This week, U.S. Secretary of State John Kerry accepted the Chatham House prize for his efforts to forge a peaceful resolution to the decades-long nuclear dispute with the Islamic Republic of Iran. While celebrating the diplomatic achievement, Secretary Kerry was pressed on the long-term sustainability of the nuclear accord – particularly in light of lingering issues relating to the lifting of U.S. nuclear-related sanctions targeting Iran.
Intensive questioning started off with the Secretary’s former colleague – former British Ambassador to the U.S. Peter Westmacott – who worried over the reluctance of global financial institutions to re-engage their Iranian counterparts so long as stringent U.S. bilateral sanctions on Iran remained in place. It is the Secretary’s response to Ambassador Westmacott’s question, though, that is the real point of interest. According to Secretary Kerry:
The problem is that we [the U.S.] agreed to lift certain sanctions. So OFAC…has come out and made it very, very clear that if you do due diligence in the normal fashion, no extra due diligence, just normal due diligence for whoever it is you’re opening an account for or for ever – whatever lending you’re about to do, and later it turns out it was some unforeseeable entity that pops up, you will not be held accountable for that. And so what we’ve done is we’ve been trying to reduce the level of risk so that people will begin to engage in broader range of lending. Why are we doing that? Because the deal we made was that sanctions would not continue to interfere with their [Iran’s] ability to do a normal course of business and regrettably because of some of the uncertainties about OFAC or some of the uncertainties about who’s doing what, it hasn’t been. And we’re trying to change that.
Few can doubt the sincerity of Secretary Kerry’s remarks, nor – for that matter – the sincerity of the Secretary’s desire to ensure that the United States is credibly fulfilling its JCPOA-related sanctions-lifting obligations. However, certain of the Secretary’s claims are just not true and warrant concern that there is a fundamental disparity between the information being put out by the State Department and that being communicated by OFAC regarding the scope and application surviving U.S. sanctions.
For instance, Secretary Kerry remarks that OFAC has stated – on record – that banks needs only conduct “normal due diligence” when engaging in transactions involving Iran. Yet, no such policy statement appears in OFAC’s Frequently Asked Questions (FAQs) Relating to the Lifting of Sanctions Under the JCPOA. Rather, as FAQ M.2 indicates, “OFAC recommends that a person considering business in Iran or with Iranian persons conduct due diligence sufficient to ensure that it is not knowingly engaging in transactions with the IRGC or other Iranian or Iran-related persons on the SDN List, and keep records documenting that due diligence.” Elsewhere, OFAC notes that “[s]creening the names of Iranian counterparties against the SDN List is a step that would generally be expected, but that [would] not [be] necessarily sufficient,” while “consider[ing] the appropriate level of due diligence to depend on [a] financial institution’s role in a transaction.”
Public statements from Treasury officials suggest that enhanced due diligence is appropriate for transactions related to or involving Iran. Recently, the Acting Undersecretary for Terrorism and Financial Intelligence Adam Szubin stated that non-U.S. financial institutions would be required to apply “an enhanced level of due diligence” to transactions involving Iran in order to avoid engaging U.S.-sanctioned Iranian parties. Other U.S. officials, however, have suggested – as does OFAC’s own FAQs – that it is not up to OFAC or other U.S. regulatory authorities to prescribe the standards governing the expected level of due diligence to be undertaken by non-U.S. parties, including banks, while engaged in dealings with Iran, as that is primarily the responsibility of local regulatory authorities.
Furthermore, the U.S. Treasury Department has found (and continues to find) Iran to be a “jurisdiction of primary money laundering” concern pursuant to Section 311 of the USA PATRIOT Act and has issued a (still-outstanding) Notice of Proposed Rulemaking (“NPRM”) requiring U.S. financial institutions to apply enhanced due diligence when maintaining correspondent accounts for foreign banks operating under a banking license issued by Iran. Most U.S. banks also apply enhanced due diligence to correspondents that serve customers who perform transactions with or otherwise involving Iran or Iran-related parties. Moreover, OFAC considers it “best practice” for those in the securities industry “to identify customers who do business in or with countries or persons subject to U.S. sanctions,” including Iran. OFAC notes that “[s]uch customers may warrant enhanced due diligence because of an increased risk that they will use their accounts to hold assets or conduct transactions for third parties subject to sanctions.”
Even global regulatory authorities have urged local jurisdictions to ensure that non-U.S. parties apply enhanced due diligence to Iran-related transactions. Last month, the Financial Action Task Force released its October 2016 Public Statement regarding jurisdictions subject to a call on Member States to apply counter-measures or enhanced due diligence measures. Iran was again included on the FATF Public Statement, and, as part of that Public Statement, FATF reiterated its “call on its members…to continue to advise their financial institutions to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran…” Local regulatory authorities – FATF members or not – are expected to abide by the recommendations issued by FATF and implement its calls into their administrative practice.
In short, there are plenty of public examples in which U.S. and non-U.S. banks alike are expected to apply enhanced due diligence to transactions involving Iran or to customers involved in dealings related to Iran. If it is the case that non-U.S. banks need only apply “normal due diligence,” per the Secretary’s remarks, that would be news to me and to the U.S. regulatory agencies tasked with promulgating such rules and overseeing their practical implementation. While the Secretary is attempting to restore confidence so that global financial institutions re-engage their Iranian counterparts and support Iran-related trade, the danger of his remarks is two-fold: (1) non-U.S. parties take him at his word and conduct “normal due diligence” in such a manner as to be inappropriate considering the risks involved, thereby exposing themselves to potential sanctions liabilities in the United States; or (2) non-U.S. parties hear what is confused and contradictory messages emanating from Washington, underscoring the need for patience in re-engaging Iran absent clarity on the scope and application of surviving U.S. sanctions. In neither case will confidence be restored so as to ensure Iran realizes the full benefits of the sanctions-lifting under the nuclear accord.