On December 14, 2009, the U.S. House of Representatives passed by a vote of 412-12 the Iran Refined Petroleum Sanctions Act of 2009[1], which would significantly expand sanctions that could be imposed on companies that engage in certain trade activities with the Islamic Republic of Iran. The U.S. Senate followed suit on January 28, 2010, passing by unanimous voice vote the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009, which reflects the core aspects of the House Bill and also includes a number of additional sanctions measures.[2] A conference committee must reconcile the two bills before a final bill is presented to President Obama for his signature.

The bills’ most salient provisions impose sanctions on any entity worldwide that exports refined petroleum products to Iran, or that provides Iran with goods or services that enhance its ability to manufacture refined petroleum products. Sanctionable activity would include not only the export or reexport of covered goods, but also activities such as insurance, reinsurance, underwriting, and brokering the sale or lease of such goods.

One or both of the bills also include enhanced export and re-export controls on U.S. origin products, government procurement restrictions for companies that engage in business with Iran, authorization for state and local governments to divest their assets from entities that have invested in the Iranian energy sector, and export licensing restrictions on foreign governments that present risks of diverting goods to Iran.

The legislation would represent a significant expansion of existing sanctions triggered by petroleum-related trade activity with Iran, and are especially noteworthy for their intended extraterritorial effect. The key provisions of the bill are summarized below.

Refined Petroleum Restrictions

Both the House and the Senate bills contain provisions that would amend the Iran Sanctions Act of 1996 (“ISA”)[3] to impose sanctions on any person or entity worldwide who engages in the export to Iran of refined petroleum products, or provides goods or services to Iran that would enhance Iran’s ability to manufacture refined petroleum products. The term “refined petroleum” is defined broadly in the legislation to include diesel, gasoline, kerosene, and various other petroleum distillates.[4]

This is a measure that has been discussed in U.S. Government circles for several years, and was supported by President Obama as a multilateral measure during his presidential campaign. Although Iran produces large volumes of oil and gas, its refining capabilities are limited and, at present, it must import gasoline and other important commercial refined petroleum products. By limiting the Iranian government’s ability to import refined petroleum, this legislation seeks to apply economic pressure on the Iranian authorities in an aspect of the Iranian economy where there U.S. perceives a potential vulnerability.

Under the proposed legislation, nearly comprehensive trade restrictions would be mandated on any entity worldwide that exports more than $200,000 worth of refined petroleum or goods/services to assist Iran in its production operations, or $500,000 worth of those items on an aggregated basis over a 12-month period (these figures are based on the House bill – the Senate bill has an aggregate threshold of $1,000,000). Specifically, for such entities the President is required (among other, more targeted restrictions) to prohibit the following three categories of financial transactions:

  • “any transactions in foreign exchange by the sanctioned person”. This prohibition would preclude sanctioned persons from engaging in any currency exchanges subject to U.S. regulatory jurisdiction (such as, for example, through any U.S. banks or foreign branch offices of those banks).
  • “any transfers of credit or payments between, by, through or to any financial institution, to the extent that such transfers or payments involve any interest of the sanctioned person”. This would restrict sanctioned persons from engaging in any credit transactions with or through U.S. financial institutions (including foreign branch offices), such as project or corporate acquisition financing arrangements, or letters of credit.
  • “any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation, or exportation of, dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which the sanctioned person has an interest by any person, or with respect to any property, subject to the jurisdiction of the United States.” This is a very broad restriction that has, as described below, been utilized by the U.S. government in sanctions programs administered under the Trading with the Enemy Act and the International Emergency Economic Powers Act, and effectively would prohibit persons from conducting most business transactions with U.S. persons or entities.[5]

Those sanctions would, essentially, foreclose a targeted entity from participating in financial transactions with U.S. companies – similar in many respects to the United States’ current financial sanctions against terrorist-supporting governments, terrorist organizations, and other entities subject to sanctions under the Department of Treasury, Office of Foreign Assets Controls (“OFAC”) regulations. Notably, the proposed sanctions would apply not only to the specific entity targeted, but to any non-U.S. subsidiary, parent or affiliate thereof.[6]

Both bills also would mandate sanctions against entities engaged in (1) underwriting or otherwise providing insurance or reinsurance for the sale, lease, or provision of refined petroleum products to Iran; (2) financing or brokering the sale, lease, or provision of refined petroleum products to Iran; or (3) providing ships or shipping services to deliver refined petroleum products to Iran.

The restrictions would be enforced directly against the sanctioned person, and also, presumably, in the form of civil or criminal penalties against any U.S. parties that violate the above restrictions in conducting business with the sanctioned person.

Under the House version of the legislation, the sanctions would apply retroactively to any person engaged in the restricted export activity as of October 28, 2009. The corresponding restrictions in the Senate bill apply prospectively only.[7]

Once imposed, the above sanctions would remain in effect until a Presidential determination that the sanctioned entity had ceased exporting to Iran. However, even with such a determination, the sanctions would remain in effect for at least one year. This is pursuant to provisions in the existing Iran Sanctions Act (Sec. 9(b)) that would be preserved in the current legislation. Importantly, the legislation preserves a Presidential authority existing in the current Iran Sanctions Act to waive application of sanctions to a particular person or entity otherwise engaged in restricted trade transactions, but only if the President were to certify to Congress that such waiver was “vital” (House bill) or “necessary” (Senate bill) to the “national security interest of the United States.”[8]

