United States: President And Congress Take Further Steps To Expand Iran Sanctions With New Legislation And Executive Order

The U.S. Congress and President Obama took action recently to further tighten sanctions against Iran.  On August 1, 2012, Congress passed H.R. 1905 that will:  (1) impose sanctions on certain non-U.S. entities conducting business with Iran; (2) counter Iran's efforts to evade existing sanctions through additional measures; and (3) expand existing sanctions that are available under the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 ("CISADA").  This legislation focuses on Iran's oil and gas sector, prohibiting non-U.S. companies that engage in Iran's oil and gas sector from trading in the U.S. market and imposing new restrictions on Iran's nationalized oil companies.  These new restrictions would broaden the sanctions that can be imposed for  human rights abuses, particularly targeting the use of information technology that may potentially be used to facilitate such abuses. Notably, the legislation would extend IEEPA-based sanctions against Iran to foreign subsidiaries of U.S. companies, and establish new monitoring and reporting requirements that are likely to expose more non-U.S. companies to sanctions risks.  President Obama signed this legislation on August 10, 2012.

Also, on July 30, 2012, President Obama issued Executive Order ("E.O.") 13622, which, among other measures, imposes new sanctions targeting the Iranian energy and petrochemical industries  and expanding the existing sanctions available under  the National Defense Authorization Act for Fiscal Year 2012, Public Law 112-81 ("NDAA").  These new U.S. sanctions are intended to limit Iran's ability to establish new payment mechanisms for the purchase of Iranian oil, and curtail the purchase or acquisition of petrochemical products from Iran.  Further, the E.O. authorizes sanctions against individuals and entities providing material support to the National Iranian Oil Company ("NIOC"), Naftiran Intertrade Company ("NICO"), or the Central Bank of Iran, as well as on those engaged in the Iranian Government's purchase or acquisition of U.S. bank notes or precious metals.  Exempted from the additional sanctions in the E.O. are persons conducting or facilitating transactions involving certain natural gas and pipeline projects from Azerbaijan to Europe and Turkey.

Below we provide a high-level summary of the recent legislation and the Executive Order.

Congressional Legislation

On August 1, 2012, the Senate and the House of Representatives passed the "Iran Threat Reduction and Syria Human Rights Act of 2012" (H.R. 1905).  The legislation introduces new sanctions that can be imposed on entities facilitating Iranian transactions, addresses Iran's efforts to bypass existing sanctions, and amends the Iran Sanctions Act of 1996 ("ISA") and CISADA.  Specifically, the legislation targets the following sectors and categories of activities:

A. Iran's Oil and Gas Sector

Section 212 authorizes sanctions against any persons providing underwriting, insurance, or reinsurance services to NIOC, the National Iranian Tanker Company ("NITC"), or successor entities to such companies.  The proposed legislation exempts from sanctions those persons who provide  underwriting, insurance or reinsurance services where it can be demonstrated that the person conducted appropriate due diligence to ensure that the services were not provided to NIOC or NITC.  Further, the President is not authorized to impose sanctions relating to underwriting, insurance or reinsurance services where those services are provided solely for the provision of agricultural commodities, food, medicine, medical devices, or humanitarian assistance for the people of Iran. 

The legislation further targets Iran's national petroleum industry.  Section 201codifies Executive Order 13590 of November 21, 2011, which sanctions any transaction that could directly and significantly contribute to Iran's ability to develop domestic petroleum resources (if a single transaction is $1 million or more, or a series of transactions from the same entity have an aggregate fair market value of $5 million or more in a 12-month period), or could facilitate or expand Iran's domestic production of petrochemical products (if a single transaction is $250,000 or more, or a series of transactions from the same entity have an aggregate fair market value of $1 million or more in a 12-month period).

The legislation utilizes E.O. 13590's definition of "petrochemical product" to include "any aromatic, olefin, or synthetic gas, and any derivate of such a gas, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea."  

The bill directs the President to impose five or more ISA sanctions on any party violating the ISA as amended including:

• Any person that purchases, subscribes to, or facilitates the issuance of Iranian sovereign debt (Section 201), and debt of any entity owned or controlled by the GOI issued on or after the law is enacted (Section 213).
• Any person engaged in investments that include infrastructure to support the delivery of refined petroleum products (including roads, railways, and ports); any person that barters or contracts by goods or services (including insurance and reinsurance) for the exportation of refined petroleum products (Section 201).
• Any person that knowingly participates in a joint venture relating to the development of petroleum resources outside Iran where the joint-venture was established on or after January 1, 2002 and where the GOI is a "substantial" partner or investor, or through which Iran could receive technological knowledge or equipment (Section 201).  The joint venture prohibition would extend to energy-related or uranium mining, production, or transportation joint ventures in which the GOI is a "substantial" partner or investor, where uranium is transferred to Iran, or where the GOI could receive know-how not previously available to it (Section 203).  The term "substantial" is not defined in the legislation.  Persons have 180 days to terminate such joint ventures or otherwise risk being subject to sanctions.

