Comments to RIN 1506-AB16

January 25, 2012 RE. Comments to RIN 1506-AB16 (Imposition of Special Measures Against the Islamic Republic of Iran as a Jurisdiction of Primary Money Laundering Concern, Including the Central Bank of Iran within the Definition ofIranian Banking Institution) Dear Mr. Freis: USA*ENGAGE and The National Foreign Trade Council collectively represent numerous financial institutions and U.S. manufacturers and exporters. On behalf of our members, several of whom export humanitarian goods to persons in Iran (or otherwise process related transactions) pursuant to licenses granted by Treasury’s Office of Foreign Assets Control (“OFAC”) under the Trade Sanctions Reform and Export Enhancement Act of 2000, (“TSRA”) program or other OFAC sanctions program, we submit the following comments addressing FinCEN’s notice of proposed rule making relating to the Imposition of Special Measures Against the Islamic Republic of Iran as a Jurisdiction of Primary Money Laundering Concern, Including the Central Bank of Iran within the Definition of Iranian Banking Institution. We respectfully suggest targeted changes so that the final rule appropriately strikes a balance between showing support for the people of Iran and isolating from the financial system the targets of the Special Measures. THE UNITED STATES GOVERNMENT AND OUR ALLIES MAINTAIN LONGSTANDING SUPPORT FOR HUMANITARIAN EXPORTS TO IRAN The dual policy objectives of sanctions have long been present in U.S. foreign policy. For example, President Clinton expressed this commitment in April 1999 when he announced that food and medicine exports to Iran would be authorized. The House and Senate, again supported humanitarian exports to the people of Iran when Congress passed TSRA in 2000. Congress reaffirmed this commitment in the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (CISADA), which strengthened sanctions on those engaged with the petroleum and weapons of mass destruction sectors in Iran, and also expressly re-affirmed support for humanitarian exports to the people of Iran. These “smart sanctions” appear, again, more recently, in Section 1245 of the National Defense Reauthorization Act of 2012, which, while calling for sanctions on the Central Bank of Iran, expressly excludes from sanctions those financial institutions engaged with the Central Bank of Iran in payments for licensed humanitarian exports to Iran. Consistent with the U.S. approach, our European allies have adopted this dual foreign policy strategy of supporting the people of Iran while isolating those engaged in global terrorism, the development of weapons of mass destruction and human rights abuse. For example, also on November 21, 2011, the United Kingdom passed the Financial Restrictions (Iran) Order 2011 (Order) imposing broad prohibitions on dealings with the Central Bank of Iran but explicitly authorizing transactions relating to humanitarian exports to Iran under €40,000. This action closely tracks the EU Council Regulations No. 961/2010 (October 25, 2010) which provides for payments of humanitarian goods destined for Iran and United Nations Security Council Resolution 1929 (June 9, 2010) which, in Annex IV, establishes policies for humanitarian exports to the people of Iran. SPECIAL MEASURE FACTOR ONE In addressing whether similar actions have been or will be taken by other nations or multilateral groups against Iran, we note that FinCEN appropriately highlights various national and international resolutions and sanctions targeting the Government of Iran. In order to appropriately acknowledge the balance in foreign policy objectives, we recommend that this section address that the United Nations and European Union, as discussed above, also support the people of Iran. We also suggest that this section is ideal for recommending to the Financial Actions Task Force (“FATF”) that the international financial sector be instructed regarding these complementary goals — and that steps should be taken to ensure secure banking channels for humanitarian exports to the people of Iran. As noted in the FinCEN commentary of Special Measure Factor One, current FATF notices warn financial institutions of the money laundering and terrorist financing threats posed by the Iranian banking sector — but remain silent on the equally important humanitarian goals of the U.S., the United Nations Security Council, our allies and fellow FATF Members. SPECIAL MEASURE FACTOR TWO Consistent with the comment above, we suggest that the discussion relating to Factor Two (the “Imposition of the Fifth Special Measure Would Create a Significant Competitive Disadvantage, Including Any Undue Cost or Burden Associated with Compliance, for Financial Institutions Organized or Licensed in the United States”) also remind financial institutions that financial transactions relating to humanitarian exports will flow through the international financial sector. As a result, and as discussed more extensively below, any notice from U.S. financial institutions to correspondent banks and PTA holders must affirmatively acknowledge that licensed or exempt humanitarian transactions continue to be consistent with U.S. and international priorities. To accomplish this goal, secure banking channels into and out of Iran must remain open. SPECIAL MEASURE FACTOR THREE In FinCEN’s discussion relating to Factor Three (“the Extent to Which the Proposed Action or Timing of the Action will Have a Significant Adverse Systemic Impact on the International Payment, Clearance, and Settlement System, or on Legitimate Business Activities or Iran”), the Agency clarifies that licensed or exempt transactions may continue under the proposed rule. To ensure the continuation of humanitarian products this statement must be strengthened to remind financial institutions — both foreign and domestic — that it remains a goal of the United States and of our allies to support the people of Iran through humanitarian exports. Over the last six years, our membership has reported increased difficulties in obtaining banking channels through which to process payments for