On February 27, 2012, the Office of Foreign Assets Control ("OFAC") published a notice in the Federal Register to reissue the Iranian Financial Sanctions Regulations ("IFSR") in order to implement Section 1245(d) of the National Defense Authorization Act for Fiscal Year 2012 ("NDAA"). The reissued IFSR expand the scope of "significant" financial transactions that may put "foreign financial institutions" at risk of having "strict conditions" or a prohibition imposed on their U.S. correspondent accounts (including payable-through accounts). This development builds on recent efforts by the U.S. Government to isolate Iran and its financial sector, including the finding that Iran is a "jurisdiction of primary money laundering concern," the blocking of the Central Bank of Iran ("CBI") and Iranian financial institutions pursuant to the NDAA and Executive Order 13599, and the initial implementation of the IFSR in 2010.
Implications for Companies Engaging in Transactions with Iran
The NDAA financial sanctions now incorporated into the IFSR target the CBI and certain "designated Iranian financial institutions" and force foreign financial institutions to choose between doing business with Iran or potentially losing their access to the U.S. financial system. As a result, customers of foreign financial institutions seeking to conduct business with Iran will find it increasingly difficult to find banks willing to process payments to and from Iran.
What the Reissued IFSR Say
The IFSR were initially issued in August 2010 to implement financial sanctions mandated by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA"), which targeted a similar but more limited range of "significant" transactions. (Background information about the IFSR and the CISADA financial sanctions are available in our previous Client Alert.) The CISADA financial sanctions remain in the reissued IFSR with some minor changes.
NDAA Section 1245(d) aims to reduce Iranian oil revenues and further isolate the Iranian financial sector by providing for financial sanctions on foreign financial institutions that engage in certain types of financial transactions with the CBI and "designated Iranian financial institutions." As implemented, the NDAA financial sanctions apply to additional types of foreign financial institutions and to additional types of "significant" financial transactions. The IFSR now target foreign financial institutions that knowingly conduct or facilitate the following transactions with the CBI or certain "designated Iranian financial institutions":
"Significant" financial transactions related to petroleum or petroleum products
- Applies to both privately owned foreign financial institutions and those owned or controlled by third-country governments
- Targets the sale or purchase of petroleum or petroleum products to or from Iran ("petroleum transactions")
- Comes into effect if the President makes specific and renewable determinations about the world supply of petroleum and petroleum products for transactions that occur on or after June 28, 2012
Other "significant" financial transactions
- Applies only to privately owned foreign financial institutions
- Does not apply to foreign financial institutions owned or controlled by third-country governments
- For transactions that occur on or after February 29, 2012
Prior to the publication of the reissued IFSR, OFAC issued related Frequently Asked Questions explaining the changes.
The NDAA financial sanctions related to non-petroleum transactions are already in effect. However, the NDAA financial sanctions related to petroleum transactions are subject to a prolonged implementation period in that they only come into effect if the President determines no later than March 30, 2012 and every 180 days thereafter that there is a sufficient supply of petroleum and petroleum products from non-Iranian sources to permit a significant reduction in the volume of such products from Iran. Once the President determines that there is a sufficient supply of non-Iranian petroleum and NDAA financial sanctions related to petroleum transactions go into effect, "significant" petroleum transactions that occur during each 180-day period may put a foreign financial institution at risk of IFSR sanctions.
Exemption for Countries Reducing Iranian Crude Oil Purchases
IFSR Section 561.203(h) provides that the Secretary of State may exempt specific countries from all NDAA financial sanctions (related to both petroleum and non-petroleum transactions) if it is determined that a country has significantly reduced its volume of crude oil purchases from Iran. Once an initial determination has been made, it must be reviewed and renewed every 180 days. This exemption does not apply to the CISADA financial sanctions. The State Department has informally advised Baker & McKenzie that its current plan is to publicly announce which countries will benefit from this IFSR exemption when those determinations are made.
Defined Terms and Other Guidance
The reissued IFSR include a number of important defined terms and other guidance. The definition of terms such as "foreign financial institutions" and "knowingly" have not been significantly amended, and the IFSR now include specific definitions for terms such as "petroleum," "petroleum products," and the different types of foreign financial institutions that may be affected by these regulations. The term "petroleum products" specifically excludes natural gas, liquefied natural gas, biofuels, methanol, and other non-petroleum fuels.
The IFSR defines the term "designated Iranian financial institution" to include any Iranian financial institution blocked and designated by OFAC except those blocked solely pursuant to Executive Order 13599 (which blocked Iranian financial institutions and those otherwise owned or controlled by the Government of Iran). (Baker & McKenzie recently issued a Client Alert about Executive Order 13599.) In other words, this term is limited to Iranian financial institutions designated under OFAC's non-proliferation and terrorism sanctions. Designated Iranian financial institutions under the IFSR will be identified on OFAC's Specially Designated Nationals and Blocked Persons List with an "[NDAA]" tag at the end of each relevant entry, in addition to the "[IRGC]" and "[IFSR]" tags used to identify designated Iranian financial institutions under the CISADA financial sanctions.
As amended, IFSR Section 561.404 provides guidance about what constitutes "significant" transactions or financial services for both the CISADA and NDAA financial sanctions. This section has not been extensively amended in the reissued IFSR except that a new subsection (g) provides that certain dealings with the CBI may not constitute "significant" transactions, such as passive holding of CBI reserves, CBI repayment of official development assistance, or funds transfers related to Iran's membership in an international financial institution.
Exemption for Food, Medicine, and Medical Devices
IFSR Section 561.203(f) provides that NDAA financial sanctions will not be imposed on foreign financial institutions conducting or facilitating transactions for the sale of food, medicine, or medical devices to Iran. In effect, this exemption covers transactions that are eligible for specific licenses from OFAC under the Trade Sanctions Reform and Export Enhancement Act of 2000 ("TSRA") as well as such transactions that are not subject to U.S. jurisdiction. This exemption is limited to food and does not extend to other agricultural commodities that may be licensed under TSRA. It remains to be seen whether this exemption will provide sufficient comfort to foreign financial institutions to encourage them to engage in such exempted transactions.
General License to Close Affected Correspondent Accounts
As amended, IFSR Section 560.504 continues to authorize U.S. financial institutions under a general license to engage in specified transactions related to closing any affected accounts during the 10-day period following the effective date of the prohibition on a foreign financial institution's accounts in the United States. A reporting requirement has been added to this general license so that U.S. financial institutions must report the details of such closed accounts within 30 days.
Sanctions and Penalties
As under the original IFSR, OFAC has the option of selecting between one of two restrictions it may impose on the opening or maintenance of a foreign financial institution's correspondent accounts: (1) one or more "strict conditions" or (2) a complete prohibition on such accounts. OFAC has added one more potential strict condition to the IFSR: prohibiting or restricting the processing of foreign exchange transactions through a foreign financial institution's correspondent account. Once OFAC determines that a foreign financial institution should have IFSR sanctions imposed on its correspondent accounts, the U.S. financial institutions where such accounts are found will be required to implement the relevant strict condition(s) or prohibition.
The names of the foreign financial institutions as well as the strict condition(s) or prohibition imposed on their correspondent accounts will be provided in a "List of Foreign Financial Institutions Subject to Part 561" (or "Part 561 List") to be posted on OFAC's Iran sanctions webpage. This list replaces Appendix A to the IFSR, which has been removed.
The civil and criminal penalties previously provided in the IFSR have been amended to incorporate references to the NDAA financial sanctions but are otherwise unchanged.
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The foregoing is intended only to provide a general overview of the reissued IFSR.