Risk Professional: US Treasury tries to lock Iran out of financial system

The US Department of the Treasury's Office of Foreign Assets Control (OFAC) maintains sanctions lists for a number of purposes. Amongst those are the "non proliferation" lists on which various Iranian interests feature heavily.

If a country, entity or person - or even a ship - is named on the OFAC list then, in the absence of specific and express authority, no US citizen or US registered corporation (or its overseas branches or subsidiaries) nor any person or corporation in the US regardless of nationality or registration may deal with the named country, entity or person.

Therefore, being named by OFAC has a devastating commercial effect - it is (in theory) impossible to conduct trade in US dollars. The way in which this works is legally and technically complex but it has been proved to work in a number of cases including Banco Delta Asia which was named due to its dealings with North Korea. The effect was that BDA's correspondent banking relationships with US banks were summarily terminated making it impossible for the bank to deal, directly, in US dollars. Although BDA was named under a slightly different provision, the USA PATRIOT Act, the effect was the same as being named under OFAC.

US banks are not permitted to deal indirectly with a named person.

That means that the Iranian banks are, in effect, blocked from doing trade in US dollars even with non-US financial institutions.

Therefore, commercial concerns in any part of the world which are customers of the named Iranian banks, or who are doing business with a customer of those Iranian banks, are likely to find that trade denominated in USD will be rejected - even if their own bank has no direct ties to the USA.

The reason for this is because the USA, uniquely, claims worldwide jurisdiction over its currency. And whilst it has no realistic prospect of controlling what physical currency - i.e. banknotes - are used for, it can and does control what inter-bank transfers are used for. And it insists that detailed information as to both the payer and payee accompanies all instructions for funds to be transferred.

Inter-bank transfers are not made in cash at the local branches so paying in USD from Bank A to Bank B, even if they are next door to each other in Lahore, for example, still goes through the banking system. And whilst local currency clears in the local clearing house, because of the international banking mechanism, foreign currency passes through a system called correspondent banking, and that means that Bank A tells a bank in New York to credit Bank B's account with a different New York bank with the necessary funds, and to debit Bank A's account.

As a matter of US law, all US dollars in the banking system are held not at your local bank, but in an account in New York.

Adding all of this together, it means that anyone anywhere in the world that deals in US dollars with any person that OFAC has named comes to the notice of the US Treasury.

And if the US Treasury considers that that there is a reason to suspect that there is an attempt to bypass the sanctions imposed by the US, then that person can be added to OFAC, too.

This happened to a London travel agent which arranged tours to Cuba - and accepted bookings from US citizens. The Treasury added the agency to OFAC which means that it cannot conduct any business in USD, and that no US citizen or corporation can deal with it. As a result, it cannot book tickets with US registered airlines even in other currencies for customers going nowhere near Cuba.

It can be seen, then that there is a significant risk to any corporation doing business with any customer of any of the Iranian banks named.

Details of the sanctions, showing which are worldwide and which relate to specific branches is at BankingInsuranceSecurities.Com

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Nigel Morris-Cotterill is Head, The Anti Money Laundering Network.

www.antimoneylaunderingnetwork.com

The Chief Officers' Network is a publication of Vortex Centrum Limited, a subsidiary of The Anti Money Laundering Network Limited.