Over-Compliance on Iran Sanctions Can Lead to Discrimination

Ireland’s Workplace Relations Commission has fined an unnamed bank EUR 20,000 for discrimination against an Iranian couple. As reported by the Irish Times:

WRC Adjudication Officer Marian Duffy found that the bank did discriminate against the two on the grounds of race. Ms. Duffy said that ‘alternative methods to counter money laundering/terrorist financing and US sanction breaches were open to the respondent… These include the implementation of robust IT systems and procedures, customer advice/guidance and information systems and/or a helpline as part of the process to monitor account activities.’

The comission found that the bank’s policy was neither appropriate nor necessary to achieve its stated aims and therefore was not objectively justified. The bank fundamentally was racially discriminatory in their actions. The bank had stated previously that it has no appetite for dealing with Iranian affiliated customers over risks of sanctions and as a result of maintaining a small presence in the US.

In another example of discrimination, S&P Global Platts had banned Iranian nationals from attending a conference it was holding in London over sanctions fears. The company reserved this ban rapidly following a report in the Financial Times which sparked outrage.

In both the case of the Irish bank and the S&P conference, we see an an overreaction to Iran sanctions, which will only be exacerbated by the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA). 

OFAC and the New Culture of Compliance

Compliance officers have a job to do. That job is not easy. Since the global financial crisis in 2008 a whole heap of new regulations have been introduced surrounding financial services on all fronts. Some industries, such as shipping, are plagued by fraud and corruption relating to banking and letters of credit. This leaves compliance officers with the fear of being held personally liable (as officers responsible for anti-money laundering often are) for even the slightest of mistakes. These mistakes can, of course, have serious personal ramifications.

The “take no chances” attitude now common among compliance officers looking to protect a banks from potential breaches and the resulting penalties, is only intensified when you add the factor of Iran.

On one hand banks see Iran as a nation with a large, successful patriotic diaspora who, regardless of what views they hold, have a deep connection to their country both sentimentally, physically, and often financially. Iran is a country with a huge consumer market and significant economic potential. But there is a catch—Iran is on the wrong side of the most powerful financial enforcement authority in the world; Office of Foreign Assets Control, known as OFAC.

For those who maintain connections to Iran—practitioners, businessmen, professionals and Iranians abroad alike—discrimination is unfortunately not uncommon. Bank accounts connected to Iranians or used for Iran related business have been regularly closed over the last ten years, including the accounts of students who rely fully on money sent by family in Iran.

The reason for these closures can be traced to OFAC, part of the US Department of Treasury. OFAC has issued fines ranging from hundreds of millions to billions of dollars against varying institutions—from RBS to Standard & Chartered, and even the Chinese telecommunications company ZTE. In fact, OFAC has generated so much income from sanctions penalties, that the UK decided to set up its own version, OFSI (Office of Financial Sanctions Implementation) in 2016.

From just a brief look at the scale of fines involved—USD 1.2 billion levied on ZTE alone—it is not hard to see why a compliance officer would not want to follow the law to the letter. But therein lies the paradox: which law?

Conflict of Laws and Regulation

We live in an ever-growing and increasingly interconnected financial market. United States is, and shall remain for this generation at least, the crown jewel at the heart of the global financial market. International companies make more money being present in the US market than in any other market, and this requires being on the “right side” of US laws. For this reason, many companies instinctively abide by US laws even in jurisdictions where these laws would seem not apply.

Since the implementation of the Joint Comprehensive Plan of Action (JCPOA) in 2015, the European Union has permitted its companies to invest in Iran by lifting most of the sanctions. But the United States had only removed secondary sanctions as part of the nuclear deal, not the primary sanctions which restrict “US persons” from trading with Iran. Following President Trump’s withdrawal from the JCPOA, and the announcement that secondary sanctions would be returning, many consider the deal to be doomed. But the remaining signatories remain in compliance with the agreement for now. 

