<http://counterterrorismblog.org/2007/10/treasury_sanctions_on_iran_wil.php> Treasury Sanctions On Iran Will Have Commercial Impact For Foreign Banks Today, October 25, 2007, 3 hours ago | Jonathan Winer <http://counterterrorismblog.org/2007/10/treasury_sanctions_on_iran_wil.php> Go to full article http://counterterrorismblog.org/2007/10/treasury_sanctions_on_iran_wil.php At first blush, some may find it easy to shrug off today's Treasury sanctions on Iran as not being meaningful on the ground that these designations are unilateral by the United States and so far have not been joined by any other country. It's also accurate that as a practical matter, the effect on U.S. companies and persons in the U.S. is probably minimal, because such U.S. persons could not have done business with them previously under OFAC's Iranian Transactions Regulations to the extent they were "in Iran" or "owned or controlled" by the Government of Iran, which most of them are. But both of these realities miss the point, as the sanctions have real bite in two ways, the first, immediately; the second, for a long time to come. The first bite comes because the designations require blocking of assets (as opposed to mere rejection of transactions) and the naming of the Iranian banks should effectively terminate U.S. Dollar clearance in relation to Iranian transactions. As a result, Iran can no longer conduct U.S. Dollar denominated transactions, including outside the U.S., because U.S. banks can no longer clear Dollars where the designated Iranian banks were in the transactional chain. Thus, if you are a foreign bank with a U.S. Dollar denominated transaction outside the U.S. that came from Iran's largest bank, Bank Melli, there is no lawful way for you to clear those Dollars through the U.S. That effectively shuts this business down immediately, and in the short term, the foreign banks are also going to have to figure out legal ways to dispose of the Dollars without violating U.S. law in the process. The second bite is that foreign banks still doing business with the designated Iranian entities, including the Iranian banks, face the risk of the U.S. using its Patriot Act Section 319 authority to seize funds of such banks held at correspondent accounts in the U.S. and treat them as fungible with any assets they hold of the sanctioned Iranian banks. Already, foreign banks routinely screen transactions against the Office of Foreign Assets Control "SDN" list of sanctioned entities. When a "hit" arises, compliance officers have to have policies and procedures in place to address the risk associated with the "hit." Here, the risk is that the U.S, if it finds out will seize the equivalent amount of funds of the foreign bank itself held at a U.S. bank. That's a significant liability for a bank to accept, and to avoid that risk, any number of foreign banks may say to Iran, "sorry, we just cannot take your business right now." Other financial institutions may be willing to considering helping Iran in laundering its money. But the risks of doing that will be considerable, and institutions that get caught could face real long-term consequences of loss of access to important parts of the payments system, as knowingly mischaracterizing a financial transaction if detected could lead to many forms of liability, and in many locations. There's another important element to today's sanctions, and that is the preliminary spade-work done by the U.S. Treasury in pushing for and successfully securing the adoption earlier this month by the Financial Action Task Force of language recognizing that Iran is a money laundering risk for all countries due to its lack of any meaningful anti-money laundering controls. The FATF language is worth revisiting, in light of the new US sanctions. It states that the FATF "is concerned that the Islamic Republic of Iran's lack of a comprehensive anti-money laundering / combating the financing of terrorism (AML/CFT) regime represents a significant vulnerability within the international financial system. . . FATF members are advising their financial institutions to take the risk arising from the deficiencies in Iran's AML/CFT regime into account for enhanced due diligence." In short, if you are a financial institution based in any country subject to FATF standards, which today means essentially everywhere with access to the international payments system, you have to do enhanced due diligence on any Iranian transaction. Given today's U.S. announcement, that means banks will have to assess the degree of proliferation risk, laundering risk, and santions-busting risk in connection with any Iranian transaction. The impact here to Iran in terms of increased cost of doing business, decreased availability of use of the international payments system, delays in payments processing for goods and services, will be real and palpable, even as Iran shifts from Dollar denominated activity to Euro-based transactions when it sells its oil. We may not know for some time whether this action by the U.S. produces changes in Iranian behavior. But it certainly creates incentives for officials in the Iranian government to consider what Iran can do to get the U.S. off its back. Notably, the sanctions will pinch not just the government, but make it harder for the officials themselves to see the world. Those kind of personal limitations have caused senior figures in other governments to re-evaluate their relationship to the U.S. We should not underestimate the potential of today's actions to have an impact some of those in Iran who have the power, if they wish, to bring about change. (F)AIR USE NOTICE: All original content and/or articles and graphics in this message are copyrighted, unless specifically noted otherwise. All rights to these copyrighted items are reserved. Articles and graphics have been placed within for educational and discussion purposes only, in compliance with "Fair Use" criteria established in Section 107 of the Copyright Act of 1976. The principle of "Fair Use" was established as law by Section 107 of The Copyright Act of 1976. 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