It is being reported that U.S. Undersecretary for Terrorism and Financial Intelligence, David Cohen, has warned a number of Chinese banks that they could face blacklisting and U.S. economic sanctions for transaction with blocked Iranian entities, including Moallem, an Iranian insurance company already designated as a Specially Designated National (SDN). Moallem is accused of providing insurance to vessels owned or controlled by the Islamic Republic of Iran Shipping Lines (IRISL), an entity designated as an SDN for allegedly aiding in Iran’s nuclear proliferation efforts.

While on one hand I understand Undersecretary Cohen’s logic and I would have a pecuniary interest in seeing more entities sanctioned (as it could lead to more work), I disagree with such a move. Undersecretary Cohen, if you are listening (or reading), I respectfully submit the following for your consideration:

1. Poor OFAC. The United States Department of the Treasury Office of Foreign Assets Control (OFAC), the agency tasked with the administration and enforcement of U.S. economic sanctions, is already under-budgeted, over-worked, and incredibly backlogged. Designating these banks would add tons of work for OFAC’s compliance, licensing, and enforcement divisions. In the Al-Haramain case, lawyers for the government contended that putting together an unclassified summary of the bases for a particular designation would be so burdensome as to prevent OFAC from effectively accomplishing its mission. If this is so, then I can only imagine what sanctions against major Chinese banks would do; particularly in a year where OFAC has already had to account for new sanctions against Syria, Libya, and Transnational Criminal Organizations.

2. The Cat and Mouse Game. Imposition of sanctions and the subsequent attempts at evading sanctions by their target is just an inherent part of the utilizing such financial measures to achieve foreign policy objectives. However, targets with extensive resources can continuously evade sanctions by using intermediates and setting up front companies and subsidiaries. In those scenarios, being targeted for sanctions becomes a cost of doing business. In other words, if it is less expensive to engage in evasive conduct and take the hit to their reputation rather than cut off the relationships that led to the imposition of sanctioning in the first place, the effectiveness of the sanctions is significantly diminished. This begs the question: does the U.S. government want to expend resources to chase down and target what could become an elaborate network of front companies and intermediaries to truly make such sanctions work?

3. The Underground. Related to point two above is that economic sanctions against banks and the attempts to evade them often lead to a variety of tactics to funnel funds through an underground network of money transmitters, hawaladars, and cash carriers. This network is not subject to reporting requirements nor do many of them keep records. A drastic move such as sanctioning Chinese banks doing business with blocked Iranian entities could have the effect of bolstering this underground economy as the aforementioned parties would need to be more heavily relied upon to transfer funds on behalf of the banks and their intermediaries.

While I disagree with a move to sanctions Chinese banks, I do acknowledge that I do not have access to the information that Undersecretary Cohen or the U.S. government has. However, I do hope any potential designation of foreign financial institutions for their dealings with Iranian entities is given sufficient thought and at a minimum the above points are considered. It will be interesting what actions will be taken to address these issues, however, this could be a defining moment for Undersecretary Cohen’s career at Terrorism and Financial Intelligence.

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@ferrari-legal.com.