This article outlines recent developments with respect to the United States sanctions affecting the Islamic Republic of Iran ("Iran"). The focus on Iran sanctions by the US Government and its allies continues to intensify, with new administrative and legislative action, expanding media coverage, and an ever more vigorous campaign to identify and make public the names of the various front companies and individuals involved in attempts to evade the sanctions. The US has also placed particular focus on identifying the growing linkages between Iranian commercial enterprises and the Iranian Revolutionary Guard Corps ("IRGC"). The impact of these efforts has extended beyond the US, and in coordination with the international architecture of United Nations, European Union, and other national sanctions regimes, served to further tighten commercial restrictions on Iran globally.
Overview of US Sanctions
US sanctions generally prohibit US persons1 from engaging in, or otherwise facilitating or being involved in, nearly all commercial transactions with or involving Iranian parties. US sanctions broadly restrict US persons, wherever located, from doing business with individuals or entities located in Iran or owned or controlled, directly or indirectly, by the Government of Iran. Separate and apart from these restrictions, US persons are also prohibited from doing business with any individuals or entities on the list of Specially Designated Nationals (the "SDN list") administered by the US Treasury Department's Office of Foreign Assets Control. The SDN list includes many Iran-related designees - including commercial enterprises - targeted because of their linkages to the Government of Iran, its weapons of mass destruction activities, its human rights abuses, or its support for terrorism. Notably, all of Iran's major air carriers are on the SDN list, as is the operating company of several of Iran's largest seaports. In addition to imposing direct restrictions on US persons, the SDN list is also used as a central due diligence screen by financial institutions around the world.
US sanctions also assert extraterritorial application, although the actual enforcement of such measures often involves a very complex and sensitive political and foreign policy calculation in addition to jurisdictional issues associated with foreign parties. Extraterritorial sanctions authorize penalties on any person, regardless of nationality or location, who knowingly (including constructive "should have known" knowledge) makes certain investments in, or provides other designated types and levels of support for, Iran's energy sector. Extraterritorial sanctions apply to:
- investing $20 million or more annually (or makes a combination of investments of at least $5 million each, which amount to at least $20 million in total in a 12-month period) in Iran's ability to develop petroleum resources2;
- providing goods, services, information, technology or support valued at $1 million or more (or that, during a 12-month period, has an aggregate fair market value of $5 million) that facilitates the maintenance or expansion of Iran's domestic production of refined petroleum products3; or
- providing goods, services, information, technology or support valued at $1 million or more (or that, during a 12-month period, has an aggregate fair market value of $5 million) that contributes to Iran's ability to import refined petroleum products, including the provision of financing, shipping, insurance, or reinsurance.
US sanctions also authorize the Treasury Department to restrict the opening or maintenance of US correspondent or payable-through accounts for foreign banks that know, or should know, that they provide certain significant transactions or financial services in support of entities involved in Iran's proliferation and terrorist activities. Additionally, special restrictions apply to all persons - US or foreign - who have, or seek to obtain, US Government contracts.
Sanctions violations can trigger civil and/or criminal liability, with penalties including substantial fines as well as possible imprisonment. In addition, violations (actual and perceived) of Iran sanctions are also frequently the subject of intense Congressional and media focus, both of which present significant reputational and business risks.
Recent Developments
In addition to SDN designations of more Iranian linked persons, amid growing pressure by the US Congress and stakeholder groups to impose stricter sanctions on Iran, there have been several recent developments shaping the sanctions landscape.
Expansion of Extraterritorial Sanctions
On November 21, the President issued Executive Order 13590, expanding extraterritorial sanctions to a wider range of activities involving Iran's energy sector. Executive Order 13590 targets assistance to Iran's upstream oil and gas activities. It also, for the first time, imposes sanctions on involvement in Iran's petrochemical industry, a key sector of the Iranian economy which accounts for nearly half of Iran's non-crude oil exports.
