November 12, 2008
On November 6, 2008, the U.S. Department of Treasury announced that, effective November 10, 2008, the Iranian Transactions Regulations would be amended to revoke authorization for so-called "U-turn" transfers. As a result, U.S. depository institutions and registered brokers or dealers in securities (together, "financial institutions") are no longer permitted to process U-turn transfers for any Iranian bank, state-owned or private, except transfers involving certain specified underlying transactions.
A copy of the amendment published in the Federal Register is available at http://edocket.access.gpo.gov/2008/pdf/E8-26642.pdf. The Treasury Department press release relating to the amendment is available at http://www.treas.gov/press/releases/hp1257.htm. Remarks of Stuart Levey, Under Secretary of Terrorism and Financial Intelligence, regarding the amendment are available at http://www.treas.gov/press/releases/hp1256.htm.
What is a "U-Turn" Transfer?
Transactions involving the transfer of funds from a foreign bank that pass through a U.S. financial institution and are then transferred out to a second foreign bank are referred to as "U-turn" transfers. Prior to the current amendment, U.S. financial institutions were authorized to process such "U-turn" transfers for the direct or indirect benefit of Iranian banks (except previously designated Iranian state-owned banks), other persons in Iran or the government of Iran, provided such payments were initiated off shore by a non-Iranian, foreign bank and only passed through the U.S. financial system en route to another non-Iranian foreign bank. This authorization permitted, for example, Iran to sell oil to a non-U.S. customer, who in turn directed their bank, a non-Iranian foreign bank, to deposit dollars obtained from a U.S. bank into a second non-Iranian foreign bank, for the direct or indirect benefit of persons in Iran or the Government of Iran.
Transactions Prohibited/Permitted By The Amendment
As a result of the amendment, U.S. financial institutions are no longer permitted to process U-turn transfers involving any Iranian banks (state-owned banks or private banks), including the Central Bank of Iran. As Under Secretary Levey noted in his remarks, the amendment resulted from information about Iran’s use of its banks to finance its nuclear and missile programs and terrorist groups. This included deceptive conduct by Iran to hide its involvement in transactions, including using non-designated Iranian banks to conduct business for designated proliferation entities. As the Treasury Department noted, the amendment closes the last general entry point for Iran to the U.S. financial system.
To ensure that transactions relating to humanitarian aid for the Iranian people and other legitimate activities continue to flow, the amendment does not affect the existing authority of U.S. financial institutions to process "U-turn" transfers, to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran, that do not involve crediting or debiting an Iranian account, if the transaction arises from certain underlying transactions including:
On October 16, 2008, the Financial Action Task Force (FATF), an intergovernmental standard setting body for anti-money laundering and counter-terrorist financing (AML/CFT), issued its fourth warning about the risks posed to the international financial system by continuing deficiencies in Iran’s AML/CFT regime. Also, on March 16, 2008, the United Nation’s Security Council adopted its fifth resolution against Iran, calling for vigilance when dealing with all Iranian banks because of the risks they pose. These actions combined with the current amendment to the Iranian Transactions Regulations will likely result in a significant restriction in the flow of funds to Iran.
U.S. financial institutions should review their policies, procedures and controls to ensure that no prohibited U-turn transactions involving Iran are processed.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
International Trade Regulation and Compliance Practice Group
Judith A. Lee (202-887-3591, [email protected])
Daniel J. Plaine (202-955-8286, [email protected])
Jim Slear (202-955-8578, [email protected])
Akita St. Clair (214-698-3154, [email protected])
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