On 26 July 2010, the European Union ("EU") adopted a set of new wide-reaching sanctions against Iran, which are of particular interest to companies in the financial services (including insurance), oil and gas, and transportation sectors. Companies in other sectors may also be impacted through the ban on exportation of most "dual use" goods or indirectly through logistics problems resulting from new requirements related to processing of funds transfers to and from Iran. Some of these new measures go beyond the sanctions imposed on Iran by the UN Security Council in June 2010.
The new EU measures include restrictions on:
a) trade (including a comprehensive ban on exports of most dual-use items);
b) financial services (including a prohibition on provision of insurance and reinsurance to Iran, authorization requirement for transfers above €40 000 and ban on establishing presence in Iran by EU financial institutions, and by Iranian financial institutions in the EU);
c) Iranian oil and natural gas industry (a ban on exports of "key equipment and technology", as well as financing and joint ventures);
d) transportation to and from Iran;
e) EU-bound investment from Iran in sensitive sectors;
f) certain persons and entities involved in ballistic and missile programs, the Iranian Revolutionary Guard Corps and the Islamic Republic of Iran Shipping Lines; and
g) EU Member State-supported trade finance.
These measures now must, on the one hand, be implemented at the EU and Member State level, and on the other, leave certain room for interpretation. Companies trading with Iran, as well as those operating in the affected industries have a limited window of opportunity to impact their implementation in a way that minimizes the damage to the companies' commercial interests.
1. Relation to UN Sanctions
The new EU sanctions largely implement UN Security Council Resolution 1929 (2010), adopted on 9 June 2010 ("UNSCR 1929"). However, in certain aspects, the EU sanctions go beyond UNSCR 1929 such as measures against the Iranian oil and natural gas industry, which are not addressed in UNSCR 1929 at all, an extended list of persons subject to asset freeze and a ban on admission, or measures only suggested by UNSCR 1929, such as the ban on insurance and reinsurance services, authorization requirement for transfers of funds, the ban on EU presence by Iranian financial institutions or of Iranian presence by EU financial institutions, or "enhanced monitoring" of activities of EU financial institutions with Iranian banks.
2. Overview of New and Existing Sanctions
The EU extends the ban on exports to Iran of most dual-use items (except for telecommunications and information security) and certain key equipment and technology destined for the Iranian oil and natural gas industry (see Section 2.3. below for more details). The ban also extends to the provision of technical assistance, training, investment, brokering services, and financing related to these items destined for Iran.
EU Member States will be able to authorize, on a case-by-case basis, dual-use exports and related assistance, if they conclude the export would "not clearly contribute" to Iran's technologies in support of its nuclear activities, and provided that certain non-proliferation guarantees and commitments are obtained from, respectively, end-users and Iran.
Existing EU measures already ban exports of (a) items from the Nuclear Suppliers Group and Missile Technology Control Regime; (b) other items contributing to Iran's nuclear activities or nuclear weapon delivery systems; and (c) arms and related material, and assistance related to these items, including technical assistance or training, investment, or brokering services, and providing financing or financial assistance (in particular grants, loans and export credits insurance). The export of non-listed items that could contribute to certain nuclear-related activities, as well as provision of related assistance, requires an authorization from EU Member States.