These new extraterritorial sanctions cover any person, regardless of nationality or location, who knowingly (including both actual knowledge and constructive "should have known" knowledge):
- provides goods, services, technology, or support valued $1 million or more (or that, during a 12-month period, has an aggregate fair market value of $5 million or more) for Iran's ability to develop petroleum resources4 located in Iran; or
- provides goods, services, technology or support valued at $250,000 or more (or that, during a 12-month period, has an aggregate fair market value of $1 million or more) for the maintenance or expansion of Iran's domestic production of petrochemical products.5
Designation of Iran (including the Central Bank of Iran) as a "primary money laundering concern"
On November 21, acting under Section 311 of the USA PATRIOT Act, the Treasury Department issued a finding that Iran, including the Central Bank of Iran, is a "jurisdiction of primary money laundering concern." As such, the Treasury Department will prohibit the opening or maintenance of correspondent accounts for, or on behalf of, any foreign banking institutions, if the correspondent account involves Iran. Covered financial institutions will also be required to take special due diligence procedures to ensure that no correspondent accounts are indirectly providing services to an Iranian banking institution.
While the actual legal impact of this so-called "special measure" is limited because other US laws already in existence prohibited such relationships, the money laundering finding could have a substantial impact on the international banking community and foreign banking regulators. Such findings are issued very rarely, and have historically been followed by a precipitous international withdrawal from the institution at issue.
Sanctions on the Central Bank of Iran
On December 31, 2011, President Obama signed into law the FY 2012 National Defense Authorization Act, which, among other things, greatly expanded US sanctions on the Central Bank of Iran (Bank Markazi). (On February 5, 2012, the President issued an Executive Order implementing certain of these provisions, including a freezing of the assets of the Central Bank of Iran and the property or interests in property of all Iranian financial institutions.)
These new sanctions were the culmination of an intense campaign by a large bipartisan coalition in Congress that had been calling for measures to "to collapse" the Central Bank of Iran, an institution involved in a wide range of Iranian energy sector commerce, as well as financial support for terrorism and nuclear proliferation. Indeed, in August of 2011, 92 US Senators signed a letter to the President calling for "crippling sanctions on Iran's financial system by cutting off" the Central Bank of Iran.
- Beginning 60 days after enactment, Section 1245 directs the President of the United States to prohibit the opening (and prohibit or impose strict conditions on the maintenance) of a US correspondent or payable-through account by a foreign financial institution that knowingly conducts or facilitates a significant transaction with the Central Bank of Iran. (There are certain exceptions for transactions involving food, medicine, or medical devices.)
- Beginning 180 days after enactment, sanctions also may apply to the US accounts of foreign central banks that engage in transactions for the sale or purchase of petroleum or petroleum products to or from Iran.
To assure that these new sanctions do not cause a spike in oil prices, and in response to concerns expressed by the Administration that these sanctions could undermine US efforts to achieve an international consensus on measures to prevent Iran from obtaining nuclear weapons, Section 1245 also includes certain exceptions and waivers. Section 1245 requires periodic reporting by the US Government on the price and supply of petroleum and petroleum products in countries other than Iran. Sanctions could only apply if there is both a sanctionable transaction and the President determines that, based upon the reports, there is a sufficient supply of non-Iranian petroleum and petroleum products such that there can be a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. Sanctions also would not apply if the President determines and timely reports to Congress that the country with primary jurisdiction over the foreign financial institution in question has significantly reduced its volume of crude oil purchases from Iran during the relevant time period. Section 1245 also includes broad authorization for the President to waive the imposition of sanctions for up to 120 days at a time if he "determines that such a waiver is in the national interest of the United States" and submits a related report to Congress.
New Sanctions Legislation
Reflecting increasing concern about Iran's nuclear program, support for terrorism, and extensive human rights abuses, the US Congress is currently considering new legislation to expand sanctions against Iran and to limit the discretion of the Administration not to investigate or punish sanctionable conduct. While there are some differences in approach between the House and Senate bills, they also have much in common, including, for the first time as a matter of law, a declaration that it is US policy to prevent Iran from acquiring or developing a nuclear weapon.
