LegiStorm

Summary:

Overview In January 2016, the multilateral nuclear agreement with Iran ("Joint Comprehensive Plan of Action," or JCPOA) entered its implementation phase, which included the lifting of U.S. sanctions on foreign banks' transactions with Iranian banks. The agreement did not require the lifting of a longstanding ban on U.S. financial transactions with Iranian banks or a ban on Iran's access to the U.S. financial system. Thus far, major international banks have been hesitant to reenter the Iranian market despite sanctions removal because of: reported concerns that the United States might restrict such transactions under remaining sanctions provisions; a lack of transparency in Iran's financial sector and its deficiencies in anti-money laundering and countering the financing of terrorism (AML/CFT); lingering concerns over financial penalties paid for concealing some past Iran-related transactions with the U.S. financial system; and extra costs and procedures necessitated by the continuing U.S. restrictions on transactions with Iran's banking system. Iranian leaders argue that the reluctance of international banks to reengage with Iran is a factor that is preventing Iran from realizing the full benefits of the sanctions relief promised by the JCPOA. Yet, international banks are privately run institutions that make business decisions based on a number of factors. It is not clear that any additional changes in U.S. sanctions would alone cause international banks to decide to reengage with Iran. Remaining U.S. Restrictions U.S. sanctions on Iran's financial system have been a significant feature of overall Iran sanctions policy. Regulations pursuant to the May 1995 Executive Order (12959) banned most U.S. trade with Iran, including any direct transactions with Iranian banks. The "Iran Transaction Regulations ("ITRs"), particularly 31 C.F.R. 560.516, allow U.S. banks to use U.S. dollars for allowed (licensed) transactions, provided that U.S. dollars are not directly transferred to an Iranian bank. Payments must instead be channeled through an intermediary bank, such as a European bank. On November 6, 2008, the Department of the Treasury tightened regulations further by barring U.S. banks from handling any indirect transactions with Iranian banks ("U-turn transactions:" transactions with foreign banks that are handling transactions on behalf of an Iranian bank). This ban remains in effect. Iranian leaders complain that the remaining U.S. sanctions are causing major banks in Europe and elsewhere to hesitate to re-build relationships with Iran, in part by preventing transactions in U.S. dollar currency. Paragraph 24 of the JCPOA obligates the parties to the agreement to remove any remaining sanctions that are preventing Iran from obtaining the full benefits of sanctions relief. Treasury Secretary Jacob Lew in March and April 2016 suggested that the Administration might take steps to license transactions by foreign (non-Iranian) clearinghouses to acquire dollars that might facilitate transactions with Iran. In April and May 2016, Secretary of State John Kerry met with European and other officials and banking institutions to encourage their reentry into the Iran market. Such a change, however, is not explicitly required by the JCPOA. No change in U.S. regulations has been announced – either to license foreign clearinghouses or to allow U-turn transactions. Trustworthiness of Iran's Banking System? Some international banks might be deterred from reengaging with Iran because of concerns about the transparency and integrity of its banking system. Since October 2007, the Financial Action Task Force (FATF), an intergovernmental body that promotes global standards in anti-money laundering and combatting financing terrorism (AML/CFT), has identified Iran as a high-risk jurisdiction with strategic AML/CFT deficiencies. FATF, as recently as June 2016, has called on states to take counter-measures to protect the international financial system from Iranian money laundering and terrorist financing threats. (See interpretive note to FATF Recommendation 19 for a list of illustrative counter-measures.) Iran has demonstrated early signs of willingness to address AML/CFT deficiencies—spurred in part by the recognition that a stronger AML/CFT regime could facilitate its reintegration into the global economy. Iran reportedly has adopted a FATF-endorsed Action Plan to address AML/CFT gaps. It is also seeking technical assistance to implement the Action Plan. The International Monetary Fund (IMF) additionally reported in December 2015 that Iran has requested an assessment of its AML/CFT regime and intends to seek membership in the Eurasian Group, a FATF-style regional body. Despite such indicators of recent political will, Iran continues to suffer from basic banking sector weaknesses and, as a result, its AML/CFT capabilities are limited. The U.S. Department of the Treasury continues to identify Iran as a jurisdiction of primary money laundering concern, pursuant to 31 U.S.C. 5318A. The U.S. Department of State also continues to describe Iran as a major money laundering country in congressionally required annual reports on money laundering and financial crimes. In July, the Basel Institute on Governance released its 2016 Basel Anti-Money Laundering Index—with Iran topping the list of riskiest money laundering jurisdictions. In June 2016, FATF, for the first time since February 2009, stopped short of calling for AML/CFT counter-measures against Iran. Pending full implementation of Iran's AML/CFT Action Plan, which is not publicly available, FATF instead urged the international community to conduct enhanced customer due diligence (CDD) measures on business relationships and transactions involving Iranian persons or entities. (See interpretive note to FATF Recommendation 10.) FATF intends to review Iran's progress by June 2017, at which point counter-measures may be reapplied. In the meantime, some foreign banks remain reluctant to modify their AML/CFT compliance policies before Iran is fully removed from international watch lists. Legislative Issues Some pending legislation seeks to prevent the Administration from easing any of the U.S. sanctions that remain on Iran's banking system. H.R. 4992, which passed the House on July 14 by a vote of 246-181, would, according to the Administration, "prohibit permissible financial transactions between Iran and the international community that are wholly outside the U.S. financial system." An Administration statement said the President would veto the bill. A provision of a Senate bill, S. 3267, would specifically prohibit the Administration from licensing U-turn transactions or transactions with Iran by foreign clearinghouses.