Note: This is one of two alerts about the recent US sanctions against Iran. Please follow this link to read more about the July 31 Executive Order expanding US extraterritorial sanctions on Iran's petroleum sales.
On August 10, 2012, President Obama signed into law H.R. 1905, the Iran Threat Reduction and Syria Human Rights Act("ITRA")1. Following months of negotiations between and among the House, the Senate, and the Administration, both chambers of Congress reached agreement on a reconciled bill2, which the House passed by a vote of 421-6 on August 1, and the Senate passed by voice vote later that same day.
The enactment of this new sanctions legislation comes amid a flurry of activity related to Iran sanctions, including several new US Executive Orders and enforcement actions3 designed to intensify the scope of US sanctions against Iran, as well as the European Union's recent embargo on imports of Iranian oil and prohibition on the provision of financial services by European individuals and entities for Iranian oil exports to third parties4. The ITRA marks the third law with a focus on Iran sanctions in the last two years: the Comprehensive Iran Sanctions, Accountability and Divestment Act ("CISADA"), which took effect in July 2010,5 and theNational Defense Authorization Act for Fiscal Year 2012 (P.L. 112-81). Section 1245 of that NDAA ("Section 1245 sanctions") imposes sanctions on foreign financial institutions that knowingly conduct or facilitate any significant financial transaction with the Central Bank of Iran or with any other Iranian financial institution that has been designated6by the United States for inclusion on the list of Specially Designated Nationals ("SDN list") subject to sanctions.
The ITRA is intended to further strengthen the existing US sanctions against Iran's energy and financial sectors, with the stated objective of cutting off Iran's access to the international energy markets and the global financial system. While "US persons"7 have been prohibited from doing business with Iran for nearly two decades, the ITRA expands the scope of activities by foreign (non-US) persons that are subject to extraterritorial sanctions under the Iran Sanctions Act, the baseline legislation that first imposed US penalties on foreign persons who provide certain types of support for Iran's energy sector. CISADA expanded the Iran Sanctions Act to cover additional types of commerce involving Iran, and to impose greater restrictions on sanctionable conduct. The ITRA further expands the Iran Sanctions Act beyond CISADA as noted below.
The ITRA intensifies US sanctions against the Iranian Revolutionary Guard Corps ("IRGC"), which over time has expanded into a major political, economic, and commercial presence in Iran from its beginnings as a security service for the Iranian government. The ITRA expands US sanctions designed to identify and penalize both the IRGC and IRGC front companies engaged in efforts to circumvent international sanctions.
The ITRA also is also designed to leverage the extraordinary and sustained focus by government regulators, policymakers, law enforcement, the media, and various stakeholder groups to pressure companies that continue to do business with Iran, however indirectly, to curtail those business activities. The ITRA requires several new public reports naming and/or exposing firms that transact business with Iran. The ITRA also includes language that, for the first time, makes US parent companies liable for the sanctionable activities of their foreign subsidiaries. Additionally, the ITRA includes language that creates a new US Securities and Exchange Commission ("SEC") disclosure obligation for companies who directly, or through their affiliates, knowingly8 engage in certain types of business with Iran.
Set forth below are highlights of some key provisions of the ITRA.
