On November 21, 2011, the President issued an Executive Order that targets Iran's petrochemical industry and broadens energy-related sanctions against Iran. The new sanctions are being imposed in a coordinated effort with allies to intensify economic pressure on the Iranian government to cease its nuclear program. The new sanctions build upon a robust framework of existing Iranian sanctions and are designed to address findings that Iran has been circumventing present sanctions against its petroleum industry by obtaining goods and services of low dollar values and by using its petrochemical facilities to refine petroleum. The new provisions targeting the petrochemical industry represent, in particular, a far-reaching expansion of the existing sanctions that sweeps many foreign petrochemical companies and projects under the scope of U.S. sanctions that previously were not covered. On the same day, the Department of the Treasury (Treasury) designated Iran as a jurisdiction of primary money laundering concern, a finding that is likely to result in new restrictions and additional due diligence requirements for U.S. financial institutions. U.S. and foreign companies in the petroleum and petrochemical industries, as well as financial institutions, are advised to closely review these new measures to assess possible impact on their activities.
Building on Existing Energy-Related Sanctions
U.S. persons have long been prohibited under the Iran Sanctions Act of 1996 (ISA) from knowingly investing in Iran's petroleum sector. In 2010, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) extended ISA sanctions to foreign persons, forcing them in many instances to choose between doing business with the U.S. or Iran. CISADA authorizes sanctioning any person who knowingly makes a large-scale investment of $20 million or more in Iran's development of petroleum resources; provides refined petroleum products to Iran worth at least $1 million ($5 million over a one-year period); or provides goods, services, or other support worth at least $1 million ($5 million over a one-year period) contributing to Iran's production of, or ability to import, refined petroleum products. For more details on CISADA, see V&E's July 2, 2010, e-communication on CISADA.
The November 21 Executive Order (EO 13590) escalates existing sanctions in two primary ways:
New Petrochemical Industry Sanctions
First, the U.S. for the first time targets Iran's petrochemical industry by authorizing sanctions for any U.S. or foreign person who knowingly sells, leases, or provides goods, services, technology or other support to Iran worth at least $250,000 (or $1 million aggregated over a one-year period) that could directly and significantly contribute to the maintenance or expansion of Iran's domestic production of petrochemical products. The covered petrochemical products include any aromatic, olefin, and synthesis gas and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea. This new provision significantly broadens the Iranian sanctions to now reach foreign companies engaging in petrochemical projects that do not meet the $20 million investment threshold under the pre-existing CISADA sanctions.
Broader Petroleum Sector Sanctions
Second, the Executive Order lowers the value threshold for triggering sanctions on contributing to Iran's petroleum resource development. Sanctions may now be imposed on any person who sells, leases, or provides any goods, services, technology, or support to Iran worth $1 million or more (or $5 million aggregated over a one-year period) that could directly and significantly contribute to enhancing Iran's ability to develop petroleum resources located in Iran. This sanction on provision of goods, services, and any other support covers many more potential transactions than the continuing ISA prohibition on making larger-scale investments of $20 million or more in Iran's development of petroleum resources. Development of petroleum resources is broadly defined and would include exploring for, extracting, refining, or transporting petroleum, oil, natural gas, liquefied natural gas, and refined petroleum products.
EO 13590 authorizes imposing the same sanctions for these new activities as those provided under CISADA, consisting of a menu of nine measures designed to cut off violators from U.S. resources, including: export-import bank assistance; U.S. government contracts; licenses for export of items from the U.S.; large loans from U.S. institutions; ability to import to the U.S.; ability to trade in U.S. currency; ability to deal in property interests, and several others. While CISADA mandated that at least three of the nine measures be imposed on sanctioned entities, the new prohibitions in EO 13590 do not contain this restriction, which may make it easier for sanctions to be imposed.
Likely Impact
The primary impact of EO 13590 is to extend the ISA sanctions to foreign petrochemical companies and smaller foreign petroleum companies that previously would not have been covered under CISADA. These companies now risk losing access to U.S. resources if they continue to do business that contributes to Iran's petroleum and petrochemical sectors.
U.S. companies are already prohibited from engaging in the activities described in EO 13590 under existing comprehensive sanctions that prohibit U.S. persons from engaging in virtually any trade with Iran. However, as under CISADA, U.S. companies can face liability under EO 13590 if they knew or should have known about the sanctionable conduct of a foreign subsidiary, or if they knowingly engaged in the sanctionable conduct of a foreign parent or affiliate. This significantly raises the stakes for a U.S. business that has foreign affiliates that operate independently and may be doing business in Iran.
New Due Diligence Requirements for U.S. Financial Institutions
U.S. financial institutions and their owned or controlled entities are already prohibited under CISADA from transacting with foreign financial institutions that deal with specially designated Iranian banks and are already required to perform audit activities, establish policies, or provide certifications that its foreign partners are not engaged in such transactions. However, in conjunction with EO 13590, on November 21, 2011, the Department of the Treasury further expanded the range of potential prohibitions relating to Iran by designating the Republic of Iran as a jurisdiction of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act. This finding authorizes Treasury to impose new requirements on U.S. financial institutions to implement additional due diligence to firewall their operations from any direct or indirect access by Iran. On the same day, Treasury's Financial Crimes Enforcement Network (FinCEN) filed a Notice of Proposed Rule Making (NPRM), which would prohibit covered financial institutions from establishing, maintaining, or managing in the U.S. any correspondent account for, or on behalf of, banking institutions in Iran. Additionally, under the proposed rule, such institutions would be required to apply special due diligence to their correspondent accounts. Although the FinCEN rule is not final, the Section 311 finding sends an immediate message to foreign financial institutions that continuing to transact with Iran could result in isolation from the U.S. financial system.
Other Measures
On the same day, the Departments of State and Treasury also designated 11 Iranian individuals and entities found to have contributed to Iran's nuclear program as blocked persons, freezing those of their assets under U.S. jurisdiction and prohibiting U.S. persons from engaging in any transactions in which they have an interest. Treasury stopped short of designating the Central Bank of Iran, but made it clear that "[n]o option is off the table" with respect to possible additional sanctions on the Central Bank of Iran. Also of note, the U.S. actions of November 21 arrived in concert with similar measures taken by the United Kingdom and Canada to cut off Iran from the financial sectors of those countries.
U.S. and foreign companies in the petroleum and petrochemical sectors, as well as U.S. and foreign financial institutions, are advised to closely review the new and broadened U.S. sanctions against Iran to assess the impact on their business activities.
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