U.K. Ban on Transactions with Iranian Banks

Fulbright Briefing
By Lista M. Cannon, David M. Harris and Nicola Kelly

In the latest wave of sanctions targeting Iran, the U.K. has taken steps independently of the UN Security Council and EU regulations to cut off all ties with Iranian banks. The new sanctions apply to all persons operating in the U.K. financial sector and place an additional compliance burden in an area that already requires stringent policies and procedures. The U.K. financial and credit institutions engaged in business in the region should monitor the developments closely. Further restrictive measures appear likely as the situation in Iran remains uncertain.

The rationale for the new restrictive measures arises from the U.K.'s position that the activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the U.K.[1] In response, HM Treasury has brought into effect for approval the Financial Restrictions (Iran) Order 2011 (the "Order"). The Order is made pursuant to HM Treasury's powers conferred by Schedule 7 of the Counter-Terrorism Act 2008 (the "2008 Act"). The Order aims to provide counter-measures to protect the U.K. financial sector from money laundering and financing of terrorism risks emanating from Iran. The Order places a further level of complexity to the existing UN and EU sanctions on Iran. According to the U.K. Written Ministerial Statement, it is considered that the existing UN and EU financial sanctions against Iran have demonstrated that targeting individual Iranian banks is not sufficient.

The Order is valid as at 3 p.m. on 21 November 2011 but requires approval by resolution of each House of Parliament within 28 days beginning with the day on which the Order was made, subject to extension for periods of dissolution or the end of a parliamentary session, or adjournment of both Houses for more than four days. If the approval is not received within the time period, the Order will cease to have effect at the end of that period. If the order is approved, it will be valid for one year.

At the time that this action was taken in the U.K., the U.S. and Canada also imposed further sanctions on Iran.[2] Press articles have also reported that the EU is proposing to impose sanctions on a further 200 Iranian firms and individuals.

Scope of the Order

The Order applies to all persons operating as financial or credit institutions in the U.K. financial sector, as well as branches of such persons, wherever located (the "relevant persons"). The U.K. Export Control Organisation had confirmed that the provisions do not apply to overseas subsidiaries or U.K. nationals working overseas.[3] Non-U.K. companies are only subject to the requirements of the Order for activities within the U.K.

The Export Control Organisation has also confirmed that exporters are unlikely to be caught directly by the Order unless they are also operating as a financial or credit institution in the U.K. As a result, the Order is not a trade ban. However, the restrictions will inevitably make trading with Iranian companies difficult for U.K. businesses, especially if Iranian companies have a banking relationship with an Iranian bank.

The Order prohibits relevant persons from entering into, or continuing to participate in, any transaction or business relationship with a designated person, except as licensed by HM Treasury. Designated persons is defined in the Order as: (i) a credit institution incorporated in Iran; (b) the Central Bank of Iran; (c) any branch or subsidiary, wherever located, of a credit institution incorporated in Iran.

Schedule 7 of the 2008 Act defines a business relationship as "a business, professional or commercial relationship between a relevant person and a customer, which is expected by the relevant person, at the time when the contact is established, to have an element of duration". Relevant persons must cease from performing any existing transactions or undertaking any activity pursuant to a business relationship with a designated person unless they are authorised to do so by HM Treasury.

HM Treasury has issued six general licences. The licences authorise all relevant persons to participate in certain transactions or business relationships, which HM Treasury believes it is appropriate to exempt from the effects of the Order, for example, for humanitarian purposes[4].

HM Treasury has confirmed that relevant persons should ensure that they have adequate policies and procedures in place to ensure their compliance with the Order. General guidance on the operation of the Treasury's powers under Schedule 7 of the 2008 Act has been prepared for financial and credit institutions by the Joint Money Laundering Steering Group and can be found on their website at: http://www.jmlsg.org.uk/industry-guidance/article/part-i-part-ii-part-iii-and-treasury-ministal-approval.

Effect on Existing EU Sanctions

Companies are reminded that the existing EU sanctions (including asset freezes) under EU Regulation 961/2010 as amended (the "Regulation") remain in force, and should also be considered when assessing the effect of the new restrictions on business relationships. For a summary of the existing sanctions, please see our briefing of 1 November 2010.[5]

The Order goes beyond the existing EU sanctions because it prevents transactions and business relationships with all Iranian credit institutions compared to the existing prohibitions on making funds or economic resources available to those subject to an asset freeze. Consequently, any transaction involving a relevant person which requires a payment to or from an Iranian bank will be prohibited unless a licence is issued.

Penalties

The Financial Services Authority (for credit institutions that are authorised persons and financial institutions), the Office of Fair Trading (for consumer credit financial institutions), and Her Majesty's Revenue and Customs (for Money Service Businesses that are not authorised persons)[6] will each play an active role in supervising firms' compliance with the Order. If a relevant person breaches the Order, they are liable either to a civil penalty or a criminal prosecution. HM Treasury has confirmed that no penalty may be imposed nor will an offence be committed if the person took all reasonable steps and exercised all due diligence to ensure that the requirements of the Order would be complied with.

With further prospective restrictions in mind, financial and credit institutions dealing in the region should review the provisions of the new sanctions and HM Treasury guidance document carefully, analyse the effect they may have on their business activities and existing compliance programmes, and monitor the situation as it continues to develop.

This article was prepared by Lista M. Cannon, Partner (lcannon@fulbright.com or +44 020 7832 3601), David M. Harris, Senior Associate (dharris@fulbright.com or +44 0 20 7832 3637) and Nicola Kelly, Associate (nkelly@fulbright.com or +44 0 20 7832 3630) of Fulbright & Jaworski International LLP in London. Lista, David and Nicola are lawyers in Fulbright's International Trade Practice Group. Lista Cannon is head of the firm's UK and EU Trade and Sanctions Practice in London. Stephen M. McNabb (smcnabb@fulbright.com or +1 202 662 4528) is Partner and Chair of Fulbright's International Trade Practice Group. Fulbright's International Trade Practice Group advises clients worldwide in matters concerning international trade laws and regulations; including economic sanctions regulations, export/import control regulations, anti-boycott regulations, and anti-corruption laws.

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[1] http://www.hm-treasury.gov.uk/d/written_ministerial_statement_comsec211111.pdf

[2] http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=5217&site_id=494&detail=yes

[3] http://www.bis.gov.uk/assets/biscore/eco/docs/notices-to-exporters/2011/nte201127.doc

[4] http://www.hm-treasury.gov.uk/d/fin_restrictions_iran_notice2011.pdf

[5] "Iran Sanctions Update: The European Union Implements Council Regulation on Restrictive Measures Against Iran", Lista M. Cannon, David M. Harris and Nicola Kelly, 1 November 2010, http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=4704&site_id=494&detail=yes

[6] The Department of Enterprise, Trade and Investment Northern Ireland for credit unions in Northern Ireland will also be a supervisory authority, until this is transferred to the FSA

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