered U.S. financial institutions from processing transactions involving Iranian financial institutions.  FinCEN based the rulemaking on its finding that Iran is a foreign jurisdiction of primary money laundering concern.

“FinCEN’s action is based on its finding that international terrorists and entities involved in missile proliferation have transacted business in Iran, and that Iran is a jurisdiction characterized by a high level of institutional corruption and weak AML/CFT laws,” said FinCEN Director Kenneth A. Blanco.  “This action seeks to protect international financial institutions from the wide range of illicit finance risks emanating from this jurisdiction.”

Section 311 of the USA PATRIOT Act authorizes FinCEN to alert U.S. financial institutions to foreign jurisdictions, foreign financial institutions, classes of transactions, or types of accounts that it finds to be of primary money laundering concern, and, if necessary, order them severed from the U.S. financial system. 

While extensive U.S. and international sanctions on Iran largely prohibit U.S. financial institutions from facilitating, directly or indirectly, transactions by Iranian financial institutions, this action requires U.S. financial institutions to apply special due diligence to their correspondent accounts to further guard against their improper indirect use by Iranian banking institutions.  It also subjects U.S. financial institutions to penalties under the Bank Secrecy Act if they violate provisions of the final rule.  Furthermore, it protects the U.S. financial system from Iran’s illicit financial activities by ensuring that U.S. financial institutions are not exposed to the Iranian regime’s support for terrorist groups, advancement of its ballistic missile program, and its fueling of armed conflicts in Syria, Afghanistan, Yemen, and elsewhere.

FinCEN’s decision to take this action as a final rule is in the interest of U.S. foreign policy and consistent with the Administrative Procedure Act.

FACTORS BEHIND FINCEN’S FINDING

The Iranian regime is the world’s leading state sponsor of terrorism, and FinCEN found evidence that international terrorist groups, including Hizballah and HAMAS, have transacted business in or with Iran and rely on Iranian financial support.  Estimates indicate that the Iranian government has historically provided approximately $700 million of Hizballah’s estimated $1 billion annual budget.  Iran’s support to HAMAS is estimated to be in the tens of millions of dollars per year and as high as $300 million per year.

FinCEN’s action builds on Treasury’s Office of Foreign Assets Control’s (OFAC) September 20, 2019 designation of the Central Bank of Iran (CBI) under its counterterrorism authority, Executive Order (E.O.) 13224, as amended by E.O. 13886.  The CBI has been intimately involved in facilitating the movement of funds to terrorist groups, and senior CBI officials, acting in their official capacity, have procured currency and conducted transactions for Iran’s Islamic Revolutionary Guard Corps Qods Force (IRGC-QF), which was designated by OFAC in connection with terrorism and human rights abuses.  As OFAC stated, in 2018 and 2019, the CBI has provided billions of dollars and euros to terrorist organizations, including the IRGC, IRGC-QF, and the IRGC-QF’s terrorist proxy, Hizballah.  The CBI has also worked to supply foreign currency and funding to the IRGC-QF and Iran’s Ministry of Defense and Armed Forces Logistics, also OFAC-designated for terrorism. 

FinCEN also found that the Iranian regime continues to engage in deceptive financial practices, such as the use of front companies and shell companies, to facilitate the advancement of its ballistic missile arsenal.  With more than ten types of ballistic missiles in its inventory or in development, some of which are inherently capable of delivering a nuclear explosive device, Iran has the largest ballistic missile program in the Middle East—a major challenge to nonproliferation efforts in the region.  

Iran has consistently been identified by non-governmental organizations as one of the most corrupt countries in the globe, and FinCEN found that institutionalized corruption in Iran is widespread in its economy.  According to FinCEN’s information, in early 2018, after hearing complaints about corruption, Iran’s Supreme Leader, Ali Husseini Khamenei, issued a directive requiring Iran’s armed forces to sell the private companies they owned. However, because Khamenei permitted the armed forces to use revenue from the sales to then purchase shares in the same companies, the directive appeared to be a gesture to placate public pressure, not a genuine effort to lessen the role of the IRGC and its components such as the Basij militia in the economy or curb corruption. Additionally, in late 2017, IRGC officials were aware of corruption and mismanagement at an IRGC economic development firm, estimating the cost of the corruption to be approximately $5.5 billion in losses, debts, and funds required for a capital injection to facilitate the firm’s dissolution.