- Expansion of Sanctions Against Iran's Energy Sector (Section 201)
- Sanctions for Transportation of Iranian Crude and Evasions of Sanctions by Shipping Companies (Section 202)
- Expansion of Sanctions Available Under theIran Sanctions Act for Energy Sanctions Violators (Section 204)
- Expansion of Definitions under the Iran Sanctions Act, Including Clarification of What Constitutes "Credible Information" (Section 207)
- Sanctions on Shipping and Shipping Services, Including Insurance, In Connection with Transport of WMD or Terrorist Activities (Section 211)
- Sanctions on Provision of Underwriting Services or Insurance or Reinsurance for the National Iranian Oil Company (NIOC) and the National Iranian Tanker Company (NITC) (Section 212)
- Sanctions on Transactions Facilitating Issuance of Iranian Sovereign Debt (Section 213)
- Expansion of CISADA Sanctions on Financial Institutions (Section 216)
- Statutory Basis for Continuation of Certain Sanctions Previously Contained in Executive Orders (Section 217)
- Liability of Parent Companies for Sanctions Violations by their Foreign Subsidiaries (Section 218)
- New SEC Disclosure Obligations (Section 219)
- Framework for Sanctions on SWIFT, the International Specialized Financial Messaging Service (Section 220)
- Sanctions on Foreign Persons Supporting the IRGC or UN-sanctioned persons (Section 302)
- Sanctions on Foreign Government Agencies Supporting the IRGC or UN-sanctioned persons (Section 303)
- US Government Procurement: Contractor Certification of No Knowing Involvement in IRGC Transactions (Section 311)
- Sanctions Determinations Regarding Whether NIOC and NITC Are IRGC Agents or Affiliates (Section 312)
- Expansion of the NDAA Section 1245 Sanctions (Section 504)
- Report on Iran's Natural Gas Exports (Section 505)
Expansion of Sanctions Against Iran's Energy Sector (Section 201)
The ITRA expands and intensifies the nature of US extraterritorial sanctions on Iran's energy sector under the Iran Sanctions Act, as amended by CISADA and other legislation. Previously, these sanctions were largely focused on persons who provided certain types and levels of financial or other support for Iran's ability to develop petroleum resources or Iran's ability to produce or export refined petroleum.
The ITRA expands US sanctions to a wider range of Iran's energy sector activities by extending sanctions to persons who participate in petroleum joint ventures (established on or after January 1, 2002) in which the Government of Iran is a substantial partner or investor. In response to Iran's ongoing efforts to increase its exports of petrochemical products, the ITRA broadens US energy sanctions to cover support for Iran's domestic production of petrochemical products. The ITRA also imposes sanctions on persons who provide assistance with respect to the construction of Iran's transportation infrastructure whose primary use is to support the delivery of refined petroleum products.
In addition to expanding the range of activities that are subject to sanctions, the ITRA also enhances the minimum penalty for engaging in sanctionable conduct. Section 201 increases from three to five the number of mandatory penalties required to be imposed upon any person determined by the President to have violated the energy sector sanctions.9
Sanctions for Transportation of Iranian Crude and Evasions of Sanctions by Shipping Companies (Section 202)
Section 202 authorizes the imposition of extraterritorial sanctions on any person who owns, controls, operates, or insures a vessel that transports crude oil from Iran to another country unless specific statutory exceptions are met.10 For persons who are "controlling beneficial owners" of such vessels, the sanctions apply if the person has actual knowledge that the vessel was used for these purposes. For all other owners, operators, controllers, or insurers, these sanctions apply if the person in question knew or should have known of the vessel's use for such transport.
Section 202 also includes language that is designed to prevent Iran from circumventing the sanctions by disguising or concealing the Iranian origin of crude oil or refined petroleum products aboard a vessel. Recent media reports have highlighted the wide range of efforts undertaken to obscure ownership or location of Iranian tankers, including suspension of satellite tracking devices, repainting, and use of "false flags" on the specific vessels. In addition to sanctions against persons who own, operate, or control vessels engaged in this sanctionable evasive activity, the ITRA also authorizes the President to prohibit the vessel in question from calling on a US port for up to two years.
Notably, Section 202 also includes a due diligence exception regarding the provision of underwriting services and insurance and reinsurance. The President may not impose sanctions under Section 202 with respect to a person that provides underwriting services or insurance or reinsurance if the President determines that the person has conducted due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not provide services for which sanctions may be imposed under this section.
Expansion of Sanctions Available Under the Iran Sanctions Act for Energy Sanctions Violators (Section 204)
Prior to the ITRA's enactment, the Iran Sanctions Actoutlined nine types of penalties that could be imposed upon a person engaged in sanctionable conduct. The ITRA adds the following three additional types of penalties to the menu of sanctions available to the President under the Iran Sanctions Act:
- Prohibit US persons from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person;
- Exclude from the United States foreign (non-US) persons who are corporate officers, principals, or controlling shareholders in a sanctioned firm; and
- Authorize the President to impose any of the full menu ofIran Sanctions Act sanctions on the principal executive officer(s) of any sanctioned person, including but not limited to freezing the US assets of any such person.
