United States Issues Regulations Authorizing Secondary Sanctions Against Non-U.S. Financial Institutions That Support Hizballah

April 19, 2016

Under U.S. sanctions regulations, U.S. persons have been prohibited from dealing with a number of individuals and entities with connections to the Hizballah organization, by way of designation to the Specially Designated Nationals ("SDN") and Blocked Persons List maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC").  On April 15, 2016, the United States issued regulations expanding the scope of U.S. sanctions targeting Hizballah by authorizing the imposition of "secondary sanctions" against foreign financial institutions determined to be supporting the organization. 

The authorization by OFAC of secondary sanctions is rare, and, as discussed further below, the impact of such sanctions often consists of both direct and indirect consequences for global business.     

Overview of the Hizballah Financial Sanctions Regulations

The Hizballah Financial Sanctions Regulations ("HFSR"), 31 C.F.R. § 566,  implement the Hizballah International Financing Prevention Act of 2015 ("HIFPA") that was signed into law on December 18, 2015 and required the President, within 120 days of its enactment, to prescribe relevant regulations on the opening or maintaining of correspondent accounts or payable-through accounts in the U.S. by foreign financial institutions that the President determined, on or after December 18, 2015, to have engaged in certain conduct related to the Hizballah.[1]  Specifically, the HFSR, inter alia, authorizes "secondary sanctions" on foreign financial institutions that facilitate significant transactions for Hizballah; describes the procedures which the Secretary of the Treasury will undertake to indicate to relevant parties that the opening or maintaining of correspondent accounts or payable-through accounts in the U.S. for foreign financial institutions is either prohibited or conditioned; and provides a general license for a 10-day period during which U.S. financial institutions that maintain such accounts for foreign financial institutions are expected to come into compliance.  Concurrent with the publication of the HFSR, OFAC modified the Specially Designated Nationals ("SDN") and Blocked Persons List to identify the individuals and entities to whom these new sanctions would apply.

In the main, section 566.201(a) of the HFSR authorizes sanctions on foreign financial institutions which, on or after December 18, 2015, knowingly engage, in any location or currency, in such activities as: (1) facilitating a significant transaction or transactions for Hizballah, (2) facilitating a significant transaction or transactions of a person identified on the SDN List, the property and interests in property of which are blocked for acting on behalf of, or being owned or controlled by, Hizballah; (3) engaging in money laundering to carry out above-described activities; or (4) facilitating a significant transaction or providing significant financial services to carry out the above-described activities. 

The restrictions of the HFSR apply to any "foreign financial institution" which is defined to encompass foreign banks, any branches or offices of such financial institutions as brokers and dealers in securities registered with the Securities and Exchange Commission, located outside the U.S., any other entities organized under foreign law, that would be identified as such brokers or dealers if they were located in the U.S., and any entities organized under foreign law that are dealers in foreign exchange or that are money transmitters.[2]

As noted above, such institutions are now prohibited from knowingly facilitating significant transactions supporting Hizballah.  The HFSR provides some definitional and interpretive guidance for several of these key terms, as follows:   

• The threshold of "knowingly" is met when a person has "actual knowledge, or should have known, of the conduct, the circumstance, or the result."[3]   
• The term "facilitation" is broadly defined to include the provision of assistance by a foreign financial institution for those efforts, activities, or transactions, including the provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.[4] 
• What constitutes a "significant" transaction for purposes of § 566.201(a) will depend on a number of factors as identified in the HFSR, including: size, number, and frequency of the transactions; the nature of the transactions or financial services; the level of awareness of upper-level management in the organizations and whether the transactions or financial series are part of a pattern of conduct or the result of a business development strategy; whether there is a nexus between the foreign financial institution and Hizballah; and the impact of such transactions or financial services on the goals articulated in the HIFPA.[5]  
• And finally, "Hizballah" is defined under the HFSR to mean "the entity known as Hizballah and designated by the Secretary of State as a foreign terrorist organization pursuant to section 219 of the Immigration and Nationality Act (8 U.S.C. 1189);" or any person "the property and interests in property of which are blocked pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.)" and who is identified on the SDN List as an agent, instrumentality, or affiliate of Hizballah.[6]  Such persons appear on the SDN List with a special reference to Hizballah at the end of their respective entries.  For example, a person whose property an interests in property are blocked pursuant to the Global Terrorism Sanctions Regulations, 31 C.F.R. § 594, and identified on the SDN List, will have the program tag "[SDGT]" and the descriptive text ["Subject to secondary sanctions pursuant to the Hizballah Financial Sanctions Regulations"].[7]

