Obama Loosens Iran Sanctions on Dollars, IRGC

The Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued an update ‪on Friday evening‪ to its guidance about sanctions relief to Iran under the nuclear agreement. The update is more just than a clarification of existing regulations; Treasury has now significantly eased restrictions on transactions between Iran and non-U.S. banks and companies by allowing foreign financial institutions to process dollar-denominated transactions involving Iran.

Back in March, press reports revealed that the U.S. government was considering this move, provided the transaction did not touch the U.S. financial system. Congress responded by raising concerns that this measure would go far beyond Washington’s obligations under the nuclear agreement. A “time out” followed, during which the White House was apparently weighing its options.

In May, Treasury asserted that U.S. sanctions jurisdiction does not extend to dollar bills held in foreign banks. Treasury’s guidance previously stipulated that foreign financial institutions could not clear “dollar-denominated transactions involving Iran through U.S. financial systems,” but it never clarified what was actually permitted. Risk-averse global banks assumed that actions not explicitly permitted remained off-limits. But that has changed after Friday's express authorization of dollar-denominated transactions.

Friday’s announcement further stated that it is not necessarily prohibited for foreign companies to do business with a non-sanctioned entity that is minority-owned or controlled by an entity on its sanctions list. Iran’s Islamic Revolutionary Guard Corps (IRGC), the key driver of proliferation and terrorism for the Iranian regime, maintains a pervasive role in the Iranian economy but often keeps its ownership shares under 50 percent to avoid sanctions. Thus, after years of Treasury warnings to avoid business dealings with the IRGC, the Obama administration just green-lighted foreign business with companies directly controlled by the IRGC or in which the Guard has a significant business interest.

Finally, Treasury took a weak stance on the question of know your customer’s customer (KYCC), a hotly debated topic among corporate compliance officers. According to the new guidance, “OFAC does not expect a non-U.S. financial institution to repeat the due diligence its customers have performed on an Iranian customer unless the non-U.S. financial institution has reason to believe that those processes are insufficient.” The new Treasury guidance thus lowers the compliance requirements for global banks doing business with companies who may have significant ties to illicit actors in Iran. In effect, unless a non-U.S. financial institution has a specific reason to believe that a customer’s clients are sanctioned, it can process transactions and provide banking services. Given the United States’ history of leading the global efforts to ensure the international financial system is not abused by terrorists, money launderers, and weapons proliferators, this is a significant weakening of the international KYCC principles.

Taken together, the new measures undermine the remaining non-nuclear sanctions against Iran, which the Obama administration promised Congress it would vigorously enforce. They go beyond any commitments negotiated under the nuclear deal. And they have far-reaching implications for the integrity of the global financial system. This may explain the timing of the Treasury press release: ‪at 6:00 p.m. on a Friday before a federal holiday. These measures will only increase congressional concerns that, even in the waning days of this administration, the White House is giving away even more significant concessions to Tehran.

Mark Dubowitz is executive director of the Foundation for Defense of Democracies and directs its Center on Sanctions and Illicit Finance, where Annie Fixler and Eric B. Lorber are a policy analyst and senior advisor, respectively. Follow them on Twitter @mdubowitz, @afixler, and @ELforeignpolicy.