This has left compliance officers at many multinational companies somewhat confused. What laws ought they abide by, those of the EU or the US? On international trade, the answer is simple. If you have connections to the US or a desire the conduct business in the US market, it is best you comply with US regulations.

However, it is also important not to breach local laws in other jurisdictions in which you operate. There can be a contradistinction between abiding by sanctions and breaking the law. For example, a compliance officer may advise against doing business with Iran, but he/she cannot take a broad brush approach and punish Iranian customers by virtue of their race. While the “take no chances” approach to sanctions may make it attractive to comply with US regulations absolutely, without considering local laws, companies are playing with fire and leaving their organizations at risk of unlawful activity that could have serious consequences.

On matters relating to human affairs, it simply does not matter at all if a company has a US presence, discrimination can and should have very severe consequences. OFAC guidance is vague on a whole range of matters, including instances where there is a conflict between EU and US law. But case precedent is building in Europe against acts of over-compliance. Regulators and judges may not be as harsh now, as there may be some understanding of the confusion stemming from a fluid situation. But the courts will be far harsher later, once their position has been established.

It is therefore imperative, before any overreaction has been made by the US withdrawal from the JCPOA, that local legal advice is taken. Remember, we are not back in the former sanctions era of 2006-2015. The EU is not participating in sanctions against Iran.

Finally, those on the receiving end of such discrimination should take immediate legal advice. The more cases which are pursued, the greater the chance that justice will prevail in the end. As relayed in the word’s of Arcesilaus, “Where you find the laws most numerous, there you will find also the greatest injustice.”

Photo Credit: Surrey Court

The New "Normal": Why the World's Banks Need to Rethink Iran

On Monday April 27th, legal proceedings began at Manchester Civil Justice Centre in the United Kingdom. Blackstone Solicitors, a small legal practice led by Emma Nawaz was challenging the banking behemoth Royal Bank of Scotland (RBS) in court. On behalf of her clients, Nawaz is claiming that RBS discriminated against people of Iranian heritage, whose bank accounts were closed in 2013.  The legal action was first filed in the same year, buthas taken nearly two years go to court. The case is expected to last 5 days.

The legal action is the latest in string of legal actions by Iranian individuals and companies, battling against the interference of sanctions. Normal citizens have been pit against a major financial firm, in a David versus Goliath scenario.  

As reported in the international press in 2013, and most recently in the Financial Tribune, the claimants allege that RBS breached Britain's much-vaunted Equality Act of 2010 in the course of closing accounts belonging to entire families. One of the claimants was a nine-year-old girl.

Emma Nawaz, the solicitor dealing with the case said, “The decision by RBS to close the bank accounts of customers connected to Iran is shocking and goes far beyond any reasonable interpretation of the sanctions rules."

She added that, “These are ordinary people who contribute to society and have become victims of racism by a high street bank simply for wanting to have a current account”.

In response, RBS' spokesperson said that they were required to comply with their legal and regulatory obligations and were unable to comment particular cases of individuals."

One might wonder why a bank such as RBS would even bother closing the accounts of these Iranians, most of whom were UK citizens with no commercial ties to Iran. What could the aforementioned “regulatory obligations” entail?

It is worth noting that in 2013, the same year when the Nawaz’ clients had there accounts closed, RBS was fined USD $100 million by American authorities for breaching sanctions on Iran, Burma, and Cuba among other countries.

Similar fines have been levied on banks such as HSBC ($1.9 billion in 2012) and Lloyds ($350 million in 2009). Both HSBC and Lloyds have similarly closed down the accounts of individuals with Iranian heritage.

And it is not just in the UK that Iranians have had bank accounts closed. Similar actions have been taken in Canada—where Iranian university student Arash Khodadadi had his account closed by CIBC—and also in the United Arab Emirates, where blanket policies affected the many Iranians who maintain accounts in Dubai.

Looking to these facts, a pattern emerges. Banks have been regularly curtailing the activities of everyday Iranians, even in the absence of definable regulatory issues. It has simply been easier for banks to close accounts than to prove to authorities that they are not in breach of sanctions.

