Iran sanctions developments
Over the past several weeks, the United States and European Union have continued to impose additional sanctions, have taken steps to implement previously imposed restrictive measures, and/or have proposed new sanctions targeting certain dealings with Iran and/or designated persons and entities. These developments include: (1) a recent decision by the Council of the European Union (EU) to require financial messaging providers to discontinue communication services to certain Iranian financial institutions, (2) the new EU Council Regulation, which implements various Iran sanctions measures from 2012 and makes substantive changes to existing provisions, (3) a recent temporary exemption by the U.S. State Department of eleven countries from the Iran sanctions under the National Defense Authorization Act of 2012 (NDAA), (4) the issuance of the revised Iranian Financial Sanctions Regulations implementing the provisions of the NDAA targeting certain dealings by non-U.S. financial institutions with the Central Bank of Iran (CBI) and designated Iranian financial institutions, and (5) several bills pending in the U.S. Congress that would further expand sanctions against Iran. Brief summaries of these recent developments are included below.
(1) Sanctioned Iranian banks disconnected from financial services following EU Council decision
On 15 March 2012, the Council of the EU adopted a new restrictive measure against Iran requiring financial messaging providers to discontinue their communication services to Iranian financial institutions that are subject to an asset freeze as set forth in Council Decision 2012/152/CFSP of March 2012, effectively cutting them off from international fund transfers and the global financial system. The new measure prohibits the financial message providers from supplying specialized financial messaging services used to exchange financial data to Iranian persons and entities subject to the asset freeze, and requires the providers to disconnect the listed Iranian financial institutions from using their networks.
Following the announcement of the prohibition, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a financial message provider facilitating international bank transfers around the world, announced that it had been instructed to disconnect over 30 listed Iranian financial institutions, including the CBI, from using their networks. SWIFT is a Belgian company and must comply with EU law. The new measure does not appear to affect the ability of non-designated Iranian banks to use SWIFT, but is likely to have a significant impact on Iran’s economy as the CBI and various other Iranian financial institutions are listed under the EU’s sanctions regime against Iran, as described in our Economic Sanctions Alert dated 7 February 2012.
EU Member State authorities may grant exemptions from the prohibition on the supply of specialized financial messaging services to listed Iranian persons or entities in certain circumstances. For a complete list of the Iranian banks subject to the freezing order and recent prohibition, as well as a complete list of the exemptions from the prohibition, please see Article 20 of Council Decision 2010/413/CFSP of 26 July 2010 as amended.
(2) New EU Council regulation implementing Iran sanctions
On 24 March 2012, the EU adopted Council Regulation 267/20121 ("the recast Regulation"), which sets out the EU's sanctions regime against Iran and replaces Council Regulation (EU) No 961/20102. The recast Regulation fully implements measures adopted earlier this year on 23 January 2012 and 15 March 2012 respectively, and it also defines certain terms and makes certain substantive changes to existing provisions.
Ban on trade in oil, petroleum, and petrochemical products
The recast Regulation implements measures adopted in Council Decision 2012/35/CFSP of 23 January 2012 concerning a ban on the purchase, import, or transport from Iran of crude oil, petroleum, and petrochemical products.
The recast Regulation also imposes a ban on key equipment or technology (items listed in Annex VI) used in the petrochemical industry in Iran. This ban is subject to the grandfathering of:
- Transactions required by trade contracts concerning key equipment or technology for the petrochemical industry concluded before 24 March 2012, or of ancillary contracts necessary for the execution of such contracts; and
- Transactions required by a contract or agreement concluded before 23 January 2012 and relating to an investment in Iran made before 23 January 2012.The recast Regulation also clarified that the restrictions on investment in the Iranian oil and gas sector cover certain key activities, such as bulk gas transmission services, joint ventures, and other forms of association or cooperation in the exploration or production of crude oil and natural gas, the refining of fuels, or the liquefaction of natural gas.
Ban on gold and precious metals
In addition, the recast Regulation implements prohibitions concerning the sale, purchase, transportation, or brokering of gold, precious metals, and diamonds to, from, or for the Government of Iran; an extension of the EU's asset freezing measures; and measures prohibiting the provision of financial messaging services, including SWIFT messaging, to listed Iranian persons and entities adopted in Council Decision 2012/152/CFSP of 15 March 2012. In principle, non-listed Iranian banks would not be affected by the restriction on financial messaging. However, to the extent that the CBI (which is listed) carries out or participates in a transaction (e.g. through correspondence, clearing, or otherwise) such transaction would be prohibited.
