This past Thursday, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued advisory guidance concerning the use of exchange houses and trading companies to evade U.S. economic sanctions against Iran. Basically, the guidance stated that Iran is using third country exchange houses or trading companies as money transmitters to process funds transfers through the United States in support of business with Iran that is not exempt or otherwise authorized by OFAC. When I read the guidance, I thought it was strange that it was issued. The reason for my thinking this was because most people people who are working in the world of OFAC, sanctions, anti-money laundering, etc. already know this. Indeed, use of exchange houses and trading companies is one of the few ways funds can be sent out of and into Iran.

The majority of the guidance concentrates on the use of exchange houses and trading companies to mask prohibited transactions from coming into the United States and offers suggestions on how financial institutions can screen for such transactions. The problem here is two fold. First, due to restrictions on transferring funds into and out of Iran, the overwhelming majority of legitimate, licensed transactions are conducted by saraaf (money exchangers in Iran) who also utilize exchange houses and trading companies outside of Iran to wire funds to the United States. Second, this guidance may well have the effect of sending foreign financial institutions on a witch hunt to shut down the accounts of exchange houses and trading companies they believe to be facilitating transactions between Iran and the United States. While that could help shut off illicit transactions between Iran and the U.S., it also has the potential to impact the ability to transfer funds to the United States for legitimate purposes.

In all fairness to OFAC, there are two sentences in the last paragraph if the guidance which read as follows, “The Advisory is not intended to suggest that U.S. financial institutions close accounts they hold for third-country exchange houses and/or trading companies. Additionally, the Advisory should not be interpreted to signal that third-country exchange houses and/or trading companies are necessarily facilitating illicit finance.” While OFAC tries to hedge against the inevitable, it seems obvious that this guidance will cause at least some foreign financial institutions to consider shutting down the accounts of money exchangers and trading companies facilitating trade between the U.S. and Iran rather than incur the risk associated with facilitating prohibited activity. In the end, OFAC’s guidance, while noble in its intent, may adversely impact the ability to transfer funds out of Iran for legitimate, licensed transactions such as those for divestment, and payment for licensed exports.

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.