04 Apr 2016
Against a backdrop of big changes to U.S. sanctions in respect of both Iran and Cuba, A. Katherine Toomey, Cristian Francos and Aaron T. Wolfson of Lewis Baach PLLC explain how to access funds which have been frozen – until now.
The United States makes changes to its sanctions programs regularly. New sanctions programs are added, new persons and entities are added to existing programs, and new issues become the subject of sanctions. In the last couple of years, the US has substantially modified two sanctions programs – Iran and Cuba – and more subtly modified others. Many other commentators have written on the basic question of what transactions may now be possible and with whom. This discussion focuses, instead, on what a lifting of sanctions means in terms of money that has been frozen.
- The Release of Blocked Funds By General License
Certain US sanctions programs require that transactions in violation of the program be blocked by US financial institutions. Blocked funds are placed by banks in interest bearing accounts and, by law, are reported to OFAC within ten business days of their seizure. The funds remain on deposit at the financial institution until they are released, which usually occurs in one of two ways. Either they are released upon application of and granting of a special license by OFAC granted to the particular parties to the transaction, or they remain blocked until the sanctions program is lifted or modified to permit their release – usually by means of a general license.
What funds are released, when, and to whom, is dependent on the terms of the license that is granted. For example, in December 2011, as a result of an agreement between the United States and the Government of Libya, Libyan sanctions were substantially eased. At the time, OFAC issued the General License No. 11, to unblock assets owned or claimed by the Government of Libya, its agencies, instrumentalities and controlled entities, and the Central Bank of Libya. However, notwithstanding the general license, all funds of the Libyan Investment Authority and entities owned or controlled by it as of September 19, 2011 remained blocked. More recently, in the case of the US Cuban sanctions, OFAC issued general licenses to release the funds of certain specific groups of individuals.
Where an individual or entity falls within the terms of a general license, he or she may contact the financial institution maintaining the blocked account or blocked funds transfer to request that it remit the funds pursuant to the general license. Provided that the terms of a general license apply, there is no need to seek for a specific license authorization from OFAC as the financial institution no longer has the authority to hold the funds.
- When a General License Isn’t Enough
On July 14, 2015, China, France, Germany, Russia, the United Kingdom and the United States reached an agreement with Iran – the Joint Comprehensive Plan of Action (“JCPOA”) – to lift certain sanctions in exchange for an agreement by Iran to limit its nuclear program. On January 16, 2016, the International Atomic Energy Agency confirmed that Iran had implemented the nuclear reforms required by the JCPOA. As a result, the United States and the EU eased elements of the existing sanctions on Iran. From a US perspective, the sanctions that were lifted were generally limited to secondary sanctions (applicable to non-US persons), including those that prohibited non-US banks from doing business with Iran.
Although an exact figure has been elusive, it is clear that the lifting of the Iranian sanctions has unblocked many billions of dollars for the government of Iran. Different outlets report different figures – perhaps up to $100 billion was unblocked with the lifting of sanctions. Most of the funds unblocked by the lifting of these sanctions were held by international banks under the US’ more recent secondary sanctions regime. But given the way that US sanctions are imposed, it is likely that there are also situations in which funds were frozen by US financial institutions pursuant to Iranian sanctions that have now been lifted. For example, when the US added Iranian owned ships to the Specially Designated Nationals list maintained by OFAC, transactions routinely got blocked by US banks because the name of the vessel on bills of lading or other shipping documents triggered US blocking software. It was not uncommon for the Iranian ships to be at sea and loaded with cargo when they became “vessels non grata” and payments on letters of credit and bank drafts got blocked mid-stream (so to speak) – the transactions were legal when the vessels left port, but became illegal in the course of the voyage. So how do these funds get released to their legitimate owners?
If release of the funds is not covered by a general license (and there is no general license permitting US financial institutions to release funds blocked in respect of the previous Iranian sanctions), the most obvious way for funds to be released is for the claimant to apply for a specific license based on the change in the sanctions program. Applications for the release of blocked funds can be found on OFAC’s website and may be submitted electronically. They can, however, take a long time to process. According to OFAC, there is no particular or required time frame for the consideration of each application. Applications are considered on a case-by-case basis and may require interagency consultation within the US government.
- Complications May Arise
The fact that an applicant can make an online request for a specific license raises additional questions. Most prominently, who is the proper claimant? In the case of a trade finance transaction, for example, a party considering making an application for release of funds may want to consider questions like:
- Were the goods delivered? (suggesting that the funds should be claimed by the supplier)
- Or not? (suggesting that the funds should be claimed by the purchaser who is out money but never received the goods)
- If the transaction involved a letter of credit, did the issuing bank make payment on it? Was the bank paid by the buyer? Did a confirming bank make payment on the letter of credit?
These types of questions may not be overly difficult to answer for funds blocked as a result of the sanctions lifted pursuant to the JCPOA. The sanctions were in place for a comparatively short period of time, so records should be accessible for determining who should claim the funds, and what paperwork needs to be assembled. The same may not be true in respect of other US sanctions programs that may be lifted or modified in the future. For example, any easing of the US’ Cuban sanctions may give rise to claims for funds that were blocked for decades. In the interim, parties may have died and businesses may have merged, changed ownership or closed. Documentation is likely to have disappeared, and memories faded. Notwithstanding the requirement that banks escrow blocked funds, changes in the banking sector, including hundreds of bank mergers, may make it difficult to identify the financial institution holding the funds. When longstanding programs are modified and funds are subject to release, basic steps need to be taken to:
- Identify and document frozen transactions. Collect whatever documents can be located.
- Identify the most logical applicant for the funds. Think about proving legal ownership to the funds and collect documentation of any inheritance, assignment, or transfer of the right.
- Identify the financial institution that is the most likely current holder of the blocked funds.
Although changes in a sanctions program, and in particular the issuance of a general license, may mean that a financial institution has no further right to block certain funds, no bank is likely to unblock specific funds unless an actual claim to the funds is made by someone with a colorable legal right to the funds. A bank is unlikely to spend resources to locate the owners of funds for transactions that may be decades old. So the burden is on the claimant to establish not only a right to payment under the applicable sanctions program, but also a legal right to return of the funds. Given the costs and complications of proving a right to the funds, it is likely that only claims for substantial funds will be pursued. This means that unclaimed funds will either remain indefinitely in the hands of a financial institution, or, with time, will be escheated to the state.
Lewis Baach’s experienced team of compliance professionals works with clients in the U.S. and around the world to develop, maintain and strengthen their compliance systems.
 US persons have been, and will continue to be, generally prohibited from conducting business with Iran or Iranian nationals with few and narrow exceptions.
 There is, however, considerable dispute over how much of that actually became available to the Government of Iran. E.g., http://www.cnsnews.com/news/article/patrick-goodenough/contradicting-kerry-iran-claims-100-billion-sanctions-relief-fully; http://www.usnews.com/news/articles/2015/07/30/will-iran-get-its-billions-back.
 This was a frequent occurrence between 2011 and 2015. E.g., https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20110331.aspx; https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20130509.aspx; https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140829.aspx.
You can claim CPD minutes for this content, by signing up to our CPD WalletFREE CPD Wallet