By Erich Ferrari

 

Just Say No: Prohibitions Against Havaleh Between the US and Iran

By Erich Ferrari

A Note from PAAIA: In response to several inquiries by our members about havaleh, we asked Eric Ferrari, a Partner in the Washington, DC office of McNabb Ferrari, P.C. and a member of the Iranian American Bar Association-Washington, DC Chapter to tell us about the laws and regulations that govern these transactions. He kindly obliged with Just Say No, an informative and thoughtful article that we are happy to share with you. Erich is an internationally recognized expert in OFAC litigation and U.S. economic sanctions programs; he publishes on related issues and blogs at www.sanctionlaw.com. Nothing in this article should be construed as legal advice as every case is different. If you are impacted by any topic discussed in this article you should consult with an attorney who has expertise in OFAC. If you would like more information about the contents of Erich’s article, call him at 202-351-6161 or email ferrari@mcnabbferrari.com.

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“The US cannot interfere with the transfer of money if it is sent using havaleh.” WRONG.

I hear this comment from individuals in the Iranian American community all the time. The sad truth is that havaleh is not the answer to circumventing U.S. economic sanctions imposed against Iran. A recent court case where an Iranian who had immigrated to America has recently highlighted the consequences of such beliefs.

In that case, an Iranian immigrant was convicted of federal criminal charges in New York for transferring money between the U.S. and Iran through the havaleh system. In addition to the criminal charges for violating the International Emergency Economic Powers Act–the underlying legal authority of the Iranian Transactions Regulations (“ITR”)—this individual was also convicted on conspiracy and money laundering charges. As such, he faces up to 20 years in prison, and millions of dollars in potential fines and restitution. Finally, due to his immigration status he will also be deported to Iran upon the termination of his confinement. These are the real life consequences of what can happen when havaleh is employed as a way of circumventing the ITR. Now it should be noted that this case was rare, because the individual was considered to be a havaleh broker; however, it does prove the point that the U.S. is serious about enforcing Iran sanctions and that the consequences can be quite severe.

The saddest part of this individual’s story is that the situation could have been avoided all together by simply applying for a specific license from the United States Department of the Treasury Office of Foreign Assets Control (“OFAC”) and by avoiding the havaleh system.

This article will explore the requirements of the ITR in light of the policy of the agency that administers it: OFAC. In addition, the topic of havaleh will be discussed and I will explain how to avoid facing similar penalties as those suffered by some Iranians and Iranian-Americans who have employed the havaleh system.

II. Iran Sanctions and OFAC

OFAC is responsible for administering U.S. economic sanctions programs. In carrying out this mission they enjoy a great amount of deference as their actions are those of an administrative agency acting under the President’s national security powers. In other words, OFAC can act without being limited by such common legal bulwarks as probable cause and warrants. Furthermore, their actions typically are not subject to judicial review. As such, there is limited legal authority in which to question OFAC’s regulations and how they are administered.

One of the major programs OFAC administers is the economic sanctions against Iran. That program is known as the Iranian Transactions Regulations (“ITR”). Under the ITR, U.S. persons, defined as U.S. citizens, corporate entities formed under the laws of the United States, and individuals and entities located within the United States, are prohibited from engaging in most types of financial transactions with Iran. These transactions do not necessarily need to be major commercial transactions; something as benign as selling your home in Iran can be viewed as a violation of the ITR. A good rule of thumb to follow is that if there is any benefit derived by anyone in Iran or by the government of Iran then there has been a violation of the ITR. Remember the ITR is very broad, so if you are unsure whether a potential transaction would violate the ITR then the best bet is to play it safe and contact either OFAC or an attorney knowledgeable about the ITR. This will help you get a better idea as to whether your proposed transaction is permitted.

While the ITR may seem cruel and unreasonable to some, OFAC does offer some recourse for individuals who wish to engage in transactions with Iran. OFAC has procedures in place that allow for individuals or companies to apply for a license to engage in transactions otherwise prohibited by the ITR.

Although an application for a license to engage in transactions otherwise prohibited under the ITR can be obtained, that does necessarily mean that once you are authorized to engage in the transaction that you should or can use havaleh.

III. Havaleh

As readers of this article may be aware, havaleh—or as it is often times referred to in the West: hawala—is an informal value transfer system that involves the use of “money brokers.” In a havaleh exchange, an individual will take a sum of money to a havaleh broker to be transferred to a recipient in another location. The havaleh broker then calls another havaleh broker in an area located near the recipient of the money and asks him to take on the debt to be paid to the recipient. In such transactions, no promissory notes or contracts are exchanged; the brokers merely keep a running tally of the debts owed to each other.