Clarification of and substantive changes to existing provisions
Certain technical amendments to existing measures are also introduced by the recast Regulation. The following are noteworthy:
- The term "brokering services" is widened to include brokering of not only goods and technology but of also financial and technical services. It is also clarified that where goods, technology, financial, and technical services have been authorized, there is no requirement for obtaining a separate authorization of related brokering services;
- Annexes I and II have been amended by extending the export and import restrictions to additional dual-use and nuclear related items (such as certain heat exchangers and pumps);
- Annex III has been substantively amended to cover additional goods and technologies which require prior export or import authorization (such as certain sensors and lasers, navigation equipment, and material processing);
- The exemptions applicable to the freezing of CBI’s assets have been expanded, and the specific exemptions applicable to Bank Tejarat have expired;
- The restrictions on transfers of funds and on financial services have been extended to cover non-electronic transfers, the restrictions apply regardless whether the transfer of funds is executed in a single operation or in several operations which appears to be linked, and there are detailed information on processing of notification and requests for authorizations; and
- Clarification that the recast Regulation apply to "any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State" (our emphasis).
(3) State Department exempts eleven countries from Iran sanctions under NDAA
On 20 March 2012, Secretary Clinton announced that an initial group of eleven countries has significantly reduced their volume of crude oil purchases from Iran, thereby becoming eligible for a temporary exemption from restrictions set forth in Section 1245 of the NDAA. These countries include: Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. The State Department issued a statement from Secretary Clinton, stating that sanctions under Section 1245 of the NDAA will not apply to the financial institutions based in these countries for a renewable period of 180 days. As described in an Economic Sanctions Alert dated 3 January 2012, Section 1245(d)(4)(D) of the NDAA allows the President to make a determination that a country has significantly reduced its volume of crude oil purchases from Iran, warranting an exemption from the restrictions that could apply to financial institutions that conduct or facilitate payments related to such transactions. The oil-related restrictions under the NDAA will not become effective until on or after 28 June 2012, but the foregoing eleven countries are exempt from the NDAA restrictions for a 6-month period. The exemption is renewable in 6-month increments, subject to the U.S. government’s finding related to a particular’s country reduction of crude oil purchases from Iran. Secretary Clinton urged other nations that import oil from Iran to follow the example of these countries.
(4) OFAC issued revised Iranian financial sanctions regulations to implement the NDAA
On 27 February 2012, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued a final rule amending the Iranian Financial Sanctions Regulations (IFSR) and reissuing them in their entirety in order to implement certain sanctions provisions set forth in the NDAA that target transactions with the CBI and other designated Iranian financial institutions by non-U.S. financial institutions. The NDAA sanctions, which were enacted on 31 December 2011, were originally described in an Economic Sanctions Alert dated 3 January 2012.
The amended IFSR essentially force non-U.S. financial institutions to choose between doing business with Iran or potentially losing their access to the U.S. financial system. As a result, companies seeking to conduct business with Iran through the use of non-U.S. financial institutions increasingly will find it more difficult to identify banks willing to process payments involving Iran. While no financial institutions have been sanctioned yet under the NDAA provisions, companies (and in particular, non-U.S. financial institutions) should be aware of the possible sanctions that may be imposed by the U.S. government for engaging in prohibited transactions with Iran. The principal changes to the IFSR in order to implement the NDAA sanctions are set forth below:
- Adding NDAA-based sanctions against non-U.S. financial institutions for “significant financial transactions” involving Iran - the IFSR were amended to include the sanctions set forth in the NDAA targeting “significant financial transactions” by non-U.S. financial institutions that involve the CBI or other designated Iranian financial institutions (effectively, the new measures target the CBI because sanctions for dealings with designated Iranian financial institutions could have been imposed under section 104(c) of CISADA, as initially implemented by the IFSR). In particular, the revised IFSR require U.S. banks to prohibit the opening, and prohibit or impose “strict conditions” on the maintaining, of correspondent or payable-through accounts for non-U.S. financial institutions that have engaged in the following types of transactions with the CBI:
- Financial transactions related to the purchase of petroleum or petroleum products from Iran by both privately-owned non-U.S. financial institutions as well as those owned or controlled by non-U.S. governments. Due to the 180-day tolling period in the NDAA for oil-related transactions, the sanctions will not be effective for activities taking place before 28 June 2012. With respect to non-U.S. financial institutions owned by non-U.S. governments, sanctions could be triggered also by the sale of petroleum or petroleum products to Iran (not just purchases from Iran).
