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March 22, 2012 Re: CISADA and NDAA Amendments

Questions Presented: (1) Whether section 104 of the CISADA blocks licensed trade by treating the last unsanctioned Iranian banks as SDNs? (2) Whether government-owned foreign central banks will be required to halt all trade with Iran or else risk having their central banks sanctioned under the National Defense Authorization Act of 2012?

I.

A foreign financial institution will be susceptible to sanctions under the CISADA for maintaining a correspondent or payable-through account within U.S. jurisdiction if the foreign financial institution has knowingly engaged in a significant transaction with the Central Bank of Iran or any designated Iranian bank. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010

(CISADA) limits foreign financial institutions access to the U.S. financial system if foreign financial institutions engage in certain transactions with Iranian banks. 1 Pursuant to section 104(c) of the CISADA, the Treasury Department maintains the authority to prescribe regulations to prohibit, or impose strict conditions on, the opening or maintaining in the United States of a correspondent account or a payable-through account for a foreign financial institution that the Secretary finds knowingly engages in specified sanctionable activities, subject to certain waiver authorities provided to the Secretary in subsection 104(f) of CISADA.2 The Treasury Department has administered such regulations through the Iranian Financial Sanctions Regulations (IFSR).3 The IFSR defines a correspondent account as an account established by a U.S. financial institution for a foreign financial institution to receive deposits from, or to make payments on behalf of, the foreign financial institution, or to handle other financial transactions related to such

Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub. L. No. 111195, 124 Stat. 1312 (codified as amended at 22 U.S.C. 8501-8551 (2012)). 2 77 Fed. Reg. 11724 (Feb. 27, 2012). 3 Seen generally

foreign financial institution. 4 The IFSR defines a payable-through account to mean a correspondent account maintained by a U.S. financial institution for a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States.5 Section 561.201 of the IFSR allows the Secretary of Treasury to limit or prohibit a foreign financial institution from maintaining a correspondent or payable-through account in the United States if the foreign financial institution knowingly engages in one or more of five enumerated activities. 6 The enumerated activities include: 1) facilitating the efforts of the

Government of Iran to acquire or develop weapons of mass destruction or provide support for organizations designated as foreign terrorist organizations; 2) facilitates activities subject to financial sanctions pursuant to the United Nations Security Council resolutions; 3) engages in money-laundering to carry out activity described in 1) or 2); 4) facilitates efforts by the Central Bank of Iran or any other Iranian financial institution to carry out an activity described in 1) or 2); and 5) facilitates a significant transaction or transactions or provides significant financial services for Iran's Islamic Revolutionary Guard Corps or any financial institution listed in the Office of Foreign Assets Control's Specially Designated Nationals and Blocked Persons List (the SDN List).7 On February 27, 2012, the Treasury Department amended the IFSR to implement a new list of foreign financial institutions subject to section 561 and to impose new reporting requirements for the closing of a foreign financial institutions correspondent or payable-through account in the U.S. after the Secretary of Treasury has found that the foreign financial institution has engaged in prohibited transactions.8 First, the Treasury Department amended the IFSR to administer and publish a separate List of Foreign Financial Institutions Subject to Section 561. Prior to the amendment, the Treasury Department would list a foreign financial institution who

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31 C.F.R. 561.306 (Feb. 27, 2012). 31 C.F.R. 307 (Feb. 27, 2012). 6 Id. 561.201(a)(1)-(a)(5); see id. 561.314 (The term knowingly, with respect to conduct, a circumstance, or a result, means that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.). 7 Id. 8 Iranian Financial Sanctions Regulations, 77 Fed. Reg. 11724 (Feb. 27, 2012) (to be codified at 31 C.F.R. pt. 561).