As noted above, the ITRA also increases from three to five the minimum number of penalties to be imposed upon a person who violates the energy sector sanctions.
Expansion of Definitions under theIran Sanctions Act, Including Clarification off What Constitutes "Credible Information" (Section 207)
Section 207 reflects Congressional intent to limit the discretion of the President and the Executive Branch generally with respect to the enforcement of US sanctions on Iran. Section 207 defines several key terms under the Iran Sanctions Act, in an effort to remove or reduce ambiguities which many in Congress view as providing the Executive Branch with excess discretion in its authority to open investigations and impose penalties on sanctionable conduct.
Section 207 provides for several new types of information to qualify as "credible information," including a public announcement by a person that he has engaged in a sanctionable activity as well as information in a report to stockholders indicating that the person has engaged in sanctionable activity. Section 207 also authorizes the President to consider as "credible information" an announcement by the Government of Iran of sanctionable activity, as well as information provided by the Government Accountability Office, the Energy Information Administration, the Congressional Research Service, or contained in "a report or publication of a similarly reputable governmental organization or trade or industry organization."
This expansion of the definition of what constitutes "credible information" is particularly significant, as the receipt of "credible information" about sanctionable activity is generally the statutory trigger for an investigation of a sanctions violation.
Sanctions on Shipping and Shipping Services, Including Insurance, In Connection with Transport of WMD or Terrorist Activities (Section 211)
The ITRA authorizes the imposition of extraterritorial sanctions on any person who knowingly sells, leases, or provides ships, or provides insurance, reinsurance or other shipping services for the transportation to or from Iran of goods that "could materially contribute" to Iran's weapons of mass destruction proliferation activities or Iran's support for international terrorism. The Section 211 sanctions apply to parent companies of the persons involved in the provision of ships or shipping services if the parent knew or should have known of the sanctionable activity. These sanctions also apply to affiliates of the persons involved in the provision of ships or shipping services if the affiliate knowingly engaged in the sanctionable activity.
Sanctions on Provision of Underwriting Services or Insurance or Reinsurance for The National Iranian Oil Company (NIOC) and National Iranian Tanker Company (NITC) (Section 212)
The National Iranian Oil Company ("NIOC") and the National Iranian Tanker Company ("NITC") are central to Iran's ability to export petroleum.11 To further constrict the ability of these companies to operate internationally, the ITRA requires that sanctions be imposed sanctions on any person determined by the President to have knowingly provided NIOC or NITC with underwriting services or insurance or reinsurance.
There are two key exceptions to this provision. First, there is a "due diligence" exception whereby the President is authorized to refrain from sanctions if the President determines that the person in question has conducted due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not provide prohibited services to NIOC or NITC. Second, there is a "humanitarian exception" that prohibits the President from imposing these sanctions on persons who provide underwriting services or insurance or reinsurance to NIOC or NITC strictly for the provision of agricultural commodities, food, medicine, medical device, or humanitarian assistance to Iran.
Additionally, Section 212 includes special language authorizing the President not to impose these sanctions if the President receives "reliable assurances" that the person in question will terminate the provision of underwriting services or insurance or reinsurance to NIOC or NITC not later than 120 days after enactment of the ITRA.
Sanctions on Transactions Involving Iranian Sovereign Debt (Section 213)
As part of the efforts by the United States to cut off Iran from the international capital markets, the ITRA authorizes the President to impose extraterritorial sanctions on any person who knowingly, on or after the date of enactment, purchases, subscribes to, or facilitates the issuance of Iranian sovereign debt, including Iranian governmental bonds, or the debt of any entity owned or controlled by the Government of Iran.