Enhanced Export Restrictions

Section 103(b) of the Senate bill provides that “no article of United States origin may be exported directly or indirectly to Iran”, with the exception of humanitarian items, food and medicine, informational materials, certain aviation items, equipment for the use of the UN or non-governmental organisations promoting democracy in Iran, or other items to the extent “necessary to the national interest of the United States.” If enacted, this provision could result in a broad restriction on re-exporting U.S.-origin products to Iran. (Currently, non-U.S. persons are not prohibited from re-exporting non-dual use items to Iran – e.g. items classified as “EAR99” under the U.S. Commerce Control List – provided no U.S. persons are involved in the transaction and the EAR99 items are otherwise lawfully procured from the United States.) That restriction could have a significant impact on the business of non-U.S. companies that utilize U.S.-origin items in their Iran-related sales or services. (It is not clear if this provision would restrict supply of U.S. origin items that are substantially transformed abroad or otherwise meet the de minimis incorporation/commingling tests under the Export Administration Regulations or Iranian Transaction Regulations.)

Restrictions on Foreign Subsidiary Activity

The Senate bill imposes liability on U.S. parent companies where the parent establishes or maintains a subsidiary for the purpose of circumventing U.S. sanctions law and the subsidiary engages in prohibited conduct.[9] Notably, this measure is narrower than past legislation introduced in Congress that would have flatly prohibited companies owned or controlled by U.S. entities from doing business in Iran (similar to the standard currently in place, for example, in respect of Cuba under the Trading With the Enemy Act and Cuban Assets Control Regulations[10]). The “purpose” test in the proposed legislation bears similarity to existing restrictions in the Iran Transaction Regulations (“ITR”), which prohibit U.S. persons from taking action to “facilitate” business by non-U.S. entities with Iran,[11] but may prove to be broader than the ITR in imposing liability on U.S. parent companies that own or control subsidiaries doing business with Iran. Much will depend upon how the new standard is implemented in administrative regulations and construed by U.S. enforcement authorities.

Procurement Restrictions

The Senate bill prohibits U.S. federal agencies from entering into procurement contracts with entities that export refined petroleum or related goods/services to Iran.[12] It further prohibits federal procurement from entities that export “sensitive technology” to Iran, defined as “hardware, software, telecommunications equipment, or any other technology that the President determines is to be used specifically (1) to restrict the free flow of unbiased information in Iran; or (2) to disrupt, monitor, or otherwise restrict speech of the people of Iran.”[13] The latter provision is noteworthy in that it marks tacit legislative support for the opposition movement in Iran, whose communications capabilities have been increasingly disrupted by the regime in recent months.

Divestment

The Senate bill permits state and local governments to divest their assets from entities they determine to have invested $20 million or more in the Iranian energy sector or to have extended $20 million or more in credit to an entity that used the funds to invest in the Iranian energy sector.[14] The bill also provides for a safe harbor from suit for asset managers who choose to divest.[15]

Imposition of Sanctions on Foreign Governments Presenting Diversion Risks

The Senate bill requires the Director of National Intelligence to submit to the Secretaries of State, Commerce, and the Treasury, and appropriate Congressional Committees, a report that identifies all countries that the Director believes are “of concern” with respect to transshipment, re-exportation or diversion to an entity in Iran of items subject to the U.S. Export Administration Regulations.[16] Following the report, the Secretary of Commerce, in consultation with the Secretaries of State and the Treasury, must determine if a country should be designated a “Destination of Possible Diversion Concern”.[17] If a country is so designated, the bill requires the Secretary of Commerce to initiate a series of government-to-government activities designed to encourage that country to cooperate with information sharing and enforcement regarding export controls and re-export controls. If the country fails to cooperate within one year after being listed as a “Destination of Possible Diversion Concern”, it shall be subject to rigorous U.S. export licensing requirements for a range of U.S.-origin items.

The House bill imposes sanctions on a country that has jurisdiction over an entity sanctioned for activity relating to Iran’s acquisition or development of nuclear weapons or related technology.[18] These sanctions include (1) prohibition of any civilian nuclear cooperation agreement between the United States and the sanctioned government; and (2) prohibition of the export to such country of any nuclear material, facilities, components, or other goods, services, or technology that would be subject to a cooperation agreement.

Implications for Foreign Companies

The financial restrictions highlighted above – which focus on restrictions on dealings in “property” in which the targeted person or entity has an “interest” – are similar to laws and regulations that the United States has already implemented against certain countries or entities of concern. As noted, they essentially deny the sanctioned entity from commercial dealings with any U.S. company or the U.S. economy as a whole.

This is because the term “property” has been interpreted to mean almost any form of commercial asset – e.g., a contract, real property, equipment, an entity, office, joint venture, a financial asset, a debt, and so forth. The term “interest in property” has been defined in previous economic sanctions regulations to mean “an interest of any nature whatsoever, direct or indirect”, and thus nearly any involvement of a sanctioned entity in “property” can trigger a restriction on dealing with U.S. persons or the U.S. economy.

Given the very broad scope of the draft legislation, the Obama Administration will push for it to be narrowed in the conference reconciliation process. For example, it is possible that some of the proposed sanctions will become optional at the discretion of the President, rather than mandatory as currently proposed. The language of the waiver provision may be modified to give the President more flexibility. An exception from sanctions may be sought for companies whose government is deemed to be cooperating in efforts to persuade Iran to cooperate in resolving international concerns with its nuclear energy program. However, given the broad Congressional support for the legislation, combined with continuing lack of progress in UN efforts with Iran, the bill may not change fundamentally by the time it is sent to the President.