For nearly two (2) years, we have received numerous questions regarding amounts frozen in the bank accounts of foreign financial institutions that belong to the Central Bank of Iran (CBI). Typically, these funds which have been frozen are revenues for the purchase of Iranian-origin oil, and the reasons cited for the blocking are U.S. sanctions. The underlying reasons for why these funds are being blocked by banks in foreign jurisdictions which may not directly be mandated to block those funds pursuant to laws in their own jurisdiction is varied and complex. However, there is some guidance contained in the Frequently Asked Questions (FAQs) on the United States Department of the Treasury’s Office of Foreign Assets Control’s (OFAC) website which provides some insight.

It is important to understand that recent U.S. legislative and regulatory authorities have threatened to cut off foreign financial institutions from the U.S. financial system if they engage in “significant financial transactions” on behalf of CBI. This authority first came about in Section 1245 of the National Defense Authorization Act (NDAA). Despite the fact that the NDAA carves out an exception for humanitarian trade (food, medicine, and medical devices), many banks are refusing to release CBI funds even for transactions related to this type of trade. One reason for this may be found in guidance from OFAC’s FAQ 179. That FAQ provides a response to the question of whether or not the definition of “significant financial transaction” excludes the passive holding of CBI reserves, and whether or not assurances will be given that such passive holdings will not be the basis of sanctions. In its response, OFAC indicates that while it has to look at every matter on a case by case basis to determine what the specifics of passive holding entails, that generally OFAC does not deem holding of such reserves sanctionable if: 1) the accounts are frozen or restricted, 2) were already opened as of December 31, 2011, and 3) CBI is unable to direct the disposition of those funds. There is no mention of humanitarian trade in this FAQ.

As such, if you are in the position of a bank compliance officer of a foreign financial institution reading this FAQ, it seems natural to believe that as long as you are maintaining a block on CBI funds in your bank that you should be in the clear. This seems to be exactly what a lot of banks are thinking and doing. By not allowing any transactions in relation to the CBI funds, the rumor has gotten out that OFAC has blocked the funds. This is inaccurate. OFAC hasn’t blocked them, it has just made it attractive for foreign financial institutions to take the initiative to block the funds themselves, in order to avoid losing access to the U.S. financial system. With guidance like this its no surprise that foreign financial institutions elect to play it safe and sua sponte block funds citing U.S. sanctions, when in reality U.S. sanctions do not mandate that they block funds; they only make it attractive to do so.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.