On July 30, 2012, House and Senate conferees reached agreement on the final language of a new package of sanctions on Iran, the “Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”). Votes on the Act in both chambers are expected in the next few days, with enactment all but certain. President Obama is expected to sign the Act when it is sent to the White House.

Overall Assessment and Political Background

The Act is a 147-page hodge-podge of amendments to the Iran Sanctions Act of 1996 (ISA) and the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA), as well as other measures. It confers no new authorities on the President and effectively adds nothing that he cannot already do under the ISA, CISADA or the International Emergency Economic Powers Act (IEEPA). However, the Act is prescriptive, in that it mandates numerous specific sanctions, limits the President’s waiver authority and generally reduces his flexibility to apply Iran sanctions in a selective or nuanced manner.

The Act contains a plethora of mandatory rulemakings and reporting requirements, mostly from the Department of the Treasury to Congress. The net practical effect of these added legal requirements is two-fold: more intensive congressional management of Iran sanctions and further complication of an already complex compliance environment for industry.

Because many of the provisions of the Act are duplicative of legal authorities the President already has to sanction Iran-related activity and are consistent with programs the administration is already pursuing, the Act might be viewed as politically motivated election-year legislation that Congress is enacting to demonstrate its own institutional activity on Iran sanctions. However, there also has been a sense among many members of Congress that the administration has been moving too slowly on sanctioning Iran, and Republican presidential candidate Mitt Romney has pointedly criticized President Obama for not being sufficiently tough with Iran. Indeed, several of the principal sponsors of the Act have already criticized it as not going far enough and have promised more legislatively imposed sanctions. As a result, the President, caught between Congress and presidential election year politics, will almost certainly have no option but to sign the Act into law.

The essentially political nature of the Act is underscored by the fact that the same day, July 30, the President, not to be outflanked, issued a new Executive Order, “Authorizing Additional Sanctions with Respect to Iran,” that expands upon sanctions under Section 1245 of the FY2012 National Defense Authorization Act (NDAA) to make sanctionable knowingly conducting or facilitating “significant transactions” with a foreign financial institution or other entity for the purchase or acquisition of Iranian oil or of Iranian petrochemical products. It also authorizes sanctions for individuals and entities that provide “material support” to the National Iranian Oil Company, Naftiran Intertrade Company or the Central Bank of Iran or for the purchase or acquisition of U.S. bank notes or precious metals by the government of Iran. In addition, the White House simultaneously released a “Fact Sheet” extolling the administration’s record on Iran sanctions with headlines such as “Building a Comprehensive Sanction Strategy,” “Partnering with Congress,” “Rallying the International Community” and “Targeting the Iranian Regime’s Nuclear Program Through Its Oil Revenues.” Finally, on July 31, 2012, the White House announced the imposition of sanctions by the Office of Foreign Assets Control (OFAC) under CISADA on Bank of Kunlun Co. Ltd. of China and Elaf Islamic Bank of Iraq for “knowingly facilitating significant transactions or providing significant financial services” to Iranian banks designated under CISADA for their connection to Iran’s support for terrorism or proliferation (so-called “Part 561 List” designations). The timing and content of these three measures were driven in no small measure by the administration’s concern that it not appear to be lagging on Iran sanctions.

Content of the Act

The most significant substantive measures of the Act that would impose new requirements on industry were contained in the Senate version of the legislation (S. 2101), as described in our February 21, 2012, International Trade & Regulatory Advisory “Congress Readies Additional Iran Sanctions That Would Close the Foreign Subsidiary Loophole.” Those provisions survived largely intact in the final version of the Act and, along with certain others likely to be of concern to industry, are summarized below.

Elimination of “Foreign Subsidiary Loophole”

Section 218 of the Act requires that no later than 60 days after its enactment, the President must prohibit any entity outside the United States owned or controlled by a United States person from engaging in any transaction, directly or indirectly, with the government of Iran or any person subject to Iranian jurisdiction that would be prohibited under OFAC’s Iranian Transactions Regulations (ITR) if it were engaged in by a U.S. person or a person in the United States. Penalties for violations would be the same as currently exist under the ITR. The penalty provision, which would apply to the U.S. parent, would not apply to a prohibited transaction if the U.S. person “divests or terminates its business with” the relevant subsidiary not later than 180 days after enactment of the Act.

This provision in effect applies the ITR extraterritorially for the first time in a meaningful fashion to non-U.S persons and constitutes an expansion of U.S. sanctions on Iran, as currently embodied in the ITR. It effectively eliminates the so-called “foreign subsidiary loophole” under which non-U.S. subsidiaries of U.S. companies have continued to do business with Iran. However, the provision would appear not to change the current de minimis rule under Section 560.420 of the ITR, under which non-U.S. persons can reexport up to 10 percent de minimis U.S.-origin content to Iran. Nor would it appear to change the current “substantial transformation” rule, which allows transshipment to Iran of U.S.-origin content substantially transformed into a foreign-made product under Section 560.205(b) of the ITR. It also would not affect the ability of non-U.S. companies that are not subsidiaries of U.S. parents to re-export U.S.-origin EAR99 goods, such as medicines or medical devices, to Iran.

