OFAC Significantly Expands Sanctions on the Iranian Financial Sector

On October 8, the U.S. Treasury Department imposed sweeping secondary sanctions on the financial sector of the Iranian economy, pursuant to Executive Order (“E.O.”) 13902.  Simultaneously, OFAC designated eighteen major Iranian banks to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”).  These new, broad sanctions apply to U.S. and non-U.S. persons, and appear to apply to nearly every transaction within Iran’s financial sector, with narrow exceptions that include, but are not limited to, humanitarian trade.  OFAC’s actions mark a significant escalation of U.S. sanctions on Iran.

Now, non-U.S. individuals and entities risk exposure to U.S. secondary sanctions by conducting transactions with major Iranian banks, or for dealings within Iran’s financial sector.  OFAC has provided a 45-day wind-down period for non-U.S. persons to cease any transactions that may become subject to sanctions as a result the October 8, 2020 designations.  However, OFAC indicated that it continues to evaluate “the scope of transactions and activity” by non-U.S. persons that will be deemed sanctionable following the wind-down period.

As part of this action, OFAC has also issued a general license and published various related Frequently Asked Questions.  These updates are discussed further below.

Although OFAC indicated that it anticipates issuing additional guidance that will “outline[] expected regulatory definitions for the Iranian financial sector, as well as goods and services used in connection with the sector,” OFAC has not provided a date for the release of any additional guidance.  Nevertheless, prior to the end of the wind-down period, on November 22, 2020, and pending the issuance of additional guidance, non-U.S. companies should assess their exposure to the Iranian financial sector.

New Secondary Sanctions for Dealings with Iran’s Financial Sector

Previously, E.O. 13599, dated February 5, 2012, imposed primary sanctions on Iran’s financial sector.  More specifically, E.O. 13599 required U.S. persons to block all property and interests in property of the Government of Iran, including the Central Bank of Iran, and of all Iranian financial institutions, that were in the U.S., that came within the U.S., or that came within the possession or control of U.S. persons, including overseas branches of U.S. corporations.  However, non-U.S. persons were not subject to E.O. 13599 for dealings with (non-designated) Iranian financial institutions, unless other grounds for secondary sanctions applied.  For example, pursuant to E.O. 13902, non-U.S. individuals and entities risked exposure to U.S. secondary sanctions by conducting transactions within Iran’s construction, mining, manufacturing, and textiles sectors.

Now, as a result OFAC’s October 8, 2020 designations, non-U.S. persons risk exposure to secondary sanctions for transactions involving the Iranian financial sector.  OFAC’s Press Release suggests that these new sanctions target “the financial sector of the Iranian economy,” which could encompass nearly any financial transaction within Iran.  Although OFAC may issue additional guidance that will further define the scope of the “Iranian financial sector,” OFAC’s actions will undoubtedly further hinder Iran’s ability to participate in the international financial system.

Designation of Eighteen Major Iranian Banks

OFAC has also sanctioned eighteen major Iranian banks.  Sixteen of these banks were sanctioned for operating in Iran’s financial sector, one for being owned or controlled by a sanctioned Iranian bank, and one on the basis that it is an Iranian military-affiliated bank.

OFAC noted that these banks are subject to the supervision and regulation of the Central Bank of Iran, which OFAC previously designated on September 20, 2019 for financing terrorist organizations.

These 18 Iranian banks are identified here.

As discussed above, U.S. persons are prohibited from, and non-U.S. persons risk secondary sanctions for, conducting transactions with these Iranian banks or using these banks to facilitate any transactions.  These broad prohibitions apply to transactions within and outside of Iran.

Issuance of General License Related to Iranian Financial Institutions

In its Press Release, OFAC emphasized that the designations “do[] not interfere with th[e] ability” to engage in commercial humanitarian exports and humanitarian transactions.  Accordingly, on the same day, OFAC issued Iran General License L - Authorizing Certain Transactions Involving Iranian Financial Institutions Blocked Pursuant to E.O. 13902 (“GL-L”).  GL-L permits certain limited transactions with Iranian financial institutions, including transactions and activities that are authorized, exempt, or otherwise not prohibited under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (the “ITSR”).  This includes, but is not limited to:  (i) transactions and activities authorized by general and specific licenses issued pursuant to the ITSR (such as those covering food and medicine); and (ii) transactions and activities ordinarily incident to such transactions, and activities and necessary to give effect thereto, that are consistent with section 560.405 of the ITSR.  For example, if a corporation relied on a general or specific license to engage in transactions and activities involving an Iranian financial institution prior to October 8, 2020, GL-L provides authorization to continue to engage in such transactions and activities for a 45-day wind-down period.

However, GL-L specifies that it does not authorize any transactions or activities that are prohibited by the ITSR, E.O. 13902, or any other part of 31 C.F.R. chapter V.

Finally, GL-L clarifies that individuals and entities are authorized to conduct or facilitate transactions for the provision of, or for the sale of, agricultural commodities, food, medicine, or medical devices to Iran, pursuant to Section 11 of E.O. 13902.  As discussed below, OFAC further explained these exceptions in Frequently Asked Questions 843 and 844.

GL-L is available here.

Publication of Related Frequently Asked Questions

Generally, OFAC issues public guidance related to its sanctions programs in the form of Frequently Asked Questions “FAQs” published on its website.  Thus, to provide additional guidance, OFAC published six FAQs in connection with its October 8, 2020 designations.  Each FAQ is summarized below.

FAQ 842 outlines the specific activities and transactions that GL-L authorizes in the financial sector of Iran.

FAQ 843 clarifies that GL-L extends the authorizations provided by specific and general licenses issued under the ITSR.  This includes humanitarian-related transactions and activities that are authorized by the ITSR, but are not covered by the exception outlined in Section 11 of E.O. 13902.

FAQ 844 clarifies that non-U.S. persons generally do not risk exposure to U.S. secondary sanctions for engaging in the sale of agricultural commodities, food, medicine, or medical devices to Iran.  However, OFAC notes that such transactions should not involve SDNs, in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction, unless otherwise permitted, such as by GL-L.  Notably, OFAC previously designated Hekmat Iranian Bank in May 2020, for being owned or controlled by an SDN, that provided support to a terrorist organization.

FAQ 845 provides a 45-day wind-down period for non-U.S. persons engaged in previously non-sanctionable activity involving the Iranian financial sector or involving Iranian financial institutions that are now sanctioned pursuant to E.O. 13902.

FAQ 846 states that waivers issued by the Department of State, and exceptions set forth in Iranian Freedom and Counter-proliferation Act of 2012, remain valid and activities conducted pursuant to such waivers and exceptions, involving Iranian financial institutions, are not sanctionable during the wind-down period.

FAQ 847 clarifies that transactions or activities by non-U.S. persons are generally not sanctionable if such activities “are consistent with activities permissible by U.S. persons.”  With respect to activities conducted by non-U.S. persons, OFAC continues to analyze whether select types of transactions and activities may, nonetheless, be non-significant and, thus, not sanctionable even after the wind-down period ends.  Significantly, FAQ 847 suggests that OFAC intends to release additional guidance regarding the scope of transactions and activities by non-U.S. persons that will become sanctionable after November 22, 2020, including the “expected regulatory definitions for the Iranian financial sector, as well as goods and services used in connection with the sector, for purposes of evaluating sanctions risk pursuant to E.O. 13902.”

We will continue to monitor developments.  Please contact the authors or your usual Herbert Smith Freehills contacts for more information.