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F ed er a l R e s e r v e Ba n k DALLAS, TEXAS of Dallas 75222 Circular No. 80-138 July 16, 1980 IRANIAN ASSETS CONTROL REGULATIONS TO ALL MEMBER BANKS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: Printed on the following pages is a proposed amendment to the Treasury Department's Iranian Assets Control Regulations. The purpose of the amendment is to require th at certain types of blocked Iranian property be held in interestbearing status. Interested persons are invited to submit comments to the Acting Director, Office of Foreign Assets Control, Department of the Treasury, Room 504, 1331 G Street, N.W., Washington, D.C. 20220. Comments must be received by August 15, 1980. Any questions on the proposed amendment should be directed to Dennis M. O'Connell a t (202) 376-0395. Sincerely yours, Robert H. Boykin First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 4 8 1 0 - 2 5 -M D E P A RTMENT CF THE TREASRY 31 CFR Part 535 Iranian Assets Control Regulations AGENCY: Office of Foreign Ass ets Control, T reasury ACTION: D e p artment of the Proposed Rule. SUMMARY: The Office of Foreign Assets Control is proposing an amendment to the Iranian Assets Control Regula tions. The p urpose of the amendment would be to add section 535.205, requiring that certain types of blocked Iranian p r o p e r t y be held in interest- bearing status. The need for the amendment is to ensure that blocked prop e r t y is held in a manner consis tent with good management of the prope r t y and with the policy objectives of the Regulations. The effect of the amendment would be that most types of blocked Iranian p r o p e r t y h e n c e f o r t h w o u l d be h e l d in i n t e r e s t - b e a r i n g status. DATE: Comments must be received after publication] . on or before [date 30 days ADDRESS: Send comments to the Acting Director, Office of Foreign Assets Control, Department of the Treas ury, Room 504, 1331 G Street, NW, Washington, D.C. 20220. FOR FURTHER INFO RMATION CONTACT: Dennis M. O'Connell, Acting Director, Office of F o r e i g n Assets Control, Department of the Treasury, Washington, D.C. 20220, (202) 376-0395. S U P P L E M E N T A R Y INFORMATION: Since the R egulations involve a foreign affairs function, the provisions of the A d m i n i s t r a t i v e Procedure Act, 5 U.S.C. 553, requiring notice of proposed rule making, opportunity for public parti c i p a t i o n and delay in effective date are i n a p p l i c a b l e . Nonetheless, because of the t e c h n i c a l nature of the regulations, comments are being requested. However, the comment period has been limited to 30 days. Para graph (a) of section 535.205 would require either that prop e r t y identified in paragraph (f) be transferred int o an i n t e r e s t - b e a r i n g a c c o u n t or that interest be c redited to the property in the hands of the p r e s e n t holder -2 - or obligor. The provision would not require any holder to break an existing certificate of deposit or to sell a bond or other interest-bearing instrument to conform to the rules go verning the relevant rate of interest. However, it would mean that, at any time when a holder of blocked assets is required to account for those assets, it will be responsible for accrued interest. The requirement to credit interest would be effective as of December 1, 1979. Persons who held blocked property as of that date would be subject to the requirement. In certain cases, blocked bank accounts may a l r e a d y have been transferred at the request of the depositor from demand to interest-bearing status. Section 535.420, published December 28, 1979, makes clear that transfers of such depo s i t s from demand to interest-bearing status at the request of the account owner are authorized by section 535.508, published on November 20, 1979. In addition, d e p o s i t a r y institutions may have made such transfers on their own initiative, in view of the inequity of continuing to hold the funds in demand status and earning income on the funds while the depositor has not had the effective power to demand either withdrawal or payment on his order. The December 1, 1979 effective date prevents any holder of blocked assets subject to the interest requirement from deriving any unjust enrichment from the fact that the e m ergency blocking action by the President, as a practical matter, converted obligations payable immediately or on demand into either deferred obligatons or time deposits. This requirement is in furtherance of the p r e s e r v a t i o n of the assets to ensure satisfaction of claims of Americans against th e Government of Iran, a primary objective announced in the President's November 14, 1979 report to the Congress. It would be inequitable to permit the retention by holders of windfall profits derived from the interes t-free use of blocked funds. Holders would have 30 days to comply with the interest requirement. Paragraph (b) would defer the immediate effect of the interest requirement as to the amount of any set-off which would have been claimed against the owner by the holder of the blocked property absent the blocking of the assets. However, use of this exemption is subject to a duty to pay interest from the effective date of this section if the set-off is ultimately not recognized, either because it is determined to be without merit under applicable law or is ot herwise disallowed as part of a claims settlement. With respect to standby letters of credit opened in favor of Iranian entities by U.S. account parties, three distinct situations should be noted. First, where there has been a demand and payment has been made by the bank into a blocked account in the name of the Iranian entity, this -3- account would be subject to the interest requirement same basis as any other blocked bank account. paragraph (c) (1).) on the (S e e , Second, where no demand has yet been made under the letter of credit, there would be no matured ob l i g a t i o n subject to the interest requirement. (Paragraph ( c ) (2) excludes unmatured obligations from t he interest r e q u i r e m e n t .) Third, where there has been a demand, but