Expansion of CISADA Sanctions on Financial Institutions (Section 216)
Section 216 expands the range of prohibited activities by foreign financial institutions that trigger CISADA-mandated sanctions on the US correspondent or payable-through account of such institutions. Under CISADA, the Treasury is required to terminate or impose strict conditions on the US correspondent or payable-through accounts of foreign financial institutions engaged in certain types of transactions with Iran or with Iranian parties that are designated for US sanctions because of their ties to the Iranian Revolutionary Guard Corps or to Iran's weapons of mass destruction proliferation or terrorist activities. The ITRA would require Treasury to revise these CISADA regulations so as to impose restrictions on the US correspondent and payable-through accounts of a wider range of foreign financial institutions, including those that knowingly facilitate transactions with prohibited Iranian parties - not simply those foreign financial institutions that are directly involved in such transactions.
Statutory Basis for the Continuation of Certain Sanctions Previously Contained in Executive Orders (Section 217)
Reflecting the concerns of many Members of Congress that this or future Administrations might unilaterally ease sanctions on Iran without first seeking Congressional approval or providing public notice, the ITRA codifies in law various Iran sanctions that have been previously imposed by Executive Order, including measures blocking the property and interests in property of the Government of Iran12 and measures relating to "foreign sanctions evaders."13 The ITRA also codifies other US sanctions blocking the property and interests in property (within US jurisdiction) of the Central Bank of Iran.
Liability of Parent Companies for Sanctions Violations by their Foreign Subsidiaries (Section 218)
In an attempt to close what many had seen as a major gap in the coverage of US sanctions against Iran, Section 218 makes US parent companies liable for the Iran sanctions violations of their foreign subsidiaries.
This provision requires that, no later than 60 days after the enactment of ITRA, the President "prohibit an entity owned or controlled by a US person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran" if the transaction would be prohibited if it were engaged in by a United States person14 or within the United States. Under Section 218, "own or control" means that a US person holds more than 50% of the equity interest by vote or value of the foreign entity; a US person holds a majority of seats on the board of directors of the entity; or the US person otherwise controls the actions, policies, or personnel decisions of the entity.
Violations of US sanctions by any such foreign subsidiaries will subject their US parent company to significant civil and/or criminal liability, as well as the potential for costly examinations and investigations by US regulators, law enforcement, and Congressional committees. However, Section 218 provides a safe harbor from these penalties for any US person that, within 180 days of enactment of the ITRA, divests or terminates its business with the foreign subsidiary engaged in sanctionable conduct.
New SEC Disclosure Obligation (Section 219)
The new SEC disclosure obligation established by Section 219 reflects the continued "naming and shaming" effort by Congress and key stakeholder groups to expose companies doing business involving Iran, as well as the recent efforts by Congress to employ the federal securities laws for foreign policy purposes, rather than exclusively to advance more traditional investor protection aims.
The ITRA establishes a new SEC disclosure obligation for SEC-registered "public" companies that are engaged, directly or indirectly through their affiliates, in a wide range of Iran-related conduct.15 Activities that trigger the disclosure obligation include knowingly providing support for Iran's ability to develop petroleum resources or produce or export refined petroleum products; knowingly facilitating a significant transaction with, or providing significant financial services for, the IRGC, Iran's weapons of mass destruction activities, or Iran's support for terrorism; or knowingly conducting a transaction with the Government of Iran or with persons on the SDN list because of their involvement in international terrorism or weapons of mass destruction proliferation activities.
The inclusion of a company's affiliates within the scope of the disclosure regime extends the breadth of a company's compliance and reporting obligations to a wider spectrum of entities, covering any entities directly or indirectly controlling or controlled by the company, or under common control with the company.
If a company or its affiliate engages in any of the foregoing activities, the company would need to file a detailed description of each such activity, including the nature and extent of the activity, the gross revenues and any net profits attributable to it, if any. The filing also would need to disclose whether the company or its affiliate intends to continue the activity.
Among the most significant features of the new SEC disclosure provision are mandatory investigation and public notification components. Upon receiving a notice of the sanctions disclosure, the SEC "shall promptly" transmit the disclosure/notice to the President and to the committees of Congress with jurisdiction over Iran sanctions issues. The SEC also "shall promptly" make the information provided in the disclosure public on the SEC's website.
