Congress rattling its saber at Iran

Congress is working to inflict greater economic pain on Iran unless it abandons its nuclear weapon ambitions. Recently, key committees in the Senate and the House of Representatives advanced legislation to:

• Authorize states and localities to divest from companies that do business in Iran’s energy sector;
• Toughen the Iran Sanctions Act, which would allow the President to punish even non-U.S. companies that help sustain Iran’s critical petrochemical industry; and
• Expand sanctions against Iran generally, potentially with consequence for financial institutions, communications companies and firms with foreign subsidiaries.

Such legislation is poised to move, as each body is considering bills substantially similar to one another and votes so far have been lopsidedly favorable. Yet, the Obama Administration may be putting on the brakes. The White House is currently urging Iran to take a “non-confrontational” approach, and offering one itself. New sanctions would send an inconsistent message, and moreover, could fracture the fragile coalition of nations forming to pressure Iran. In any case, tougher Iran sanctions promise to proceed further through Congress if negotiations with Iran unravel.

Sanctions Against Iran’s Petrochemical Sector

In the last week of October, key House and Senate committees passed legislation that would sanction those that contribute to Iran’s supply of refined petroleum, directly or indirectly. Although Iran is a leading global producer of crude oil, it lacks the oil refineries to meet more than a fraction of its country’s refined petroleum needs. The current legislation targets this strategic weakness. Notably, it also threatens sanctions extra-territorially, meaning the President could potentially sanction any entity worldwide that contributed to Iran’s refined petroleum resources.

Specifically, the House Foreign Affairs Committee has ordered the report of H.R. 2194, while the Senate Finance Committee reported original legislation (without a bill number at the time of writing) sponsored by Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) (collectively, the “Companion ISA Bills”). The House and Senate bills are materially identical.

The Iran Sanctions Act of 1996 (ISA; Pub.L. 104-172, as amended)—which the Companion ISA Bills would amend—was designed to deter investment in Iran’s petroleum sector generally, its military and its ambitions to acquire weapons of mass destruction. Since 1996, the Act has required the President to impose at least two sanctions from a menu of six on companies that knowingly invest more than $40 million in one year in Iran’s petroleum sector. Simplified, the current menu of sanctions is:

• Denial of Export-Import Bank loans;
• Denial of U.S. government export licenses;
• Denial of U.S. bank loans exceeding $10 million in one year;
• Denial of authority to act as a primary dealer of U.S. debt instruments or repository of U.S. funds;
• Restriction of imports from a sanctioned person; and
• Prohibition on U.S. government procurement.
• Any individual or company worldwide could potentially fall subject to such sanctions. Yet, no business has ever been sanctioned under the ISA during its 13 year history. Indeed, many countries, including U.S. allies, have strongly objected to ISA’s extraterritorial threat and adopted statutes designed to negate it. Nonetheless, in our experience, the potential reputational risks of an ISA action do influence business decisions.

The Companion ISA Bills would heighten sanctions on doing business with Iran’s petroleum sector while maintaining the ISA’s potential extraterritorial reach to any company worldwide. First, the Bills lower the threshold for sanction based on a knowing, direct investment in Iran’s petroleum sector to $20 million within a 12 month period. Next, they target Iran’s refined petroleum supply through several new provisions, which would impose sanctions based on a company’s knowing:

• Sale, lease or provision of goods, services, technology, information or support—worth at least $ 200,000 under one version of the legislation—that could directly and significantly facilitate Iran’s domestic production of refined petroleum;
• Provision to Iran of refined petroleum worth at least $200,000 under one version of the legislation; or
• Provision of goods, services, technology, information or support worth at least $200,000 that facilitates Iran’s importation of refined petroleum.

The last of the three could snare companies whose connection with Iran’s petroleum sector is only indirect. The Companion ISA Bills pose a risk to any business worldwide involved in the insurance, reinsurance, financing, brokerage or shipment of Iran’s refined petroleum imports.

The Companion ISA Bills would not only expand the types of companies that sanctions might capture. The Bills would also impose special sanctions on companies involved in Iran’s refined petroleum business. Where the United States has enforcement jurisdiction, and depending on the President’s implementation of sanctions:

• The sanctioned company could be prohibited from foreign exchange transactions;
• Transactions involving the transfer of credit or payments could be prohibited if the sanctioned company has an interest therein; or
• Transactions involving property in which the sanctioned company has an interest could be prohibited.

If amended, the ISA would reach far beyond Iran’s petrochemical sector per se. The legislation explicitly targets financial institutions, insurers, underwriters, guarantors and export credit agencies whose customers invest in Iran’s energy sector, or merely ship goods or provide services to Iran that are tied to its energy sector. Moreover, companies would be responsible for their direct actions as well as those of a foreign subsidiary, parent or affiliate. Thus, a company potentially could be sanctioned under the ISA although it never had any direct dealings with Iran’s petrochemical business.

State Divestment from Companies Doing Business in Iran

In October, the full House and a key Senate committee passed legislation that would clear the way for States, localities and their instrumentalities to divest from companies that invest in Iran’s energy sector. The legislation would establish that no Federal law or regulation pre-empts such State or local action. Even prior divestment decisions by State and local governments would retroactively be authorized.

The House passed the relevant bill, H.R. 1327, on October 14. Thereafter, its language was materially incorporated in the Dodd-Shelby bill, which the Senate Finance Committee ordered reported on October 29 (collectively, the Companion Divestment Bills). The legislation would authorize state and local governments to divest their assets from, or prohibit investment in, any entity doing business with Iran’s energy sector that exceeds certain thresholds:

• The entity has an investment of $20 million or more in the energy sector of Iran.
• In the alternative, the entity is a financial institution that extends $20 million or more in credit to another person, for 45 days or more, if funds are used in the energy sector in Iran. “Financial institution” includes a depository institution, including a branch or agency of a foreign bank, a credit union, a securities firm, an insurance company (including an agency or underwriter) and any other company that provides financial services.

Iran’s “energy sector” is defined broadly as “activities to develop petroleum or natural gas resources or nuclear power” in Iran. The Bills call out as examples investments in oil or liquified natural gas tankers and products used to construct or maintain pipelines used to transport oil or liquified natural gas. The definition of “investment” is also broad, including a commitment or contribution of assets; a loan or other extension of credit; or the entry into or renewal of a contract for goods or services.

State or local action would be authorized by the Companion Divestment Bills only if it is based on “credible information available to the public.” In addition, divestment targets must receive written notice at least 90 days in advance of a divestment, as well as an opportunity to comment or withdraw from the Iran-related investment.

The Companion Divestment Bills also provide some protection for “investment companies” against liability. If a financial institution voluntarily divests from entities whose activities in Iran cross the thresholds described above, such action would be immune from civil, criminal and administrative action.

Additional Iran Sanctions

The Dodd-Shelby bill proposes new sanctions against Iran that would have consequences for a variety of companies. U.S. financial institutions likely would be required to freeze the assets of a wide array of Iranian diplomats and government officials and their families. Next, U.S. companies whose foreign subsidiaries are doing business with Iran would face the risk that this arrangement would be deemed “for the purpose of circumventing” U.S. sanctions, and thus, the U.S. parent could be held liable.

The risks for telecommunications and technology companies are also notable. Some in Congress apparently believe that the Iranian government used technology sold by Western companies to monitor protestors of Ahmadinejad’s re-election. In response, the Dodd-Shelby bill intends to be the basis for prohibiting U.S. government procurement from companies that export certain technology to Iran. Exports of hardware, software, telecom equipment and other technology that could restrict the flow of information into or out of Iran or the speech of Iranians could trigger the procurement prohibition.