engaged in significant transactions with a prohibited Iranian financial institution in OFACs Specifically Designated Nationals and Blocked Persons List. 9 However, now such foreign financial institutions are listed in a separate subsection of the IFSR, and the strict conditions imposed upon such foreign financial institutions are explicitly stated.10 Second, the IFSR has been amended to authorize a general license for U.S. financial institutions to close a foreign financial institutions correspondent or payable-through account after the Secretary of Treasury has prohibited the maintenance or opening of such an account in section 561.11 After the Secretary of Treasury has determined that a foreign financial institution is prohibited from maintaining a correspondent or payable-through account due to significant transactions with an Iranian financial institution, the IFSR grants U.S. financial institutions a tenday license to close the correspondent account without facing sanctions.12 Further, the IFSR requires that a U.S. financial institution file a report to the Treasury Department within thirty days of the foreign financial institutions account closing.13 The report must include complete information on all transactions processed or executed in winding down and closing the account. 14 A specific license may be issued on a case-by-case basis for U.S. financial institutions that fall outside the ten-day general license requirement.15 The CISADA amendments prevent foreign financial institutions from maintaining correspondent or payable-through accounts in the United States if the foreign financial institution engages in significant transactions with designated Iranian financial institutions. The Secretary of Treasury must first find that the foreign financial institution engages in one or more of the sanctionable activities under the CISADA. Once such a determination is made, the Secretary of Treasury can prohibit or impose strict conditions on the opening or maintenance of a foreign financial institutions correspondent or payable-through account in the United States. The recent CISADA amendments designate a new list of foreign financial institutions found to have engaged in a significant transaction with an Iranian financial institution. If the maintenance of a

Iranian Financial Sanctions Regulations, 77 Fed. Reg. at 11728. Id. 11 Iranian Financial Sanction Regulations, 31 C.F.R. 561.504(a) (2012) 12 Id. 13 Id. 14 31 C.F.R. 561.504(b). 15 561.504(c).
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foreign financial institutions correspondent account is not entirely prohibited, the list provides the strict conditions U.S. financial institutions must follow in maintaining such an account. Furthermore, the CISADA amendments provide a general license for U.S. financial institutions that maintain a foreign financial institutions correspondent or payable-through account once the Secretary of Treasury has deemed a foreign financial institution sanctionable. The CISADA also requires that U.S. financial institutions report to the Treasury Department regarding the closing of a prohibited account. As a result, no trade could be licensed if it were to offend Section 104 of CISADA. Therefore, there is no concern that licensed trade would be blocked by Section 104, as OFAC would either deny or revoke any license which sought to engage in a transaction which would violate that section. II. Government Owned Foreign Financial Institutions Face Potential Sanctions from the United States Government for Engaging in Trade with Iran only if the Trade Qualifies as a Significant Financial Transaction, and the Trade is for the Sale or Purchase of Petroleum or Petroleum Products to or from Iran. On December 31, 2011, the President signed into law the National Defense Authorization Act for Fiscal Year 2012 (NDAA).16 The NDAA formally designates the entire Iranian financial sector as posing terrorist financing, proliferation financing, and money laundering risks for the global financial system. 17 To combat money-laundering, section 1245(d)(1) of the NDAA sanctions foreign financial institutions that maintain correspondent or payable-through accounts in the United States if the foreign financial institution engages in significant transactions with the Central Bank of Iran or any designated Iranian financial institutions. 1245(d)(1) provides that the President: [S]hall prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account by a foreign financial institution that the President determines has knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran or another Iranian financial institution designated by the Secretary of the Treasury for the imposition of sanctions designated by the Secretary of the Treasury pursuant to [IEEPA].18

Specifically, section

National Defense Authorization Act for Fiscal Year 2012, Pub. L. No. 112-81, 1245 (2011). Id. 18 Iranian Financial Sanctions Regulations, 77 Fed. Reg. 11724 (Feb. 27, 2012) (to be codified at 31 C.F.R. pt. 561).
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Thus, a foreign financial institution will be susceptible to sanctions for: 1) knowingly engaging in a significant financial transaction; 2) with the Central Bank of Iran or a designated Iranian financial institution; 3) through the maintenance of a correspondent account or payable-through account in a U.S. financial institution. The NDAA prohibits foreign financial institutions from engaging in significant transactions not only with Central Bank of Iran, but also with any designated Iranian financial institution.19 The Iranian Sanctions Financial Regulations (IFSR) define a designated Iranian financial institution under section to include any Iranian financial institution whose assets are blocked by the Treasury Department under this chapter or whose assets are blocked under an Executive Order pursuant to the International Emergency Economic Powers Act, and whose name is listed on the Specially Designated Nationals and Blocked Persons List on the Office of Foreign Assets Controls Web site, except for any Iranian financial institution whose property and interests in property are blocked solely pursuant to Executive Order 13599 of February 5, 2012.20 The harsh sanctions imposed upon foreign financial institutions under the NDAA are limited by a number of conditions and exceptions. First, the NDAA does not impose sanctions upon foreign financial institutions for conducting or facilitating a transaction for the sale of food, medicine, or medical devices to Iran. 21 Second, foreign financial institutions will become susceptible to sanctions under the NDAA only if the Secretary of Treasury determines that the financial institution has knowingly engaged in a significant transaction with the Central Bank of Iran or any designated Iranian financial institution. 22 Finally, the NDAA sanctions privately-owned financial institutions and government-owned financial institutions differently; sanctions imposed upon a government-owned financial institution apply only if the transaction was for the sale of petroleum or petroleum products, whereas privately-owned financial institutions face sanctions for all transactions. 23 Therefore, the NDAA does not provide a mechanical and automatic sanctioning program to foreign financial institutions that maintain a