a substitute blocked account, in lieu of payment by the bank, has been established by the U.S. account party pur suant to a sp ecific license issued under the provisions of section 535.568, that account is exempt. However, interest shall be due from the e ffective date of the section on any liquidated o b l i g a t i o n of the U.S. account party to an Iranian e ntity on its underlying contract, performance of which is secured by the standby letter of credit, to the extent of any obl i g a t i o n to an Iranian entity which is ultim ately determined to exist and which is recognized, either by judicial or quasi-j udicial determinat ion or for purposes of a claims settlement. Paragraphs (d) and (e) set forth the rates of interest to be credited on various types of blocked property. Paragraph (f) identifies the types of blocked pro perty subject to the interest requirement: currency, bank deposits and bank accounts, and undisputed debts, claims or obligations which ar e either liquidated or matured. However, the pr ovisions of section 535.205 do not apply to blocked Iranian property held by foreign affiliates of U.S. firms. The duty to credit interest will be d e t e rmi ned by the law of the host country of the foreign affiliate. Paragraph (g) states that the requirement to credit interest applies to the United States Government and any a g e n c y or i n s t r u m e n t a l i t y t h e r e o f , e x c e p t as o t h e r w i s e licensed by the Office. 31 CFR Part 535 535.205 as follows: is amended by the addition Section 535.205 Holding of certain p roperty in interest-bearing accounts! of section types of blocked (a) Except as otherwise provided or as licensed under this part, any person holding any property included in paragraph (f) , or who held such property at any time on or since December 1, 1979, is p r o h i b i t e d from holding, withholding, using, transferring, engaging in a ny transac tion involving, or exercising any right, power, or privilege with respect to any such property, unless it is -4- held in an interest-bearing account, or unless interest is credited on the prop e r t y by the holder in ac c o r d a n c e with the provisions of this section. Persons subject to this requirement have thirty days from the ef fe c t i v e date of this section to comply with the reauirement. (b) Persons who would have claimed a set-off against proper ty subject to the provisions of par a g r a p h (a) of this section but for the prohibitions of s e c tio n 535.201 are exempt from paragraph (a) to the extent of the set-off, provided however, that interest shall be du e from the effective dat-e of this section if the claim to a set-off is ultima tely not recognized. (c) The interest requirement of par a g r a p h (a) to obliga t i o n s under standby letters of credit, as in section 535.568, as follows: applies defined (1) Where there has been a demand under the letter of credit and payment has been made by the bank into a blocked account in the name of the Iranian entity, that account is subject to the interest requirement of p a r a g r a p h (a) , in ac cordance with paragraph (f) (1) . (2) Where no demand has been made under the letter of credit, the contingent obli gations of the bank and the account party are not subject to the interest requirement of paragraph (a) , in accordance with paragraph (f) (2) which excludes unmatured obligations from the s c o p e of the interest requirement. (3) Where there has been a demand, but a substitute blocked account, in l i e u of p a y m e n t b y t h e b a n k and reimbur sement by the account party, has been e s t a b lished by the U.S. account party pursuant to a specific license issued under section 535.568, the substitute blocked account is exempt from the interest requirement of p a r a g r a p h (a) , provided however, that interest shall be due from the effective date of this section if any liquidated obli gation of the account party to an Iranian entity on the underlying cont r a c t between the parties is ultimately d e t e r m i n e d to exist and is recognized. (d) The rate of interest required by par a g r a p h (a) on interest-bearing accounts or other o b l i g a t i o n s subject to the i n t e r e s t r e q u i r e m e n t s h a l l be c a l c u l a t e d as from December 1, 1979, and shall be not less than 5-1/2%, provided however, that on amounts of $100,000 or more, the rate payable on 30-day certificates of deposits, as stated in Federal Reserve 3oard week ly release H.15, shall apply. (e) Any account subject to the p r o v i s i o n s of this section may be held at a higher rate than specified in para g r a p h (d) upon instruction of the account owner. -5- (f) The following paragraph (a) : types of property (1) currency, bank deposits and bank to the provision s of section 535.201; and, are subject accounts to subject (2) pro perty subject to the pro visions of section 535.201 which consists, in whole or in part, of undisp uted and either liquidated or matured debts, claims, obligations or other evidences of indebtedness, to the extent of any amount that is undisputed and liquidated or matured; Provided however, that the duty to credit interest on any prop e r t y subject to the provisions of section 535.201 which, as of the effective date of this section, was held outside the United States by a foreign branch or s ub s i d i a r y of a U.S. per son shall be determined in acco rdance with the local law of the host country of the foreign branch or subsidiary. Property in the form of a debt is not held outside the United States if the funds intended to pay that debt are held inside the United States. (g) The provisions of this section apply to the United States Government and any agency or i n s trumentality thereof, except as other wise licensed by the Office of Foreign Assets Control. (h) Soley for purposes of this section, "effective date" shall mean December 1, 1979. the Datec : uennis w. C *Connell Acting Director A p p r o v e d :_____________________________ Richard J. Davis Assistant Secretary [Authority: Secs. 201-207, 1701-1706; E.O. No. 12170, FR 26685.] 91 Stat. 1626, 50 U.S.C. 44 FR 65720; E.O. 12211, 45 term