The U.S. government, responding to warnings from the Financial Action Task Force and the UN Security Council, has determined that Iran's access to the U.S. financial system facilitates the Iranian regime's support for terrorism and weapons proliferation.

OFAC sanctions targeting Iran prohibit U.S. persons from engaging in virtually all transactions involving Iran or the Iranian government. OFAC previously allowed a limited exemption to permit U.S. banks to process so-called "u-turn" transactions. The u-turn transaction exemption allowed U.S. banks to indirectly process transactions involving Iran or the Iranian government if they began and ended with a non-Iranian bank and only passed through the U.S. financial system on their way between the two offshore non-Iranian financial institutions.  In the relevant part, the Iranian Transaction Regulations (ITR) provided that U.S. banks were "authorized to process transfers of funds to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran, if the transfer . . . is by order of a foreign bank which is not an Iranian entity from its own account in a domestic bank . . . to an account held by a domestic bank . . . for a [second] foreign bank which is not an Iranian entity." 31 CFR §560.516(a)(1).

OFAC has now amended the ITR to revoke the authorization of u-turn transfers involving Iran. As a result of this action, U.S. banks are no longer allowed to process u-turn transfers to or from Iran, or for the direct or indirect benefit of persons in Iran or the Iranian government. This action became effective when the amendment to the ITR was published in the Federal Register on November 10, 2008.

OFAC had previously issued individual actions prohibiting U.S. banks from taking advantage of the u-turn authorization in connection with certain Iranian state-owned banks-Bank Melli, Bank Mellat, Bank Sepah, Bank Saderat, Future Bank and the Export Development Bank of Iran-due to their perceived roles in Iran's weapons proliferation and terrorism activities. This amendment extends that prohibition to all Iranian banks, Iranian companies and the settlement of third-country trade transactions that involve Iran. 

This amendment will not affect funds transfers by U.S. banks arising from several types of underlying transactions involving humanitarian aid and other legitimate activities, which will continue to be allowed. These include:

This action by OFAC has direct implications not only for U.S. banks, but also for foreign banks and foreign companies that have commercial operations in or involving Iran, who may now find it difficult to make or receive U.S. dollar payments on related contracts. 

Allen & Overy LLP regularly advises U.S. and multinational clients on the U.S. regulatory aspects of cross-border transactions and ongoing compliance with U.S. laws, including compliance with OFAC regulations.

For additional information, please contact Ken Rivlin at +1 212 610 6460 or ken.rivlin@allenovery.com, or Jennifer Stamberger at +1 212 756 1109 or jennifer.stamberger@allenovery.com.

About the OFAC Sanctions
OFAC imposes and administers economic sanctions against countries, companies and individuals that the U.S. government has determined to be a threat to the United States. OFAC maintains a List of "Specially Designated Nationals and Blocked Persons," which is a list of entities with which U.S. parties are prohibited from transacting, ranging from companies to individuals to political groups. There are several countries that OFAC has specifically targeted including the Balkans, Belarus, Burma/Myanmar, Cote d'Ivoire (the Ivory Coast), Cuba, the Democratic Republic of the Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria and Zimbabwe. The sanctions, rules and penalties vary by country. Finally, OFAC administers industry-specific sanctions relating to diamond trading, narcotics trafficking, weapons non-proliferation and terrorism. 

OFAC sanctions apply to U.S. citizens and permanent resident aliens (wherever located), entities organized under the laws of the United States or any U.S. jurisdiction (including foreign branches), persons and entities in the United States (including foreign branches) and, in respect of certain sanctions programs, entities owned or controlled by any of the foregoing (including foreign-organized subsidiaries of U.S. corporations).

Violations of OFAC sanctions can result in both criminal and civil penalties, both of which can be substantial. Penalties vary depending on the specific violation but include criminal fines ranging from USD50,000 to USD10,000,000 and imprisonment ranging from 10 to 30 years for willful violations, and civil penalties ranging from USD11,000 to USD1,000,000 per violation.