Sanctions ‘Derisking’ Causing Avoidable Banking Delays, Cancellations, NGOs Tell Treasury

The NGOs submitted comments to Treasury in response to a June proposed rule that could explicitly require banks and other financial institutions to put in place “effective, risk-based, and reasonably designed“ compliance programs to combat money laundering and terrorism financing (see 2407010018). The groups applauded some of the rule’s proposals, but said Treasury should use the rulemaking to also urge banks to promote “financial inclusion” and mitigate the effects of sanctions “derisking.” They said this derisking sometimes causes banks to block transactions that should be allowed, because those banks would rather be overly cautious than risk a sanctions penalty.

InterAction, the largest U.S.-based alliance of international humanitarian NGOs, said it welcomed a move by the U.N. in 2022 that created a new humanitarian carve-out across its sanctions regimes, which was designed to allow aid groups to deliver food and medical assistance to vulnerable people living in sanctioned jurisdictions (see 2212120054). It said at least one of its members saw a positive change as a result of the new carve-out -- during the first nine months of 2023, the member experienced a 40% decrease in blocked transfers from its banks.

But those blocked transfers began returning in October, InterAction said, when the member experienced a “sharp and sudden 300% spike” in delayed and blocked transfers.

The organization said those blocks and delays have continued into this year. Its member is seeing about 200 delayed or canceled transfers per month, which it has largely attributed to U.S. correspondent banks rejecting transactions involving Yemen, Myanmar, Libya and Afghanistan.

Other InterAction members have also complained about problems with correspondent banks, “including significant delays as well as refusals to process transactions,” the group said. “These challenges force NGOs to use alternatives to the traditional banking system in order to meet program requirements. These alternative mechanisms are expensive, which means funds destined for programs are instead used to facilitate these financial transactions.”

InterAction said its member organizations have reported challenges sending funds that should be authorized to more than 20 countries, including Syria, Myanmar, Afghanistan, Iraq, Yemen, Venezuela, Pakistan and Sudan. One member said transfer delays average anywhere from one to four weeks but can be as long as six weeks, InterAction said, and multiple members reported delays for transactions that don’t touch sanctioned jurisdictions.

One of the group's members reported having spent an additional $100,000 annually over the past three years to pay staff whose sole job is to manage wrongly blocked or delayed transactions. “This is the equivalent annual cost of 20,000 school kits for displaced children,” InterAction said. “While large organizations can absorb this cost, it is often prohibitive for smaller organizations with more limited capacity.”

Banking derisking practices are also harming foreigners living or studying in the U.S., including from Iran, the National Iranian American Council (NIAC) said. The council said Bank of America in particular has frozen accounts of former Iranian citizens -- “often with no notice and despite confirmations from their clients of their U.S. residency” -- or of Iranian students studying in the U.S.

NIAC said it's involved in a class action lawsuit with Bank of America over these issues, adding that the bank has "defended its compliance practices" in court and "cited a variety of federal regulations to argue that their enforcement actions were proper." The bank specifically cited the Office of Foreign Assets Control as "discouraging banks from servicing the accounts of foreign nationals," NIAC said, and it argued that the International Emergency Economic Powers Act shields it from "well-founded charges of discrimination."

NIAC said it has asked the bank to "cease these de-risking actions" at least three times since 2014 "to no avail." Bank of America didn't respond to a request for comment.

The Yemeni American Merchants Association made similar points, saying its members have for years “been subjected to unjust account closures, denials of financial services, and other forms of exclusion by financial institutions,” largely driven by a “misinterpretation or overenforcement of sanctions.” It said Muslims who are U.S. citizens and lawful residents have been unfairly targeted because of their national origin, religion or “perceived risk associated with their background.”

NAIC said it’s clear “these actions have been driven by efforts to comply with existing U.S. sanctions regulations on Iran.” The group pointed to confusion among banks surrounding language in the Iranian Transactions and Sanctions Regulations, which “broadly prohibit transactions” between U.S. companies and people or entities subject to the jurisdiction of Iran. The regulations define those people or entities as anyone who is “ordinarily resident in Iran,” the council said.

It said that phrase is unclear and “appears to have led to significant overenforcement of sanctions on the part of some major U.S. financial institutions who have de-risked or closed the accounts of many Iranian Americans and Iranian nationals, often without valid cause or justification.”

The group noted that Treasury has issued guidance clarifying that Iranian Americans and Iranian nationals “ordinarily resident” in the U.S. don’t need to have their accounts restricted.

“However, either this clear directive has often been ignored or does not filter through to financial institutions and their compliance practices,” it said.

NIAC said it asked Treasury several years ago to issue a general license that would allow U.S. people and entities to operate bank accounts for people physically located in Iran, “consistent with license authorizations that have been promulgated with respect to other U.S.-embargoed countries and jurisdictions,” including Syria and Ukraine's Crimea region. It said Treasury rejected this request in 2020.

“We encourage the Treasury Department to examine its sanctions regulations closely,” the council said, “and to once again consider publishing a license allowing non-sanctioned individuals to bank from inside of Iran.”

InterAction said Treasury should specify that banking compliance programs should also promote “financial inclusion and [mitigate] the effects of de-risking.” It also said Treasury should require banks, as part of their compliance risk assessment, “to consider the full risk picture presented by a customer, including any mitigating measures in place as well as any applicable OFAC licenses authorizing proposed activity and transactions.”

Treasury also should add specific language to its regulations to state that “compliance with these regulations by a bank that is acting in good faith would be taken into account in any enforcement action if there is an unintentional AML/CFT violation by the bank,” InterAction said. “The strict liability standard of sanctions law and concerns about inadvertent violations creates an imbalance in financial institutions’ risk-benefit calculation in favor of derisking. A statement such as this could help shift the calculation.”

The agency should also issue guidance to explain that correspondent banks can rely on the due diligence of the originating bank when helping with international funds transfers, and should stress that these intermediary banks “are not a target of” enforcement by the Office of Foreign Assets Control. “Correspondent banks receive a nominal payment for facilitating these transfers but face the same enforcement risks as originating banks,” InterAction said. “This has resulted in a sharp decline in correspondent banking relationships over the past decade, a significant driver of derisking.”

Banks also should be encouraged to seek out more information from a customer if they find a red flag, rather than immediately cancel the transaction, the group said. This could include giving the customer “opportunity to correct or explain any problems in cases in which the issue would not rise to the level of a law enforcement investigation.” InterAction said some customer screening tools or media searches turn up negative information about a person even though they’re not subject to sanctions, and sometimes that information is inaccurate.

The group pointed to a 2021 survey that found 82% of financial services seeking anti-money laundering or know-your-customer data used Google for due diligence or risk investigations, and 34% said false positives were a challenge to their due diligence.

“Checking a customer, its partners, and the recipient of a funds transfer against sanctions lists for blocked parties should be sufficient,” the group said.