The Office of Foreign Assets Control (“OFAC”) recently announced that it removed Iraq’s Elaf Islamic Bank from its Part 561 List. Elaf became noteworthy last July when it and China’s Bank of Kunlun became the first two foreign financial institutions named to the 561 List.  U.S. financial institutions are prohibited from opening or maintaining a correspondent account or a payable-through account for banks on the 561 List.

As we reported at that time, OFAC provided no details for the reasons of either bank’s designation. In the case of Elaf, however, we have referred to a 2012 New York Times article reporting that the Obama Administration has said that Elaf facilitated transactions worth millions of dollars with sanctioned Iranian banks and has objected to the Central Bank of Iraq’s allowing Elaf to continue to attend its U.S. dollar currency auctions.

OFAC now says that Elaf has offered its mea culpa, frozen the accounts it holds for the Export Development Bank of Iran (“EDBI”) and begun “reducing its overall exposure to the Iranian financial sector.” Quite an about-face from a foreign entity that reportedly had denied any wrongdoing and seemed not to be concerned with U.S. sanctions against it.

One might ask how this development squares with Congress continuing to legislate further sanctions against foreign banks for dealings with Iran, as we reported last week. One answer may be that Congress continues its chest thumping and OFAC does its best to show that these sanctions have some bite behind the bark.  This is a hard case to make when the Part 561 List was only two and is now one.

If the goal, however, is to deter non-U.S. banks from financing the Iranian government and its apparatus, Kunlun and Elaf seem to be examples of the low-hanging fruit of the global financial community. If the United States goes after bigger banks alone, it would, of course, run the risk of jeopardizing cooperation with others, most notably the European Union, on how to advance international sanctions against Iran. OFAC appears cognizant to that point when referring to EDBI as “U.S. and EU-designated.” If sanctions are extraterritorial in nature, it helps to have friends outside the territory to support you.

In any event, it is hard to assess whether the settlement with Elaf or the Part 561 sanctions in general will be effective as part of future sanctions enforcement. The Elaf development appears to be a victory on paper as a non-U.S. person agreed to terms with the U.S. government over its dealings with Iran apparently occurring exclusively outside the United States. One can only wonder about how the United States will monitor Elaf’s frozen accounts or any of its future dealings with Iranian banks.

For now, at least, the Part 561 List just became a lot a lonelier for Kunlun, and it is a bit easier for everyone to comply with a List of one.

OFAC announced on Friday a settlement with California-based SAN Corporation (“SAN”) for an alleged violation of the Iranian Transactions Regulations that occurred in September of 2007.  OFAC alleged that SAN sold nutritional supplements to an entity in Kuwait with knowledge that their end use was to be in Iran.  SAN agreed to pay $22,500 to settle liability for the alleged violation.  OFAC reported that the base penalty amount for the alleged violation was $25,000.

OFAC determined that the alleged violation was non-egregious and it provided several conditions to support that finding: (1) its allegation involved one instance, (2) SAN had no history of prior OFAC violations and (3) the goods at issue, in OFAC’s words, “appear to have been eligible for a license” under TSRA.

What leaves us bewildered is the parade of horribles that OFAC also recites: (1) SAN did not voluntarily disclose the transaction to OFAC, (2) SAN acted with “reckless disregard” for sanctions law by selling to an entity in Kuwait with knowledge that end use was in Iran and having been informed by the Iranian end-user that intended shipment to Iran required an OFAC license and (3) SAN did not fully cooperate with OFAC by providing “incomplete and/or inaccurate statements” to OFAC.

Whatever all the reasons were behind OFAC’s agreeing to this settlement, the result is a good reason to give pause before going to OFAC with a voluntary disclosure. While much goes into a decision of whether to make a voluntary disclosure, it is important to assess enforcement actions like this one to determine carefully if efforts spent to prepare, submit and deal with a voluntary disclosure are worth it.

Clif adds: If shipping an item to Iran without a license even after the Iranian end-user tells you that a license is required isn’t enough to make something an “egregious” violation, I am not sure the word egregious has any meaning left.