Yesterday, I reported on the New York Department of Financial Services’ Order against Standard Chartered claiming that the Bank violated the rules of the Office of Foreign Assets Control by stripping out the names of Iranian entities in wires for legal U-turn transactions permitted before November 2008 under section 560.516(a)(1) of the Iranian Transaction Regulations. The New York agency attempted to premise this claim of illegality on section 560.516(c) of the regulations. That section reads:

Before a United States depository institution initiates a payment on behalf of any customer, or credits a transfer to the account on its books of the ultimate beneficiary, the United States depository institution must determine that the underlying transaction is not prohibited by this part.

This, NYDFS argued, required the U.S. bank to verify the legality of the transaction, something it couldn’t do if the customer data referring to Iran was stripped from the wires. I pointed out as long as the transaction was otherwise legal, this section wouldn’t be violated.

But in a letter on the Standard Chartered matter from OFAC to the U.K. authorities, obtained by Business Insider, OFAC makes a different and better point

Subsection 560.516(c) of the Iranian Transactions Regulations calls on U.S. financial institutions, including foreign financial institutions operating in the U.S., to confirm the applicability of a license only if the institution holds an account for a customer that is initiating or receiving a payment generally, the first and last banks in a transaction. Because U.S. financial institutions could not serve as either the originating or recipient bank on offshore-to offshore U-Turn transactions, this subsection did not apply to U.S. financial institutions serving as intermediaries on licensed U-Turn transactions.

That’s an excellent point. In a U-Turn transaction, the U.S. bank by definition would not be transferring money to or from one of its customers, and so this provision would not impose any obligation on the U.S. bank. Instead, this provision applies when, for example, there is a specific license permitting payment to or from a U.S. customer, as referenced by 560.516(a)(2), and in that case the U.S. bank would need to verify the existence and applicability of the license.

As I said yesterday, NYDFS shouldn’t get all tangled up in interpreting regulations that it doesn’t understand and has no authority to enforce.

Permalink


Copyright © 2012 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)