For example, if you wanted to send money to an uncle in Iran through the havaleh system, you might go to a havaleh broker in your community, give him the money, and specify the name and address of your uncle in Iran. The havaleh broker would then contact his counterpart in Iran, who would deliver the money to your uncle. In return, this havaleh broker would ask your local havaleh broker to pay money to someone else in his community. The two havaleh brokers keep track of who owes whom how much.

The informality of the system has made it attractive to some individuals seeking to avoid U.S. economic sanctions against Iran because the transactions occur outside of the purview of banking institutions. Moreover, the transactions can be done more quickly and with avoiding additional bank fees.

It is an acknowledged fact that one effect the ITR has had is that Iranians and Iranian Americans have turned to the use of havaleh in order to transfer money to and from Iran. As such, large sums of money now flow between Iran and the United States through the havaleh system.

While it is hard to argue that OFAC is always clear and upfront in their presentation of the requirements of the various sanctions programs they administer, they have in the past offered some guidance on the use of havaleh. In that guidance OFAC has stated that havaleh is not an appropriate method of transferring funds. But why does OFAC not approve of havaleh as a legitimate money transfer system under the ITR? The answer itself lies in the definitions found in the ITR.

The simple fact is that havaleh brokers are not considered to be depository institutions under the ITR. The relevant law is found in Title 31 of the Code of Federal Regulations at Part 560, section 516. Under that section, only United States depository institutions are authorized to process transfers of funds to or from Iran that are permitted pursuant to a general or specific license from OFAC. A United States depository institution is considered to be an entity organized under the laws of the United States of America, or any branch of a foreign institution located in the United States whose primary business is banking.

Since havaleh brokers do not meet the definition of depository institutions under the ITR they cannot send authorized payments to or from Iran. This is regardless of whether the transaction is permitted by a general license or not. As such, havaleh brokers generally will receive cease and desist orders from OFAC, asking them to not engage in any havaleh transaction pertaining to Iran. In more severe cases, they may be fined or in the most egregious of cases criminal prosecution can be brought against them.

However, it’s not just the havaleh brokers who are at risk. U.S. citizens, individuals in the U.S., or U.S. companies can all be penalized for engaging in transactions with Iran via the havaleh system. These penalties, as noted above, can range from heavy fines to criminal prosecution.

IV. Hope is Not Lost

OFAC does permit some transactions with Iran, despite the prohibitions of the ITR. For example, importation of carpets and foodstuffs, telecommunications and mail transactions, and import and export of household goods are all authorized by general license. That means OFAC permits these types of transactions without any further application to engage in such transactions. However, they differ from exempted transactions in that OFAC reserves the right to revoke the general license as they deem necessary.

Other transactions may also be permissible despite prohibitions found in the ITR, however, those transactions must be specifically authorized by OFAC. Some examples of these kinds of transactions are commodities trading, and the export of food, medicine, and medical supplies. Such authorization is referred to as a specific license. A specific license allows one to engage in transactions otherwise prohibited for a certain period of time and subject to certain requirements.

As illustrated above, transactions if authorized by either general or specific license are permissible. However, there is an old saying that must be followed closely in this scenario: “you have to do the right thing in the right way or it is wrong.” This is completely applicable here, because although you might be able to engage in a transaction otherwise prohibited by the Iran embargo, you may find yourself in trouble if you attempt to consummate the transaction through the use of havaleh.1

So how does one avoid the wrath of OFAC and still transfer money to and from Iran? The formula for staying out trouble is easy:

1. Do not engage in any transfer of funds with Iran until you are 100 percent sure it is authorized by OFAC;2

2. If the transfer you wish to engage in requires a specific license, then apply for the specific license;

3. Don’t use the havaleh system;

4. Make sure that the transfer of funds is processed at some point through a U.S. depository institution.

This formula is straight forward; however, there is one point in here that always confuses individuals. Transfers of funds with Iran have to be processed through a non U.S. bank in a third country. What that means is that a transfer cannot come directly from an Iranian bank to a U.S. bank. For example, you could not send money via wire transfer from Bank Sarmayeh directly to Bank of America in the United States. You would have to send it from the Iranian bank to a foreign bank elsewhere in the world and then on to the U.S. bank of your choice.

In closing, the consequences for violating the Iran sanctions are severe and the enforcement of the sanctions is strict. Stay on the right side of the law by making sure your

transfer of funds is authorized and comes through a U.S. depository institution. In other words, when it comes to havaleh: just say no!

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1 You may request as part of your application for a specific license to be allowed to use havaleh; however, OFAC does not normally grant such requests.

2 If you are unsure if a transaction is authorized or not contact an attorney experienced and knowledgeable about the Iranian Transactions Regulations, or call OFAC’s hotline at 1-800-540-6322.