Pursuant to § 566.201, if the Secretary of the Treasury determines that a foreign financial institution knowingly engages in a prohibited activity, the Secretary of the Treasury may (1) impose one or more strict conditions on the opening or maintaining of a correspondent account or a payable-through account in the U.S. for a foreign financial institution or (2) prohibit a U.S. financial institution from opening or maintaining a correspondent account or a payable-through account in the U.S. for foreign financial institutions.[8]  The names of foreign financial institutions that are determined by the Secretary of the Treasury, in consultation with the Secretary of State, to engage in activities described in § 566.201(a) which are subject to prohibitions or strict conditions on the opening or maintaining of correspondent or payable-through accounts will be published in the Federal Register and will appear on the Hizballah Financial Sanctions Regulations List ("HFSR List") on the Counter Terrorism Sanctions page of OFAC’s website (www.treasury.gov/ofac).  Accordingly, the U.S. financial institutions are prohibited from opening or maintaining correspondent accounts or payable-through accounts in the U.S. for foreign financial institutions that appear on the HFSR List.  

The HFSR does provide a general license for transactions related to closing otherwise prohibited corresponding or payable-through accounts.  Specifically, pursuant to § 566.504(a), U.S. financial institutions that maintain accounts for foreign financial institutions listed in the HFSR List are given a 10-day "wind-down" period from the "effective date of the prohibition in § 566.201(c)" and are authorized to (1) process or permit financial institutions to execute transactions through the account necessary to close the account, and (2) transfer the remaining funds in the correspondent account or the payable-through account to an account of the foreign financial institution located outside the U.S. and close such accounts.  Importantly, pursuant to 31 C.F.R. § 566.504(b), U.S. financial institutions must file a report with OFAC within 30 days of the closure of an account providing detailed relevant information on the accounts that were maintained and the transactions processed or executed to close the accounts and transfer the remaining funds to an entity outside the U.S. 

Conclusion and Implications 

Under these regulations, foreign financial institutions, in addition to U.S. persons, will need to ensure that compliance systems and due diligence procedures include reasonable checks to ensure transactions they process, facilitate or otherwise support do not involve persons designated to the SDN List pursuant to the HFSR.  Note also that, because the HFSR-designated persons are included on OFAC’s SDN List, and as alluded to in § 566.201(a)(2), OFAC’s "50% Rule" will apply to these persons, foreign financial institutions will need to ensure they are not processing or facilitating transactions for  any entity which is owned 50% or more by one or more persons designated pursuant to the HFSR.[9]  

In addition, as noted at the outset of this alert, secondary sanctions are an infrequently used tool in the OFAC arsenal, in no small part due to their potential for far-reaching effect.  As was evidenced with the use of secondary sanctions in the Iran context,[10] the effects of such sanctions can stretch beyond the strict prohibitions set forth in the regulations, as both U.S. and foreign financial institutions alike begin to ‘over-comply’ with the restrictions, and shy away from even those transactions that are allowable if there is even a hint of a connection to a sanctioned person or country.  Although the scope of the secondary sanctions authorized under the HFSR is certainly much narrower than those that were imposed in the Iran context, it is certainly possible, for instance, that a company seeking to do legitimate business in a jurisdiction in which Hizballah has a significant presence may find it difficult in the near future to find banking partners willing to support the business.

   [1]   Section 102(a)(1), Hizballah International Financing Prevention Act of 2015, Public Law 114-102.

   [2]   31 C.F.R. § 566.309.

   [3]   31 C.F.R. § 566.312.

   [4]   31 C.F.R. § 566.403.

   [5]   See 31 C.F.R. § 566.404.

   [6]   31 C.F.R. § 566.311.

   [7]   See Note to paragraph (a)(2) of 31 C.F.R. § 566.201.

   [8]   31 C.F.R. § 566.201(b).

   [9]   Office of Foreign Assets Control, Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked (Aug. 13, 2014), available at https://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf.  For a summary of this development, please see Gibson Dunn Client Alert: 2014 Year-End Sanctions Update (Jan. 15, 2015) , available at http://www.gibsondunn.com/publications/Pages/2014-Year-End-Sanctions-Update.aspx#_ftn195.

  [10]   The language of the HFSR draws heavily from the regulatory language that imposed similar secondary sanctions in the context of Iran (many of which have been lifted now pursuant to the Joint Comprehensive Plan of Action).  For more information on the Joint Comprehensive Plan of Action, and the lifting of secondary sanctions in the Iran context, please see Gibson Dunn’s Jan. 18, 2016 Client Alert, "’Implementation Day’ Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks," available at http://www.gibsondunn.com/publications/Pages/Implementation-Day-Arrives-Substantial-Easing-of-Iran-Sanctions–Continued-Limitations-and-Risk.aspx.