As attention continues to focus on efforts to deny Iran the ability to further its nuclear weapons program by crippling its economy, the United States is expanding the universe of people and entities placed on OFAC’s List of Specially Designated Nationals (SDN) and Blocked Persons. In fact, starting July 1, Section 1244 of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA) represents a significant expansion of activities and entities potentially subject to sanctions, including key Iranian industries such as energy, shipping, shipbuilding and automotive.
This latest round of regulations not only presents several challenges to U.S. banks, but also greatly expands extra-territorial reach. The broadened mandates state the president reserves the right to impose sanctions on anyone who knowingly sells, supplies or transfers significant goods or services used in connection to the energy, shipping, automotive and shipbuilding industries, along with a ban on shipments of precious metals and other materials such as coal and graphite.
Further, underwriting and insuring anyone on the SDN list in the energy, automotive, shipping and shipbuilding industry or in the transfer of “banned goods” into Iran is prohibited. Any foreign financial institution that knowingly facilitates a significant transaction on behalf of an Iranian on the SDN list can have their correspondent and payable through accounts terminated with a U.S. bank. Similar enforcement actions were taken last year with the release of the OFAC Part 561 list which resulted in two banks finding themselves shut out of the U.S. banking system. Both were sanctioned for providing significant financial services for Iranian banks designated by the United States as having connections to Iran’s Weapons of Mass Destruction program.
So, the question arises: Are banks likely to fall under the jurisdiction of IFCPA prepared to face these challenges come July 1, 2013? More specifically, are appropriate compliance systems and data sets current, especially since some of the much needed data points won’t be available in the OFAC SDN list?
It may be easy to assume, in light of such expanded mandates, that every transaction with Iran should be restricted and blocked. This may be the situation for U.S. banks because regulations regarding Iran is clear and comprehensive, but this may not be the case from a global perspective. Although Iran can be considered a high-risk jurisdiction in light of U.S. regulations and U.N. sanctions, regulations for transactions of seemingly benign products from non-U.S. banks are less clear. Thus, are financial institutions really prepared to take such a wide-ranging and indiscriminate approach, especially if the transaction is for a shipment of office products such as printers or pencils?
It is increasingly evident that with IFCPA coming into effect July 1, the sanctions compliance programs for many organizations will need to be re-examined. Such review may uncover the need to cooperate closer with other departments, such as trade finance or sales, and the general impact the latest regulation has on the organization. For example, graphite is a material that is specifically banned and any underwriting activity facilitating the transfer of graphite into Iran is sanctioned under the IFCPA. Like heavy water, graphite can be used to moderate nuclear fission reactions. As a result, it can be used in nuclear reactors, with Chernobyl being one of the more notable graphite moderated reactors. However, we all know that graphite is more commonly used in pencil lead. The question is therefore whether current compliance processes can accurately identify banned goods, and if a financial institution’s compliance programs are focusing on the right departments.
Some international banks may already be well prepared with country risk ratings and the compliance framework to completely reject businesses in certain jurisdictions as the risks far outweigh the benefits while other banks may not be. Regardless of this spectrum, taking a more proactive rather than reactive approach to work with corporate clients in educating them on the risks involved and decisions taken on certain businesses will better position them should the bank decide to reject the transaction. Also, ensuring the right technologies are available to the trade finance team and having a well established process for trade and compliance is essential to complying with these new regulations. The adage that compliance is a mindset that should be owned by the entire organization is critical as sales, trade and compliance must work together. As evidenced by recent sanctions violations, the consequences of non-compliance have never been more worrisome. David Pan is a product manager in the risk compliance group BankersAccuity