- Other “significant financial transactions” by privately-owned non-U.S. financial institutions that do not involve petroleum or petroleum products and occur on or after 28 February 2012 - such sanctions are currently in effect.
- Adding exemptions from the NDAA - The revised IFSR include the exemption set forth in the NDAA that financial sanctions will not be imposed on non-U.S. financial institutions conducting or facilitating transactions for the sale of food, medicine, or medical devices to Iran (as those terms are defined in the IFSR). The revised IFSR also state 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 purchased from Iran over a certain time period.
- Defining terms used in the NDAA and revised IFSR - OFAC included definitions for a number of terms used in the NDAA that previously were undefined, thereby providing additional guidance to companies regarding the nature of activities that could result in sanctions under the NDAA and the revised IFSR. In particular, the revised IFSR includes definitions and related guidance for “petroleum” and “petroleum products,” “significant financial transactions,” “strict conditions” on the maintenance of correspondent or payable-through accounts, and other relevant terms that relate to the NDAA provisions. In particular, the revised IFSR clarify that the term “designated Iranian financial institution” means any Iranian financial institution whose property is blocked under the IFSR or any Executive Order under the IEEPA and that is identified on the Specially Designated Nationals and Blocked Persons List. We note that in February 2012, OFAC issued guidance on “Frequently Asked Questions” related to the NDAA that covered many of the definitions and guidance now contained in the revised IFSR.
(5) Pending U.S. sanctions legislation
Several bills (i.e., S. 2101 and H.R. 4179) currently pending in Congress seek to further expand U.S. sanctions against Iran. In summary, the proposed legislation would expand the reach of U.S. sanctions to any entity “owned or controlled” by a U.S. person (effectively applying the full scope of U.S. sanctions against Iran to the activities of foreign incorporated subsidiaries of U.S. companies), expand the scope of financial messaging restrictions (SWIFT-related measures) beyond the Iranian banks already targeted by the EU, penalize institutions transacting business with any Iranian bank (not just designated Iranian banks), and allow for the imposition of restrictive measures against any underwriter or insurer/reinsurer found by the U.S. government to have been providing insurance or reinsurance for Iran-related activities that are prohibited under U.S. law, or to persons on which sanctions have been imposed under U.S. law for Iran-related activities.
S. 2101: The Senate Banking, Housing, and Urban Affairs Committee marked up and reported favorably for full Senate action the Iran Sanctions, Accountability, and Human Rights Act of 2012 (S. 2101). Section 213 of S. 2101, titled “Liability of Parent Companies for Violations of Sanctions by Foreign Subsidiaries,” would directly affect foreign subsidiaries of U.S. companies by extending the current restrictions applicable to “U.S. persons” to the foreign-incorporated entities “owned or controlled” by a U.S. person. Effectively, non-U.S. subsidiaries would be subject to the same restrictions on dealings with Iran that currently apply to their U.S. parent companies. This would have a direct impact on the operations of non-U.S. subsidiaries of U.S. companies, even if the U.S. company does not have an active role in the management of non-U.S. operations. The principal provisions of section 213 are set forth below:
- Prohibits transactions with Iran: Section 213 would require the President to “prohibit an entity owned or controlled by a U.S. person and established or maintained outside the U.S. from engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of that Government that would be prohibited . . . if the transaction were engaged in by a U.S. person or in the U.S.” no later than 60 days after the law’s signing. To avoid penalties, the U.S. entity would have 180 days to “divest” from such non-U.S. subsidiary or “terminate” its business with the foreign subsidiary.
- Applies to non-U.S. entities “owned or controlled” by U.S. person: Section 213 would apply to a non-U.S. entity which is “owned or controlled” by a U.S. person or company. The term “own or control” is defined to include any of the following: (1) to hold “more than 50 percent of the equity interest by vote or value of the entity”; (2) to hold a “majority of seats on the board of directors of the entity”; or (3) to “otherwise control the actions, policies, or personnel decisions of the entity.”
