Western banks are understandably cautious about doing business in Myanmar and Iran, even after changes to sanction rules were introduced in 2016. Matthew Oresman and Aaron Hutman of Pillsbury Law negotiate their way around what remains a delicate subject for many.

In 2016 changes to US and EU sanctions rules opened up new business opportunities in Iran and Myanmar. Yet as 2017 begins, most banks are still extremely cautious about proceeding with financial services for countries with sanctions exposure – limiting even legal and potentially profitable transactions.

Therefore, financial regulators in the US made several attempts in 2016 to clarify rules applicable to non-US banks and US banks that provide correspondent banking services.

On October 7, 2016, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued updated guidance for banking related to Iran. This followed joint guidance by US financial regulators on August 30, 2016, and clarification of customer due-diligence requirements in May 2016.

What can be done?

What transactions are not prohibited? For Myanmar, remaining US sanctions were removed in October 2016 with limited exceptions. In the case of Iran, a broad US embargo continues to rule out most Iran-related activity. However, US officials have emphasised that the US embargo only prohibits transactions where US jurisdiction applies and that most secondary sanctions have been removed for Iran.

US law still prohibits dollar transfers through the US financial system relating to Iran. However, OFAC’s October 7 guidance provided that non-US banks may maintain US dollar accounts and process local US dollar transactions (outside the US) for: Iranian companies; persons ordinarily resident in Iran; and 'blocked' Iranian banks and government institutions, as well as property in which they have an interest.

Transactions for Iran may be authorised or exempted under US law. Transactions incident to US general or specific licences normally are authorised. Non-US banks may route these transactions through the US financial system via US correspondent banks.

Sanctions and AML

Apprehension by non-US banks over the reaction of their US correspondent banks is often a major factor when considering business with Iran or Myanmar. US guidance in 2016 sought to address correspondent account relationships with regards to sanctions and anti-money laundering (AML) rules.

The guidance states that US banks can maintain correspondent account relationships and otherwise transact with non-US financial institutions that do business with Iran or maintain correspondent accounts with Iranian banks, excepting banks that are 'specially designated nationals' (SDNs).

In the case of Myanmar, although the US government removed sanctions, it maintained some AML measures. The Treasury provided “exceptive relief” on September 15, 2016, to these AML “special measures” and US financial institutions are authorised to provide correspondent banking services to Myanmar banks.

Thus, US banks face a risk decision on correspondent banking, but frequently not a legal impediment.

Due diligence expectations

What level of customer due diligence is expected? In May 2016, US regulators issued new standards for customer due diligence and knowledge of beneficial owners. This naturally has implications for sanctions and AML compliance. To clarify where it is acceptable for one bank to rely on another’s due diligence, US financial regulators on August 30 and OFAC on October 7 advised that financial institutions are not expected to repeat due diligence for customers of other banks. US correspondent banks are therefore not expected to repeat due diligence on non-US bank customers (and vice versa).

However, US correspondent banks were advised to consider the risks posed by the specific non-US bank, types of transactions and soundness of the bank’s national regulatory system. Non-US banks may need to consider due diligence on another bank’s customers where that bank’s “processes are insufficient”. The guidance also clarified that screening against the SDN list is expected, but not necessarily sufficient, and risk-based due diligence is expected.

What does and does not cause legal exposure? Many banks adjusted their risk policies following large fines by the US government. In 2016, US regulators sought to reassure non-US banks that large fines are imposed for wilful misconduct or a pattern of compliance failures – not simply from isolated mistakes.

The regulatory clarifications discussed above indicate there are paths for non-US banks to expand services relating to Iran and Myanmar, as well as for US correspondent banks to update their risk assessments and be open to discussions with responsible non-US banking customers.

Matthew Oresman and Aaron Hutman are counsels in Pillsbury Law’s public policy practice.

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