Any person determined to be the controlling beneficial owner, operator, controller, or insurer of a vessel that transports crude oil from Iran, on or 90 days after the enactment of the Iran Threat Reduction and Syria Human Rights Act of 2012, where any beneficial owner had actual knowledge, or the owner or operator knew or should have known, how the vessel was used.   The sanction applies only where the President has determined there is a sufficient supply of petroleum products under NDAA Section 1245(d) and the country to which the oil is destined to has not received an exception under Section 1245(d)(4)(D); and any person, including the owner, controller, or insurer, concealing the Iranian origins of petroleum products transported on the vessel (Section 202). The President may prohibit a vessel owner, operator, or controller from landing at a United States port for up to 2 years after the date on which the President imposed those sanctions.  The legislation also specifically refers to the persons identified by the Department of Treasury, Office of Foreign Assets Control ("OFAC") as evading or concealing their Iranian origin (see our previous advisory here). 

Section 204 also expands the ISA to allow the President to:  (1) prohibit any U.S. person from investing in or purchasing "significant" amounts of equity or debt instruments of a sanctioned person (without defining "significant"); (2) exclude any corporate officer, principal of, or shareholder with a controlling interests in a sanctioned person from entry into the United States; and (3) impose any sanction available under the subsection, including prohibition from investing in or purchasing "significant" amounts of equity or debt instruments of a sanctioned person and exclusion from entry into the United States, on the principal executive officers of any sanctioned person.

The legislation also adds detailed requirements to the reporting obligations set forth in the CISADA regarding the importation to and exportation from Iran of crude oil and refined petroleum products.  Such details include reporting on the volume of, the persons selling and transporting, and the financing of the importation and exportation of crude oil into and out of Iran.  It also amends CISADA to require the Administration to investigate whether NIOC and NITC are agents and affiliates of the Iran Revolutionary Guard Corporation, and to block transactions under U.S. jurisdiction that relate to the purchase, or financial services relating to the purchase, of petroleum or petrochemical products from these entities.

Section 603 exempts from the sanctions certain natural gas projects that involve the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Europe and Turkey in furtherance of a production sharing agreement or license awarded by a sovereign government other than the Iranian Government.  While not explicit, this exemption would appear to be directed at the Shah Deniz gas development project in the Caspian Sea region.  This exemption does not apply where the President certifies that an Iranian entity:  (1) has increased its equity interest in the project relative to the interest it held on January 1, 2002, or (2) has assumed an operational role in the project.  An Iranian entity, as defined in the legislation, includes any entity that is:  owned or controlled by the GOI; organized under the laws of Iran or with the participation or approval of the GOI; owned or controlled by another entity that is owned or controlled by the GOI or controlled by Iranian law; or a successor entity to any such entity.  It is not clear whether any increase in the equity interest by an Iranian entity or the Government of Iran writ large (e.g., a different Iranian entity that is owned by the Government of Iran) vitiate the exemption.  Moreover, the legislation does not expound on the notion of an operational role.

B. Transportation of Goods Related to Proliferation or Terrorism-Related Activities

Section 211 requires the President to block and prohibit any transaction in property, which is in the United States or within the possession or control of a U.S. person, of any person who "knowingly" provides a vessel, insurance or reinsurance for transportation services, or any other shipping services to transport goods to or from Iran that could "materially contribute" to the GOI's proliferation of weapons of mass destruction-related activities. These restrictions extend to persons that own, have a controlling interest in, or are successor entities to persons providing such transportation services.  

C. Financial Institutions

Section 216 broadens CISADA's scope by applying its restrictions to any foreign financial institution that facilitates, participates or assists in, attempts or conspires to facilitate or assist in, or is owned or controlled by a foreign financial institution that engages in a number of prohibited activities described in section 104(c)(2) of CISADA.  These activities include, but are not limited to, supporting Iran's efforts to acquire or develop weapons of mass destruction or efforts to support terrorist organizations.  Section 217 also continues the blocking of property and restrictions on financial transactions relating to property of the GOI, the Central Bank of Iran, and sanctions evaders, as identified pursuant to Executive Order 13608.

Section 220 authorizes, but does not require, the President to impose sanctions on global financial communications services providers, such as the Society for Worldwide Interbank Financial Telecommunications ("SWIFT"), that directly provide their services, or facilitate direct or indirect access to such services, to the CBI and other blocked Iranian financial institutions. The provision requires, within 60 days of enactment, a report to Congress of all known entities that provide or facilitate access to such services for the CBI or Iranian financial institutions designated under CISADA.  Providers who have not terminated such services, or who serve as intermediary financial institutions for such messaging services, as well as their directors and significant shareholders, can be subjected to sanctions either under the International Emergency Economic Powers Act or CISADA within 90 days of enactment of the legislation.  It appears the President has discretion to impose such sanctions.  The legislation provides two exceptions to such sanctions, which appear to be aimed at exempting European institutions:  (1) the provider is already subject to a sanctions regime under its governing foreign law that requires it to terminate the "knowing" provision or facilitation of specialized messaging services; and (2) the provider has terminated the "knowing" provision or facilitation of specialized messaging services for the CBI or other Iranian financial institutions, as identified by the governing foreign law.

Section 503 of the bill expands the NDAA to explicitly exclude the sale of agricultural commodities from NDAA sanctions.  Section 504 amends Section 1245(d)(3) to target only foreign central banks, and not foreign financial institutions owned or controlled by the government of a foreign country.  In addition, it amends Section 1245(d)(4) to exclude only financial transactions that involve trade in goods or services between the country with primary jurisdiction over the foreign financial institution and Iran.  Under this amendment, any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution.  Section 504 further allows a country to receive an exemption under 1245(d) (see our previous advisories here) where the country is significantly reducing its imports of Iranian crude oil.  Where a country reduces its crude oil imports to zero, that country's financial institutions will continue to qualify for the exemption.  This section of the legislation expands the measurement of "significant reduction" to include both the volume and price of purchases from Iran of petroleum and petroleum, whereas before "significant reduction" was based purely on imported volume. 

D. Parent Companies of Foreign Subsidiaries Engaging in Transactions with the Government of Iran

The legislation prohibits any non-U.S. entity owned or controlled by a U.S. person from engaging in any transaction with the GOI or with any person subject to GOI's jurisdiction (a term that is not defined in the legislation and potentially could be interpreted broadly), if current U.S. laws prohibit a U.S. person, or a person in the United States, from engaging in such transactions.  The legislation requires the President to prohibit such transactions no later than 60 days after enactment of H.R. 1905, unless the entity "divests or terminates its business with" the relevant subsidiary no later than 180 days after enactment.  Failure of a non-U.S. entity to terminate such transactions would potentially subject the U.S. parent company to civil penalties.

E. Reporting and Disclosure Requirements

Section 219 of the legislation requires all U.S. stock exchange-listed companies to disclose whether they or their affiliates have engaged in activities sanctionable under current U.S. law, including activities:  (1) relating to Iran's oil, gas, and petrochemical industries; (2) supporting the proliferation of weapons of mass destruction; or (3) violating the Iranian Transactions Regulations ("ITR").  The legislation does not define the term "affiliate," nor specify whether the requirement extends only to affiliates owned or controlled by the listed entity, or whether it also extends to other types of affiliates, such as parent or sister companies.  Further, the legislation requires the Securities Exchange Commission to notify the President of such disclosure.  Upon notification, the President is required to initiate an investigation into the possible imposition of sanctions on such companies, and determine whether to impose sanctions within 180 days after initiating the investigation.

F. Human Rights Abuses

The legislation includes sanctions against persons that commit, or assist in the commission of, human rights abuses in Iran.  Sections 401and 402 expands CISADA sanctions to persons that have transferred, facilitated the transfer of, or provided any services relating to goods (including ammunition, chemical sprays, and water cannons) and technologies (including surveillance technology and other "sensitive technologies") used by Iran and any of its agencies or instrumentalities to commit serious human rights abuses.   Section 412 further directs the Secretary of State to provide periodic guidelines on what constitutes "sensitive technology".  The President must submit to Congress a list of persons engaging in such activities 90 days after enactment.  The list will include persons who help transfer or provide services to any entity organized under the laws of Iran or otherwise subject to the jurisdiction of the GOI, or any national of Iran, for use in or with respect to Iran, as well as transferring such goods or providing such services to the IRGC..

Executive Order 13622 of July 30, 2012 Authorizing Additional Sanctions With Respect to Iran

A. Sanctions Targeting Foreign Financial Institutions

Section 1 of the E.O. authorizes the Secretary of the Treasury to impose sanctions on a foreign financial institution when Treasury determines that the foreign financial institution has knowingly conducted or facilitated any significant financial transaction with NIOC or NICO for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran.  Not included in the sanctions are sales or provision of products described in section 5(a)(3)(A)(i) of the Iran Sanctions Act of 1996 (Public Law 104-172) (i.e., refined petroleum products), as long as the fair market value of the products is lower than the applicable dollar threshold in that section. 

The Treasury Department can prohibit the opening or maintenance of, or otherwise impose strict conditions on, a correspondent account or a payable-through account by the foreign financial institution in the United States.  These restrictions seek to deprive foreign financial institutions found to be engaging in such transactions from access to the U.S. financial system.

