President Obama has issued two new Executive Orders that impose significant new extraterritorial sanctions on persons who do business with Iran or Syria. One of the Executive Orders has particularly important implications for foreign financial institutions and other non-U.S. persons.
Executive Order 13608 “Prohibiting Certain Transactions With and Suspending Entry Into the United States of Foreign Sanctions Evaders with Respect to Iran and Syria”
On May 1, 2012, President Obama issued Executive Order 13608, targeting foreign individuals and entities that have violated, attempted to violate, conspired to violate or caused a violation of U.S. sanctions against Iran or Syria or that have facilitated “deceptive transactions” for or on behalf of persons subject to U.S. sanctions concerning those two countries. Executive Order 13608 gives the U.S. Department of the Treasury (“Treasury”) the authority to publicly identify foreign individuals and entities that have engaged in such activities, and it imposes two types of sanctions on such designated foreign persons and entities:
- denial of access to the U.S. financial and commercial systems (short of blocking their property); and
- denying them visas to enter the United States.
Under the Executive Order, U.S. persons are prohibited from providing to, or procuring from, the sanctioned party any goods, services or technology. It also prohibits the contribution of funds to or from the sanctioned foreign party.
The prohibitions appear to extend to any person owned or controlled by, or acting on behalf of, such a designated foreign person, although the technical wording of this extension is less than clear.
Importantly for foreign fi nancial institutions and other non-U.S. parties, Section 7(d) of the Executive Order defi nes the term “deceptive transaction” to mean any transaction “where the identity of any person subject to United States sanctions concerning Iran or Syria is withheld or obscured from other participants in the transaction or any relevant regulatory authorities.” The effect of this provision is to make it a deceptive transaction under the Executive Order for a foreign bank or other foreign party, in a transaction conducted entirely outside the United States by non-U.S. persons, to withhold or obscure the identity of any person subject to U.S. sanctions on Iran or Syria from transactional parties or regulators. This provision is sweeping in its extraterritorial reach inasmuch as it gives Treasury the authority to require the divulgence of information in transactions that are otherwise entirely outside the jurisdiction of the United States. Moreover, it provides an important new additional tool for Treasury to sanction foreign fi nancial institutions and other foreign parties for failure to comply with the requirement. Interestingly, the sanctions for violation of this provision apply only to “foreign persons” and not to U.S. persons.
This provision appears to have been infl uenced by the so-called “stripping cases” in which U.S. prosecutors have imposed signifi cant criminal penalties on foreign banks for not including Iranian and other sanctioned party identifi ers in U.S. Dollar denominated transactions outside the United States but whose associated Dollars clear the U.S. banking system. However, under this provision there is not even the pretense of a nexus with the United States via Dollar clearing. The Administration is telling transactional parties outside the United States that they must identify U.S.-sanctioned parties to their transactional counterparties and foreign regulators and that if they do not comply they could be sanctioned by Treasury.
In implementing the new Executive Order, the Offi ce of Foreign Assets Control (OFAC) has issued guidance that makes clear that, among other things:
- U.S. fi nancial institutions must reject any wire transfer involving a listed person and fi le a report with OFAC within 10 days.
- The Executive Order does not require blocking of accounts, although an account held for a listed person must be “restricted” and a U.S. fi nancial institution cannot allow it to be operated without authorization from OFAC.
- U.S. persons must have authorization from OFAC to provide or procure property of a listed person to or from the listed person or to provide or procure services to or from the listed person in connection with that property.
- U.S. persons are prohibited from all transactions or dealings with a listed person and not just those that relate to Iran or Syria.
- U.S. persons may not deal with a listed person on a transaction that was previously licensed by OFAC in the absence of specifi c authorization from OFAC pursuant to the Executive Order, unless the transaction is otherwise exempt from regulation under the International Emergency Economic Powers Act (IEEPA).
- If the transaction is already underway at the time of the listing, the U.S. person must cease dealing with the listed person unless the transaction is exempt under IEEPA or until such time as OFAC authorizes it under the Executive Order. If the transaction underway involves a wire transfer, the U.S. fi nancial institution must reject it and fi le a report with OFAC within 10 days.
Executive Order 13606 “Blocking Property and Suspending Entry Into the United States of Certain Persons With Respect to Grave Human Rights Abuses by the Governments of Iran and Syria via Information Technology”
The May 1, 2012, Executive Order follows hard on the heels of Executive Order 13606, issued April 22, 2012. Executive Order 13606 is aimed at persons who facilitate human rights abuses by the governments of Iran and Syria through the provision of information and communications technology that facilitates computer or network disruption, monitoring or tracking. It is specifi cally aimed at third-country persons or entities that have sold, leased or otherwise provided—directly or indirectly—goods, services or technology to Iran or Syria likely to be used to facilitate such activities. Unlike Executive Order 13608, this earlier Executive Order is a blocking regime, and it requires U.S. persons in possession of property or interests in property belonging to persons listed in the Annex to the Executive Order or in the future designated by Treasury under the Executive Order to block the property and report such blocking to OFAC within 10 days. Entities that are 50 percent or more owned by persons blocked under the Executive Order are also blocked, regardless of whether such subsidiaries appear on the Annex or on the OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”).
In guidance issued by OFAC in implementation of Executive Order 13606, OFAC advised that non- U.S. companies that have provided to Iran or Syria communications technology that has the potential to facilitate computer or network disruption, monitoring or tracking “should exercise great caution given Iran and Syria’s use of technology to assist in the commission of serious human rights abuses.”
OFAC also clarifi ed that exports and re exports of U.S. origin goods or technology to persons blocked under Executive Order 13606 would require authorization from OFAC or the Department of Commerce, as appropriate.