New sanctions on foreign financial institutions
Sanction waivers for Japan and Europe
Comment



On March 30 2012 President Obama determined that there is a sufficient supply of petroleum products in world markets to allow countries to reduce their petroleum imports from Iran significantly . The finding clears the way for new sanctions under Section 1245 of the 2012 National Defence Authorisation Act on foreign financial institutions that conduct or facilitate financial transactions related to purchases of petroleum products from Iran.

New sanctions on foreign financial institutions

Signed into law on December 31 2011, the act calls for sanctions on foreign financial institutions that knowingly engage in significant financial transactions with the Central Bank of Iran or 'designated Iranian financial institutions' – a term which refers to Iranian financial institutions whose property interests have been blocked in connection with Iran's proliferation of weapons of mass destruction or its support for international terrorism. The sanctions have the potential effectively to cut off foreign financial institutions from the US financial system by prohibiting the opening of, requiring the closing of, or imposing strict conditions on, the maintenance of correspondent or payable-through accounts at US financial institutions.

The act applies differently to foreign financial institutions that are privately owned and to foreign financial institutions that are owned or controlled by a foreign government (state-owned financial institutions), including central banks. The act became effective on February 28 2012 for private foreign financial institutions that knowingly engage in significant financial transactions with the Iranian Central Bank or designated Iranian financial institutions related to transactions other than:

  • purchases of petroleum products from Iran, which are subject to an effective date of June 28 2012; or
  • sales of food, medicine or medical devices to Iran, which are exempt.

State-owned banks, by comparison, may be sanctioned only to the extent that they engage in financial transactions for the sale or purchase of petroleum products to or from Iran on or after June 28 2012.

As noted above, the sanctions are limited to restrictions on correspondent and payable-through accounts at US financial institutions. To enforce these sanctions, the Office of Foreign Assets Control (OFAC) plans to create a Part 561 list (a reference to Part 561 of Title 31 of the Code of Federal Regulations, which implements the act) that will list foreign financial institutions sanctioned under the act. Such foreign financial institutions will not be placed on OFAC's specially designated nationals list, their property interests will not be blocked and US persons will not be prohibited from dealing with them.

The president's finding clears the way for sanctioning foreign financial institutions that conduct or facilitate financial transactions related to purchases of petroleum products from Iran on or after June 28 2012. The president must re-visit his determination on the supply and price of petroleum products from countries other than Iran every 180 days. Absent a short-supply determination, however, both private and state-owned financial institutions may be sanctioned under the act for conducting or facilitating financial transfers related to purchases of petroleum products from Iran.

Sanction waivers for Japan and Europe

In addition to waiving sanctions based on a short-supply determination, the act also permits the president to waive sanctions on foreign financial institutions – whether private or state-owned – in countries that have significantly reduced their imports of Iranian crude oil. Waivers based on such reduced-imports determinations apply on a country-wide basis and without regard to whether a foreign financial institution has engaged in financial transactions for petroleum or non-petroleum transactions.

On March 20 2012 Secretary of State Hillary Clinton announced the first such waivers for Japan and 10 members of the European Union. This announcement followed a determination that each country had significantly reduced its imports of Iranian crude oil. As a result of the waivers, financial institutions in Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain and the United Kingdom will be exempt from National Defence Authorisation Act sanctions for 180 days after March 20 2012. The waivers may be renewed for subsequent 180-day periods.

Coming in the wake of the European Union's January 23 2012 ban on new Iranian oil contracts, these reduced-imports determinations underscore US efforts to isolate Iran economically while encouraging foreign countries to shift to alternative sources of supply. This shift represents a particularly significant challenge for Japan, which is reportedly the second largest importer of Iranian crude oil.

However, waivers have not been granted to other major importing countries – chiefly China, reportedly the world's largest importer of Iranian oil, and India, which is reportedly the third largest. Other significant importers include Turkey, South Africa and South Korea, which is in talks with the US State Department. In the absence of evidence of national efforts to reduce Iranian petroleum imports significantly, financial institutions in these countries could face serious consequences in the United States if they continue to conduct business with Iranian-linked financial institutions.

Comment

Foreign financial institutions that knowingly engage in significant transactions with any US-designated Iranian financial institution may still be sanctioned under the Comprehensive Iran Sanctions, Accountability and Divestment Act, as implemented by Section 561.201 of the Iranian Financial Sanctions Regulations. The act authorises sanctions on any foreign financial institution that facilitates a significant transaction or provides significant financial services for a financial institution whose property interests are blocked in connection with Iran's proliferation of weapons of mass destruction or Iran's support for international terrorism. Such parties are identified on the OFAC's list of specially designated nationals with the 'IFSR' designator.

For further information on this topic please contact Robert Torresen or Lisa Crosby at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (rtorresen@sidley.com or lcrosby@sidley.com).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscriptionThis article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription