United States: US, UK, Canada Announce New And Expanded Iran Sanctions Increasing Risks To Persons Conducting Business With Iran

On November 21, the US Government, along with the United Kingdom and Canada, announced significantly expanded energy-related sanctions against Iran. In the US, Executive Order 13590 (November 19, 2011), which authorizes these sanctions, expands upon actions taken pursuant to the Iran Sanctions Act ("ISA") of 1996 and the Comprehensive Iran Sanctions, Accountability, and Divestment Act ("CISADA") of 2010. The new sanctions expand the scope of sanctions  against Iran, present new risks to non-US persons conducting certain business with Iran's petroleum and petrochemical industry, and mark the first time the US Department of the Treasury ("Treasury") has identified the entire Iranian financial sector as a "primary money laundering concern" under the USA PATRIOT Act.

Petroleum-based Sanctions

Regarding Iran's petroleum and petrochemical industries, the new sanctions under EO 13590 specifically target any sale, lease or provision of goods, services, technology or support that could directly and significantly:

  • Contribute to maintenance or enhancement of Iran's ability to develop domestic petroleum resources, if a single transaction has a fair market value ("FMV") of $1 million or more, or if a series of transactions from the same entity have an aggregate FMV of $5 million or more in a 12-month period.
  • The monetary thresholds set forth in the EO for triggering sanctions represent a significant decrease in the thresholds under CISADA (which are FMV $5 million per single transaction and $20 million in the aggregate for a 12-month period).
  • "To develop" is defined to mean explore, extract, refine, or transport by pipeline petroleum resources. This definition is consistent with previously existing law.
  • "Petroleum resources" includes petroleum, oil, natural gas, liquefied natural gas, and refined petroleum products. This definition is consistent with the definition found in CISADA.
  • As is also the case in CISADA, the definition of "Refined petroleum products" includes diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel), and aviation gasoline.
  • "Iran" is defined as the Government of Iran and the territory of Iran and any other territory or marine area, including the exclusive economic zone and continental shelf, over which the Government of Iran claims sovereignty, sovereign rights, or jurisdiction, provided that the Government of Iran exercises partial or total de facto control over the area or derives a benefit from economic activity in the area pursuant to international arrangements.  This definition is based largely on the definition of "Iran" found in the Iranian Transactions Regulations at 31 CFR Section 560.303, though they do differ in one potentially significant way.  Whereas Section 560.303 says "...derives a benefit from economic activity in the area pursuant to an international agreement," the new Executive order says "... pursuant to international arrangements," which potentially could be read more broadly than the definition in the existing regulations. This definition was not previously in CISADA or the Iran Sanctions Act, and raises the possibility that activities outside of the legal territory of Iran may be subject to the new sanctions.
  • Facilitate the maintenance or expansion of Iran's domestic production of petrochemical products, if a single transaction has a fair market value of $250,000 or more, or if 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 monetary thresholds have been lowered from those set forth in CISADA ($1 million per single transaction and $5 million in the aggregate).
    • "Petrochemical products" includes any aromatic, olefin, and synthesis gas, and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea.

The new sanctions apply to (1) any person, entity, or financial institution that "knowingly" provides the specified items, (2) a person that owns or controls a person referred to above, and had actual knowledge or should have known of the latter engaging in such transactions, and (3) a person that is owned or controlled by, or under common ownership or control with, a person referred to above, and "knowingly" participated in the above activities.  The US Department of State has responsibility for making such a finding.  Based on the knowledge standard articulated in the Executive Order, US companies potentially could be at risk for the activities of their non-US affiliates. In addition, because companies may be subject to successor liability for the acts of others, any company considering acquiring another entity should implement enhanced due diligence measures to enable them to undertake an accurate risk assessment.

Under the Executive Order, any transaction by a US person or within the United States that evades, avoids, attempts to violate, or causes a violation of these sanctions is prohibited. 

For any entity or person that is found to have engaged in sanctionable conduct, the US Government can impose one or more of the following sanctions: (1) prohibit any transactions in foreign exchange that are subject to US jurisdiction; (2) preclude involvement in any US Export-Import Bank supported transactions; (3) deny any licenses required from any US Government agency, including export and reexport authorizations; (4) preclude contracting with the US Government; (5) prohibit loans of more than $10 million from US financial institutions; (6) deny any financial institution a designation as a primary dealer, or repository of US Government funds; (7) prohibit transfers of credit or payments subject to US jurisdiction by, through, or to any financial institution; (8) block all property or interests in property of the sanctioned person; and (9) prohibit imports of goods or technology from the sanctioned person.

