In some cases, an underlying transaction may be prohibited, but there is no blockable interest (i.e., that of a Specially Designated National (SDN) or blocked person or government) in the transaction. In these cases, the transaction is simply rejected, or not processed and returned to the originator.
For example, a U.S. financial institution would have to reject a wire transfer between two third-country companies (non-SDNs) involving an export to a company in Iran that is not otherwise subject to sanctions. Since there is no interest of the blocked person (e.g., the Government of Iran, and Iranian financial institution, or an SDN), there is no blockable interest in the funds. However, the U.S. financial institution cannot process the transaction because that would constitute a prohibited export of services to Iran pursuant to the Iranian Transactions and Sanctions Regulations (ITSR), unless authorized by OFAC or exempt from regulation. Similarly, a U.S. financial institution is prohibited under the ITSR from an engaging in trade-related transactions or dealings with Iran, including financing a prohibited transaction. A U.S. financial institution cannot so much as advise a letter of credit if the underlying transaction is in violation of OFAC regulations. In addition, U.S. persons are prohibited from facilitating transactions by foreign persons that would be prohibited if performed by a U.S. person.
The following examples may help illustrate which transactions should be blocked and which should be rejected.
A U.S. financial institution interdicts a commercial payment destined for the account of XYZ Import-Export Co. at the Bank of XYZ in Iran. The Bank of XYZ is an Iranian financial institution and wholly-owned by the Government of Iran; accordingly, Bank of XYZ is blocked under section 560.211 of the ITSR. This payment must be blocked.
A U.S. financial institution interdicts a commercial payment destined for ABC Import-Export in Tehran, Iran. Unlike the Bank of XYZ, ABC Import-Export in Tehran is not a blocked person, so there is no blockable interest in this payment. However, processing the payment would mean facilitating trade with Iran, exporting a service to Iran, and engaging in trade-related transactions with Iran; therefore, the U.S. financial institution must reject the payment.
Blocked and rejected transactions must be reported to OFAC within 10 days (see 31 C.F.R. §§ 501.603 and 501.604). Questions about whether a transaction should be blocked or rejected should be directed to OFAC’s Sanctions Compliance & Evaluation Division at OFACReport@treasury.gov.