U.S. Treasury Clamps Down on Iranian Banking and Defense Organizations
On October 25, 2007, the United States Treasury Department announced sweeping sanctions on Iranian entities connected to Iran’s nuclear energy program and Islamic Revolutionary Guard Corps (IRGC), also known by its Persian name Pasdaran-e Enghelab-e Islami or Pasdaran. Most importantly, this includes blocking certain banks owned by the Iranian government from the U.S. banking system, as well as the sanctioning of several large Iranian companies.
The sanctioning of the Iranian entities, all of which are pursuant to either Executive Order 13224 or 13382, prohibit U.S. entities from engaging in any activity with listed entities, and calls for the blocking of all assets of such entities that come within U.S. jurisdiction.
While the U.S. has maintained various types of sanctions on Iran for many years, certain transactions have been and continue to be permitted under the Treasury Department’s Office of Foreign Assets Control (OFAC) Iranian Transactions Regulations, 31 C.F.R. Part 560 (the ITR). Exceptions provided in the ITR include permission for U.S. banks and their foreign branches to perform dollar-clearing functions for certain transactions involving Iranian banks, such as the so-called “u-turn” transactions, wherein a dollar-clearing transaction between two non-U.S. banks, such as an Iranian and German bank, is performed by an intermediary U.S. bank. An example would be where an Iranian bank seeks to credit a dollar account in a German bank, and undertakes this transaction by transmitting the funds to the German bank by means of a U.S. bank, which performs the u-turn transaction.
The Treasury Department first began to bar certain Iranian banks from activities related to the u-turn exception in September 2006 when it blocked Bank Saderat Iran from the U.S. banking system due to its facilitation of activities for groups such as Hezbollah. This was followed by Treasury’s sanctioning of Bank Sepah in January 2007, which according to the Treasury Department was providing “direct and extensive financial services to Iranian entities responsible for developing missiles capable of carrying weapons of mass destruction.”1
The most prominent banks targeted as part of the October 25 announcement are:
- Bank Mellat
- Bank Melli Iran
- Bank Saderat Iran
All three of these banks are based in Iran, although their foreign branches and subsidiaries, such as Bank Melli’s United Kingdom subsidiary Melli Bank PLC, are also included. Additional financial service providers targeted include:
- Arian Bank, a joint venture established in Afghanistan between Bank Saderat and Bank Melli
- Persia International Bank PLC, a British bank created from the merger of the London branches of Bank Mellat and Bank Tejarat, another Iranian state-owned bank
The institutions named in the October 25 statement can no longer receive dollar-clearing services by U.S. banks or their foreign branches.
Bank Melli and Bank Mellat have been cited by the United States for allegedly helping facilitate proliferation of illicit technologies, and Bank Saderat has been cited for funding terrorist activities. According to the Treasury Department, Bank Melli exercised care by not referencing Bank Sepah in transactions, the latter having been cited by United Nations Security Council Resolution 1747 as an entity involved in nuclear or ballistic missile activities.
Last month, the Financial Action Task Force (FATF), the multinational governing body with responsibility for combating money laundering and terrorist financing, issued a statement expressing concern with regard to Iran’s lack of a comprehensive legal framework to combat money laundering and terrorist financing. The statement warned that Iran’s actions have exposed the global financial system to unwarranted risk.
Accordingly, U.S. banks should avoid any transactions directly or indirectly related to the above-named banks, and should, in general, exercise due caution when dealing with Iran-related transactions, particularly those involving Iranian banks.
Islamic Revolutionary Guard Corps (IRGC)
The IRGC was founded following the 1979 Iranian revolution as a force to defend Iran’s new government. It operates in parallel to the conventional armed forces of the country. In the recently announced sanctions, the IRGC and the Quds Force, a tactical branch of IRGC, were cited for their involvement in Iran’s nuclear program and terrorist activities. The sanctioning of these entities may at first glance not appear to be relevant for any U.S. company. However, it is speculated that the designation will ultimately affect a sizeable percentage of international business vis-à-vis Iran due to the IRGC’s increasingly prominent role in the Iranian economy.
Over time, the IRGC has been gradually expanding its extra-military role and is today not only politically active, but also heavily involved in the Iranian economy. The IRGC is active in many businesses, through various subsidiaries and affiliates, including construction, engineering services and automobile manufacturing. For example, one of the entities named by Treasury, Khatam al-Anbya, has become a key player in Iran’s economy, having recently secured several billion dollars worth of contracts with the Iranian government.
The IRGC entities sanctioned include several of its top officials and the following companies:
- Khatam al-Anbya Construction Headquarters
- Oriental Oil Kish
- Ghorb Nooh
- Sahel Consultant Engineering
- Ghorb-e Karbala
- Sepasad Engineering Co.
- Omran Sahel
- Hara Company
- Gharargahe Sazandegi Ghaem
Treasury Secretary Henry Paulson said in an announcement, “[w]e call on responsible banks and companies around the world to terminate any business with Bank Melli, Bank Mellat, Bank Saderat, and all companies and entities of the IRGC.”2
It should be noted that the current round of sanctions do not close all doors to business between the United States and Iran. However, U.S. companies and their foreign affiliates doing business with Iran under exceptions to the embargo regulations should exercise extreme caution in dealing with Iranian entities, as many of the large players in that country’s economy are affiliated with the IRGC. In addition to screening business partners, U.S. banks and other U.S. persons should be careful not to engage in a transaction with any of the named financial institutions, and also should conduct due diligence regarding all current and prospective Iranian business relations.
1 HP 220, Prepared Remarks of Stuart Levey, Under Secretary for Terrorism and Financial Intelligence on the Designation of Bank Sepah for Facilitating Iran’s Weapons Program, http://www.treasury.gov/press-center/press-releases/Pages/hp220.aspx.HP 220, Prepared Remarks of Stuart Levey, Under Secretary for Terrorism and Financial Intelligence on the Designation of Bank Sepah for Facilitating Iran’s Weapons Program, .
2 HP 645, Statement by Secretary Paulson on Iran Designations, http://www.treasury.gov/press-center/press-releases/Pages/hp645.aspx.