Treasury Warns Banks, Others of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) Risks Associated with Iran Sanctions
[Post updated 2021]The U.S. Treasury Department issued new warning to U.S. financial institutions to better detect illegal transactions related to the Islamic Republic of Iran. Banks, precious metal dealers and virtual currency exchangers can be held responsible for violations of the recently imposed Iran sanctions.
Treasury’s Financial Crimes Enforcement Network (FinCEN) says that Iran has long used shell companies to move money into the country. The government believes the money is used to support human rights abuses, the development of long range nuclear capable missiles and to support the Syrian government. The agency also believes that Iran finances Lebanese Hezbollah, Hamas, and other terrorist groups.
Banks and other financial institutions that fail to impose proper safeguards can be held liable under both the Bank Secrecy Act and the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. When a U.S. bank or credit union violates those laws, whistleblower rewards may be available through another federal law, the Financial Institutions Reform, Recovery and Enforcement (FIRREA).
As of January 1st, 2021, Congress enacted the Anti-Money Laundering Act that can directly pay rewards to those with inside information about AML and BSA violations. Those rewards can be as high as 30% of whatever the government collects and without a cap.
The list of federal laws involved in sanctions and whistleblower rewards gets confusing. We will break it down into easy to digest pieces.
America Pulls out of Iran Nuclear Deal
President Trump has withdrawn the United States from participating in the Iran Nuclear Deal. That agreement was approved by President Obama in 2015. Iran, the U.S., China, France, the U.K., Russia and Germany all agreed to a plan to curb Iran’s nuclear program in exchange for a lifting of economic sanctions.
Now that the U.S. has withdrawn from the deal, the president re-imposed sanctions on Iran. The other countries didn’t follow suit, however.
Foreign banks can do business with Iran and companies doing business there while U.S. banks and domestic companies are prohibited from doing so. The new U.S. sanctions go into effect in November and Uncle Sam is making it clear that it intends to enforce those sanctions. Even if a financial institution doesn’t intentionally violate the sanctions order, it can still be responsible if it allows its customers to do so.
The Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Asset Control (OFAC) are the agencies primarily in charge of making sure banks comply with sanctions. FinCen issued a special warning this week after determining that Iran was likely to increase evasion efforts. They are especially afraid of a recent Iranian plot that used exchange houses to provide funding to the Islamic Revolutionary Guard Corps-Qods Force as well as to terrorist organizations.
The Government’s Iran Sanctions
When President Trump pulled out of the Iran Nuclear Deal, he re-imposed sanctions on Iran. Much like the sanctions on North Korea, the Iran sanctions prohibit any transactions with Iran involving United States currency, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The sanctions also end the importation of Iranian carpets and food into the United States.
Section 560.204 of the Iranian Transactions and Sanctions Regulations (ITSR) prohibits U.S. financial institutions from opening or maintaining correspondent accounts for or on behalf of Iranian financial institutions. Absent OFAC authorization, foreign persons, including foreign financial institutions, are prohibited from processing transactions to or through the United States, including transactions through U.S. correspondent accounts for or on behalf of Iranian financial institutions, other Iranian persons, or where the benefit is otherwise received in Iran.
Things get a bit trickier with foreign banks. Although the U.S. Treasury can’t directly regulate foreign banks, it does have jurisdiction over them if they do business in the United States. According to FinCEN,
“Pursuant to the Iranian Financial Sanctions Regulations (IFSR) and multiple statutory and executive authorities, foreign financial institutions may be subject to sanctions for knowingly conducting significant transactions for or with certain Iran-related persons, including prohibitions or strict conditions on their ability to open or maintain correspondent or payable-through accounts in the United States. Non-U.S. persons, including foreign financial institutions, may also be subject to blocking sanctions for, e.g., providing material support to designated persons. U.S. and non-U.S. financial institutions should be conscious of their obligations under OFAC sanctions to prevent any use (both direct and indirect) of their U.S. correspondent accounts for transactions involving an Iranian financial institution. OFAC has issued penalties to both U.S. and non-U.S. financial institutions for processing prohibited transactions through the U.S. financial system that involve an indirect, underlying interest of Iranian individuals and entities, including Iranian financial institutions.”