As part of the ongoing efforts by Congress to try to ensure that sanctions are enforced aggressively, upon receiving the company's disclosure/notice from the SEC, the President "shall" initiate an investigation into the possible imposition of sanctions. Not later than 180 days after initiating such an investigation, the President is required to make a determination about whether sanctions should be imposed with respect to the company or any affiliate that is involved in the sanctionable conduct.
Framework for Sanctions on SWIFT, The International Specialized Financial Messaging Service (Section 220)
Section 220 outlines a framework by which the United States could ultimately impose sanctions on SWIFT, the international specialized financial messaging service used by banks to facilitate global payment transactions. Despite efforts by the United States Congress and several stakeholder groups to pressure SWIFT to cut off the Central Bank of Iran and other Iranian banks, SWIFT continues to link these financial institution to the global payments system.
Section 220 requires that, within 60 days of the enactment of the ITRA and every 90 days thereafter, the Secretary of the Treasury report to Congress with a list of all the person who provide "specialized financial messaging services" to the Central Bank or Iran or to Iranian banks that are on the SDN list because of their involvement in international terrorism or weapons of mass destruction proliferation activities. This report must also provide "a detailed assessment of the status of efforts" by the Treasury Secretary to cut off such services.
Beginning 90 days after the enactment of the ITRA, Section 220 authorizes the President to impose sanctions on persons who continues to knowingly provide (or facilitate the provision of) "specialized financial messaging services" to the Central Bank of Iran or other designated banks. However, in response to concerns expressed by the Administration that any such SWIFT sanctions could unravel the international alliance against Iran, Section 220 includes an exception from these sanctions for persons who are subject to foreign (non-US) sanctions regimes that require them to cut off the provision of specialized financial messaging services to "a substantially similar group of Iranian financial institutions" to the sanctions imposed on the Central Bank of Iran and the Iranian banks that are on the SDN list because of their involvement in international terrorism or weapons of mass destruction proliferation activities.
Sanctions on Foreign Persons Supporting the IRGC or UN-sanctioned Persons (Section 302)
Section 302 establishes new extraterritorial sanctions on any person who knowingly provides material assistance to, or engages in a significant transaction with, the IRGC, or its agents and affiliates. Section 302 also imposes sanctions on persons who engage in significant transactions with individuals and entities that are subject to the United Nations sanctions on Iran. Section 302 additionally requires that, within 90 days of enactment and every 180 days thereafter, the President submit a report to Congress identifying individuals and entities engaged in sanctionable conduct with the IRGC or UN-sanctioned persons.
Sanctions on Foreign Government Agencies Supporting the IRGC or UN-sanctioned Persons (Section 303)
One of the most innovative components of the ITRA is a new measure requiring that the President report to Congress with a list of any foreign government agencies (other than those of the Government of Iran) that the President determines knowingly provide material support for, or knowingly and materially engaged in a transaction with, the IRGC or any person designated for Iran sanctions by the United Nations. Section 303 authorizes the President to impose one or more of several types of penalties on any such foreign government agency, such as denying US foreign assistance to the agency in question; prohibiting the foreign government agency from receiving licenses to import US defense articles, defense services, or munitions; and opposing any loan or financial or technical assistance to the agency by the international financial institutions, such as the International Bank for Reconstruction and Development (the "World Bank"), the International Development Association, the International Finance Corporation, the Inter-American Development Bank, the African Development Fund, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, and the International Monetary Fund.
US Government Procurement: Contractor Certification of No Knowing Involvement with the IRGC (Section 311)
In an attempt to leverage the market power of the US Government as one of the largest purchasers of goods and services, Section 311 requires prospective US Government contractors to certify that neither they nor their subsidiaries have knowingly engaged in a significant transaction with the IRGC or any of its affiliates on the SDN list. Section 311 also expands the minimum US Government procurement ban for any contractor or prospective contractor that violates this provision, by establishing a minimum procurement ban penalty of not less than two years and eliminating the existing three year ceiling on such penalties.
