US and non-US persons risk monetary fines and secondary sanctions, as well as negative commercial and reputational consequences, if they engage in prohibited transactions involving Iran. On October 11, 2018, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, issued a 19-page advisory to help US financial institutions better detect and report potentially illicit transactions involving Iran. FinCEN said the advisory is also intended to assist foreign financial institutions in better understanding the obligations of their US correspondents, avoiding exposure to US sanctions and addressing the anti–money laundering/combating the financing of terrorism (AML/CFT) risks Iran poses to the global financial system. FinCEN’s advisory does not merely provide information and guidance - it places financial institutions on notice of the types of deceptive practices that may be employed in transactions involving Iran.
FinCEN details several “typologies” (i.e., schemes) that the Iranian regime uses to access the international financial system while obscuring its activities. FinCEN cautions that Iran uses these illicit means to exploit “financial systems around the world to generate revenues and transfer funds in support of malign conduct” such as human rights abuses, support for terrorist groups and the Syrian regime, ballistic missile development and “other destabilizing actions targeted by US sanctions.”1
As the full array of US sanctions comes back into force on November 5, 2018, FinCEN expects Iran to increase its engagement in money laundering and other activities to evade the sanctions. Accordingly, financial institutions, such as banks, broker dealers, and other money services businesses, should implement robust screening processes to detect deceptive schemes in transactions that involve Iran, regions with strong economic or geographic ties to Iran, or other Iran-related risk factors.
The Iranian regime attempts to obtain access to the international financial system “to further its malign activities” using a variety of methods.2 These include masking illicit transactions through senior Central Bank of Iran (CBI) officials, misusing exchange houses and trading companies, running procurement networks that use front or shell companies, engaging in deceptive shipping practices and using precious metals and virtual currency to evade US sanctions.
The advisory provides background and additional information on these “typologies”:
Senior officials of the CBI have obtained currency and conducted transactions for the benefit of the Islamic Revolutionary Guard Corps-Quds Force (IRGC-QF) and Hizballah. For example, in May 2018, the US sanctioned then-CBI Governor Valiollah Saif and assistant director of CBI’s International Department, Ali Tarzali, for transferring funds through an Iraqi bank for the IRGC-QF’s benefit. FinCEN warns that some counterparty financial institutions may not be equipped to identify or address CBI officials’ deceptive transactions,3 which have employed personal accounts and individuals with no affiliation with the CBI or the Iranian government. Additionally, front companies of the IRGC-QF are known to retrieve funds in various currencies from CBI’s accounts in foreign banks and then transfer those funds back to Iran.
When monitoring payments involving third-country exchange houses or trading companies, financial institutions should consider: (1) requesting additional information on the parties involved and nature of such transactions; (2) conducting “account and transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate US sanctions against Iran”; and (3) contacting their “correspondents that maintain accounts for, or facilitate transactions on behalf of, third-country exchange houses or trading companies” engaging in Iran-related activities to request additional information and alert them on Iran’s use of such practices.4
FinCEN explains that “as part of a risk-based approach, financial institutions should familiarize themselves with these deceptive practices and take steps to avoid direct or indirect facilitation of them.”5
Financial institutions that provide services to the commercial aviation industry “should be aware of prior actions by designated Iranian airlines to evade sanctions,” and should exercise “appropriate due diligence to ensure compliance with legal requirements.”6 Foreign financial institutions may be subject to US sanctions for knowingly conducting significant transactions for, or providing material support to, designated Iranian airlines.
As the sanctions lifted under the Joint Comprehensive Plan of Action (JCPOA) come back into effect, Iranian companies may return to the use of such deceptive practices, and that financial institutions “may see indications of these deceptive shipping practices in the information contained in international wires, payment requests, and letters of credit.”7 Financial institutions should report any changes regarding the issuance or writing of letters of credit and other trade-related financial transactions in their Suspicious Activity Report (SAR) filings if the changes appear to be related to malign activity.
With US sanctions coming back into full force, financial institutions “should be aware of prior schemes used by entities with a nexus to Iran to evade sanctions using gold and other commodities."8
FinCEN recommends that institutions “should consider reviewing block-chain ledgers for activity that may originate or terminate in Iran,” and “should be aware that the international virtual currency industry is highly dynamic,” and that “new virtual currency businesses may incorporate or operate in Iran with little notice or footprint.”9
Financial institutions and virtual currency providers that have obligations under US sanctions and the Bank Secrecy Act (BSA) should be “aware of and have the appropriate systems to comply with all relevant sanctions and AML/CFT requirements.”10 A non–US based virtual currency provider or exchanger transacting substantial business in the US is “subject to AML/CFT obligations” and the jurisdiction of the US Treasury Department’s Office of Foreign Assets Control (OFAC), which administers and enforces US sanctions.11
FinCEN outlines certain red flags that could help financial institutions identify suspicious activity involving the activities described above. However, “no single transactional red flag necessarily indicates suspicious activity.”12 Rather, FinCEN says that financial institutions should consider taking into account additional indicators and the surrounding facts and circumstances, such as a customer’s financial history and the presence of other red flags, before concluding that a transaction is suspicious.
The specific red flags listed in the advisory are as follows:
US sanctions against Iran prohibit US financial institutions from opening or maintaining correspondent accounts on behalf of Iranian financial institutions. Additionally, absent an exemption or authorization, US sanctions prohibit foreign persons, including foreign financial institutions, from processing Iran-related transactions to or through the US, including “transactions through US correspondent accounts for or on behalf of Iranian financial institutions, other Iranian persons, or where the benefit is otherwise received in Iran.”13
Furthermore, pursuant to certain authorities, foreign financial institutions may be subject to sanctions for knowingly conducting significant transactions for or with certain Iran-related persons, or for providing material support to designated persons. Accordingly, US and non-US financial institutions should be cognizant of their obligations under US sanctions “to prevent any use (both direct and indirect) of their US correspondent accounts for transactions involving an Iranian financial institution,”14 and should continue to develop “controls designed to curtail indirect involvement of Iranian persons in transactions that transit through or otherwise involve the US financial system.”15
US and non-US financial institutions should continue to implement “robust and multi-tiered levels”16 of screening and review for transactions that originate from or involve jurisdictions that are in close proximity to Iran, or with strong geographical and economic ties to Iran.
US financial institutions are subject to compliance with the below-listed AML and regulatory obligations. Consistent with these obligations, US financial institutions should take practical, risk-based steps to identify individuals and entities involved in money laundering and sanctions evasion activities.
Once all the secondary sanctions come back into force on November 5, 2018, Iranian financial institutions, the Iranian regime and its officials are likely to “increase their efforts to evade US sanctions to fund malign activities and secure hard currency for the Government of Iran.”18 As such, US and foreign financial institutions must be careful in detecting the transactional red flags described above and reporting any suspicious or illicit activities. FinCEN also sets forth regulatory expectations in the advisory that financial institutions should consult for Iran-related transactions to avoid violating US sanctions and financial regulations.