This culture of economic corruption is further compounded by Iran’s continued failure to adequately address its AML/CFT deficiencies, as identified by the Financial Action Task Force (FATF). To protect the international financial system from abuse, the FATF has therefore re-imposed several countermeasures on Iran and called on its members and urged all jurisdictions to advise their financial institutions to apply enhanced due diligence with respect to business relationships and transactions with natural and legal persons from Iran.

And OFAC issued a guidance on “Financial Channels to Facilitate Humanitarian Trade with Iran and Related Due Diligence and Reporting Expectations”:

Financial Channels to Facilitate Humanitarian Trade with Iran and Related Due Diligence and Reporting Expectations

The U.S. Government has levied unprecedented economic pressure to disrupt the Iranian regime’s ability to covertly and illicitly access the international financial system to finance terrorism abroad, increase its domestic oppression, support the brutal Assad regime, procure ballistic missile technology, and broadly destabilize the Middle East. These U.S. government efforts are directed at the Iranian regime. They are not directed at the people of Iran, who themselves are victims of the regime’s oppression, corruption, and economic mismanagement.

The United States maintains broad exceptions and authorizations for the sale of agricultural commodities, food, medicine, and medical devices to Iran by U.S. and non-U.S. persons, provided such transactions do not involve persons designated in connection with Iran’s proliferation of weapons of mass destruction (WMD), or Iran’s support for international terrorism. These exceptions and authorizations are clearly outlined by Treasury’s Office of Foreign Assets Control (OFAC) in Frequently Asked Questions (FAQs) regarding Iran sanctions, Guidance on Humanitarian Assistance and Related Exports to the Iranian People (2013), and Guidance on the Sale of Food, Agricultural Commodities, Medicine, and Medical Devices by Non-U.S. Persons to Iran (2013).

Unfortunately, the U.S. government has seen the Iranian regime abuse the goodwill of the international community, including by using so-called humanitarian trade to evade sanctions and fund its malign activity. The U.S. government also knows that the regime and its proxies are looking for new ways to generate funds and launder money. In fact, we have grown increasingly concerned as we have uncovered Iranian and Iranian-proxy schemes to access illicitly the international financial system under the cover of seemingly humanitarian organizations or through shell companies or exchange houses.

Today, October 25, 2019, the U.S. Departments of the Treasury and State announced a new humanitarian mechanism to ensure unprecedented transparency into humanitarian trade with Iran. Given the Iranian regime’s history of squandering its wealth on corruption and terrorism instead of supporting the Iranian people, we have developed a framework to guard against such theft and assist foreign governments and foreign financial institutions in establishing a payment mechanism to facilitate legitimate humanitarian exports to Iran. Through this mechanism, no revenue or payment of any kind will be transferred to Iran.

Importantly, this path restricts the Central Bank of Iran’s (CBI) role in facilitating humanitarian trade, which is critical because the CBI and its senior officials have facilitated significant funds transfers to terrorist organizations. Iran’s deceptive financial practices and its deficient anti-money laundering and countering the financing of terrorism (AML/CFT) regimes can make it extremely difficult to determine who is on the other end of an Iranian transaction. Our designation of CBI under Executive Order 13224 puts governments and financial institutions on notice that engaging in transactions with the CBI may make them complicit in the CBI’s support of terrorism.

This mechanism, designed solely for the purpose of commercial exports of agricultural commodities, food, medicine, and medical devices to Iran, will provide unprecedented transparency into humanitarian trade to Iran and help ensure that humanitarian goods go to the Iranian people, and are not diverted by the Iranian regime to fund its nefarious purposes. To achieve this transparency, participating governments and financial institutions must commit to conducting enhanced due diligence to mitigate the higher risks associated with transactions involving Iran. Such stringency is merited given Iran’s status as the largest state sponsor of terrorism, as well as its continued failure to implement key AML/CFT safeguards established by the Financial Action Task Force (FATF), the global standard-setting body for combating money laundering and the financing of terrorism and proliferation. The enhanced due diligence requirements are informed by appropriate FATF standards.

As set forth below in greater detail, this framework will enable foreign governments and foreign financial institutions to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions in exchange for foreign governments and financial institutions committing to provide to Treasury robust information on the use of this mechanism on a monthly basis.

