ABOVE: ANSI offices in DC

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The Office of Foreign Assets Control (“OFAC”) recently sent a letter of guidance to the American National Standards Institute (“ANSI”) stating that U.S. participation in international standards organizations, such as the ISO and the ITU, did not violate OFAC’s sanctions on Iran even though Iranians also participated in these standards organizations and, often, in the same standard setting processes with U.S. participants. ANSI had filed a request for guidance with OFAC after a number of American companies, particularly those in the oil and gas industry, had expressed concern as to whether they could participate in the international standards process alongside Iranian companies.

OFAC held that the participation in the standards process with Iranians through ANSI and the ISO was both (1) an exempt transfer of informational materials and (2) a permissible elaboration of written materials permitted under the general license set forth in section 560.538 of the Iranian Transaction Regulations (“ITR”). Although the result clearly furthers demonstrable U.S. economic interests in broad adoption of international standards and U.S. participation in the formulation of those standards, this guidance involves, at least with respect to its reliance on the information exception, an unusual interpretation of OFAC’s rules.

The exception for exports of informational materials is limited, under section 560.210(c)(2) of the ITR, to informational materials “fully created and in existence at the date of the transactions.” The problem here, of course, is that the information supplied by U.S. persons may be part of the deliberative process and not fully in existence prior to the U.S. person’s participation in the standards process with the Iranian companies.

The ANSI request for OFAC guidance tries to finesse this problem this way:

Although the ITR require that “informational materials” be fully created and in existence at the time of the transactions, new international standards may be derived from existing national standards . . . or are based on technical information already in existence.

There are enough weasel words in that argument, which I have taken the liberty to emphasize in bold, to see the problem with that argument. The rule doesn’t talk about information that may be based on or derived from information already in existence; it talks about information itself already in existence.

Another effort that ANSI tries to finesse the problem is more direct, although not more logical:

Technical information shared at the working group level is similarly fully created and in existence at the time it is shared within the group

Again, the rule talks about the information in existence at the time of the transaction, not at the time it is shared. By definition, information will always be fully in existence when it is shared or exported. If Iran commissioned me to engage in a market study, it would not be in existence at the time of the commission (which is the time of the transaction under the rule) but would be at the time I exported it to Iran and there is no question that such a transaction would run afoul of the Iran sanctions.

The other rationale urged by ANSI and adopted by OFAC is on much firmer footing. Section 560.538(a)(2) of the ITR permits U.S. persons to participate with non-Governmental Iranian entities in “[c]ollaborating on the creation and enhancement of written publications.” Since the ISO standards are ultimately published (indeed, they would be pointless without publication), this seems to cover U.S. participation in the process with Iranians, including the sharing with, and export to, Iranians information that was not in existence at the time the standards process began. The marketing study example I gave above wouldn’t fit under this exception because it wasn’t intended to be published.

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Lots of news lately on Iran sanctions, so here’s a summary and some links.

• Here’s a link to the OFAC letter we mentioned last week disputing some of the charges made by the New York State Department of Financial Services against Standard Chartered Bank.
• A report by Reuters says that Iran is now trying to open up banks in Armenia to skirt U.S. sanctions.
• The New York Times reports that Iran’s best buddy Iraq is also helping Iran skirt financial sanctions, including letting the newly sanctioned Iraqi bank, Elaf Islamic Bank, participate in the daily auction of U.S. dollars for Iraqi dinars conducted by the Central Bank of Iraq. The Central Bank says it is permitting Elaf’s participation because it believes Elaf’s assertion that the U.S. is lying when it accuses Elaf of dealing with Iran.
• You can add the Royal Bank of Scotland and Commerzbank to the list of European banks being investigated by U.S. authorities for their dealings with Iran.
• The United Nations today accused Iran of violating UN sanctions by supplying arms to Syria.
• The Office of Foreign Assets Control (“OFAC”) issued yesterday a general license to allow tax-exempt NGOs to transfer up to $300,000 in the next 45 days for Iranian earthquake relief, provided that the funds do not transit blocked persons such as Bank Sepah et al. Banks that had not been previously blocked by name but which were blocked solely the recent E.O. 13599, which blocked all the remaining banks in Iran, can be used for transfers. Drop meet bucket; bucket meet drop.

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.