As the U.S. continues to pursue multilateral efforts to intensify sanctions on Iran, yesterday, President Obama signed into law H.R. 2194, the Comprehensive Iran Sanctions Accountability and Divestment Act ("CISADA"), following approval of the Conference Report on the legislation by both the U.S. House and U.S. Senate on June 25.

The enactment of CISADA comes after several months of negotiations between House Foreign Affairs Committee Chairman Howard Berman (D-CA), Senate Banking Committee Chairman Chris Dodd (D-CT), key Members of Congress, stakeholder groups, and the Obama Administration over the scope of the extraterritorial applicability of the sanctions and the nature of any Presidential waiver authority.

CISADA seeks to make Iran incur substantial economic costs for its attempts to develop nuclear weapons and its support for terrorism by further cutting off Iran from access to the international financial markets. To achieve this objective, CISADA seeks to establish a legal and regulatory framework that imposes negative consequences on entities that do business (directly or indirectly) with the Government of Iran, entities owned or controlled by the Government of Iran, and entities involved in Iran's energy and banking sectors ("Iran"). As nearly all U.S. commerce with Iran is already prohibited under existing law and policy, CISADA more directly targets foreign firms and is structured to leverage the U.S. financial system to amplify the cost and risk that such companies face when doing business with Iran. CISADA also seeks to prevent Iran from acquiring potentially sensitive technologies by tightening U.S. export control policies.

Set forth below are highlights of key provisions of CISADA.

Expanded energy sanctions against Iran, increased penalties for violations (Section 102)

CISADA expands the range of activities covered by the existing U.S. sanctions with respect to Iran, increases the number and types of penalties for violations of the sanctions, and attempts to curtail the President's ability to forego investigations and enforcement of potential violations.

Current U.S. law requires the President to impose two out of a menu of six enumerated sanctions against any company that makes an investment of over $20 million in the development of Iran's petroleum resources. Under CISADA, the President is required to impose three out of a menu of nine enumerated sanctions for a much broader range of "investment" in Iran's petroleum sector, including the sale, lease, or provision to Iran of goods, services, technology, information, or support that "could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products."

The President also is required to impose three out of the menu of nine sanctions for the sale, lease, or provision to Iran of "goods, services, technology, information, or support" that "could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products," including insurance or reinsurance, financing or brokering, or providing ships or shipping services to deliver refined petroleum products to Iran. CISADA includes language that specifically allows the President not to impose sanctions on such an insurer or reinsurer if the President determines that the insurer or reinsurer "has exercised due diligence" in establishing and enforcing official policies, procedures, and controls to ensure compliance with sanctions against Iran.

Sanctions against foreign banks that facilitate certain business with Iran (Section 104)

CISADA requires the Treasury Department to issue regulations within 90 days of enactment "to prohibit, or impose strict conditions on" the opening or maintenance of U.S. correspondent or payable-through accounts for foreign banks working with key Iranian entities. Targeted foreign banks are those that facilitate the Government of Iran's efforts to develop weapons of mass destruction and support for terrorism; do business with Iranian companies that are subject to U.N. Security Council sanctions; or launder money or support the Central Bank of Iran's efforts in support of Iran's weapons of mass destruction activities, Iran's role in international terrorism, and Iranian entities subject to U.N. Security Council sanctions.

In addition, this provision also targets foreign banks that facilitate "a significant transaction or transactions or provide[] significant financial services for" the Iranian Revolutionary Guard Corps or its affiliates, or a financial institution that is designated by the U.S. under the International Emergency Economic Powers Act ("IEEPA") in connection with Iran's proliferation of weapons of mass destruction or support for terrorism. Along with issuing regulations concerning the treatment of such correspondent and payable-through accounts, CISADA directs Treasury to issue regulations: (1) requiring the U.S. financial institutions maintaining such accounts to audit their foreign financial institution clients to ensure they do not engage in these prohibited activities; (2) requiring U.S. financial firms to report to Treasury regarding any transactions with respect to any such prohibited activity; and (3) requiring the U.S. financial institutions maintaining these correspondent or payable-through accounts to certify that their foreign financial firm clients are not knowingly engaging in the specified activities.

Along with these new restrictions on correspondent and payable-through accounts, CISADA clarifies that U.S. sanctions against Iran apply to the foreign subsidiaries of U.S. banks, and requires Treasury to issue regulations within 90 days of the date of enactment of the bill to prohibit any person owned or controlled by a U.S. financial firm from engaging in a transaction benefiting the IRGC or any of its agents or affiliates who are blocked under IEEPA.

Reports to leverage public pressure

As part of the U.S. Government's broader campaign to leverage public pressure against companies doing business with Iran, and to generate unwanted and costly media, shareholder, political, and regulatory pressure on these companies, CISADA requires the issuance of several reports.

