Why the New Iranian Sanctions Could Hit You Where It Hurts- In Your Wallet

There has been much talk lately about the Trump administration’s recent imposition of tougher economic sanctions against Iran; 25 individuals and companies connected with the country’s ballistic missiles programs were specifically targeted. With many dramatic changes happening in the global landscape, you may be wondering how it might affect you. 

A short time ago, a friend of a friend of mine received a letter from his bank, asking him to confirm that he had no ties to the Iranian government; with the threat of severe consequences for failure to comply. He was flabbergasted and angry; he was an American, doing business in America- his only Persian tie was his name. Several friends were thoroughly convinced that it was an issue of blatant anti-Muslim discrimination, hot on the heels of the new travel restrictions. Because I work in banking compliance and have a good grasp of what could cause a flag like this, I offered to take a look and give my own, inside-the-industry perspective. 

1) What Sanctions Mean

In the case of the United States, all economic sanctions are enforced by a special department of the Treasury, called OFAC, or Office of Foreign Assets Control. This means there can be freezing or forfeiture of assets, or an order not to do any banking with designated individuals from these countries, particularly if they are a PEP (Politically Exposed Person). Additionally, specifically named individuals can be placed on lists to ensure compliance with these sanctions. In the case of Iran, a special license from the Treasury is required to conduct business with Iranian entities. 

2)The Iranian Sanctions Aren’t New (And It’s Not Just Iran On That List)

Sanctions against Iran are not new. The United States first imposed economic sanctions against Iran, a former ally, following the Revolution in 1979.

A look at the Treasury’s webpage show that there are several other countries that have economic sanctions placed upon them, for various reasons, varying in severity and scope. Iran’s, by far, is the most comprehensive and severe; what first started in 1979 has evolved into further sanctions for the collection of nuclear materials for weapons proliferation- several rounds of sanctions were placed by the U.N. Security Council to address just this, counter to Iran’s claim that they were only intended for alternative power generators, and compounded by repeated failures by Iran to comply with requests for transparency and good faith via independent verification by the United Nations. 

3) Okay, so how does this affect me? 

When a bank is creating its risk model to vet potential clients, there are, depending on the size of the bank and the size of its footprint, hundreds of different variables that go into creating the algorithms that can trigger red flags. If a person is a PEP or a family member of such, or one who does business with them, this could trigger a flag. A second or third hand connection could also trigger a flag. Here is an example: Company A is based in NYC. They purchase equipment for their business from Company B, which is based in China. What company A doesn't know, is that Company B uses a vendor that gets the raw materials for their equipment from a sanctioned country. Company A may now be flagged as high risk because of an indirect connection to a sanctioned country. This is what I feel is most likely the case with the friend with the bank letter.

For every day banking clients, what this means is that the information that you give to your banker when you open your account- where you work, the nature of your work, where you hold outside assets, how you use your account, (and if you’re not from the US, what country you’re from)- can all be used to create a risk score for you, so it’s critical that it’s accurate and truthful. Each piece of information creates a separate variable to calculate a risk score than can change depending your banking activity. A big bank will have a different risk model than a small or mid-size bank; a domestic only bank will assess their risk scoring differently than one with international affiliates or locations.

Another thing to keep in mind is that there is always a chance of false positives with any given algorithm model. The more variables, the higher the chance for false positives; (in some big banks, the false positive rate has been calculated as high as 95%) conversely, banks must balance the need for risk management with ensuring that regular clients do not fall into the net without due cause. It is an imperfect, imprecise, and ever-evolving process to create the algorithms best suited to each institution. Some banks, in light of the issue of false positives in assessing their risk, have scaled back their willingness to do business with foreign entities almost entirely, so as to eliminate another, potentially inflammatory variable. 

4) Going Forward

There are many valid reasons that the banks have changed so much in the last decade. Once the Crash of 2008 happened, the consumer rightly started demanding more accountability and transparency from their institutions, particularly as they all had been freshly bailed out with TARP funds, paid for from the taxpayer purse. Now that the there are several consumer protection laws in place to prevent much of what happened from occurring again, it would be well to note that this is how the banks now must comply with government regulations- no one can hide in a bank account anymore. I would expect a far more involved relationship between the bank and the client going forward.