This provision is not specific to any industry but, if enacted as currently proposed, would effectively result in the treatment of non-U.S. subsidiaries of U.S. companies as being fully subject to all U.S. sanctions against Iran (similar to the Cuba sanctions program). It was previously expected that the Senate would hold a vote on S. 2101 by the end of March and such action was attempted by unanimous consent earlier this week. However, one Senator objected and prevented passage. As a result, further action on this bill will not take place until after 13 April 2012, when Congress returns from Easter recess.
H.R. 4179: Another proposed bill, H.R. 4179, may have a significant impact on global insurers as well as financial institutions transacting business with any Iranian banks. On 8 March 2012, Senators Sherman (D-CA) and Ros-Lehtinen introduced H.R. 4179, the “Iran Financial Sanctions Improvement Act,” targeting global insurers and calling for the sanctioning of transactions with all Iranian banks – whether government or privately affiliated, or inside or outside of Iran. The most significant provisions of the proposed bill include:
- Section 2(b) – SWIFT measure: Section 2(b) of H.R. 4179 contains provisions similar to the Council of the EU’s recent measure affecting SWIFT. Specifically, Section 2(b) states that “not later than 90 days after the date of the enactment of this act, the Secretary of the Treasury shall submit to the appropriate congressional committees a report on the status of efforts to ensure that SWIFT, Clearstream, and other entities that provide similar services, have terminated services to, and the enabling and facilitation of access to services for, the Central Bank of Iran and other Iranian financial institutions.” Section 2(c) then authorizes the President to impose sanctions on an entity that has not terminated the provision of services to, or the enabling and facilitation of access to services for, the CIB or any other Iranian financial institution. In its reach, this provision would go beyond the current scope of the EU measures requiring SWIFT to terminate access only for designated Iranian banks.
- Section 3 – Expand Section 104 of CISADA: the new bill would amend Section 104(c) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), which provides for sanctions against foreign financial institutions that engage in transactions with designated Iranian banks. The new bill would expand this provision to restrict dealings with all Iranian banks – not just those that are designated by the Treasury Department.
- Section 4 – Expand provision in NDAA: the bill would also expand the Menendez-Kirk provision enacted in the NDAA that targeted the CBI by sanctioning not only those financial institutions that conduct or facilitate transactions on behalf of the CBI, but also those who maintain accounts or funds for or on behalf of the CBI or another Iranian financial institution. Therefore, H.R. 4179 would effectively cut off every Iranian financial institution from the international financial community, subjecting any bank that conducts transactions, maintains a correspondent account, or holds money for an Iranian bank to the risk of losing its own access to the U.S. financial system.
- Section 5 – Insurance-specific measures: This provision contains insurance-specific restrictions that would apply not only to non-U.S. subsidiaries, but also to foreign insurance companies. The intent is to prevent access not just to international payments/banking system but also to insurance/reinsurance coverage for Iran-related transactions, thereby reducing the ability of Iranian entities to conduct business globally. Restrictive measures could be imposed if the State Department finds that a particular insurer or reinsurer has engaged in either of the two types of sanctionable activities identified in section 5(a):
- Providing insurance or reinsurance for “any activity with respect to Iran for which sanctions have been imposed” under a number of U.S. statutes, including the International Emergency Economic Powers Act (IEEPA) (pursuant to which several Executive Orders and OFAC’s Iranian Transactions Regulations have been issued imposing sanctions on Iran); or
- Providing insurance or reinsurance “to or for any person on which sanctions have been imposed” under U.S. law “for engaging in an activity with respect to Iran” or a person designated for IEEPA-based sanctions in connection with Iran’s support of international terrorism or weapons proliferation efforts.
Because the sanctionable activity provision can be broadly interpreted to include any Iran-related activity in which a U.S. person itself could not engage, this provision could expose any insurer/reinsurer (including global insurers that are not owned by a U.S. parent) to possible restrictive measures. Senator Kirk intends to introduce a similar measure in the Senate, leaving the possibility of it being offered as an amendment to S. 2101. H.R. 4179 has been referred to the Financial Services, Foreign Affairs, Judiciary, and Oversight and Government Reform Committees, but presently has no additional co-sponsors.