  • Within 90 days of enactment, and annually thereafter, CISADA directs that the President submit to Congress a report on the dollar value amount of trade between Iran and each G-20 member country. (Section 102)
  • Within 90 days of enactment, the President is required to submit to Congress a report on "investments in the energy sector of Iran"1 from January 1, 2006 through 60 days after the date of enactment. This report also must contain an estimate of the volume of energy resources that Iran imported during the report period, as well as "a list of all significant known energy-related joint ventures, investments, and partnerships located outside Iran that involve Iranian entities in partnership with entities from other countries." 180 days after submitting this report, and then every 180 days thereafter, the President is required to provide an updated report on this issue. (Section 110)
  • Within 90 days of enactment, the President is required to submit to Congress a report on any activity of an export credit agency of a foreign country that would violate the sanctions imposed by the U.S. with respect to Iran's energy sector. CISADA requires the President to update this report as new information becomes available. If the U.S. Export-Import Bank is considering entering into a co-financing arrangement with any foreign export credit agency identified by such a report, prior to approving the transaction, the President must submit a report identifying the export credit agency of the foreign country and the beneficiaries of the financing. (Section 111)
  • Within 180 days of enactment, the President is required to submit to Congress a report on equitable methods for a comprehensive system to compensate U.S. nationals who are victims of acts international terrorism. (Section 115)

Authorization for public pension fund, private fund divestment from Iran

CISADA authorizes state and local governments to divest their public pension funds from, or prohibit the investment of their pension funds in, any company that engages in certain investment activities in Iran. This authorization expressly applies to - and does not preempt - divestment laws and policies previously enacted or adopted by states and local governments. Under this provision, state and local governments are authorized to divest from persons that have an investment of $20 million or more in Iran's energy sector, including a person that provides oil or natural gas tankers or pipelines for Iran. Divestment also is authorized from any financial institution that extends $20 million or more in credit to another person, for 45 days or more, if that person will use the credit for investment in Iran's energy sector. (Section 202).

In addition to authorizing divestment by state and local pension funds, CISADA amends the Investment Company Act to provide a safe harbor for private fund managers to divest from, or avoid investing in, any securities issued by persons that the investment company determines have engaged in these same investment activities in Iran (or that have certain investments in business operations in Sudan). The SEC is directed to issue any regulations that may be necessary to implement this safe harbor within 180 days of the date of enactment. (Section 203)

Government contractor certifications required (Section 102)

In the wake of recent revelations that over $100 billion in U.S. government contracts have been awarded to companies that do substantial business with Iran, within 90 days after the date of enactment, CISADA revises the Federal Acquisition Regulations to require that all U.S. government contractors certify that neither they, nor any person they own or control, engages in any activity that is subject to Iran sanctions. False certifications shall result in the termination of the government contract for which the certification was provided, and the suspension or debarment of the prospective government contractor for up to three years.

Codification of U.S. policy prohibiting imports from and exports to Iran (Section 103)

CISADA codifies longstanding U.S. Executive Orders prohibiting U.S. persons, wherever located, from doing business with the Government of Iran and any entities it owns or controls. CISADA codifies the general prohibition on the importation of Iranian origin goods or services into the U.S. It also codifies the general prohibition on exports to Iran from the U.S. or by U.S. persons, wherever located, subject to certain exceptions, such as for transactions incident to travel to Iran and for the export of communications technologies that promote democracy in Iran.

Next steps

The impact of CISADA, and whether it meets its objectives, will be shaped in large degree by the regulatory implementation and whether, and if so how, the Administration exercises its enforcement and waiver authorities. The reaction by foreign firms and foreign governments to the extraterritorial nature of CISADA also will play a key role in shaping its impact. The enactment of CISADA comes on the heels of the U.N. Security Council's passage of a new Iran sanctions resolution2 and the European Council's agreement on the principles for its own package of Iran sanctions.3 In recent days, countries such as Canada, Australia, and the United Arab Emirates have announced their own efforts to enforce sanctions against Iran, and a steady stream of major foreign companies, such as the French oil giant Total, have said they would stop doing business with Iran.

Conclusion

As CISADA is implemented, the U.S. government has indicated that it will continue to seek additional ways to impose pressure on Iran, making it essential for any business with linkages to the U.S., including any U.S. affiliates, personnel, suppliers, or counterparties, to actively monitor the policy landscape. The intensified legal, regulatory, political, media, and public focus on any commercial linkages with Iran also requires the consideration of strengthened internal controls and the review of compliance programs to ensure that they guard against any actual, potential, or perceived exposure to Iran. Given the critical role to be played by the Treasury Department with respect to issuing regulations that implement many of the key provisions of CISADA, including Section 104, interested parties also should consider submitting comments for Treasury's consideration during the rulemaking process.

Footnotes

1. CISADA does not further specify what types of "investments in the energy sector of Iran," or by whom, must be reported under this provision.

2. http://daccess-dds-ny.un.org/doc/UNDOC/GEN/N10/396/79/PDF/N1039679.pdf?OpenElement

3. http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/115346.pdf

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