The Office of Foreign Assets Control (OFAC) is the financial intelligence and enforcement agency of the U.S. Treasury Department; more specifically, OFAC administers and enforces U.S. economic and trade sanctions. In the past, companies engaging in JCPOA-related, sanctions-exempt, or specifically licensed trade activities with Iran often sought, to little avail, detailed guidance from OFAC on what, in OFAC’s view, constituted sufficient due diligence and compliance programs. Until recently, interested parties relied on public releases of OFAC settlement agreements and financial penalty decisions for takeaways on best practices and mistakes to avoid, but this type of targeted analysis necessarily requires after-the-fact assessments and comparisons to complex, case-specific situations. OFAC’s May and October 2019 publications of additional guidance attempt to address these concerns in unprecedented detail.
OFAC’s May 2, 2019 General Guidance on Sanctions Compliance Programs
Earlier this year, OFAC took steps to clarify its expectations of compliance programs, by issuing its most comprehensive guidance to date. On May 2, 2019, OFAC issued, “A Framework for OFAC Compliance Commitments,” to encourage companies to “develop, implement, and routinely update” a risk-based sanctions compliance program (“SCP”). The guidance was intended for U.S. companies as well as non-U.S. companies, and laid out five “essential components” of an effective SCP: (i) management commitment; (ii) risk assessment; (iii) internal controls; (iv) testing and audit; and (v) training.
OFAC’s October 25, 2019 Iran-Specific Guidance on Humanitarian Trade, Due Diligence & Reporting Expectations
Most recently, on October 25, 2019, OFAC published a four-page document called “Financial Channels to Facilitate Humanitarian Trade with Iran and Related Due Diligence and Reporting Expectations” (the “Mechanism”), which purports to provide further guidance and set forth OFAC’s expectations concerning humanitarian trade with Iran. OFAC clarifies that the Mechanism is “designed solely for the purpose of commercial exports of agricultural commodities, food, medicine, and medical devices to Iran” (i.e., humanitarian, sanctions-exempt trade). According to OFAC, the Mechanism “will provide unprecedented transparency into humanitarian trade to Iran.” The Mechanism specifically applies to foreign governments and foreign financial institutions, the near-totality of which have withdrawn or abstained from humanitarian trade with Iran out of fear of reprisal from U.S. secondary sanctions.
The Mechanism was issued as part of the concurrent designation of Iran as a “jurisdiction of primary money laundering concern” under Section 311 of the USA PATRIOT ACT. This designation was not made by OFAC, but by a separate bureau of the U.S. Treasury Department, the Financial Crimes Enforcement Network (“FinCEN”), which collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. The designation prohibits correspondent accounts in the U.S. on behalf of Iranian financial institutions, and prohibits foreign financial institutions from processing transactions involving Iranian banks.
Under the terms of the Mechanism, “participating governments and financial institutions must commit to conducting enhanced due diligence to mitigate the higher risks associated with transactions involving Iran.” It contains an “illustrative list” of comprehensive enhanced due diligence protocols that OFAC says it “may require” depending on the nature of the transaction. As OFAC explains: “this framework will enable foreign governments and foreign financial institutions to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions in exchange for foreign governments and financial institutions committing to provide to Treasury robust information on the use of this mechanism on a monthly basis.”
In short, by committing to develop and implement enhanced due diligence procedures, and provide to OFAC a copious volume of information on a monthly basis, foreign governments and foreign financial institutions may be able to obtain written confirmation from OFAC that their intended humanitarian trade activities will not be exposed to U.S. secondary sanctions.
Practical Considerations of OFAC’s “Enhanced Due Diligence and Reporting Expectations”
OFAC indicates that it has issued the Mechanism to bar against illegitimate trade under the guise of humanitarian trade, to ensure transparency, and to promote greater understanding of U.S. sanctions laws and regulations. The “illustrative list” contained at pages three and four of the Mechanism provides much greater clarity as to the depth of OFAC’s due diligence expectations. The list is profoundly comprehensive, and observes a wide range of due diligence and Know Your Customer principles. Sanctions compliance experts will recognize many familiar themes in the Mechanism, from identity verification to designated persons to transactional logistics.
For the most part, none of this material should be surprising, particularly for large, sophisticated entities that have due diligence experience, sanctions-specific software methodologies, strong compliance programs, and budgetary resources to expend on due diligence of this nature. This being said, one of the counterintuitive and unintended consequences of long-term, broad economic sanctions is the erosion of a legitimate economic engine; this is because over time, sanctions push market forces into the willing arms of the black market, which in turn, stifles the development of transparent, sound business record-keeping practices. Thus, participants in heavily sanctioned economies such as Iran may struggle to meet the level of detail outlined in the Mechanism’s “illustrative list.”
OFAC acknowledges that the Mechanism includes a “great deal of information” to convey on a monthly basis. As noted above, much of it is information that generally would – and should – result from comprehensive, well-effectuated due diligence. But updating this amount of information and certifying its continued appropriateness and accuracy on a monthly basis is extremely costly and time-consuming. Thus far, OFAC’s monthly reporting requirements are proving to be the greatest source of concern for foreign governments and foreign financial institutions. Additionally, the proximity between OFAC’s October release of the Mechanism and Europe’s official launch of INSTEX in June 2019 has led some observers to opine that the Mechanism may be more of a deterrent to INSTEX and humanitarian trade, rather than – as suggested in the document’s title – to “facilitate” humanitarian trade with Iran.
The Mechanism provides some much needed clarity as to OFAC’s due diligence expectations and reporting requirements for foreign governments and foreign financial institutions engaging in humanitarian trade with Iran. However, the Mechanism may be prohibitive in terms of its monthly reporting requirements. As foreign governments and foreign financial institutions consider and perhaps attempt to implement the Mechanism’s criteria, they should remain alert for additional guidance and clarifications from OFAC, or seek interpretive guidance from the agency. In the midst of procedures being developed in the wake of the U.S. withdrawal from the JCPOA, whether it be INSTEX or OFAC’s recent publications, one thing appears certain: the humanitarian crisis in Iran has no meaningful end in sight for ordinary Iranians.
By Fiona Yang