On December 14, 2011, by a vote of 410-11, the House passed the H.R. 1905, the Iran Threat Reduction Act. On February 2, 2012, by a bipartisan voice vote, the Senate Banking Committee marked up and favorably reported the Iran Sanctions, Accountability and Human Rights Act. The Senate is expected to take up and pass its bill in March, with a Conference Committee to reconcile the House and Senate bills expected soon thereafter.
The House-passed bill (H.R. 1905) and the Senate Banking Committee's bill would each expand the scope of extraterritorial sanctions on support for, or involvement in, Iran's energy or banking sectors, as well as require the production of various reports on companies and countries engaged in Iranian commerce. Other notable provisions of both bills include:
- Amending the 1934 Securities and Exchange Act to require issuers whose stock is traded on US exchanges to disclose whether they or their affiliates have engaged in certain sanctionable activities with Iran.
- Imposing legal liability on US parent companies for sanctions violations by their foreign subsidiaries.
- Establishing new extraterritorial prohibitions on any foreign person who engages in certain commercial or financial transactions with the IRGC.
The House-passed H.R. 1905 contains some elements not currently found in the Senate Banking Committee's bill. Among such provisions is a new extraterritorial restriction on any person who facilitates the issuance of Iranian sovereign debt, including government bonds. H.R. 1905 also would direct the Secretary of the Treasury to require domestic financial institutions (and persons they own or control) to certify that they are not engaged in correspondent banking relations or other business activities with the IRGC.
For its part, the Senate Banking Committee's bill includes some language not found in the House bill. Notably, the Senate Banking Committee's bill also would extend the scope of US sanctions on Iran to include restrictions on Iran's use of the Society for Worldwide Interbank Financial Telecommunication ("SWIFT") network. The bill would require the Treasury Department to issue a report on efforts by the US Government to convince SWIFT to cut off the Central Bank of Iran and designated Iranian banks. If the relationships identified continued for 90 days after the issuance of the report, the bill would authorize the President to impose sanctions on those entities that are enabling Iran's access to SWIFT, including their directors or significant shareholders. Additionally, the Senate Banking Committee's bill would subject to asset freezing and other sanctions any persons who knowingly provide shipping (or related services, such as insurance or reinsurance) for the transportation of goods that materially contribute to Iran's weapons of mass destruction or terrorism-related activities.
Enhanced International Coordination: European Union Oil Embargo and UK Banking Sanctions
The growing global consensus about the need for stricter regulations on Iranian commerce has resulted in the establishment of new sanctions regimes by the European Union and by the United Kingdom, with additional measures likely to be imposed by other major economies in the near term.
European Union Sanctions
On January 23, 2012, the European Union substantially expanded its sanctions on Iran, including by adopting a phased-in embargo on importation into the EU of Iranian crude oil. These new sanctions represent a significant increase in the nature and extent of EU restrictions on Iranian commerce, striking at the very heart of Iran's economy. The EU sanctions also mark a major political decision by the EU to find alternative sources of crude oil, and to more fully align European restrictions on Iran with United States sanctions on that country.
The EU sanctions ban the import (into the EU), purchase or transport of Iranian crude oil, petroleum and petrochemical products. The sanctions ban the provision (direct or indirect) of financing or financial assistance, including financial derivatives, insurance and reinsurance, related to the import, purchase, or transport of Iranian crude oil, petroleum and petrochemical products. Additionally, the new EU sanctions also ban must transactions or other involvement with Iran's petrochemical sector, and expand the scope of existing export controls to cover gold, diamonds, and other metals.
Notably, as part of the political negotiations needed to reach an EU consensus to adopt the new sanctions, the restrictions include two provisions that are designed to ease the impact of the oil embargo on EU Member States. For certain contracts entered into prior to January 23, 2012, the sanctions provide additional time within which these contracts can be executed. (Contracts for crude oil and petroleum may be executed until July 1, 2012. Petrochemicals deals may be executed until May 1, 2012.) The sanctions also allow for the continued supply of Iranian crude oil, petroleum or petrochemical products (or the proceeds derived from such supply) for the reimbursement of outstanding amounts due under contracts entered into prior to January 23, 2012, where those contracts specifically provide for such reimbursements.