The above sanctions apply with respect to the acquisition or purchase or petroleum or petroleum products only if:  (1) the President determines pursuant to the NDAA that there is sufficient supply of such products from countries other than Iran; and (2) an exception pursuant to NDAA does not apply for the country with primary jurisdiction over the foreign financial institution. 

B.Various Sanctions on Individuals or Entities Regarding Purchases of Petroleum, Petroleum Products, or Petrochemicals

The E.O. also authorizes the Secretary of State to impose sanctions on a "person" (defined as an individual or entity) when State determines that the person knowingly engaged in a significant transaction for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran.  The sanctions can apply to: (1) successor entities of such persons; (2) entities which own or control such persons and had knowledge that the persons engaged in such activities; or (3) entities which are owned and controlled by (or under common ownership or control with) such persons and knowingly participated in such activities.

The sanctions that may be imposed by the State Department, in conjunction with the Treasury Department, Commerce Department, the United States Trade Representative, the Export-Import Bank, and the Federal Reserve System, include:  (1) Export-Import Bank denial of any guarantee, insurance, extension of credit, or participation in any extension of credit in connection with the export of any goods or services to the sanctioned person; (2) U.S. Government agencies refusing approval, where required, of the export or reexport of goods or technology to the sanctioned person; (3) precluding a sanctioned financial institution from acting as a primary dealer in U.S. Government debt instruments or from serving as an agent of the U.S. Government or repository for U.S. Government funds; and (4) prohibiting U.S. Government agencies from procuring or entering into procurement contracts for goods or services from the sanctioned person. 

In addition, the State Department may, in conjunction with the Treasury Department (which is responsible for implementing the following sanctions when selected by the State Department), prohibit a U.S. financial institution from making loans or providing credits to the sanctioned person of more than $10 million in any 12-month period (unless for projects to relieve human suffering); may prohibit any foreign exchange transactions subject to the jurisdiction of the United States in which the sanctioned person has any interest; and may prohibit transfer of credit or payments between financial institutions (or by, through, or to any financial institution) where such transfers or payments (subject to U.S. jurisdiction) involve an interest of the sanctioned person.  When such sanction is selected by the State Department, the Treasury Department is also authorized to block all of the sanctioned person's property and interests in property in the United States, that come within the United States, or that are or come within the possession or control of any U.S. person (including a foreign branch of a U.S. person), and providing that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in, and may restrict or prohibit the direct or indirect importation of the sanctioned person's goods, technology, or services into the United States.

The above sanctions apply with respect to the acquisition or purchase of petroleum or petroleum products only if:  (1) the President determines pursuant to the NDAA that there is sufficient supply of such products from countries other than Iran; and (2) an exception pursuant to NDAA does not apply for the country with primary jurisdiction over the foreign financial institution. 

C. Sanctions on Individuals or Entities Providing Support to NIOC, NICO, or the Central Bank of Iran

The E.O. also authorizes Treasury to impose additional sanctions on a person that the Treasury Secretary determines has materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, NIOC, NICO, or the Central Bank or Iran, or the purchase or acquisition by the Government of Iran of U.S. bank notes or precious metals.  The sanctions authorized by the E.O. for violation of this provision are the blocking of any transaction involving the sanctioned person's property and interests in property which are in the United States, come within the United States, or are or come within the possession or control of any U.S. person, including any foreign branch of a U.S. person.

D. Exemption

Like the proposed legislation, the sanctions imposed by the E.O. do not apply to any persons engaged in conducting or facilitating a transaction involving a natural gas development and pipeline project initiated prior to July 31, 2012 to bring gas from Azerbaijan to Europe and Turkey in furtherance of a production sharing agreement or license awarded by a sovereign government other than the Iranian Government before July 31, 2012. 

Conclusion

The new legislation has a number of significant provisions, apart from the incremental expansion of sanctions against Iran.  For example, for the first time, non-U.S. companies that are owned or controlled by U.S. persons are now subject to the restrictions of the ITR.  Non-U.S. persons who engage in certain energy related activities involving Iran but located outside of Iran can now be subject to sanctions.  The legislation attempts to further limit the financing (including financing through barter type arrangements) and transportation logistics associated with Iranian petroleum and petroleum products.  And there are significant new reporting and monitoring obligations that are intended to identify non-U.S. company involvement in the Iranian economy, which could lead to additional enforcement investigations and sanctions against such companies.  Meanwhile, the E.O. expands U.S. sanctions against Iran by further targeting transactions and payments related to the petroleum and petrochemical industry of Iran.  It expands upon sanctions in the NDAA in order to prevent circumvention of existing sanctions against Iran's oil industry, particularly with regard to payment mechanisms for the purchase of Iranian oil.  

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.