With the Iranian Presidential elections exactly one month away the U.S. has taken the opportunity to ratchet up sanctions on the Islamic Republic. Last week, both the President and Congress took aim at Iran vis a vis the utilization of economic sanctions. The President acted when Treasury designated an individual, as well as a number of vessels and entities, under Executive Orders 13382 and 13599. While Congress didn’t necessarily take immediate action a bill was introduced in the Senate which would target Iran’s ability to obtain and use foreign currencies. The bill, known as the Iran Loophole Elimination Act, provides authority to apply sanctions to parties who knowingly facilitate foreign exchange transactions in a currency other than the currency of that person or entity’s home country, on behalf of the Central Bank of Iran or any Iranian financial institution designated pursuant to the President’s authority under the International Emergency Economic Powers Act (IEEPA), or as described in the Iran Freedom and Counter Proliferation Act (IFCPA).

Of last week’s actions, the new legislation has the potential to have the greatest impact. This is particularly true because although it provides a rule of construction relating to the non-applicability of the authority on humanitarian trade in agricultural commodities, medicine, and medical devices, it still requires that such trade be done in the currency of the country which the person facilitating the transfer is operating in at the time. For example, a bank in Japan could still facilitate sales of medicine on behalf of Iranian banks with correspondent banking relationships, however, it could only facilitate that trade in Yen; there could be no exchange of the Yen into Euro, or any other currency, as it may do so now to facilitate the trade, lest the Japanese bank be subject to targeting for sanctions by the U.S.

If this bill is passed, a major issue will need to be resolved through guidance from the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC). That issue is what the law means by “designated” under IEEPA. As readers of this blog might remember, on February 5, 2012, President Obama issued Executive Order 13599 which blocked the Government of Iran and all Iranian financial institutions. That executive order was issued, in part, pursuant to the President’s authority under IEEPA. However, that action is commonly viewed as a blocking action, as a opposed to a designation. Indeed, there was some open discussion regarding the difference between a blocking vs. a designation at a recent OFAC Symposium. Essentially, blocking means that any non-exempt, or non-authorized transaction in which a blocked party has an interest which enters into the U.S. financial system must be blocked. If the transaction is exempt, or authorized, however, a party that is solely blocked can still have an interest in that transaction. On the other hand, if a party is designated, such as one targeted for sanctions under Executive Order 13382, then that party can have no interest in the transaction regardless of whether OFAC has otherwise authorized it or not.

If OFAC determines that Congress, by stating “designated under IEEPA”, means the application of any type of sanction under IEEPA, this new bill spells big trouble for humanitarian trade with Iran. Since a large volume of trade for humanitarian products with Iran is done in Euro, it would be very damaging to such trade if private Iranian financial institutions did not have the ability to obtain such Euro. Also, if this legislation is to pass, it is likely that foreign financial institutions will close down those Euro and other currency accounts for those private Iranian financial institutions at which point the Iranian financial institutions will have to depend solely on local currency accounts. The problem with that is that those local currencies are in denominations through which international trade rarely takes place. Most international trade is done in Dollars or Euro, not different varieties of currencies. It has been widely rumored, that some exporters have already turned down trade with Iran because the Iranian importers involved could not conduct the trade in Euro and wanted to make payments in alternative currencies. For various reasons this has turned the exporters and they are shying away from humanitarian trade rather than concerning themselves with dealing in alternative currencies. From our experience and understanding, there are few, if any, European banks still holding Euro accounts for Iranian financial institutions, so this new legislation could prove a damaging blow to humanitarian trade with Iran.

Even if OFAC were not to take the position indicated above, and the U.S. government did not make it a policy to sanction those parties facilitating trade in non-local currencies with private Iranian financial institutions, many foreign financial institutions will likely take the position that the risk of sanctions is too great to maintain the non-local currency accounts of any Iranian financial institutions. In sum, whether its through official U.S. government policy or through private sector over compliance, it looks like all Iranian financial institutions are going to lose their ability to transact in multiple currencies from the few foreign financial institutions still willing to do business with them if this bill passes. The net result of this could spell big trouble for humanitarian trade with Iran and could portend a growing reliance by Iran to utilize informal value transfer systems such as hawala to carry out such trade.

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.