On July 1, 2010, President Obama signed into law the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 ("CISADA"), ushering a new era of enhanced sanctions against Iran in response to that nation's continued refusal to cease its uranium enrichment and nuclear proliferation activities. The United States passed the final version of the law just weeks after additional sanctions were adopted by the United Nations and the European Union.
CISADA expands the Iran Sanctions Act of 1996 ("ISA"), which already targeted petroleum resources in that country, with the objective of further depriving Iran of oil revenues in order to encourage it to abandon its nuclear related activities. CISADA also imposes new requirements on financial institutions, codifies existing bans on imports from and exports to Iran, imposes new requirements for U.S. Government contractors, supports the decisions of state and local governments to divest their investments in companies that conduct business with Iran, and adds three additional sanctions to those set out in ISA.
As with previous sanctions laws and regulations, CISADA applies to all "U.S. persons"1 and also authorizes, in certain circumstances, the imposition of sanctions on both foreign persons2 and U.S. persons and entities and permits U.S. companies to be held liable for the acts of foreign subsidiaries.
Sanctions Related to the Petroleum Industry
The provisions of CISADA that target the petroleum industry include the imposition of sanctions:
- where a person knowingly invests $20 million that directly and significantly contributes to the enhancement of Iran's ability to develop petroleum resources,3 or
- where a person knowingly engages in the following conduct, the fair market value of which is $1 million or more, or where the aggregate fair market value is $5 million or more in a 12 month period:
- sells or provides goods, services, technology, information or support that could facilitate the maintenance or expansion of Iran's production of refined petroleum products,4 including direct or indirect assistance in construction, modernization or repair of Iranian refineries,
- sells or provides Iran with refined petroleum products,5 or
- sells or provides goods, services, technology, information or support that could contribute to Iran's ability to import refined petroleum including:6
- underwriting or entering into a contract to provide insurance or reinsurance for any such goods, services, technology, information or support;
- financing, brokering the sale, lease or provision of goods, services, technology, information or support; or
- providing ships or shipping services to deliver refined petroleum products to Iran.
Petroleum Resources are defined as "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." Refined Petroleum Products are described as "diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel), and aviation gasoline."
CISADA expanded the knowledge requirement beyond ISA's requirement of "actual knowledge." Under CISADA, the requirement is that either "a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result."7 These provisions emphasize the importance of conducting thorough due diligence when dealing with parties that may have ties to Iran or with products that could ultimately be exported to Iran.
Companies involved in the petrochemical business should pay particular attention to these provisions and any further developments in Iran sanctions policy. While the definitions of Petroleum Resources and Refined Petroleum Products do not include any references to petrochemicals, a Congressional Research Service ("CRS") report published on December 24, 2009 stated that "[c]onstruction of oil refineries or petrochemical plants in Iran-included in the referenced GAO report-might also constitute sanctionable projects because they might, according to ISA's definition of investment, 'include responsibility for the development of petroleum resources located in Iran.'"8
The CRS report refers to a December 2007 Government Accountability Office ("GAO") Report titled "Iran Sanctions - Impact in Furthering U.S. Objectives Is Unclear and Should Be Reviewed," which includes a table listing the major agreements between Iran and foreign investors in Iran's energy sector.9 The GAO Report table includes references to several agreements related to the petrochemical industry, including the construction of ethylene cracker and petrochemical plants.
Requirements for Financial Institutions Maintaining Accounts for Foreign Financial Institutions10
CISADA institutes certain requirements for foreign financial institutions and for U.S. financial institutions that maintain accounts for foreign financial institutions. The Act directs the Secretary of the Treasury to issue regulations to either prohibit or severely limit a foreign financial institution from opening or maintaining a correspondent account or a payable through account in the United States where the foreign financial institution is found to:
- Facilitate the Government of Iran, including the Revolutionary Guard Corps, in the acquisition or development of weapons of mass destruction or the support of terrorist organizations;
- Facilitate the activities of a person subject to UN Sanctions;
- Engage in money laundering or facilitate the Central Bank of Iran or any other Iranian financial institution in the development of weapons of mass destruction or facilitate activities of a person subject to UN Sanctions; or
- Facilitate a significant transaction involving, or provide significant financial services to, Iran's Revolutionary Guard Corps, a blocked financial institution, the proliferation of weapons of mass destruction in Iran or Iran's support for international terrorism.
Further, CISADA requires a domestic financial institution that maintains a correspondent account or a payable-through account in the United States for a foreign financial institution to:
- perform audits to ensure that the foreign financial institution is not participating in any of the activities set forth above;
- report such activities to the Department of the Treasury about any such activities;
- certify that, to the best of its knowledge, the foreign financial institution is not knowingly engaging in any such activities; and/or
- establish due diligence policies, procedures, and controls that are designed to detect whether the foreign financial institution engages in any such activity.
CISADA added three sanctions to the original ISA sanctions:
- New Sanctions Under CISADA
- prohibiting transactions in foreign exchange in the United States;
- prohibiting access to U.S. financial institutions and the U.S. banking system; and
- prohibiting transactions related to U.S. property.
- Existing Sanctions Under ISA
- a ban from participation in U.S. government procurement;
- prohibiting transactions with the U.S. Export Import Bank;
- denying certain U.S. export licenses;
- denying loans of over $10 million per year by U.S. banks;
- restricting dealings in U.S. government bonds by financial institutions; and
- restricting the importation of goods to the U.S.
While ISA permits the President to waive the imposition of sanctions, CISADA heightens the standard from conduct "important to the national interest" to that which is "necessary to the national interest." This elevation of the standard reflects a Congressional intent to inhibit the President's ability to grant such waivers.
Other Important Provisions: Import/Export Sanctions, Diversion and Government Contractors
CISADA codifies prohibitions related to the importation of Iranian goods to the U.S., the export of U.S. goods to Iran, and the export of goods by U.S. persons, wherever located, to Iran.11 CISADA also focuses attention on diversion to Iran through other countries of critical goods and technologies that enhance Iran's military or support terrorism. Finally, the Act requires any company that contracts with the U.S. Government to certify that neither the company, nor any companies in which it has ownership or control, is conducting any business with Iran that is subject to sanctions under CISADA. False certifications may result in the termination of a government contract or debarment from contracting with the U.S. government for a period of up to three years.
Divestment by State, Local and Private Asset Managers
CISADA supports the efforts of state and local authorities and private asset managers to divest their investments in companies that conduct business with Iran. Divestments are encouraged where a company has investments of $20,000,000 or more in the energy sector of Iran or where a financial institution extends $20,000,000 or more in credit to a person if that person will use the credit to invest in the energy sector in Iran.
With the enactment of CISADA, Congress and the current Administration have put foreign and domestic companies that currently conduct business with Iran on notice that the U.S. Government is determined to deter such business and further isolate Iran from the global economy. It is also clear that Congress intended to target both direct and indirect activities, thus requiring due diligence to ensure that transactions do not inadvertently run afoul of the law. It remains to be seen the extent to which U.S. and foreign companies will decide that the risk of violating the new law is sufficient to cause them to terminate business with Iran.
At a minimum, however, it is critical that companies and organizations who continue conducting business with Iran implement policies and procedures to monitor compliance with the law, and provide appropriate training to their employees.