While account closure policies have harmed Iranians outside of Iran, the risk aversion of banks has also caused harm to Iranians within Iran. Notably, banks remain reluctant to handle funds even for projects that are permissible under specific or general licenses. For example, the volume of humanitarian trade between the West and Iran is lower than would be expected because of a lack of “comfort” among banks about trade with Iran, even trade that is clearly legal.  

The implication is troubling. We would hope that the discrimination against Iranian clients should be coming to an end considering that the recent JCPOA agreement between Iran and the P5+1 world powers indicates an improving political climate. However the legacy of risk aversion may linger on for years to come, with a punitive impact on everyday Iranians.

The question is how banks will weigh the rewards and risks of engaging Iran as it approaches a “post-sanctions” era.  They will surely remain vigilant when it comes to rule breakers as sanctions are partially lifted. Yet at the same time, financial firms will surely be setting up small exploratory operations, “Iran Desks” to explore the possibilities of entering the Iranian market once again. 

If the nuclear deal does go-ahead by the June deadline, then Iran could expect an initial interest by a number of global banks and financial institutions. Firstly, given the risk aversion outlined above, it is highly unlikely that banks such as HSBC, RBS, Credit Suisse or any other of the major European or American players would enter the Iranian banking sector immediately after any agreement. At best, these banks may engage in humanitarian trade finance, but only if there is a high degree of confidence that they will not be stung by further fines.

To understand what might unfold in Iran, it is worth considering what has transpired in other “frontier markets.” Myanmar, with about one-fifth the gross domestic product of Iran, is the most recent example of what a post-sanctions environment is like.

Myanmar began its détente with the US in earnest in 2011. The easing of financial sanctions followed in 2013. This set the stage for foreign banks to increase their in-country activities. In October of 2014, three Japanese banks— Bank of Tokyo-Mitsubishi UFJ (BTMU), Sumitomo Mitsui Banking Corp and Mizuho Bank— were the first top-tier financial institutions to earn operating licenses for Myanmar. A further 6 banks from the Asia Pacific region won licenses, but none as large as the Japanese brand-name firms.

In April of this year, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation two banks that have been fined over sanctions breaches before, opened the first foreign bank branches in Myanmar.

These two banks are also notable in the case of Iran, which does significant oil trade with Japan and has continued to do so under the 2013 JPOA framework. This trade amounted to 172,154 barrels-per-day in 2014, with imports rising by 25% in the early months of 2015. Iran accepts payment for this oil in its accounts at Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation while also maintaining a sovereign account at Bank of Japan.

These two Japanese banks therefore represent financial institutions that have been stung by fines for sanctions non-compliance, and yet have been bold enough to enter into a post-sanctions market within the first 1-2 years of its opening. Importantly, these are also banks with significant exposure to the Iranian economy. American and European banks have not exhibited the same gusto for post-sanctions markets, nor do they have such a fundamental connection to Iran trade. Therefore, we might expect Japanese banks to lead the charge.

What is encouraging is that the Japanese financial sector is highly developed and well regulated, with standards in line with global best practices. If Japanese banks lead the way, they could offer the proof-of-concept for similarly operating American and European banks to follow into Iran.

Furthermore, Iran is unlike Myanmar in one key way. It has its own domestic financial industry, with significant regulations and a wide range of institutions.

The country currently boasts thousands of branches, ATM and EPOS systems based on an clearance and automated payment system called Shetab, and consumer tools like online banking. The public and private banking industry is currently going through a shakeup courtesy of the Central Bank of Iran in order to prepare for possible foreign competition.

There is no easy way to predict how an “end of sanctions” scenario will play out, but considering the extent of Iran’s banking industry development and the attractiveness of the market, the potential rewards are clear. But as the RBS episode shows, banks will need to fundamentally “rethink” Iran itself.  Hopefully somewhere in that process, everyday Iranians will start to find the world’s banks welcoming them once again. 

Photo Credit: Vahid Salemi, AP