Recent Developments

On January 2, 2013, President Obama signed into law the National Defense Authorization Act for Fiscal Year 2013, which includes the “Iran Freedom and Counter-Proliferation Act of 2012” (“IFCPA”) in sections 1241 to 1255.  Among other things, the IFCPA expands the list of activities for which sanctions under the Iran Sanctions Act (“ISA”) or the Iranian Financial Sanctions Regulations, 31 C.F.R. Part 561 (“IFSR”) may be imposed.  These new sanctions target Iran’s energy, shipping, and shipbuilding sectors; the insurance/reinsurance of various sanctionable activities; and non-U.S. financial institutions that deal with Iranian parties on the List of Specially Designated Nationals and Blocked Persons (“SDN List”).  The IFCPA also provides the U.S. Government with new authorities to designate and block parties engaging in certain Iran-related activities.  For the most part, the IFCPA measures will become effective 180 days after the law’s enactment—i.e., on July 1, 2013.

Implications for Companies Engaging in Transactions with Iran

The IFCPA will make it even more difficult for companies to engage in business with Iran, particularly for non-U.S. companies and banks.  Specifically, the IFCPA extends the exposure of non-U.S. companies involved in the energy, shipping, or shipbuilding sectors as well as trade in certain types of metals (i.e., precious, raw, semi-finished) and other materials.  Thus, these new sanctions are likely to cause non-U.S. companies and banks to operate with increased vigilance regarding any transactions involving Iran, no longer limiting such vigilance to Iran’s petroleum or petrochemical sectors.  The IFCPA comes only a few months after the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) was enacted in August 2012 and before all of the ITRA’s provisions have gone into effect.  As a result of the ITRA, non-U.S. entities owned or controlled by U.S. Persons (i.e., entities organized under U.S. laws and their non-U.S. branches; persons in the United States; and U.S. citizens and permanent resident aliens wherever located) are already subject to the same restrictions as U.S. Persons regarding dealings with Iran, the Government of Iran, Iranian financial institutions, and other Iranian parties.

Sanctions Targeting Iran’s Energy, Shipping, or Shipbuilding Sectors

The ISA is the main piece of legislation targeting Iran’s energy sector.  It includes a menu of various potential sanctions that the U.S. State Department may impose on parties who engage in certain activities, even if wholly outside U.S. jurisdiction (i.e., no U.S. Persons, no items subject to U.S. jurisdiction, no U.S. dollars, etc.).  IFCPA Section 1244(d)(1) provides that five or more ISA sanctions may be imposed on parties who knowingly sell, supply, or transfer to or from Iran “significant” goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran, including the National Iranian Oil Company (“NIOC”), the National Iranian Tanker Company (“NITC”), and the Islamic Republic of Iran Shipping Lines (“IRISL”).  The term “significant” is not defined in this IFCPA provision.  These activities have not been added to the ISA’s own separate list of sanctionable activities.

The IFSR authorize the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) to impose restrictions or prohibitions on the U.S. correspondent accounts of non-U.S. financial institutions that engage in certain Iran-related transactions.  IFCPA Section 1244(d)(2) provides that IFSR sanctions may be imposed on non-U.S. financial institutions that knowingly conduct or facilitate a “significant” financial transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran, including NIOC, NITC, and IRISL.  In this context, the term “significant” with respect to financial transactions is defined by IFSR § 561.404.

In addition, IFCPA Section 1244(c) expands OFAC’s authority to block parties who engage in activities related to Iran’s energy, shipping, and shipbuilding sectors.  Parties subject to blocking are those who

  • are part of the energy, shipping, or shipbuilding sectors in Iran;
  • operate a port in Iran; or
  • knowingly provide significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction on behalf of or for the benefit of, (i) the foregoing or (ii) Iranian parties on the SDN List except Iranian banks that have not been designated under OFAC’s terrorism, weapons of mass destruction (“WMD”) proliferation, or human rights abuses sanctions programs (e.g., Iranian banks designated only under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560).  

Note that the terms “energy sector,” “shipping sector,” and “shipbuilding sector” are not defined in the IFCPA.  These sanctions targeting Iran’s energy, shipping, and shipbuilding sectors are subject to the following exceptions:

  • Humanitarian: conducting or facilitating an Iran-related transaction for (i) the sale of agricultural commodities, food, medicine, or medical devices or (ii) humanitarian assistance;
  • Afghanistan Reconstruction: the President may make exceptions for reconstruction assistance or economic development for Afghanistan if in the national interest of the United States; and
  • Natural Gas: the sale, supply, or transfer to or from Iran of natural gas (except non-U.S. financial institutions that conduct or facilitate financial transactions for the sale, supply, or transfer of natural gas under certain circumstances).  

These IFCPA sanctions are applicable to the purchase of petroleum and petroleum products from Iran if the President determines there is a sufficient supply of non-Iranian oil on the world market pursuant to the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”).  The relevant determination has been in effect since June 11, 2012 and was renewed on December 7, 2012.  Countries that are exempt from certain sanctions pursuant to the NDAA are also exempt from these IFCPA sanctions to the extent they affect transactions involving the purchase of petroleum or petroleum products from Iran.  To date, 20 countries have received an NDAA exemption.

Sanctions Targeting the Sale, Supply, or Transfer of Certain Materials to or from Iran

IFCPA Section 1245 provides that five or more ISA sanctions may be imposed on parties who knowingly sell, supply, or transfer, directly or indirectly, the following materials to or from Iran:

  • Precious metals;
  • Graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes to the extent they are determined by the President to be used by Iran under certain circumstances;
  • Other materials used in connection with Iran’s energy, shipping, or shipbuilding sectors or other sectors of Iran’s economy determined by the President to be controlled by Iran’s Revolutionary Guard Corps (“IRGC”)
  • Other materials sold, supplied, or transferred by Iranian parties on the SDN List (except Iranian banks that have not been designated under OFAC’s terrorism, WMD proliferation, or human rights abuses sanctions programs); or
  • Other materials determined by the President to be used in connection with Iran's nuclear, military, or ballistic missile programs.

