Effective July 1, 2013, the United States imposed further secondary sanctions on non-U.S. parties who engage in trade or other transactions with Iran. The new sanctions will impact companies operating in the following sectors: energy, financial services, shipping, precious metals and other materials, insurance, automotive, ship-building and port operations. The U.S. Government targeted the industrial sectors it believes are a significant source of revenue for the Iranian Government, as well as sectors such as insurance and financial services that facilitate the revenue-generating sectors.
The United States has long maintained extraterritorial sanctions against non-U.S. companies that trade with Iran, particularly with regard to energy and financial services. However, new laws—including the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) and Executive Order 13645—significantly expanded the scope of activities that put non-U.S. companies at risk of being sanctioned.
Potentially sanctionable activities now include:
- Providing material support (including financial or technological support) to Specially Designated Nationals (SDNs);1
- Selling to or supporting the Iranian energy, automotive, shipping, shipbuilding or port operation sectors;
- Supplying precious metals to Iran;
- Supplying certain materials (including graphite, aluminum, steel, coal and software for integrating industrial processes) to Iran if the President of the United States determines that such materials are used in certain ways;
Providing underwriting services, insurance or reinsurance—
- for any activity with respect to Iran for which sanctions have been imposed;
- to or for any person with respect to the energy, shipping or shipbuilding sectors of Iran;
- for the supply to or from Iran of certain materials, as identified above;
- to or for most Iranian SDNs;
For foreign financial institutions—
- Trading in, or maintaining accounts denominated in, the Iranian rial;
- Knowingly conducting or facilitating significant financial transactions on behalf of SDNs;
- Knowingly conducting or facilitating significant financial transactions for the supply to Iran of significant goods or services used in connection with the automotive, energy, shipping or shipbuilding sectors.
To assist traders, the Office of Foreign Assets Control (OFAC) has amended the SDN List to identify parties that the U.S. Government has determined are engaged in activities in the energy, automotive, shipping, shipbuilding or port operation sectors. Such parties will have either “IFCA Determination - Involved in Energy Sector;” “IFCA Determination - Involved in the Shipbuilding Sector;” “IFCA Determination - Involved in the Shipping Sector;” or “IFCA Determination - Port Operator” annotated in their SDN listing. The first parties that have had these annotations added to their SDN listings were parties that were already on the SDN List and subject to blocking, including the National Iranian Oil Company (energy), National Iranian Tanker Company (shipping) and Tidewater Middle East Co. (port operator). If non-U.S. companies are determined to have engaged in any sanctionable activity, the U.S. President must impose sanctions, which can include, among others:
- Blocking of all property interests of the sanctioned person that are subject to U.S. jurisdiction;
- A ban on U.S. persons investing in the sanctioned person’s equity or debt instruments;
- Barring entry into the United States of the sanctioned party’s corporate officers;
- Denial of Export-Import Bank assistance for exports to sanctioned persons;
- Denial of any export licenses for exports to sanctioned persons;
- A prohibition on loans from U.S. financial institutions to sanctioned persons;
- A procurement ban barring the U.S. Government from purchasing goods or services from a sanctioned party;
- A prohibition on any foreign exchange transactions with a sanctioned interest;
- A ban on banking transactions involving a sanctioned person.
The U.S. President may also apply the foregoing sanctions to the principal executive officers of the non-U.S. company. In other words, the personal U.S. bank accounts of a sanctioned firm’s principal corporate officers could be frozen.
The new sanctions are subject to various waivers and exceptions. For example, underwriters, insurers and reinsurers may avoid sanctions if the U.S. President determines that they exercised due diligence in establishing and enforcing controls to avoid sanctionable activities. National security waivers are also available in some cases.
Corollary State Activities Affecting Insurers and Reinsurers
Consistent with other actions to enforce federal economic sanctions, New York State’s Department of Financial Services (“NY DFS”) issued a letter on June 25, 2013 to certain non-U.S. reinsurance companies qualified as Certified Reinsurers under New York Insurance Law, demanding extensive information relating to activities that are potentially sanctionable under the new laws. The letter also seeks detailed information on specific procedures such reinsurers have in place to ensure compliance with U.S. sanctions laws.
In its letter, the NY DFS recognizes the nature of diligence required for insurers to avoid insuring/reinsuring sanctionable transactions. The NY DFS also casts doubt that the issue can be avoided through sanctions clauses limiting an insurer’s or reinsurer’s obligations to pay claims that would violate a sanctions regime. While such clauses may purport to exclude coverage of sanctionable activities, according to the NY DFS they may not protect against the risk that the act of insuring a transaction is itself sanctionable. The NY DFS also believes it is not clear how and whether insurers will enforce such clauses.
The New York State legislature recently passed a bill (awaiting the Governor’s signature) prohibiting domestic insurers from including, as admitted assets, investments in entities included on a list maintained by the state’s Office of General Services of entities invested in the Iranian energy sector. A similar bill was passed in September 2012 in California, following judicial challenges to the California Insurance Department’s efforts to regulate such investments without promulgating a formal regulation. On the banking side, the NY DFS has been very aggressive in monitoring Iran-related transactions and has pursued regulatory actions against banks for alleged concealment of Iran-related monetary transactions. It recently settled cases against several global banks for alleged “stripping” of information from bank wire transfers involving Iran, resulting in large fines. The settlements require formal compliance and monitoring programs as well as enhanced management oversight concerning sanctions compliance.
New York’s letter underscores the need for both U.S. and non-U.S. insurers/reinsurers who reinsure U.S. cedents to reassess their compliance protocols and training in light of the potential for increased regulatory or enforcement activity at the state level. U.S. lenders and underwriters should also consider their companies’ risk of secondary sanctions under IFCA.
These new sanctions and state follow-up action are the most recent developments in an increasingly robust and complex network of sanctions imposed against the Government of Iran, by both the United States and the international community. On June 4, 2013, the Treasury Department exposed a network of 37 companies set up to evade international sanctions. The companies, many of which operate only as front companies, funnel profits to Iran’s leadership, according to the findings of the U.S. Treasury Department.