If foreign governments or financial institutions detect any potential abuse of this mechanism by Iranian customers, or the involvement of designated individuals or entities, they will be required to immediately restrict any suspicious transactions and provide relevant information to Treasury.

This mechanism also can be used by U.S. persons and U.S.-owned or -controlled foreign entities, as well as other non-U.S. persons. Of course, U.S. persons and U.S.-owned or – controlled entities must still comply with existing requirements under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) for humanitarian exports to Iran, as implemented through OFAC’s regulations.

Enhanced Due Diligence and Reporting Expectations

Provided that foreign financial institutions commit to implement stringent enhanced due diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions

Host nation foreign financial institutions and their governments, as appropriate, will be expected to collect, maintain, and report to Treasury, with appropriate disclosure and use restrictions, a great deal of information on a monthly basis. Treasury will evaluate the information it receives in making any determination about whether the transactions continue to meet the stated due diligence and reporting expectations. Treasury will seek to protect information identified by the submitter, consistent with applicable laws and regulations.

The following is an illustrative list of documentation and information that Treasury and State may require depending on the nature of transactions:

1. The information used to identify the Iranian customers and to verify their identities and beneficial ownership;

a. For legal persons or arrangements, this would include the information used to identify and verify the existence of the entity or arrangement (company name, legal form and status, proof of incorporation, basic regulating powers, the registered address, list of directors, and principal place of business), and information sufficient to understand the nature of the Iranian customers’ business, ownership, and control structure;

b. For legal persons, information sufficient to identify and verify the identities of the natural person(s) who are beneficial owners. For legal arrangements, information sufficient to identify and verify the identities of the natural person(s) who are the settlor, trustee(s), protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the legal arrangements;

2. The information used by both the host nation’s foreign financial institutions and any Iranian financial institution involved to understand the purpose and intended nature of the business relationship between the seller of the humanitarian goods and the Iranian customer;

3. Monthly statement balances with the value, currency, and balance date of any account of an Iranian financial institution held at the participating host nation’s foreign financial institutions that is being used for humanitarian transactions, in .csv format;

4. A list of Iranian designated individuals or entities1 with which the Iranian customers indicate they currently have business relationships;

5. Detailed information regarding the commercial elements and logistics of the transaction that would be transmitted between the seller of humanitarian goods and the customer in the normal course of financial messaging, which could include:

a. customer information, including the identities of all consignees and intermediaries involved in the transactions;

b. information about the Iranian customer and the seller of the humanitarian goods and the Iranian financial institution’s payment order explanation or narrative linked to the contracts for the sale of humanitarian goods;

1 Persons designated on the List of Specially Designated Nationals and Blocked Persons under a program other than solely the Iranian Transactions and Sanctions Regulations (31 C.F.R. Part 560), and carrying a tag other than solely the “[IRAN]” tag.

c. order transaction amount and currency;

d. date of transaction order;

e. names of all involved financial institutions;

f. bills of lading, airway bills and invoices, as well as other relevant documents that verify the export to and entry into Iran of the goods;

g. the beneficiary’s identity; and

h. the beneficiary’s bank.

6. A written commitment from any Iranian distributors involved in the transactions that they will not allow the goods to be sold or resold to Iranian designated individuals or entities and that the Iranian distributor will impose this obligation on downstream customers;

7. Additional information obtained regularly throughout the course of the host nation foreign financial institutions’ ongoing due diligence of the business relationship that is necessary to verify the consistency of the transaction with the purposes of the humanitarian channel, including host nation’s foreign financial institutions’ knowledge of the Iranian customers and their business and risk profiles;

8. If, through the course of the host nation’s foreign financial institutions’ enhanced due diligence, Iranian customers are found to have attempted, or are suspected of, misuse of the humanitarian channel, the participating host nation’s foreign financial institution will immediately restrict any suspicious transactions and provide relevant information to Treasury when permitted; and

9. If a host nation foreign financial institution finds that an Iranian customer had previous ties (within five years) to U.S.-, U.N.-, or EU-designated entities or individuals, the host nation foreign financial institution will provide to Treasury detailed information regarding any changes to those ties, such as a change in beneficial ownership or control of the Iranian customer.

In certain circumstances, Treasury and State may require other information.

Interested foreign governments and foreign financial institutions should reach out to Treasury for more information or with any questions.

Links:

Treasury Press Release

Section 311 Final Rule

OFAC Guidance

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