Within 180 days of the IFCPA’s enactment and every 180 days thereafter, the President will publish in the Federal Register a list of materials subject to IFCPA Section 1245 and sectors of Iran's economy determined to be controlled by the IRGC.  These activities have not been added to the ISA’s own separate list of sanctionable activities.

IFCPA Section 1245 also provides that IFSR sanctions may be imposed on non-U.S. financial institutions that knowingly conduct or facilitate a “significant” financial transaction for the sale, supply, or transfer to or from Iran of the materials described above.  As noted above, the term “significant” with respect to financial transactions is defined by IFSR § 561.404.

These IFCPA sanctions targeting the sale, supply, or transfer of certain materials to or from Iran provide an exception for parties that have exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that parties do not engage in activities sanctionable under IFCPA Section 1245.  Separately, note that Executive Order 13622 (July 30, 2012) already provides OFAC with authority to block parties who materially assist, sponsor, or provide financial, material, or technological support for the purchase or acquisition of precious metals by the Government of Iran.

Sanctions Targeting Underwriting Services or Insurance/Reinsurance of Sanctionable Activities or Certain Specially Designated Nationals

IFCPA Section 1246 provides that five or more ISA sanctions may be imposed on parties who knowingly provide underwriting services or insurance or reinsurance (i) for any Iran-related activity for which sanctions may be imposed under the ISA; International Emergency Economic Powers Act (“IEEPA”); Comprehensive Iran Sanctions, Accountability, and Divestment Act (“CISADA”); ITRA; Iran, North Korea, and Syria Nonproliferation Act; or IFCPA or (ii) to terrorism or WMD proliferation Specially Designated Nationals (“SDNs”) or Iranian parties on the SDN List (except Iranian banks that have not been designated under OFAC’s terrorism, WMD proliferation, or human rights abuses sanctions programs).  These IFCPA sanctions targeting certain underwriting services or insurance/reinsurance are subject to exceptions for humanitarian activities (i.e., sale of agricultural commodities, food, medicine, or medical devices to Iran; humanitarian assistance) or parties that have exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure they do not provide insurance or reinsurance for any targeted activities.

Financial Sanctions Targeting Iranian Parties on the SDN List

IFCPA Section 1247 provides that IFSR sanctions may be imposed on non-U.S. financial institutions that knowingly facilitate a “significant” financial transaction on behalf of Iranian parties on the SDN List (except Iranian banks that have not been designated under OFAC’s terrorism, WMD proliferation, or human rights abuses sanctions programs).  As noted above, the term “significant” with respect to financial transactions is defined by IFSR § 561.404.  The IFCPA’s financial sanctions targeting Iranian parties on the SDN List are subject to exceptions for humanitarian activities (i.e., the sale of agricultural commodities, food, medicine, or medical devices to Iran; humanitarian assistance) and the sale, supply, or transfer of natural gas to or from Iran under certain circumstances. 

These IFCPA sanctions are applicable to the purchase of petroleum and petroleum products from Iran if the President determines there is a sufficient supply of the non-Iranian oil on the world market pursuant to the NDAA.  Countries that are exempt from certain sanctions pursuant to the NDAA are also exempt from these IFCPA sanctions to the extent they affect transactions involving the purchase of petroleum or petroleum products from Iran.

Additional Blocking Authorities

The IFCPA expands OFAC’s authority to block certain Iranian parties.  IFCPA Section 1248 mandates that the Islamic Republic of Iran Broadcasting and its president be blocked.  IFCPA Section 1249 amends CISADA to mandate that OFAC block parties who engage in corrupt or other activities related to (i) the diversion of goods such as agricultural commodities, food, medicine, and medical devices intended for the people of Iran or (ii) the misappropriation of proceeds from the sale or resale of such goods.

Exemption for Natural Gas Projects

IFCPA Section 1254 provides that none of the IFCPA’s sanctions apply to (i) the Shah Deniz natural gas field in Azerbaijan’s sector of the Caspian Sea and related pipeline projects, (ii) projects that provide Turkey and European countries energy security and independence from Russia and Iran, or (iii) projects initiated before August 10, 2012, pursuant to a production-sharing agreement entered into with, or a license granted by, a government other than Iran’s before August 10, 2012.  This is the same exception for natural gas projects found in ITRA Section 603(a).

Potential Civil and Criminal Penalties for IFCPA Violations

IFCPA Section 1253 provides for the potential imposition of civil or criminal penalties under IEEPA for a party who “violates, attempts to violate, conspires to violate, or causes a violation” of the IFCPA.  IEEPA is the statutory basis for most of OFAC’s sanctions programs and the statute under which parties are generally prosecuted for violations of these sanctions programs.  Previous laws such as CISADA and the ITRA that targeted activities for which ISA or IFSR sanctions may be imposed did not also authorize the U.S. Government to impose IEEPA civil or criminal penalties for parties who engage in targeted activities.  CISADA and ITRA provisions analogous to IFCPA Section 1253 limit the application of IEEPA penalties to blocking provisions elsewhere in those laws.  It remains to be seen whether the U.S. Government will seek to use IFCPA Section 1253 to impose IEEPA civil or criminal penalties on non-U.S. parties who engage in activities targeted by the IFCPA.