2.2 Financial Services (Including Insurance)
The EU introduces expansive restrictions on the financial services industry, including:
- ban on provision of insurance and re-insurance to entities in Iran and the Government of Iran ("GOI"), as well as to any individuals or entities acting on their behalf or at their direction or entities owned or controlled by them, with the limited exception of health and travel insurance for individuals;
- prior authorization requirement for most transfers of funds to and from Iran above € 40 000 (with the exception of those related to foodstuffs, healthcare, medical equipment or humanitarian purposes), with a notification requirement of any transfers above € 10 000;
- ban on establishing presence in the EU by Iranian banks, and a prohibition on Iranian banks and Iranian-controlled third-country financial institutions on setting up of joint ventures with, taking an ownership interest in, or establishing corresponding banking relationships with, EU banks;
- ban on establishing presence in Iran by EU financial institutions;
- duty on EU branches and subsidiaries of all Iranian banks to notify EU authorities of any transfers carried out or received by them. Previously, this duty applied only to Bank Saderat;
- duty on EU Member States to exercise "enhanced monitoring" of activities of all EU financial institutions with all banks domiciled in Iran, their branches and subsidiaries (including foreign), or with third-country financial institutions controlled by Iranian persons, including (a) vigilance over account activity; (b) requiring that all fields related to originator and beneficiary of payment instructions be filled; (c) 5-year record-keeping requirements; and (d) duty to report possible proliferation financing. Previously, these restrictions applied to activities involving only selected Iranian banks and some of their branches, and subsidiaries (such as - depending on the restriction - Bank Melli, Bank Sepah, Bank Saderat, Bank Tejarat, Persia International Bank or Bank Mellat);
- ban on sale, purchase, brokering, or assistance in issuance of, public or public-guaranteed bonds to, and from, GOI, Central Bank of Iran, Iranian banks, their subsidiaries and branches (including non-EU), Iranian-controlled third-country financial entities, or persons acting on their behalf, under their direction or control; and
- duty on EU persons to "exercise vigilance" when doing business with Iranian entities, including those of the Iranian Revolutionary Guard Corps ("IRGC") and Islamic Republic of Iran Shipping Lines ("IRISL"), and persons acting on their behalf, under their direction or control, to ensure that business does not contribute to Iran's proliferation-sensitive nuclear activities.
It is noteworthy that many of the above measures apply not only to entities in Iran, but also to their EU and third-country subsidiaries, branches, and other entities controlled or directed by them. The ban on establishing a presence in the EU and Iran by the other's financial institutions, as well as a duty on EU Member States to monitor their financial institutions' dealings with Iranian financial institutions (including an authorization requirement for transfers) will be reviewed after six months.
Currently existing EU financial restrictions on Iran in force include asset freeze (see Section 2.6), and a ban on EU Member States to enter into new commitments for grants, financial assistance and concessional loans to GOI including through international institutions.
2.3 Iranian Oil and Natural Gas Industry
Going beyond UNSCR 1929, the EU targets the Iranian oil and natural gas industry, including through:
- a ban on exports of "key equipment and technology" (to be specified once implementing EU legislation is adopted) for refining, liquefied natural gas, exploration and production sectors of oil and natural gas industry in Iran, or to Iranian or Iranian-owned enterprises engaged in these sectors outside Iran, as well as a ban on technical assistance, training and other services related to such equipment and technology, and financing or financial assistance for sales, supply, transfer or export of such equipment and technology, or for provision of related technical assistance or training; and
- a ban on financing of Iranian, or Iranian-owned, enterprises engaged in the Iranian oil and natural gas industry, including prohibition on (a) financial loans and credits to such enterprises; (b) acquisition or extension of participation in such enterprises, including acquisition of their shares and certain securities; and (c) creation of any joint ventures with such enterprises in Iran or their subsidiaries and affiliates under their control.
The new measures targeting Iranian oil and gas sectors (apart from the ban on joint ventures) do not apply to obligations under contracts concluded before 26 July 2010, the date the new measures were adopted.
The EU adopts, and obliges EU Member States to implement, a series of new measures against the Iranian transport sector and transportation of merchandise suspected of violating EU measures against Iran, including:
- ban on access to EU airports by all cargo flights operated by Iranian carriers or originating from Iran (with the exception of mixed passenger and cargo flights);
- duty of all aircraft and vessels transporting cargo to and from Iran to submit additional pre-arrival and pre-departure information for all goods brought into and out of the EU. Previously, this restriction applied only to Iran Air Cargo ("IAC") and the IRISL;
- duty on EU Member States to inform the United Nations Sanctions Committee on any attempts by IAC and IRISL to transfer the business targeted under UN sanctions to other companies, as well as re-registering of aircraft, vessels and ships; and
- if an EU Member State has reasonable grounds to believe that the vessels or aircraft violate the embargo, the new EU measures:
- ban the provision of bunkering or ship supply services or other servicing of Iranian-owned or contracted vessels, and engineering and maintenance services to Iranian cargo aircraft (with certain limited exceptions);
- impose a duty to inspect all cargo to and from Iran (previously, only applicable to cargo in vessels and aircraft of, respectively, the IAC and the IRISL); and
- give EU Member States the right to inspect, with consent of the flag State, vessels in international waters, and to seize and dispose of, any contraband.
