"Family Remittances" from U.S. to Iran Not Prohibited by Iranian Transactions Regulations
A New York federal appeals court has reversed the conviction of Mahmoud Reza Banki ("Banki"), an Iranian born United States citizen charged with violating the Iranian Transactions Regulations ("ITR"), among other offenses. See United States v. Banki, Docket No. 10-3381-cr (2d Cir. October 24, 2011). Notable for that reason alone (criminal convictions are rarely reversed, much less convictions related to transactions with Iran), the case is also significant because of the court's detailed analysis of the Iranian sanctions regime administered by the Office of Foreign Assets Control ("OFAC") and the types of transactions permitted by the ITR.
Banki's prosecution arose out of $3.4 million in money transfers made by Banki's family in Iran to Banki in the United States. None of these transfers involved the physical or electronic transmission of funds between the United States and Iran. Rather, these transfers – 56 in total -- were made through an informal money transfer system known as the "hawala." Because Banki's family used a particular version of the hawala known as the "matching" hawala system, when they sent money to Banki in the United States a hawala broker in Iran would make a corresponding payment in Iran. One e-mail sent to Banki by his uncle showed that Banki knew about at least one corresponding payment in Iran. The e-mail read: "I told your father that a friend of mine wants to send 6000 USDA to Iran. I asked him to send the money to that account you gave me before." These payments made in Iran formed the basis of the ITR related charges that accused Banki of providing money transfer services (i.e., through the hawala) to individuals in Iran.
The ITR, issued pursuant to the International Emergency Economic Powers Act, prohibit the exportation to Iran of any goods, technology or services from the United States or by a United States person. Banki argued that the government had not proved an ITR violation because: (1) there was no fee paid for the money transfers to Iran, and thus they didn't qualify as "services" under the ITR, and (2) the money transfers were exempted from prosecution because they were non-commercial family remittances. The Court rejected Banki's first argument, but reversed his convictions on the second ground, not so much because Banki was right but because the ITR regulation at issue was too ambiguous to form the basis of a criminal prosecution.
The term "services" is not defined in the ITR. Banki argued that a passage from an earlier appeals court decision established that "services" "refer[ed] to the performance of something useful for a fee." The Banki court concluded that this language was non-binding dicta, that is, the court in that earlier case was not called upon to decide whether a "service" required receipt of a fee, but rather it decided whether exporting funds on behalf of another constituted a prohibited exportation of a "service."
Next, after noting competing dictionary definitions of "service" – some including a "fee" component and some not – the court turned to the text and purpose of the ITR to decide Banki's claim. While the Iranian embargo is primarily concerned with addressing Iranian involvement in the proliferation of weapons of mass destruction and state-sponsored terrorism, it is "deliberately over-inclusive," prohibiting "not only bombs but also beer." The court concluded that given the broad purpose of employing economic sanctions to isolate Iran, there was "no sound reason" to prohibit only the exportation of services to Iran for a fee because "[a]fter all, both exportations (with and without a fee) have the same impact in Iran."
The court was also uncomfortable with the anomalies that Banki's interpretation would create. For example, under Banki's view, a U.S. entity would be permitted to render gratis legal or consulting services to an Iranian corporation, or United States persons would be able to further – for free – the very activities the Iranian embargo was intended to prevent. Thus, the Court concluded that the over-inclusive nature of the ITR and the goal of isolating Iran made the money transfers at issue "services," even if they were not performed for a fee.
Banki prevailed, however, on his second argument centered on the language of 31 C.F.R. § 560.516(a)(2). Section 560.516(a)(2) provides that "United States depository institutions are authorized to process transfers of funds to or from Iran . . . if the transfer . . . does not involve debiting or crediting an Iranian account [and it] arises from an underlying transaction that is not prohibited [by the regulations], such as a non-commercial remittance to or from Iran (e.g., a family remittance not related to a family-owned enterprise) . . . ."
The government argued that this regulatory exemption only applied when such remittances are processed through U.S. depository institutions, while Banki asserted that the plain language of the regulation meant that anyone could process an exempt non-commercial remittance.
The court concluded that Banki's view of the regulation is supported by the plain wording of § 560.516, which specifically lists "family remittances" as an example of a permitted transfer, a fact that also suggested that family remittances did not contravene the larger Iranian sanctions scheme. The court also concluded that the regulation does not provide that only U.S. depository institutions may process family remittances. According to the court, "[i]f the intent [of the regulation] were to permit only U.S. banks (and U.S. brokers and dealers) to process these remittances, the regulation could have easily so provided."
Responding to the argument that accepting Banki's view would render a nullity the first clause of § 560.516(a) – providing that "United States depository institutions are authorized to process transfers of funds to or from Iran" – the court wrote:
Given the complexity of the regulatory scheme, the number of prohibitions and exemptions contained in the ITR, the highly-regulated nature of the banking industry, and the criminal nature of the violations, it is appropriate that financial institutions are given explicit guidance that they may process these specific transactions. The processing of money transfers is undoubtedly a "service," and the language in the regulation makes clear that U.S. banks can process non-commercial remittances without running afoul of the ban on providing services. Without the language authorizing banks to provide this service, banks would not be able to process non-commercial remittances, even if they are not prohibited. We do not agree with the assertion that under Banki's interpretation anyone could process a non-commercial transaction; under the more general ban on providing goods, technology, and services, providing a "service" of processing non-commercial remittances would be barred. Hence, the language in the first clause is necessary to permit U.S. banks to provide this service.
The court also rejected the government's argument that construing the regulation to require that only U.S. banks are authorized to process non-commercial remittances would further the ITR's purpose of subjecting Iranian transactions to U.S. oversight and regulation. The court noted that while the ITR imposed recordkeeping and reporting requirements on U.S. depository institutions when processing ITR related transactions, the ITR were also adopted to limit "the adverse impact of the sanctions on the Iranian people."
All in all, this type of point – counterpoint led the court to conclude that there was "ambiguity in the regulation." Because the "rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subject to them," Banki's ITR convictions could not stand.
 To a lesser extent, the case is an example of the adage that "the cover up is worse than the crime" -- while Banki's ITR related convictions were reversed, his convictions for making false statements to OFAC during the investigation were affirmed.
 The false statement counts were another matter. These charges stemmed from OFAC's initial investigation of the case. In 2008, OFAC issued administrative subpoenas to Banki seeking information about transfers into Banki's account. Banki responded to the subpoenas by identifying his cousin – a non-citizen and thus not subject to OFAC regulation – as the source of the transfers and stating that he had made no payments to anyone in Iran since arriving in the United States in 1994. Banki was convicted of making these false statements.