I’ve heard a lot of concern that U.S. regulators continue to punish foreign banks for violating U.S. sanctions on Iran and that this will cause foreign banks to be reluctant to re-engage with Iran following the provision of sanctions relief. For some, this is troubling at a time in which the U.S. will soon be relieving financial sanctions on Iran and facilitating Iran’s re-entry into the global financial order and could threaten to undermine the quid pro quo of the nuclear agreement between the U.S., other major world powers, and Iran.

It’s an elementary point, but one that is often lost and bears repeating: the big fines on non-U.S. banks for Iran sanctions violations are mostly for activities that took place prior to 2009 and, as a theoretical matter, should not impact the decisions of non-U.S. banks moving forward with Iran.

Credit Agricole, the latest victim, is the perfect example. According to the Consent Order agreed to with the New York Department of Financial Services (“NYDFS”), Credit Agricole “employed non-transparent methods to process more than $32 billion in U.S. dollar payments through [its] New York branch and other banks with offices in New York…” These “non-transparent methods” involved “internal instructions to omit the names of Sanctioned Parties; and the cover payment method…” The use of such methods took place “from at least August 1, 2003 through 2008,” which was taken as the “Review Period” by U.S. authorities.

For other major banks fined for Iran sanctions violations, U.S. regulators scrutinized the bank’s activities over similar timelines. For example, in Commerzbank’s case, the Review Period extended from October 2002 up to and including January 2010 (the latter period being reserved for Commerzbank’s processing of transactions involving specific Iranian clients). But the brunt of Commerzbank’s activities during the period prior to 2009 was “omitt[ing] references to Iranian financial institutions and replac[ing] the originating bank information with Commerzbank’s name” – in other words, wire-stripping the names of Iranian parties so that its U.S. branch would not see the true originator of any given payment message.

The timing is not coincidental – at least in the context of Iran. Up until November 10, 2008, a general license authorization existed for what are known as “U-turn” transactions – i.e., funds transfers for the direct or indirect benefit of Iranian persons, including the Government of Iran, “provided that such payments were initiated offshore by a non-Iranian, non-U.S. financial institution and only passed through the U.S. financial system en route to another offshore, non-Iranian, non-U.S. financial institution.” At the time that this license authorization was effective, foreign banks were able to transmit funds for Iranian parties through their New York-based branches for dollar-clearing purposes and on to recipients at third-country financial institutions.

What turned out to be problematic is that most major banks wire-stripped information on the beneficiary and/or the recipient from the payment messages, thereby avoiding any slow-down that would have resulted from their New York-based branches undertaking the necessary due diligence to make sure certain designated Iranian parties were not involved in the funds transfer in any manner. Some of the banks excused their conduct by arguing that they conducted the appropriate due-diligence checks prior to transmitting the funds through New York, though it was an excuse that fell on deaf ears to U.S. regulators.

Others contended that the use of the ‘cover method’ for certain payments, in which incomplete information as to the parties to any given transaction was standardized on the MT 202 General Financial Institution Transfer message, had the effect of leaving out information regarding either originator or beneficiary, but that this was standard practice at the time in which these transactions were being engaged.

The larger point, though, and barring non-U.S. banks’ excuses for their conduct, is that while some take these enormous fines as evidence that no banks will re-engage with Iran following the provision of sanctions relief, the fact is that the conduct for which these banks have been penalized took place prior to the period when the U.S. enacted secondary sanctions on foreign financial institutions engaged in certain transactions with Iranian parties and shortcomings in compliance have largely been remedied since that time. Indeed, if we think of Section 104(c) of the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (“CISADA”) as the major turning point in the U.S.G.’s use of financial sanctions against Iran, then these banks were penalized for conduct that largely predates the advent of that provision.

Moreover, the nuclear agreement does not reinstate the general license authorization for U-turn transactions. Even if banks were apt conceal the parties to any given funds transfer through their New York branches (a highly unlikely prospect in light of the fact that payment messages tend to contain significantly more information than they did a decade ago), there is no license authorization for them to do so in the Iran context in the first place. As such, these fines should have little consequence on banks’ willingness to re-engage with Iranian parties.

Will it, though? Partly yes, but that is because of the over-enforcement of sanctions and the desire of some major global financial institutions – such as Standard Chartered – to demonstrate to U.S. regulators that they are undertaking significant remedial measures to avoid similar sanctions violations in the future. Some of these are indeed couched as remedial measures, while being nothing of the sort at all (e.g., Standard Chartered refused to handle any future Iranian customers following the investigation by the NYDFS and other U.S. regulators into its wire-stripping practices.).

There is no reason why U.S. regulators cannot penalize banks for sanctions violations without forcing banks to leave the field altogether. Indeed, if the point of penalizing non-U.S. banks is to instill the value of U.S. sanctions compliance, then what we would want to see is foreign banks continue to engage in normal banking activities but undertake sanctions-compliance measures to ensure that those activities are not facilitating transactions that the U.S.G. has identified as anathema to its interests. For instance, non-U.S. banks can transact with Iranian parties but must take steps to exercise diligence and ensure that prohibited Iranian entities or individuals are not privy to those transactions or do not otherwise receive a benefit from them. That is how sanctions enforcement is supposed to play out.

Fears that U.S. fines on non-U.S. banks for Iran sanctions violations will somehow scuttle the nuclear agreement are understandable, but ultimately misplaced. Most major global financial institutions have internalized sanctions-compliance over the past decade and should be able to transact with Iranian parties without compromising their reputation or bottom-lines.