2.5 EU-bound Investment from Iran in Proliferation-Sensitive Sectors
As mandated by UNSCR 1929, the EU also institutes a novel ban on EU-bound investment from Iran, pursuant to which any EU investment by Iran, Iranian persons, or persons acting on their behalf, or at their discretion, or entities owned or controlled by them, in any commercial activity involving uranium mining, production or use of nuclear materials and technology, in particular uranium enrichment and reprocessing activities, all heavy-water related activities or technologies related to ballistic missiles capable of delivering nuclear weapons is now prohibited.
The exact scope of this ban remains to be specified in the implementing EU legislation (see Section 3 below), as well as possibly in national measures. It is worth noting that the ban covers not only investment originating in Iran, but also investment by third-country entities controlled by Iranian persons.
2.6 Blacklisting: Extending Freezing of Funds and Visa/Transit Ban
The EU also codifies at the EU level the list of persons subject to the freezing of funds and a ban on admission to persons and entities listed in the UNSCR 1929, as well as extends it to additional persons and entities. In addition to persons listed in UNSCR 1929, the EU adds 59 other individuals and entities involved in nuclear and ballistic missile activities (including banks, financial services, trading and manufacturing companies), 19 other individuals and entities related to the IRGC, and 25 additional subsidiaries and branches of IRISL, including those foreign-based. The listing of additional persons will be reviewed every 12 months.
No funds or economic resources shall be made available to listed persons and all their existing funds and economic resources are frozen, subject to a very limited exemption system, based on prior authorization requirement, for certain payments (e.g., satisfaction of certain liens, claims, pre-existing contracts, basic needs of listed persons or their dependents and others).
2.7 EU Member State-supported Trade Finance
Finally, the restrictions on EU Member State financial support for trade with Iran are strengthened. First, the restrictions imposed on EU Member States now extend to private financial support, not only public. Second, EU Member States are now prohibited to enter into new medium and long term commitments. New short term commitments are still allowed, but continue to be subject to a duty to "exercise restraint".
3. Implementation and Future Action
Under EU law, most of the measures require further implementation, either at the EU (e.g., EU-wide export ban on dual use items or key equipment and technology used by the Iranian oil and gas industry) or Member State level (e.g., visa and transit bans, duty to exercise vigilance when dealing with Iranian entities, preventing access to EU airports by all Iranian cargo flights), or both. This is also required by lack of specificity of certain provisions, lack of definitions of key terms (e.g., "key equipment or technology," "financial institutions" or "investment"), questions about the effective date of some of the provisions, their effect on existing contracts (only certain provisions have explicit grandfathering clauses) and other questions.
With respect to EU-level provisions, the asset freeze provisions have already entered into force. For the remaining EU-level provisions, the European Commission ("Commission") will propose implementing changes to Council Regulation 423/2007 concerning restrictive measures against Iran. Due to the complexity of the new measures and unresolved legal issues related to certain aspects of the regime (e.g., ban on EU-bound investment), the adoption of implementing measures could be delayed. The Commission is expected to have a proposal ready by the end of August, to be adopted at the end of September.
Although the Council Decision still requires implementation, EU enterprises are advised to comply with it without delay because certain EU Member States may implement the sanctions immediately. For example, the EU-wide ban on dual-use items will be effective only upon entry into force of the amendments to Council Regulation 423/2007, but EU Member States may already begin denying any license applications for any dual-use exports to Iran. Furthermore, the implementing measures may have retroactive effects to the date of the adoption of sanctions, i.e. 26 July 2010. Finally, under some very limited circumstances, courts could conclude that certain provisions of the Council Decision are directly effective.
The Commission is preparing the draft implementing measures and EU companies still have a limited window of opportunity to influence the practical impact that the application of the sanctions will have on them. For example, there are various scope-related terms which need to be defined in the next two months such as "key equipment and technology" (the exports of which are subject to an export ban), EU "financial institutions" (subject to a ban on establishing presence in Iran), or "provision of insurance and reinsurance" (that is now forbidden to Iran). The implementing measures may also clarify whether the performance of existing obligations under contracts that are not expressly grandfathered by the Council Decision are also exempted from the new measures.