licensed or exempt humanitarian exports to Iran. We understand that non-U.S. financial institutions are increasingly reluctant to process OFAC licensed humanitarian transactions because those financial institutions misperceive U.S. foreign policy to mandate a cessation of all financial transactions with Iran. As a result, we request that this section affirmatively remind financial institutions that the United States Government (and our allies) continues to support humanitarian exports to the people of Iran. Without this statement, the resulting burden on humanitarian exports will result in the potential for a nullification of U.S. policy supporting the people of Iran. SECTION-BY-SECTION ANALYSIS In the preamble to the Section-by-Section Analysis, FinCEN explains that the second step in conducting the proposed due diligence includes mandating that financial institutions take “reasonable steps to identify any indirect use of its correspondent accounts by Iranian banking institutions, to the extent that the indirect use can be determined from transactions records maintained by the covered financial institution in the normal course of business.” These reasonable steps, the preamble comments, should be from a risk-based approach (i.e., types of services offered, geographic location of the correspondents). This language, in the proposed 31 C.F.R. § 1010.657 (b)(2), includes, at a minimum, a requirement that covered financial institutions notify correspondent account holders that the covered financial institution knows or has reason to know that the correspondent bank provides services to Iranian banking institutions, and that such correspondents generally may not provide Iranian banking institutions with access to the correspondent account. FinCEN further suggests that additional due diligence is appropriate where a correspondent bank is processing a transaction under the authority of an OFAC license. This section as currently drafted will discourage non-U.S. financial institutions from processing licensed or exempt payments and undermine the humanitarian elements of U.S. foreign policy. We are also unclear as to why a financial institution appropriately processing an OFAC licensed transaction should be categorized as “higher risk.” OFAC Licenses are issued after an exhaustive multi-agency review process; OFAC licensed US Exporters have significant compliance programs, and multiple financial institutions automatically analyze these transactions from deep within their CFT/AML departments. Where a non-U.S. financial institution maintains a sanctions compliance program designed to process licensed transactions, the money laundering risks of exposure to a sanctioned party has been significantly mitigated rather than aggravated. Hanging a “scarlet letter” on financial institutions who process the OFAC license financial transactions necessary to achieve these foreign policy goals will be devastating to humanitarian trade and foreign policy. In order to maintain the appropriate dual foreign policy balance between isolating the Government of Iran from the U.S. financial sector and supporting the people of Iran, we suggest that the proposed Notice to correspondent institutions more explicitly promote payments related to licensed or exempt exports to (or imports from) Iran. We suggest the following Notice: Pursuant to U.S. regulations issued under section 311 of the USA PATRIOTAct, 31 CFR 1010.657, we are prohibited from establishing, maintaining, administering or managing a correspondent account, for, or on behalf of, an Iranian banking institution or any of its subsidiaries. Consistent with the Trade Sanctions Reform Enhancement Act of 2000 (“TSRA”) and the Comprehensive Iran Sanctions Accountability and Divestment Act (“CISADA “), it is also a goal of the United States Government to promote, on a case-bycase basis, exports of humanitarian goods to persons in Iran. Treasury’s TSRA licenses also authorize financial transactions incident to those exports. See e.g., 31 C.F.R. §560.532(a). In addition, other exports (including related payments for those exports) to Iran are either authorized or exempt from regulation under the International Emergency Economic Powers Act, 50 U.S.C. 1701 et seq., and the Iranian Transactions Regulations, 31 C.F.R. Part 560. See e.g., 31 C.F.R. § 560.509; 560.210; 560.516; 560.522; 560.525; 560.538; 560.539. As a result, please note that you remain authorized to process payments for licensed or exempt transactions involving persons in Iran or Iranian financial institutions. Other non-licensed or non-exempt transactions involving an Iranian banking institution or any of its subsidiaries with access to the correspondent account you hold at our financial institution may not be provided. If we become aware that an Iranian banking institution or any of its subsidiaries is indirectly using the correspondent account you hold at ourfinancial institution for transactions other than those specified above, we will be required to take appropriate steps to prevent such access, including terminating your account. We recommend that the notice, as drafted above, be provided to correspondent account holders because it provides each with clarity as to the types of transactions that remain permitted or exempt — and those that are prohibited. We have learned from some of our members that the lack of written guidance on this point, coupled with strong United States Government statements urging a cessation of banking activities with Iran, has eroded banking for licensed and exempt transactions. To this end, we also suggest that FinCEN and its sister agency the Office of Foreign Assets Control publish on their respective websites a notice that certain transactions with persons in Iran remain an important U.S. foreign policy objective. Taken together, the comments above should mitigate the potential damage to licensed and exempt exports to persons in Iran; without addressing the concerns established above, there is real danger that support for the people of Iran will be eliminated. Regards, Richard N. Sawaya Director, USA* Engage