In the debate surrounding whether Congress should accept or reject a nuclear deal with Iran, there have been a surplus of claims regarding what sanctions can or cannot do in the event Congress overrides a presidential veto and torpedoes sanctions relief. One of the claims that seem to persist is that if Congress were able to prevent the President from issuing waivers suspending secondary sanctions, companies could still be subject to massive financial penalties for violations of these sanctions. This represents a fundamental misunderstanding of the legal authorities upon which U.S. sanctions are based. The argument also fails to accurately describe the basis for the large sanctions-related fines imposed in the last few years on international financial institutions.

While by no means the only source of the mischaracterization of U.S. sanctions authorities, this press release from the American Israel Public Affairs Committee is representative:

Even if the president chooses to de-designate Iranian banks, international financial institutions are unlikely to quickly resume their ties with Iranian banks. They would reasonably fear opening themselves up to multi-billion dollar fines by a future administration and potentially losing access to the U.S. market.

There are 5 general categories of consequences for sanctions violations under U.S. law:

• Civil penalties;
• Criminal penalties;
• Asset Blocking;
• Prohibition on Opening/Maintaining Correspondent Account; and
• Iran Sanctions Act (“ISA”) Menu

Of these 5 categories, only civil and criminal penalties can result in the “multi-billion dollar fines” described above. But in order for civil or criminal liability to attach, U.S. regulators, or law enforcement require a jurisdictional hook, i.e. some part of the activity needed to involve the United States or U.S. persons.

In the various bank cases, the jurisdictional hook was that the transactions in question were dollar payments that passed through the U.S. financial system; in most if not all the incidents this meant branches or correspondents in New York. Furthermore, the vast majority of the Iran-related violations were not due to dealing with prohibited parties, but for stripping the names of Iranian financial institutions or companies from wire transfers in order to avoid triggering filtering software.

The reason that major international financial institutions were able to process such a high volume of dollar transactions, which eventually led to sky-high fines, is that prior to 2008, they were allowed to do so under the so-called “U-Turn License.” U-Turn transactions allowed U.S. financial institutions to process Iran-related dollar payments so long as 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. It became common practice to remove any reference to Iran from payment messages because bank software designed to catch sanctions violations would regularly delay transactions, causing major headaches.

But with the U-Turn License no longer in force, international banks are no longer processing dollar payments on behalf of Iranian financial institutions. With no U.S. jurisdictional hook, there is no ability to impose significant monetary fines for violations. The only available option to punish sanctions violators would be asset blocking, correspondent account bans, or various ISA sanctions, depending on what sanctions provision was violated. Prohibiting a major foreign financial institution from dealing the United States would likely trigger a significant negative reaction from the foreign government with primary jurisdiction over that institution.

It should be noted that the misunderstanding described above is not limited to advocacy groups debating the Joint Comprehensive Plan of Action. Many companies still do not understand what triggers a particular sanctions-related penalty. That said, while placement on the SDN list may remain a deterrent against future violations of secondary sanctions, most financial institutions have learned their lesson. Banks considering returning to the Iranian market are already on notice and will be careful to avoid transacting in dollars, which means massive financial penalties should not be a significant consideration going forward.