The US government is proposing regulations clarifying the responsibilities of US and foreign banks under the expansive Iran sanctions laws that were enacted last year to target foreign financial institutions transacting business with Iran. On April 27, 2011, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury (Treasury) posted on its website a Notice of Proposed Rulemaking to implement Section 104(e) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). These regulations are issued in proposed form at this time and parties are being asked to submit comments prior to the issuance of final regulations.  

The proposed regulations would impose reporting requirements on US banks — including US branches and agencies of foreign banks — that maintain US correspondent accounts for foreign banks, essentially requiring foreign banks to provide information concerning certain Iran-related business.

Within 30 days of receiving a written request from FinCEN regarding a specific foreign bank, a US bank that maintains a US correspondent account on behalf of that foreign bank would be required to collect the following information from the foreign bank and report it to FinCEN:

  • Whether the foreign bank maintains a correspondent account for an Iranian-linked financial institution designated by the US government under the International Emergency Economic Powers Act (IEEPA), including information concerning use of that account;
  • Whether the foreign bank has processed any transfers of funds within the preceding 90 calendar days related to a designated Iranian-linked financial institution, even if not through a correspondent account;
  • Whether the foreign bank has processed any transfers of funds within the preceding 90 calendar days related to Iran’s Islamic Revolutionary Guard Corps (IRGC), or any of its agents or affiliates designated under IEEPA; and
  • Whether the foreign bank, at any time within 365 calendar days from the date of its initial response, establishes a new correspondent account for Iranian-linked financial institutions designated under IEEPA (to be reported by the US bank within 10 days of receiving this information from the foreign bank).

The proposed regulations implement Section 104(e) of CISADA, which requires the Treasury to prescribe regulations to establish one or more requirements for US financial institutions maintaining correspondent accounts for non-US financial institutions in order to identify certain Iran-related transactions. In two respects, the proposed regulations are more limited than the regulations that could have been promulgated.

First, CISADA sets forth four possible requirements that could have been imposed on US financial institutions by FinCEN: (i) audits of sanctionable activities carried out by foreign financial institutions; (ii) certifications concerning sanctionable activities of foreign financial institutions; (iii) reports to Treasury regarding sanctionable activities engaged in by foreign financial institutions; and (iv) additional due diligence procedures for US correspondent accounts. Out of these four options, FinCEN proposes to impose only the reporting requirement. 

Second, FinCEN proposes to impose the reporting requirement only on US “banks” with respect to the correspondent accounts of “foreign banks,” as opposed to the broader category of US and foreign “financial institutions,” as defined in CISADA and under FinCEN regulations and the Iran Financial Sanctions Regulations (IFSR) issued by the Office of Foreign Assets Control. Thus, broker-dealers, insurance companies, futures commission merchants, money service businesses, and mutual funds are not subject to the proposed rule, although FinCEN specifically requests comments as to whether its regulations should be expanded to include these and other financial institutions.

The term “bank” is defined in the proposed regulations to include each agent, agency, branch, or office within the United States or persons doing business in one or more of the following capacities: commercial banks or trust companies, private banks, savings and loan associations, national banks, thrift institutions, credit unions, other organizations chartered under banking laws and supervised by banking supervisors of any State, and banks organized under foreign law. The term “foreign bank” means “a bank organized under foreign law, or an agency, branch, or office located outside the United States of a bank. The term does not include an agent, agency, branch, or office within the United States of a bank organized under foreign law.” The definitions of “bank” and “foreign bank” are the same as those in the FinCEN regulations implementing the Bank Secrecy Act.

The proposed regulations are designed to complement the IFSR, 31 C.F.R. Part 561, promulgated last August under Section 104(c) of CISADA. Under the IFSR, the Treasury may prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts in the United States for foreign financial institutions that knowingly engage in certain sanctionable activity described in CISADA. When the proposed regulations are finalized, Treasury would use the information it collects under the proposed regulations to identify foreign banks that are engaging in activities relevant to CISADA.  

If, after receiving a written request from FinCEN, a US bank were unable to obtain the requisite information from a foreign bank for which it maintains a correspondent account, the US bank would be required to report this inability to FinCEN. A US bank would be in compliance as long as it reported to FinCEN that the foreign bank did not respond to the US bank’s inquiry.

Based on the information received from a foreign bank, or the failure of a foreign bank to provide such information, Treasury could take immediate action to prohibit or impose conditions on that foreign bank’s US correspondent account. Alternatively, Treasury could engage in consultations with the foreign bank, or it could investigate further to determine whether the foreign bank is facilitating significant transactions or providing significant financial services for an Iranian-linked financial institution or an IRGC-linked person designated under IEEPA.

Under the proposed regulations, a US bank would not be required to take any action with respect to the US correspondent account of a foreign bank upon receiving a written request from FinCEN, other than requesting the required information from the foreign bank. The proposed regulations do not preclude a US bank from taking any other action, however, such as restricting or terminating a correspondent account relationship with the foreign bank, based on the US bank’s risk-assessment of the facts and the bank’s policies.

Public comments may be submitted to FinCEN during the 30 days after publication in the Federal Register, which is scheduled for May 2.