Recently, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) further tightened its economic sanctions against Iran by issuing a notice amending its Iranian Transactions Regulations to prohibit U.S. banks and other financial institutions from processing so-called “U-turn” transactions. The amendment (31 CFR Part 560) went into effect November 10, 2008 and could have far-reaching consequences for foreign and U.S. banks that have been involved in such transactions in the past.
Previously, U.S. financial institutions were allowed to process transfers of dollars to or from Iran, or for the direct or indirect benefit of persons in Iran or the government of Iran, but only if the transfer was by order of a non-Iranian foreign bank’s customer from the foreign bank’s own account in a U.S. bank to an account held by the U.S. bank or another non-Iranian foreign bank. These transactions were known as “U-turn” transactions because they allowed U.S. banks to process payments involving Iran, provided there were no payments directly between U.S. and Iranian banks.
There is no grace period for the amendment and U.S. authorities could penalize institutions that participate in an international transfer of dollars to or from Iran. The U.S. has previously levied significant penalties against foreign banks for activities that took place outside the U.S. but were alleged to violate U.S. economic sanctions.
With the new amendment, only certain types of transfers of funds to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran are permitted (so long as it does not involve debiting or crediting an Iranian account). These transfers include the following:
- transfers resulting from an underlying transaction that are authorized by a license, either through the Regulations or issued by OFAC;
- transfers resulting from a transaction that are not prohibited by the Regulations, such as a family remittance not related to a family-owned enterprise; or
- transfers resulting from an underlying transaction that are exempted from the Regulations, such as transfers of information or informational materials and certain humanitarian donations.
More recently, effective December 3, 2008, OFAC expanded the scope of Appendix A to the Regulations (a non-exhaustive list of entities determined to be owned or controlled by the Government of Iran) to add the following non-financial institutions: The National Iranian Oil Company (aka NIOC), Naftiran Intertrade Company Ltd (aka NICO), and Naftiran Intertrade Co (NICO) SARL.This amendment may have significant consequences for both U.S. and foreign financial institutions.