This panel was convened at 2:15 pm, Friday, April 5, by its moderator, Barry Carter of the Center on Transnational Business and the Law, Georgetown University Law Center, who introduced the panelists: Maya Lester of Brick Court Chambers; Serena Moe of Wiley Rein; and Adam Szubin of the Office of Foreign Assets Control, U.S. Department of the Treasury.*
OVERVIEW AND OPERATION OF THE EVOLVING U.S. FINANCIAL SANCTIONS, INCLUDING THE EXAMPLE OF IRAN
By Barry E. Carter and Ryan M. Farha ([dagger])
Economic sanctions have had a long history dating back to the Greek city-states. (1) Their use has become more common since World War II, often being employed by the United Nations, regional entities, and individual countries, including the United States. Although a range of sanctions continues to be used, financial sanctions have grown in importance. This stems in part from the burgeoning increase in international financial transactions. Also, the terrorist attacks of September 11, 2001, provided great impetus to the United States to improve significantly the tools and techniques for tracing and identifying financial transactions by terrorists or others. (2)
Activities that usually are possible subjects of economic sanctions (3) include: (a) bilateral government programs, such as foreign assistance and aircraft landing rights; (b) exports of goods or services from the sending country; (c) imports from the target (4) country; (d) financial transactions, including bank deposits and loans; and (e) the economic activities of international financial institutions, such as the Inter-American Development Bank. (5)
Financial sanctions focus on the flow of funds and other forms of value to and from a target country, corporation, individual, or other entity. These sanctions can have wide impact because they can not only freeze financial assets and prohibit or limit financial transactions, but they also impede trade by making it difficult to pay for the export or import of goods and services. Financial sanctions are often used in tandem with trade and other sanctions to maximize their impact. (6)
Using U.S. financial sanctions as an example, this paper tries to highlight the mechanics and operation of financial sanctions. This includes their enforcement, which occurs through a unique combination of (a) actions and self-reporting by U.S. and other international financial institutions and (b) supervision by U.S. regulatory authorities.
U.S. financial sanctions are imposed by U.S. statutes (7) and executive orders, (8) and generally implemented through regulations. (9) The Office of Foreign Assets Control (OFAC) within the U.S. Department of the Treasury (Treasury), in consultation with the U.S. Department of State and sometimes other federal agencies, generally has primary responsibility for implementing these financial sanctions. (10)
As a key part of its efforts, OFAC maintains the Specially Designated Nationals and Blocked Persons list (SDN List). (11) The SDN List contains individuals, companies, and other entities whose assets are blocked, generally because they are owned or controlled by, or acting for or on behalf of, sanctioned countries, or are designated under non-country-specific programs, such as those targeting terrorists and foreign narcotics traffickers. (12) Collectively, these individuals, companies, and other entities are "Specially Designated Nationals" (SDNs). (13) With certain exceptions, U.S. persons are generally prohibited from transacting with SDNs. (14) In addition, U.S. persons are generally prohibited from engaging, without OFAC's authorization, in most transactions in or with certain countries or geographic areas targeted by economic sanctions. (15)
TRANSFERRING VALUE AND THE PAYMENT SYSTEMS
To understand the mechanics and operation of financial sanctions, it is very helpful to have some familiarity with how value is transferred and how the key payment systems operate.
Transferring Value. In modern economies, value is transferred between parties via cash or claims on banks. These claims in turn may be transferred using checks, credit cards, or electronic funds transfers (wire transfers). (16) Wire transfers are the most important kinds of payments in the international financial system; large financial institutions and corporations mainly use wire transfers to send large volumes of funds at a high frequency. (17)
Essentially, a wire transfer is a transaction in which the transferor or "originator," which may be an individual, a corporation, or a bank, instructs its bank to transfer funds from its account to the account of the recipient or "beneficiary." (18) If the originator and beneficiary have accounts at the same bank, that bank simply makes a "book transfer" by debiting (and thus reducing the funds in) the originator's account and crediting (and thus increasing the funds in) the beneficiary's account. (19)
If the originator and beneficiary do not have accounts at the same bank, but the originator's bank and the beneficiary's bank maintain "correspondent accounts" (20) with each other, the transfer may be completed through one of those correspondent accounts. (21)
Alternatively, the originator's bank and the beneficiary's bank may both maintain correspondent accounts at a third "intermediary bank," where the transfer will occur. (22) This approach essentially requires that the banks retain sufficient balances in their correspondent accounts and establish chains of intermediaries by which to effect funds transfers. (23)
Key Payment Systems
Fedwire. These requirements are ameliorated within the United States by Fedwire, a communication and settlement system owned by the twelve Federal Reserve Banks, where a large number of U.S. banks maintain correspondent accounts and where liquidity is plentiful. (24) The Federal Reserve Banks, taken together, serve the role of an intermediary bank in funds transfers and actually settle payments. (25) Among the Federal Reserve Banks, the Federal Reserve Bank of New York (FRBNY) plays an especially important role because the majority of U.S. Fedwire transactions originate from financial institutions under FRBNY's jurisdiction.
CHIPS and SWIFT. Two other important payment systems are the Clearing House Interbank Payments System (CHIPS) and the Society for Worldwide Interbank Financial Telecommunications (SWIFT). CHIPS, like Fedwire, performs both communication and settlement functions. (26) CHIPS is the main domestic electronic funds transfer system in the United States for processing U.S. dollar wire transfers between international banks and other financial institutions. (27)
SWIFT, unlike Fedwire and CHIPS, is just a communication system. (28) SWIFT, which is based in Belgium, provides a common language--its payment instructions--for financial institutions around the world and is thus vital to the settlement of international payments. (29) However, SWIFT does not actually provide settlement services; that is, SWIFT-directed funds transfers are actually settled through correspondent banking relationships, Fedwire, CHIPS, or other national payment systems. (30)
COMPLIANCE AND ENFORCEMENT
Enforcement of financial sanctions begins in the payment systems. It is worth noting, though, that the FRBNY, despite its role...