Policing Banks and Brokerage Houses
Money used to fund Iran, North Korea and terrorism almost always passes through one or more banks. If the money is being wired and is in U.S. dollars, chances are high that it passed through a U.S. correspondent bank. (Surprisingly, Iran is not thought to be a big user of cryptocurrency. FinCEN only identified $3.8 million passing through virtual currency exchanges.)
Under the Patriot Act, Bank Secrecy Act and the Comprehensive Iran Sanctions, Accountability, and Divestment Act, banks have enhanced due diligence and reporting requirements. They are required to know their customers and watch transactions in and out of the bank. In essence, they become the eyes and ears of the government.
Although the renewed sanctions are new, the use of bank accounts to finance organized crime, terrorism and illegal behavior is nothing new. Since 1970 and the passage of the Bank Secrecy Act, regulators have put the burden of anti-money laundering detection on the financial industry.
Whistleblower Rewards for Iran Sanctions Violations
Banks and financial institutions that fail to properly monitor their accounts or who turn a blind eye to their responsibilities can be fined. If the bank is a U.S. bank or has deposits guaranteed by a federal agency such as the FDIC, that bank can be punished under FIRREA.
A federal law called the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) allows prosecutors to pursue banks that violate a wide variety of banking laws. Under that law whistleblowers can receive rewards of up to $1.6 million if their information helped prosecutors.
To qualify for a whistleblower reward, the whistleblower must have inside information of the misconduct and generally be the first to file. Whistleblowers may also be able to remain anonymous.
If the financial institution is a commodities or securities broker, rewards may be available under the SEC or CFTC’s whistleblower programs. There is evidence that Iran favors transfers in precious metals and has used exchange houses in past money laundering schemes meaning the risk for SEC and CFTC regulated entities is real.
We often see that brokerage houses and commodities brokers lack the sophisticated anti money laundering capabilities of commercial banks. (Ditto for many small credit unions.)
Unlike FIRREA which caps awards at $1.6 million, there is no cap if the illegal behavior falls within the SEC and CFTC whistleblower programs. The SEC and CFTC whistleblower programs do have some restrictions which prevent the very people who often are the first to spot AML violations – compliance officers and auditors – from claiming a reward.
We love the new Anti-Money Laundering Act because it pays up to 30% of whatever the government collects from the wrongdoers. No caps. No prohibitions on compliance professionals.
If you believe you have original source (inside) information involving financial institutions violating the Iran sanctions, call us. You may be entitled to an award. All inquiries are protected the attorney – client privilege and kept confidential.
Specific Warnings for Banks and Brokerage Houses
According to the most recent FinCEN advisory on Iran sanctions, banks and brokerage houses should be especially aware of the following red flags:
- Use of Personal Account. Iran routes transactions to personal accounts instead of central bank or government-owned accounts. Banks should know their customers and be wary of individuals or entities with no central bank or government affiliation who withdraw funds from such accounts.
- Unusual Wire Transfers. Iran sometimes engages in multiple wire transfers to banks or financial institutions that are not related to traditional central bank activity. FinCEN says it will impose restrictions on foreign banks beginning November 5, 2018.
- Use of Forged Documents. Front companies acting on behalf of Iran use forged documents to conceal the identity of the parties involved in the transaction.
- Use of Multiple Exchange Houses. Customers may have multiple transactions moving through multiple exchange houses adding additional fees. The fees and number of transactions are atypical of normal business practices.
- Multiple Depositors. Account holders that receive deposits that do not appear to match the customer’s profile. Receiving numerous deposits outside the normal business profile is also a red flag.
