On October 25, 2019, FinCEN issued a final rule imposing the Fifth Special Measure against the Islamic Republic of Iran as a “jurisdiction of primary money laundering concern” (“Final Rule”) under Section 311 of the USA PATRIOT ACT. The Final Rule will prohibit the opening or maintaining of a correspondent bank account in the U.S. for, or on behalf of, an Iranian financial institution. It also will prohibit the correspondent accounts of foreign financial institutions at covered U.S. financial institutions from processing transactions involving Iranian financial institutions.
According to the government’s press release:
“FinCEN’s action is based on its finding that international terrorists and entities involved in missile proliferation have transacted business in Iran, and that Iran is a jurisdiction characterized by a high level of institutional corruption and weak AML/CFT laws,” said FinCEN Director Kenneth A. Blanco. “This action seeks to protect international financial institutions from the wide range of illicit finance risks emanating from this jurisdiction.”
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While extensive U.S. and international sanctions on Iran largely prohibit U.S. financial institutions from facilitating, directly or indirectly, transactions by Iranian financial institutions, this action requires U.S. financial institutions to apply special due diligence to their correspondent accounts to further guard against their improper indirect use by Iranian banking institutions. It also subjects U.S. financial institutions to penalties under the Bank Secrecy Act if they violate provisions of the final rule. Furthermore, it protects the U.S. financial system from Iran’s illicit financial activities by ensuring that U.S. financial institutions are not exposed to the Iranian regime’s support for terrorist groups, advancement of its ballistic missile program, and its fueling of armed conflicts in Syria, Afghanistan, Yemen, and elsewhere.
The Final Rule sets forth detailed findings to support its conclusion, which can be summarized highly as findings that: (i) the Iranian government engages in deceptive financial practices, such as the use of front and shell companies, to advance its ballistic missle arseneal; (ii) the Iranian government is extremely corrupt; (iii) Iran has continued to not address its AML/CFT deficiencies identified by the Financial Action Task Force, or FATF; and (iv) Iran continues to support groups identified by the U.S. government as terrorists, such as Hizballah, Hamas and the Taliban. Perhaps coincidentally, the Final Rule came just days after the U.S. government announced that it had indicted state-owned bank Halkbank with money laundering, bank fraud and sanctions offenses arising from the bank’s alleged involvement in a multibillion-dollar scheme to evade U.S. sanctions on Iran.
As to the practical steps required as a result of the Final Rule, covered financial institutions must apply to all of their foreign correspondent accounts special due diligence that is “reasonably designed to guard against such accounts being used to process prohibited transactions involving Iranian financial institutions.” This includes issuing a related notice to foreign correspondent account holders when the covered financial institution knows or has reason to believe that the account holder provides services to an Iranian financial institution (the Final Rule provides language for such a notice that FinCEN regards as acceptable).
In terms of the content of the required special due diligence, the Final Rule provides:
Special due diligence also includes implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving Iranian financial institutions. A covered financial institution is expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed an Iranian financial institution as originator or beneficiary, or otherwise referenced an Iranian financial institution in a manner detectable under the financial institution’s normal screening mechanisms. An appropriate screening mechanism could be the mechanisms used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC.
The Final Rule provides that it does not impose any additional record keeping obligations, although a covered financial institution must document its compliance with the notification required described above.
Finally, and concurrent with the Final Rule, the U.S. Deparments of the Treasury and the State announced “a new humanitarian mechanism to ensure unprecedented transparency into humanitarian trade with Iran.” This mechanism will apply to the commercial export of humanitarian goods to Iran, and will require participating foreign governments and financial institutions to “provide to Treasury a substantial and unprecedented amount of information,” as well as comply with other “stringent requirements.”