Recent Developments in Economic Sanctions: Libya, Syria, Transnational Organized Crime, and CISADA

1. Recent Developments in Economic Sanctions: Libya, Syria, Transnational Organized Crime, and CISADA Timothy P. Leary Senior Special AML Examiner Board of Governors of the Federal Reserve System Washington, DC

2. Libya-related Sanctions • Executive Order 13566 published February 25, 2011. • Applies to the Libyan government, as well as designated individuals and entities. • Approximately 125 designations to date. • Ten General Licenses issued to date. • May end soon.

3. Syria-related Sanctions • Original Syria sanctions authorized in 2004 (Executive Order 13338 (May 12, 2004)). • Recent flurry of E.O.s – three issued since April 2011 (13572, 13573, and 13582). • Approximately 175 designations to date. • Fourteen General Licenses issued since August 2011.

4. Strategy to Combat Transnational Organized Crime “This Strategy is organized around a single, unifying principle: to build, balance, and integrate the tools of American power to combat transactional organized crime and related threats to our national security – and to urge our partners to do the same . . . While this Strategy is intended to assist the United States Government in combating transnational crime, it also serves as an invitation for enhanced international cooperation. We encourage our partners and allies to echo the commitment we have made here and join in building a new framework for international cooperation to protect all our citizens from the violence, harm, and exploitation wrought by transnational organized crime.” —President Barack Obama (July 19, 2011)

5. Strategy to Combat Transnational Organized Crime • 56-point strategy effective July 25, 2011. • Broken down into 6 broad chapters. • Executive Order placing economic sanctions on four international organized crime groups: • Yakuza (Japan) • Brother’s Circle (Eurasia) • Los Zetas (Mexico) • Camorra (Italy)

6. CISADA “CISADA offers a clear choice: a foreign financial institution can have access to the largest and most important financial sector in the world – the United States – or it can do business with the IRGC or Iranian banks sanctioned for facilitating Iran’s illicit activity, but it cannot do both.” —Under Secretary of the Treasury David S. Cohen (October 13, 2011)

7. Comprehensive Iranian Sanctions, Accountability, and Divestment Act (CISADA) • Signed into law July 1, 2010. • Statute builds upon United Nations Security Council Resolution 1929. • U.N. Resolution 1929 calls on States to: • Prohibit the opening of new branches, subsidiaries, or representative offices of Iranian banks; • Prohibit Iranian banks from establishing or maintaining correspondent relationships with banks in their jurisdiction; • Prevent the provision of financial services if the State has reason to believe that could contribute to Iran’s nuclear proliferation activities.

8. CISADA — § 104(c) • Directs Treasury to issue regulations that prohibit or impose strict conditions on the opening or maintenance of a correspondent account or PTA for a foreign financial institution that knowingly: • Facilitates the acquisition or development of WMDs or provides support for terrorist organizations or acts; • Facilitates the activities of a person subject to Iran-related U.N sanctions; • Engages in money laundering; • Facilitates a significant transaction or provides significant financial services to the IRGC or its affiliates or Iranian sanctioned banks.

9. CISADA — §§ 104(d) and (e) • Section 104(d) prohibits any person owned or controlled by a U.S. financial institution from knowingly engaging in any transaction with or benefiting the IRGC or its affiliates or agents whose property is blocked under IEEPA. • Section 104(e) requires Treasury to prescribe due diligence measures concerning correspondent accounts and PTAs.

10. CISADA implementing regulations — OFAC (§§ 104 (c) and (d)) • Final rule published August 16, 2010. • Largely mirrors statute. • Specifies factors OFAC will consider in determining whether a transaction is “significant”: • Size, frequency, and number of transactions; • Nature of transaction(s) (type, complexity, and purpose); • Level of awareness and pattern of conduct; • Nexus or proximity between transaction and blocked person; • Impact on goals of CISADA; • Use of deceptive practices; • Other factors that OFAC deems relevant.

11. CISADA implementing regulations — OFAC (§§ 104(c) and (d)) • Upon a finding that a foreign financial institution has knowingly engaged in a specified activity, OFAC must either: • Add the name of the foreign financial institution to the SDN list, and a U.S. financial institution is prohibited from opening or maintaining a correspondent account or PTA for that foreign financial institution; or • Impose one or more of the following strict conditions on a correspondent account or PTA: • Prohibit trade financing; • Restrict type of transactions (e.g., limit to personal remittances); • Impose monetary transaction limits; • Require pre-approval from the U.S. bank for the transaction.

12. CISADA implementing regulations — FinCEN (§ 104(e)) • Final rule published October 5, 2011. • Requires a U.S. bank, upon request from FinCEN, to inquire of specified foreign banks for which the U.S. bank maintains a correspondent account, and report back to FinCEN, whether the foreign bank: • Maintains a foreign correspondent account for a designated Iranian-linked bank; • Has processed one or more funds transfer within the preceding 90 days for or on the behalf of, directly or indirectly, a designated Iranian-linked bank, other than through a correspondent account; or • Has processed one or more funds transfer within the preceding 90 days for or on behalf of, directly or indirectly, the IRGC or its designated agents or affiliates. • FinCEN has already issued several requests.

13. § 311 Designation – “Jurisdiction of Primary Money Laundering Concern” • FinCEN published Finding and Proposed Rule November 21, 2011. • Proposed Rule imposes Special Measure 5. • Prohibits a U.S. bank from opening or maintaining a correspondent account for or on behalf of an Iranian bank. • Requires a U.S. bank to apply special due diligence to its existing correspondent accounts to guard against their improper indirect use by an Iranian bank. • Notify existing correspondents that U.S. bank knows or has reason to know provide services to Iranian banks that the correspondent cannot provide the Iranian bank with access to the correspondent’s U.S. bank account; • Take reasonable steps to identify any indirect use of the correspondent’s U.S. bank account by an Iranian bank, to the extent such indirect use can be determined from transactional records maintained in the normal course of business.

14. Practical Implications • OFAC • One designated foreign bank (EIH). • “Aggressive” implementation (50 countries and counting) – CDD implications. • FinCEN • Process for responding to inquiries. • § 311 • Notice to foreign correspondents. • Enhanced due diligence trigger (§ 312). • Certifications.

15. Contact Information Timothy P. Leary Senior Special AML Examiner Division of Banking Supervision and Regulation Board of Governors of the Federal Reserve System Washington, DC 20551 (202) 452-2428 Timothy.P.Leary@frb.gov

16. Questions?