Money Laundering

Regarding Iran's financial sector, the Treasury Department's Financial Crimes Enforcement Network ("FinCEN") has identified Iran as a jurisdiction of "primary money laundering concern."  Under the USA PATRIOT Act, the Treasury Department has designated the entire Iranian financial sector – to include Iran's Central Bank, private Iranian banks, as well as their foreign branches and subsidiaries – as posing a risk; in particular, entities doing business with the Iranian financial sector risk violating US money laundering laws and regulations. In connection with this designation, FinCEN filed a Notice of Proposed Rulemaking under section 311 of the USA PATRIOT Act. This provision grants the Treasury Department the authority to require US "financial institutions" and financial agencies to take certain "special measures" against one or more financial institutions in a country that is so identified as a money laundering concern. The special measures proposed vis-ŕ-vis Iran concern "correspondent accounts" – i.e., an account that one financial institution maintains at another financial institution.  The special measures concerning correspondent accounts include the following:

  • Prohibiting opening and maintaining accounts for, or on behalf of, Iranian banking institutions (to the extent not already blocked);
  • Conducting additional due diligence to ensure no account at a non-Iranian financial institution is being used indirectly to provide services to an Iranian banking institution; and
  • When the US financial institution knows, or has reason to know, that an account holder provides services to Iranian financial institutions notifying that account holder that it may not provide an  Iranian financial institution access to the account holder's US accounts.

These restrictions could serve as a means to terminate US correspondent banking relationships with third country financial institutions that may be conducting financial transactions and engaging in other business relationships with Iranian banks and credit institutions.

Additional Designations by OFAC

In addition to the above sanctions, the US Department of the Treasury, Office of Foreign Assets Control ("OFAC") has added additional Iranian entities to the Specially Designated Nationals ("SDN") List for their alleged role in nuclear proliferation and other activities. Effectively, US persons may not conduct transactions or business dealings with the new SDNs, and the SDNs' property and property interests held by US persons or in the US are now blocked. 

UK and Canada Action Against Iran

The expanded US sanctions are undertaken alongside similar sanctions imposed by the United Kingdom and Canada on November 21, 2011. Specifically:

  • UK: The UK Government imposed an order under the Counter-Terrorism Act of 2008 requiring UK credit and financial institutions to cease all business with financial institutions incorporated in Iran, and their branches and subsidiaries, wherever located, as well as the Central Bank of Iran (referred to as "designated persons" in the order). This measure supplements, and in some respects expands upon, Iran sanctions implemented by the European Council (see EC Regulation 961/2010), which the UK has implemented. Effectively, these new, unilateral UK measures prohibit UK financial institutions (referred to as "relevant persons") from entering into, or continuing, transactions or business relationships with designated persons, unless licensed by HM Treasury. This may include making a payment, processing a payment, transmission of funds, exchange of financial or credit documents, acting under a contract with or pursuant to an obligation owed, or taking any other business relationship act, unless licensed by the UK Government. The order covers existing transactions entered into prior to the Direction becoming effective on 21 November 2011, which means that business relationships must cease, unless licensed.  The UK Government has published (6) six general licenses, but if none are available, applications for specific licenses may be submitted and approved, depending on the circumstances.
  • Canada: The Canadian Government, pursuant to subsections 4(1) to (3) of the Special Economic Measures Act, amended and expanded the Special Economic Measures (Iran) Regulations. The updated sanctions prohibit the provision or acquisition of most financial services to, from, or for the benefit of Iran, or at the direction or order of Iran or any person in Iran. The new sanctions also, with certain exceptions, expand Canada's previously-existing petroleum-based sanctions to prohibit the export, sale, supply or shipping of any goods used in the petrochemical, oil, or natural gas industry. The amended sanctions also expand the Canadian Schedule 1 list of persons (and family members and associated of such persons) who contribute to Iran's nuclear activities and weapons of mass destruction, as well as officials in the Islamic Revolutionary Guard Corps, and also expand the Schedule 2 list of goods prohibited for export to Iran. 

The above sanctions are the most expansive and thorough to date. All three countries highlighted the recent International Atomic Energy Agency November report (setting out the Agency's concern about the potential military dimensions to Iran's nuclear program) and the Financial Action Task Force October report (noting Iran's failure to combat risk of terrorist financing) as a basis for the new sanctions. They also emphasized the possibility of additional sanctions on the Iranian financial sector. Taken together, these sanctions and announcements further solidify the commitment of the US, UK, and Canada to restrict Iran's financial and energy sectors, and thereby further isolate Iran from involvement in international commerce.

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