Extension of Sanctions to Subsidiaries and Agents

In addition, Section 214 of the Act requires the Secretary of the Treasury to issue regulations within 90 days following its enactment under Section 104 of CISADA to extend sanctions under CISADA to include subsidiaries and agents of parties sanctioned for violations of United Nations Security Council resolutions. This provision also represents a significant expansion of U.S. sanctions to embrace not just the specific legal entity that is sanctioned, but also its affiliates.

Shipping Services Sanctions

Section 211 of the Act requires mandatory sanctions (including blocking of property subject to U.S. jurisdiction) as to any person who “knowingly” sells, leases or provides a vessel, insurance or reinsurance or “any other shipping service” (a broad and undefined term) for the transportation to or from Iran of goods that could “materially contribute” to the activities of the government of Iran with respect to the proliferation of weapons of mass destruction (WMDs) or support for acts of terrorism. The knowledge standard includes “reason to know,” and the “material contribution” requirement relates only to the goods themselves and to the “shipping service” (thus allowing almost any kind of shipping service, however minimal, to potentially trigger sanctions). Sanctions under this section would also apply to upstream and downstream affiliates of the sanctioned party if they merely knew or should have known that the party provided the vessel, insurance, reinsurance or other shipping service (not knowledge of whether the goods transported were related to WMD or terrorism). A waiver provision in the U.S. national security interest is available. Sanctions under this section could potentially reach a wide variety of activities under the term “other shipping service.”

National Iranian Oil Company and National Iranian Tanker Company Sanctions

Section 212 of the Act requires mandatory sanctions under CISADA against any person who knowingly provides underwriting services or insurance or reinsurance for the National Iranian Oil Company (NIOC) or the National Iranian Tanker Company (NITC) or any successor company to them. There is an exception for underwriters and insurance providers exercising “due diligence.” Sponsors of the measure reportedly sought tougher language.

Sovereign Debt Sanctions

In a new provision not contained in the Senate bill, Section 213 of the Act requires mandatory CISADA sanctions on any person found to knowingly “purchase, subscribe to or facilitate the issuance” of government of Iran sovereign debt, including government bonds, or the debt of any entity owned or controlled by the government of Iran. The effective date is the date of enactment of the Act, as to both the activity and issuance of the debt.

Mandatory Disclosure and Investigation of Iran-Related Activity by the Securities and Exchange Commission (SEC)

Section 219 of the Act requires all companies whose stock (including American Depository Receipts (ADRs)) is traded on U.S. stock exchanges to disclose whether they or their affiliates have “knowingly” engaged in activities that may be subject to sanction under U.S. law (including, among other things, activities related to Iran’s energy sector; conducting or facilitating certain banking activities that support WMD activities or terrorism, money laundering, and the Iranian Revolutionary Guard Corps (IRGC); transferring weapons and certain other technologies to Iran; transferring sensitive communications jamming or monitoring technology to Iran; interacting with persons or firms who have been designated for WMD or terrorism sanctions; and engaging in transactions with entities representing the government of Iran). It would mandate detailed public disclosure of any such information by the SEC and the conveyance of that information by the SEC to Congress and the President. Finally, it would require that the President initiate an investigation into whether any such disclosed activities are sanctionable and that a decision on the imposition of sanctions be made within 180 days after the start of the investigation.

Sanctions Against SWIFT

Section 220 of the Act expresses the “sense of Congress” that “providers of specialized financial messaging services,” including the Society for Worldwide Interbank Financial Telecommunication (SWIFT), should deny access to their services to the Central Bank of Iran and other sanctioned Iranian financial institutions. It also would require a report to Congress within 60 days after enactment on all entities (including intermediary financial institutions) that provide specialized financial messaging services to the Central Bank of Iran or designated Iranian banks, and it would authorize the President within 90 days after enactment, subject to some exceptions, to sanction those specialized financial messaging services providers under IEEPA (these sanctions would include imposition of civil penalties and potentially freezing of their assets in the United States; because member banks own SWIFT, this section could target those banks). Although sanctions under this section are discretionary with the President, if pursued, they could effectively shut down all international banking. Separately, SWIFT reportedly has been working to eliminate access by sanctioned Iranian banks to its services, so these sanctions may not, as a practical matter, be triggered.

U.S. Sanctions on Iranian Energy Sector

Section 201 of the Act contains a broad package of sanctions related to the Iranian energy sector. These include extending sanctions under the ISA to firms engaged in new energy-related joint ventures anywhere in the world in which Iran’s government is a substantial partner or investor or by which Iran could otherwise receive critical advanced energy sector technology or know-how not previously available to its government.

It also sanctions all suppliers who knowingly provide goods, services, technology or support valued at $1 million or more, or $5 million annually, to a person or firm involved in Iran’s energy sector, including petroleum resource projects and domestic production of refined petroleum products, primarily gasoline, in Iran. Further, it clarifies somewhat the CISADA term “domestic production of refined petroleum products” to make clear that it includes any “direct and significant assistance” with respect to the construction, modernization or repair of refineries or “directly associated infrastructure,” including “port facilities, railways and roads,” if their “primary use” is to support the delivery of refined petroleum products.