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Id. Iranian Financial Sanction Regulations, 31 C.F.R. 561.324 (2012) (emphasis added). 21 31 C.F.R. 561.203.
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561.203(f). 561.203(e).

correspondent or payable-through account in the United States; rather, an inquiry into the type of foreign financial institution and the conditions surrounding the transaction must be examined. A. A government-owned foreign financial institution will only face sanctions under the NDAA for the sale of petroleum or petroleum products. A foreign owned financial institution owned or controlled by the government of that foreign country is any foreign financial institution, including a central bank of a foreign country, in which a government of a foreign country owns a 50 percent or greater interest and any foreign financial institution which is otherwise controlled by a government of a foreign country.24 If a foreign financial institution is defined as being controlled or owned by a foreign country, that financial institutions significant transactions with the Central Bank of Iran or a designated Iranian financial institution will be susceptible to sanctions only on or after June 28, 2012, for the sale or purchase of petroleum or petroleum products to or from Iran.25 The NDAA distinguishes sanctions imposed upon privately owned foreign financial institutions and government owned or controlled foreign financial institutions. For privately owned foreign financial institutions, sanctions will apply sixty days after the enactment of the NDAA for transactions other than the purchase of petroleum or petroleum products from Iran.26 For privately owned foreign financial institutions engaging in transactions for the purchase of petroleum or petroleum products from Iran, sanctions pursuant to 1245(d)(1) become effective 180 days after the date of enactment of the NDAA.27 Conversely, a foreign financial institution owned or controlled by the government of a foreign country, including the central bank of a foreign country, will be susceptible to sanctions pursuant to section 1245(d)(1) beginning 180 days after the date of enactment of the NDAA and only for transactions for the sale or purchase of petroleum or petroleum products to or from Iran.28 In the instant case, a government owned or controlled foreign financial bank engaging in significant transactions with the Central Bank of Iran or a designated Iranian financial institution will be susceptible to sanctions under the NDAA only for transactions for the sale or purchase of

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31 C.F.R. 561.323 (2012). 561.203. 26 Iranian Financial Sanctions Regulations, 77 Fed. Reg. 11724, 11729 (Feb. 27, 2012) (to be codified at 31 C.F.R. pt. 561). 27 Iranian Financial Sanctions Regulations, 77 Fed. Reg. at 11729. 28 Id.

petroleum or petroleum products to or from Iran. 29 Additionally, for all foreign financial institutions engaging in transactions for the purchase of petroleum or petroleum products from Iran, sanctions will be applicable only if the President determines that there is sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. 30 Moreover, the President may waive sanctions pursuant to 1245(d)(1) if the President determines and periodically reports to Congress that the country with primary jurisdiction over that foreign financial institution has significantly reduced its volume of crude oil purchases from Iran during a specified period of time preceding the report.31 Thus, sanctioning a government owned or controlled foreign financial institution under the NDAA may vary depending upon the Presidents assessment of the sufficiency of the supply of petroleum and a countrys efforts to reduce petroleum products purchased from Iran. Section 1245 of the NDAA sanctions foreign financial institutions who maintain a correspondent or payable-through account within U.S. jurisdiction and who are found to engage in a significant transaction with a designated Iranian financial institution. However, the NDAA poses numerous restrictions and conditions prior to sanctioning a foreign financial institution. The NDAA does not sanction transactions for the sale of food, medicine, or medical devices to Iran. Further, purchasing petroleum or petroleum products from Iran will not result in sanctions for foreign financial institutions if the President determines that alternative supplies of petroleum are unavailable. Therefore, sanctions under the NDAA are not automatic in application, but rather are dependent upon the facts and circumstances surrounding the transaction.

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Id. Id. 31 Id.