United Kingdom Sanctions
On November 21, 2011, in a move closely coordinated with the US, the UK strengthened its sanctions against the Iranian financial sector, which are in addition to its implementation of European Union Regulations6 prohibiting certain dealings with Iran and Iranian persons. Pursuant to the UK's Counter Terrorism Act 2008, the UK Treasury issued a "Direction" broadly prohibiting UK persons from doing business with Iranian financial firms. The Financial Restrictions (Iran) Order 2011 bans all persons operating in the UK financial sector from involvement in any transaction or business relationship with the Iranian banking sector.
The Direction applies to all financial and credit institutions operating in the UK financial sector, and all their branches. It covers all entities covered by the Money Laundering Regulations, such as banks, investment banks and brokers of most financial products, fund managers, bureaux de change, certain insurers, and many other types of professionals. The UK sanctions prohibit such persons from engaging in transactions or business relationships with all banks incorporated in Iran (including their subsidiaries and branches, wherever located), as well as the Central Bank of Iran.
The Direction covered a broader range of interaction with the Iranian financial sector than the existing EU financial sanctions (which remain in effect.). Among other impacts, the Direction effectively bans the issuance by UK persons of insurance for any Iranian entity. While UK Treasury notes the Direction is not a trade ban per se, exporters will no longer be able to use UK credit or financial institutions to make or receive payments to or from Iranian banks, nor will UK institutions be able to enter into new letter of credit arrangements with Iranian banks.
Outlook
As Iran continues to defy the demands of the international community for transparency with respect to its nuclear program, the intense focus on Iran sanctions by the US Government is likely to continue for the foreseeable future. With US backing, the international architecture of Iran sanctions is also expected to grow more robust, as the European Union phases in its prohibition on purchases of Iranian crude, and other major economies (and Iranian trading partners), such as India, Japan, and South Korea also expand their restrictions on commerce with Iran.
The enforcement of Iran sanctions by the US Government - in coordination with allied governments - is expected to remain a key priority. The US State Department is likely to identify more foreign companies as having engaged in sanctionable conduct in Iran's energy sector, although it remains to be seen how US authorities will implement these findings. From the US Treasury Department, additional SDN designations of Iranian linked entities can also be expected, particularly where there is any nexus with the IRGC. (Indeed, on January 23, 2012, Treasury designated Bank Tejarat - one of the last remaining Iranian banks that had not been deemed an SDN.) The exercise of the new sanctions authority with respect to the Central Bank of Iran is also likely to be a key focus.
The European Union's January 23, 2012 decision to formalize a ban on the import into the EU of Iranian oil and petrochemical products will likely be another area for focus. The implementation of this embargo will be closely watched by allied governments who are likely to face increasing pressure to curtail their own involvement in Iran's energy sector. Indeed, Australia has already announced that it would soon adopt its own embargo on the importation of Iranian crude.
This continued intensified focus on Iran counsels heavily in favor of enhanced due diligence and heightened compliance procedures. Active monitoring of the policy landscape is also critical as the US and its allies continue to modify and expand restrictions on Iran.
Footnotes
1. "US persons" includes any US citizen or lawful permanent resident, any entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person actually within the US.
"Petroleum resources" is defined to include petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas.
3. "Refined petroleum products" is defined to include diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel), and aviation gasoline.
4. "Petroleum resources" includes petroleum, oil, natural gas, liquefied natural gas, and refined petroleum products.
5. "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.
6. The EU measures, among other things, include freezing of funds and economic resources; restrictions on transfers of funds to and from any Iranian person, entity or body (not just those named on a list of designated persons), requiring "vigilance" over activities with Iranian banks; restrictions on dealing with the Iranian banking sector; restrictions on Iran's access to the EU's bonds markets; restrictions on Iran's access to the EU's insurance and reinsurance markets; and restrictions on financing certain Iranian enterprises.
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