UK: International Law Advisory - New European Sanctions on Iran Target Insurance, Oil and Gas Goods and Services

Last Updated: 8 November 2010
Article by David S. Lorello

On 26 July 2010, the European Council passed two new measures that will further expand the scope of EU economic sanctions against Iran.

Implementing Regulation 668/2010

First, the Council enacted Implementing Regulation (EU) No 668/2010, which expands the EU's existing financial sanctions regime against Iran by targeting a new group of Iranian entities. The regulation went into effect immediately upon publication.

The newly-designated entities include those listed in last June's United Nations Security Council Resolution 1929, as well as a number of additional parties who the EU have blacklisted on a unilateral basis. Notably, the new list includes the Islamic Republic of Iran Shipping Lines (IRISL), which conducts extensive business outside of Iran and has offices in Belgium, and a number of Iranian banks with international presence, including Bank Saderat Iran and its London-based subsidiary, BankSaderat PLC.

Certain of those entities already were subject to more targeted sanctions by individual EU Member States (for example, since October 2009 UK financial and credit institutions have been restricted under UK anti-terrorism legislation from doing business with some of the designated entities). However, the EU-Iran financial sanctions regime is more comprehensive – all EU persons and entities are now prohibited, subject to narrow exceptions and licensing requirements, from transferring any funds, assets or other "economic resources" to parties designated under Regulation 668/2010, and must block any assets or resources belonging to, owned, held or controlled by sanctioned parties that they come into possession of.

Council Decision on Supplemental Iran Sanctions

In addition, the Council also issued a Decision outlining a new set of export controls and other economic sanctions against Iran. The Decision does not come into force immediately – the EU must issue an implementing regulation, which is expected in early September. Much of the necessary detail has been left to the subsequent regulation, but the Decision signals a potentially substantial enhancement of European sanctions against Iran.

By way of background, the EU has imposed economic sanctions on Iran since 2007.1 The EU sanctions regime has, however, been fairly targeted, focusing on certain Iranian government and government-affiliated entities, as well as the export of a discrete range of goods and services that could assist Iran in pursuing its nuclear and weapons of mass destruction ("WMD") programmes. Last week's Council Decision, however, extends beyond WMD-related activities, and targets whole EU industries – including, in particular, insurance and oil and gas – that had not previously been a focus of Iran sanctions. The Decision includes the following key measures, in particular:

Insurance and Reinsurance Services

Article 12 of the Decision prohibits the provision of insurance and re-insurance by EU providers to the Government of Iran or to any entities worldwide that are "acting on behalf of" or "owned or controlled by" any public or private entity subject to Iran's jurisdiction. The Decision exempts health and travel insurance provided to individuals.

EU insurers had not previously been subject to a broad-based ban on providing services to Iran, and the scope of the new insurance restriction in Article 12 is, in many respects, unclear. For example, the Decision does not address how ongoing contractual commitments should be handled by EU insurance and reinsurance providers, including payment of claims under existing coverages and the termination of policies that are in force. The Decision also leaves unclear whether the sanctions will extend to reinsurance and retrocessional coverages that involve underlying Iranian beneficiaries. Finally, the suggestion in Article 12 that the insurance sanctions would extend to any entity worldwide that is owned or controlled by an Iranian entity will need to be addressed – for example, there are many entities operating in the EU that are owned or controlled by Iranians, who are subject to compulsory insurance requirements (e.g., motor insurance and occupational injury coverage).

Given the potential scope of Article 12, those and other issues will need to be considered and clarified in the implementing regulation.

Dual-Use Export Restriction

Article 1 imposes a new restriction on the export to Iran of any goods, or related technical data, services, or financing, that fall within the EU Dual-Use List (Council Regulation (EC) No 428/2009), with the exception of certain telecommunications and encryption items. The EU had not previously imposed a blanket restriction on the export of dual-use items to Iran, and most Member States have been issuing licenses regularly for exports to Iran of many dual use items.

The Decision will permit Member States to authorize the export of items covered under Article 1, on a case-by-case basis, where it is determined that the exports clearly will not contribute to Iran's WMD capability, and where (1) contracts for the delivery of the items in question include end-user guarantees, and (2) Iran has committed not to use the items in question for nuclear weapons activities.

Oil and Gas

Similar to insurers and reinsurers, the EU oil and gas industry is targeted squarely in the Decision. Oil and gas producers and service providers had not previously been targeted by the EU for Iran sanctions, although certain items used by oil and gas service providers have been covered under earlier EU sanctions regulations, given that those items also were capable for use in nuclear or chemical weapons applications. However, the Decision imposes new sanctions that focus squarely on oil and gas producers and service providers, irrespective of any potential weapons-related dual use considerations. In particular:

  • Article 4(1) introduces a new export controls regime restricting the export of "key equipment and technology" for the oil and gas refining, liquefied natural gas, exploration and production sectors. It remains to be determined which products will constitute "key equipment and technology."
  • Associated financing, technical assistance, training, and services relating to the aforementioned "key equipment" also will be restricted.
  • Article 6 prohibits (1) the granting of any financial loan or credit to Iranian oil and gas enterprises, (2) the acquisition or extension of participation in Iranian oil and gas enterprises, or (3) the creation of any joint venture with such enterprises.

Articles 4 and 6 are subject to a grandfathering provision, in Article 7 of the Decision, which permits transactions pursuant to contracts concluded before the date of the Decision (i.e. 26 July 2010).

Additional Requirements For Financial Institutions

Article 10(2) requires EU financial institutions to engage in enhanced due diligence and a variety of new financial controls in respect of their activities with Iranian-affiliated banks. For example:

  • Article 10(2) requires financial institutions to maintain records of financial transactions for 5 years, and to make those records available to national authorities "on request" – this may provide national authorities with greater rights of access to European financial records than had been the case previously.
  • Article 10(2) also requires that all information fields on payment instructions be completed before transactions are processed. This requirement may have been motivated by a practice, adopted in the past by many European financial institutions, of removing the names of Iranian entities from payment instructions before forwarding those instructions to affiliates for further processing. Notably, that practice was the subject of a number of very large U.S. sanctions enforcement actions in recent years, including fines in the hundreds of millions of USD against a number of major European banks.2
  • Finally, Article 10(2) requires that financial institutions report to the competent authority of their Member State if the institution suspects that funds are related to Iran proliferation financing.

Funds Transfer Restrictions

Article 10(3) requires that EU persons and entities report transfers of funds to or from Iran, in amounts above €10,000, to their relevant Member State government. Moreover, transfers above €40,000 require the prior approval of the Member State. Depending on how this requirement is implemented, it could potential require prior government approvals for most commercial sales between EU and Iranian entities.

Summary

The new EU measures come on the heels both of Security Council Resolution 1929, and new legislation in the United States that expands U.S. extra-territorial sanctions on business activities by non-U.S. companies with Iran. (The new U.S. measures are summarized in our June 28, 2010 alert.) Collectively, the UN, EU, and US measures present new challenges both for companies that remain in the Iranian market, as well as for those who do not do business with Iran but are involved the same markets where Iranian companies operate.

Footnotes

1. The primary EU sanctions regulation against Iran is Regulation (EC) No 423/2007, which is summarized in our client alert at the attached link.

2. Steptoe International Law Advisory - Swiss Bank to Pay $536 Million Fine in Largest Ever U.S. Economic Sanctions Penalty

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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