On January 12, 2012, the US State Department imposed sanctions on three foreign energy companies under the Iran Sanctions Act of 1996 (ISA), as amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), for their involvement in providing refined petroleum products to Iran.
The designations mark the latest step in an increasingly determined campaign by the United States to discourage Iran from continuing its controversial nuclear program. They also follow the enactment of new legislation at the end of 2011 threatening to restrict access to the US financial system of banking institutions in third countries that conduct business with Iran, as detailed in our recent advisory.
As described in our previous advisories on CISADA and Executive Order 13590, which further expand ISA restrictions, the ISA as amended by CISADA authorizes certain specified sanctions against non-US entities that are engaged in any of the following categories of activities: the development of petroleum resources in Iran, Iran’s production of refined petroleum products, the exportation of refined petroleum products to Iran, and/or providing assistance to Iran with the development of weapons of mass destruction or other military capabilities, including through the transfer of nuclear technologies. With the exception of the latter sanction on activities related to WMD, military or nuclear capabilities, the other activities are subject to specific dollar thresholds. The three recently-sanctioned companies were involved in the exportation of refined petroleum products to Iran.
- Zhuhai Zhenrong Co. (Zhenrong), one of China’s four major state oil traders, was determined to have brokered delivery of over $500 million of gasoline to Iran from July 2010 to January 2011;
- Kuo Oil (S) Pte. Ltd. (Kuo Oil), a private Singaporean firm, was determined to have sold over $25 million in refined petroleum products to Iran between late 2010 and early 2011; and
- FAL Oil Co. Limited (FAL), a private energy trader based in the United Arab Emirates, provided over $70 million in refined petroleum products to Iran in late 2010.
The ISA authorizes sanctions against entities that, among other things, knowingly sell or provide to Iran refined petroleum products where a single transaction has a fair market value of $1 million or multiple transactions equal or exceed $5 million or more within a 12-month period. These dollar thresholds were far exceeded by the activities of the sanctioned entities.
The sanctions imposed on each of these three entities are: bans on receiving or being the beneficiary of US export licenses; denial of US Export-Import Bank financing; and a prohibition on loans of over $10 million from US financial institutions. Other sanctions available under the amended ISA that the Secretary chose not to impose on these entities are: blocking of property or interests in property; prohibitions on foreign exchange transactions subject to US jurisdiction; barring of contracts with the US Government; denial of primary lender designations for financial institutions; prohibitions of transfers of credit or payments; and an import embargo on goods from the sanctioned entity.
The Secretary of State has elected to impose some of these alternative measures on entities previously subject to sanction during the last round of ISA designations in May 2011, as described in our previous advisory. At that time, for example, the Secretary of the Treasury, implementing the Secretary of State’s decision, blocked the property and interests of property of four of eight sanctioned entities, in addition to prohibiting foreign exchange transactions and transfers of credit or payments between financial institutions involving their interests. This varied approach suggests that the mix of measures in any case appears to be carefully calibrated to achieve a particular objective or send a specific signal to that entity and/or its home country.
Notably, the latest designations mark the first time that a Chinese entity has been sanctioned under the ISA. The decision to do so comes a day after US Treasury Secretary Geithner visited Beijing in an effort to persuade China to reduce purchases of Iranian petroleum. China has thus far refrained from agreeing to do so (even as it has in fact bought less Iranian oil, reportedly over pricing considerations). Although Zhenrong does not conduct much if any business in the US, and will probably not be inconvenienced by these sanctions, other Chinese petroleum entities do substantial business with Iran and have extensive US exposure, such as Sinopec, China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC). Of interest is that the State Department chose to focus at this juncture on those companies supplying refined product into Iran, rather than on those companies involved in exploration and development. It may be that this round of sanctions should be considered a warning to Chinese and other companies that the United States is serious about exercising its enhanced ISA sanctions.
Entities from the UAE and Singapore were also included in the last round of ISA designations, in May 2011. The sanctioning of an additional UAE company comes despite the UAE’s commitment to boost its petroleum output to provide an alternative source of supply to countries that reduce their purchases of Iranian oil, such as Japan and South Korea.
As tensions grow between the US and Iran, and the US seeks to restrict Iran’s access to oil revenues, it appears likely that the US will continue to pursue a mixture of persuasion and economic coercion against entities and perhaps even states that continue to do business as usual with Tehran. These latest sanctions signal that the administration is actively engaged in identifying such entities and will continue to do so as long as the dispute over Iran’s nuclear program continues.