Iran Sanctions Legislation: New Controls and Penalties for U.S. Financial Institutions

July 28, 2010

On July 1, 2010, President Obama signed the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (“CISADA”), which amends and extends sanctions imposed under the Iran Refined Petroleum Sanctions Act of 2009 and the Iran Sanctions Act of 1996 (formerly the Iran and Libya Sanctions Act of 1996).  Congress passed CISADA after the United Nations Security Council voted on June 9, 2010 to impose sanctions on Iran for its ongoing violation of the Nuclear Non-Proliferation Treaty (UN Security Council Resolution 1929).  CISADA affects domestic financial institutions in three significant ways.

First, CISADA section 104(c) requires the Secretary of the Treasury, not later than 90 days after the date of enactment of the Act (i.e., September 29, 2010), to issue regulations to prohibit, or impose strict conditions on, the opening or maintenance in the United States of a correspondent or payable-through account by a foreign financial institution that the Treasury Department finds “knowingly” engages in facilitating any of the following (hereinafter “prohibited activities”):

(1)  Iran or Iran’s Revolutionary Guard Corps (“RGC”) efforts to acquire or develop weapons of mass destruction (“WMD”) or WMD delivery systems;

(2)  Iran or RGC efforts to provide support for organizations designated as foreign terrorist organizations or for acts of international terrorism;

(3)  the activities of a person subject to UN Security Council financial sanctions;

(4)  money laundering in support of the above activities;

(5)  the efforts of Iranian financial institutions to carry out the above activities;

(6)  “a significant transaction or transactions” or “provides significant financial services” for RGC or a party or financial institution whose property is blocked because of Iran’s WMD proliferation or support for international terrorism.

A financial institution that opens or maintains an account prohibited by CISADA section 104(c) is subject to civil penalties up to the greater of $250,000 or twice the amount of “the transaction that is the basis of the violation,” arguably the value of the account.  Criminal penalties can also be imposed up to $1,000,000, and individuals can be imprisoned for up to 20 years.  Importantly, CISADA provides that these penalties can be assessed not only on the financial institution that opens or maintains the prohibited account, but also “to the same extent” against any person who “attempts,” “conspires” or “causes” a proscribed account to be opened or maintained, allowing enforcement of the Act extraterritorially to foreign financial institutions.

Second, under CISADA section 104(d), within 90 days after the enactment of the statute (again, by September 29, 2010), the Secretary of the Treasury must issue regulations to prohibit any subsidiary or affiliate, owned or controlled by a domestic financial institution, from “knowingly engaging in transactions with or benefiting” RGC or any of its agents or affiliates whose property is blocked.  Although the prohibition relates to the activities of foreign subsidiaries or affiliates, penalties will be imposed upon the U.S. financial institution parent if the U.S. financial institution “knew or should have known” that the controlled subsidiary or affiliate violated, attempted to violate, conspired to violate, or caused a violation of the Treasury regulations implementing section 104(d).  Under this section, only civil penalties are authorized, up to the greater of $250,000 or twice the amount of “the transaction that is the basis of the violation.”

Third, under CISADA section 104(e), the Treasury Department must issue regulations to require U.S. financial institutions that maintain correspondent or payable-through accounts in the United States for foreign financial institutions to take one or more of the following measures to ensure that the foreign financial institutions are not using the accounts to engage in prohibited activities:

(1)  audit the activities of the foreign financial institution to determine whether it is engaged in any of the prohibited activities;

(2)  report to the Department of the Treasury any transactions or financial services related to any prohibited activities;

(3)  certify that, to the best of the knowledge of the U.S. financial institution, a foreign financial institution is not knowingly engaging in prohibited activities; and/or

(4)  establish due diligence policies, procedures, and controls that are similar to those required under Section 312 of the USA PATRIOT Act for foreign financial institution correspondent accounts and that are reasonably designed to detect whether the Secretary of the Treasury has found the foreign financial institution to have knowingly engaged in such activities.

Civil and criminal penalties for violations of CISADA section 104(e) regulations are based on the penalties assessed by the Treasury Department’s Financial Crimes Enforcement Network relating to records and reports on monetary instruments transactions (31 U.S.C. sections 5321(a) and 5322).  The precise scope of such penalties for these particular types of violations, however, is not clearly provided in the statute.

Unlike CISADA sections 104(c) and (d), section 104(e) does not require the Treasury Department to issue implementing regulations within a particular time.  Consequently, these regulations could be issued after the other regulations are finalized.

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or any of the following lawyers in the firm’s Washington, D.C. office:

Judith A. Lee (202-887-3591, [email protected])
Amy G. Rudnick (202-955-8210, [email protected])
Daniel J. Plaine (202-955-8286, [email protected])
John J. Sullivan (202-955-8565, [email protected])
Jim Slear (202-955-8578, [email protected])

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