- Shell or Front Companies. Transactions involving companies that originate with, or are directed to, entities that are shell corporations, general “trading companies”, or companies that have a nexus with Iran. For example, a company has an affiliate in Iran or is owned by individuals known to be loyal to the Iranian regime and appears to lack a general business purpose.
- Suspicious Declarations. Declarations of information that are inconsistent with other information, such as previous transaction history or nature of business.
- Unrelated Business. Transactions that are directed to companies that operate in unrelated businesses, and which do not seem to comport with the Customer Due Diligence (CDD) and other customer identification information collected during client onboarding and subsequent refreshes.
- Use of Front Companies and Transshipment Hubs to Source Aircraft Parts. Financial institutions that facilitate commercial aviation-related financial transactions where the beneficial ownership of the counterparty is unknown and the delivery destination is a common transshipment point for onward delivery to Iran. FinCEN says that Iran-linked persons have “attempted to source U.S.-origin aircraft and related parts from third countries known to be hubs for maintenance, repair, and overhaul operations, and then use front companies located in third-countries to conceal or obfuscate the ultimate Iranian beneficiary of the U.S.-origin aircraft, parts, and aviation-related materials.”
- Accounts Associated with Mahan Air. FinCEN says Mahan Air, Iran’s flagship commercial airline, has transferred weapons, funds, and people on behalf of the Iranian military and provided support to the Syrian Assad regime and Hezbollah. To evade sanctions, Mahan Air uses front companies to negotiate sales contracts and obtain American made aviation components. These front companies operate in Turkey, Ukraine, Kyrgyzstan, UAE, Thailand, the United Kingdom and Iraq including airlines located in those countries.
- Falsified Documentation. Transactions and wire transfers that include bills of lading with no consignees or involving vessels previously linked to suspicious financial transactions.
- Inconsistent Documentation for Vessels Using Key Ports. Inconsistencies between shipping-related documents and maritime database entries that are used for conducting due diligence. For example, the maritime database may indicate that a vessel docked in an Iranian port, even though this information is not included in the shipping documents submitted to financial institutions for payment processing.
- Lack of Information Regarding Origin of Funds. Wire transfers or deposits that do not contain any information about the source of funds. Or that are inconsistent with the customer’s current business or occupation.
- Unusual or Unexplainable Wire Transfers. Multiple, unexplained wire transfers and transfers that have no apparent connection to the customer’s occupation or business. Some individuals will try to claim the high dollar wires they receive are merely from family members in Iran. Financial institutions should also look for wire transfers into the United States from high risk jurisdictions that are not related to the customer’s profile.
- Using Funnel Accounts. Third parties who deposit monies into the accounts of U.S. based individuals or companies with ties to Iran. Heightened scrutiny should be paid to these transactions if they do not match the customer’s profile or if the source of funds is unknown or unclear.
- Structuring Transactions. S. persons send or receive money to or from Iran by structuring the cash portion of the transactions to avoid the currency transaction reporting threshold of $10,000. Individuals returning to the United States from Iran also may make large deposits of monetary instruments rather than cash.
Once again, if you have knowledge of banks or brokerage firms that are turning a blind eye to suspicious transaction or who are knowingly allowing accounts to be used by people violating U.S. sanctions, you may be entitled to a reward. More importantly, you are doing your part to protect America from terrorism and to protect the world from human rights abuses.
We see money laundering violations in many different types of financial institutions. From a tiny one branch credit union in Miami to large brokerage houses with virtually no AML, to huge banks like HSBC.
In 2012, the Senate Permanent Committee on Investigations found that HSBC allowed Iranian terrorism funding and Mexican drug cartel money to enter the U.S. and gain access to U.S. dollar liquidity. The bank paid a $1.9 billion fine but no HSBC executives were ever prosecuted criminally.
If you have inside information involving financial institutions violating the Iran sanctions and are interested in stopping those transactions or receiving a reward for your information, call us. We can be reached online, by email or by phone at 414-704-6731 (direct). All inquiries are protected the attorney – client privilege and kept confidential.