Sanctions Determinations Regarding Whether NIOC and NITC Are IRGC Agents or Affiliates (Section 312)
Section 312 is designed to increase the pressure on NIOC and NITC - two companies that are central to Iran's ability to export petroleum.16 Section 312 requires the Secretary of the Treasury to determine - and then notify Congress - whether the National Iranian Oil Company and the National Iranian Tanker Company are agents or affiliates of the IRGC. If so, sanctions would apply to any foreign financial institution which engages in "significant" transactions or provides "significant" financial services for the purchase of petroleum or petroleum products from NIOC or NITC. The application of these sanctions is contingent upon the President first determining that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. Additionally, as with the Section 1245 sanctions, these aspects of Section 312 would not apply with respect to foreign financial institutions where the country of primary jurisdiction over the institution in question has received an exemption from the Section 1245 sanctions for "significantly reducing" its imports of Iranian petroleum and petroleum products.
In a non-binding Sense of the Congress clause in Section 312, Congress states that NIOC and NITC "are not only owned and controlled by the Government of Iran" but that "those companies provide significant support to Iran's Revolutionary Guard Corps and its affiliates," placing context around the language requiring Treasury to make a formal finding.
Expansion of the NDAA Section 1245 Sanctions (Section 504)
As noted above, Section 1245 of the FY 2012 National Defense Authorization Act imposes sanctions on the US correspondent or payable-through accounts of foreign financial institutions that knowingly conduct or facilitate any significant financial transaction with the Central Bank of Iran or with any other Iranian financial institution that has been designated by the United States for inclusion on the SDN list.
However, the application of these sanctions is contingent upon the President first determining that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. Additionally, the NDAA sanctions do not apply with respect to foreign financial institutions where the country of primary jurisdiction over the institution in question has received an exemption from the Section 1245 sanctions for "significantly reducing" its imports of Iranian petroleum and petroleum products.
Despite the fact that the Administration determined that all of the countries that import Iranian oil have "significantly reduced" their imports so as to qualify for the foregoing exemption, many Members of Congress believe that these preconditions to the Section 1245 sanctions make them less effective. Accordingly, the ITRA amends the Section 1245 Sanctions to provide that financial institutions located in countries that have received the exemption noted above may continue to do business with the Central Bank of Iran only for petroleum transactions and for limited bilateral trade with Iran. The ITRA also expands the reach of the Section 1245 sanctions from foreign central banks and foreign privately held banks to include all foreign state-owned banks. Additionally, the ITRA clarifies that "significantly reducing" a country's imports of Iran petroleum and petroleum products includes a reduction in price or volume toward the complete cessation of crude oil imports from Iran.
Report on Iran's Natural Gas Exports (Section 505)
In addition to its massive reserves of crude oil, Iran also has significant quantities of natural gas. Thus, as international sanctions now inhibit Iran's petroleum and petrochemical exports, many US policymakers are focusing on Iran's natural gas sector as a ripe target for yet another round of new sanctions.
The ITRA lays the groundwork for sanctions on Iran's natural gas sector by requiring two reports. First, the ITRA requires the US Energy Information Administration to submit a report to Congress and to the President on Iran's natural gas sector. This report must include an assessment of Iran's natural gas exports, the names of the countries that are the largest purchasers of Iranian gas, and an assessment of the alternative supplies of natural gas that are available to these countries. The report also must assess the impact a reduction in exports of natural gas from Iran would have on global natural gas supplies and the price of natural gas.
Within 60 days of receiving the US Energy Information Administration report, the President must submit a report to Congress outlining, among other things, specific recommendations for measures to limit the revenue received by the Government of Iran from its exports of natural gas, an assessment of whether imposing sanctions on Iran's natural gas exports could be applied effectively to Iran's natural gas exports, and any other information the President considers appropriate.
* * *
As the international architecture of United Nations, European Union, United States and other national sanctions regimes continues to expand and intensify, active monitoring of the policy landscape is critical. The ITRA's extraordinary expansion of US extraterritorial sanctions also counsels heavily in favor of heightened attention to these issues, increased engagement with the US policy arena, and strengthened measures to ensure compliance.
Note: This is one of two alerts about the recent US sanctions against Iran. Please follow this link to read more about the July 31 Executive Order expanding US extraterritorial sanctions on Iran's petroleum sales.