Section 201 additionally codifies the President’s decision in Executive Order 13590 of November 21, 2011, to extend U.S. sanctions to Iran’s petrochemical sector, adopting the standards, monetary thresholds ($250,000 per transaction, or multiple transactions aggregating to $1 million in a 12-month period) and specific petrochemicals list contained in that Executive Order.

Sanctions on Transportation of Crude Oil from Iran and Evasion of Sanctions by Shipping Companies

Section 202 of the Act amends the ISA to mandate sanctions under that act against any person the President determines owns, operates, controls or insures vessel used to transport crude oil from Iran to another country, subject to certain knowledge requirements depending on the status of the person and to certain detailed exceptions relating to determinations of sufficient supply of non-Iranian oil and other factors. Section 202 also imposes ISA sanctions on any person who conceals the Iranian origin of crude oil or refined petroleum products carried by vessels by certain practices, such as concealing the Iranian ownership interest in the vessel or suspending operation of the vessel’s satellite tracking device.

Limitations on ISA Waiver Authority

Section 205 of the Act limits the presidential waiver authority on ISA sanctions to one year, renewable on a case-bycase basis for additional one-year periods, but only after a formal presidential determination and reporting to Congress.

Sanctions on Iranian Uranium Mining Joint Ventures

Section 203 of the Act requires ISA sanctions to be imposed on persons who knowingly engage in joint ventures with Iran’s government, Iranian firms or persons acting for or on behalf of Iran’s government in the mining, production or transportation of uranium anywhere in the world. There would, however, be an exemption for persons who agree to withdraw from such projects within 180 days after the effective date of the Act.

Expansion of ISA Menu of Sanctions to Senior Corporate Officers

Section 204 expands the current menu of sanctions under the ISA to authorize exclusion from the United States of corporate officers, principals or controlling shareholders in a sanctioned firm. It also provides for application of ISA sanctions personally to the “principal executive officer” of a sanctioned firm.

Iran Revolutionary Guard Corps (IRGC) Sanctions

Title III of the Act contains a package of ISA and IEEPA-based sanctions against the IRGC and its agents and affiliates, including the following:

  • Section 301 requires the President to identify and designate for sanctions known officials, as well as “agents and affiliates,” of the IRGC within 90 days of enactment and periodically thereafter. It requires exclusion of such persons from the United States and freezing of their assets subject to U.S. jurisdiction.
  • Section 302 makes foreign persons who knowingly “materially assist” or “engage in a significant transaction with” the IRGC or its “agents or affiliates” subject to mandatory ISA sanctions and optional IEEPA sanctions, limited only by a waiver authority tied to “damage to the national security” of the United States. It applies similar sanctions against any persons or firms that engage in significant transactions with UN-sanctioned persons or those acting for them or on their behalf. Both of these provisions are broad and could subject non-U.S. persons who “materially assist” or conduct “significant transactions” with IRISL or its “agents” or “affiliates” to sanctions under ISA and/or IEEPA.
  • Section 311 of the Act extends a U.S. government procurement ban to foreign persons who interact with the IRGC by requiring certification by all prospective U.S. government contractors that neither they nor any of their subsidiaries have knowingly engaged in “significant transactions” with the IRGC or any of its designated officials, agents or affiliates.
  • Section 311 requires the Secretary of the Treasury to determine within 60 days of enactment whether NIOC or NITC are agents or affiliates of the IRGC and impose sanctions, as above, on persons who conduct business with them.

Attachment of Iranian Government Blocked Assets

One of the more targeted provisions of the Act, Section 502 under Title V (“Miscellaneous”) is designed to facilitate attachments relating to judgments against Iran for personal injury damages resulting from terrorism. Section 502 amends the U.S. Foreign Sovereign Immunities Act, 28 U.SC. 1602 (FSIA) to subject any blocked assets of the Central Bank of Iran located in the United States to attachment, notwithstanding sovereign immunity claims under the FSIA. However, the provision applies solely to financial assets that are identified in and subject to a single lawsuit in the U.S. District Court for the Southern District of New York, Peterson et al. v. Islamic Republic of Iran, Case No. 10 Civ. 4518 (BSJ) (GWG).

Sanctions on Human Rights Abuses in Iran

Title IV of the Act contains a package of ISA-based sanctions against persons found to have transferred goods or technology to Iran that are likely to be used to commit human rights abuses or who engage in censorship or other related activities against Iranian citizens. Section 412 requires the State Department to issue regulations that clarify “sensitive technologies” for purposes of the U.S. government procurement ban under CISADA on providers to Iran of jamming, monitoring or surveillance technology relating to mobile telecommunications and the Internet.

Syria Sanctions

Finally, Title VII of the Act imposes similar sanctions on persons responsible for human rights abuses in Syria and on persons who provide goods or technology to Syria likely to be used to conduct human rights abuses, as well as “sensitive technology,” as described above.