On January 28, 2010, the U.S. Senate passed by voice vote the “Comprehensive Iran Sanctions, Accountability and Divestment Act of 2009” (S. 2799). The bill, which was co-sponsored by Senate Banking Committee Chairman Christopher Dodd (D-CT) and ranking member Richard Shelby (R-AL), contains many provisions that potentially impact both U.S. and foreign manufacturers and financial institutions through its significantly increased unilateral U.S. sanctions against Iran. Some of these provisions are extraterritorial in their reach. Taken as a whole, the legislation would effectively rewrite U.S. sanctions against Iran.

The Senate passed the bill over the objections of the Obama administration and various industry groups. It now goes to conference committee to be reconciled with similar but somewhat narrower companion legislation, the “Iran Refined Petroleum Sanctions Act” (H.R. 2194), which passed the U.S. House of Representatives on December 15, 2009, by an overwhelming vote of 412 to 12. Senate Majority Leader Harry Reid (D-NV) has signaled his intent to push the conference committee to reconcile the two measures into a single bill, with ensuing full congressional approval within the next few weeks. Because of the similarity of the two bills and the strong bipartisan support for both measures, the likelihood of enactment of the substance of the Senatepassed version is strong.

Although the Obama administration had earlier requested that the Senate “go slow” on the legislation out of concern that it did not provide the President sufficient flexibility and could alienate allies whose support is critical to multilateral efforts regarding Iran, there is no indication so far that President Obama intends to veto the final measure. Enactment of the legislation therefore sets the stage for significantly increased unilateral U.S. sanctions against Iran, a resulting need for multilateral companies that do business with Iran to review their U.S. supply chains, a possible wedge between the U.S. and its allies on the Iran issue and perhaps, ultimately, a challenge to the measures in the World Trade Organization (WTO). Coupled with recent political developments (including Tehran’s rejection of an International Atomic Energy Agency (IAEA) deal to remove Iran’s low enriched uranium, the revelation of a secret uranium processing facility at Qom, the ensuing IAEA censure vote against Iran and Iran’s response by announcing plans to develop 10 new uranium enrichment facilities within two years), the legislation leaves international negotiations with Iran politically difficult for the Obama administration to pursue and seemingly all but dead, barring any unforeseen major breakthroughs.

Highlights of the Senate bill include the following provisions:

Ban on Exports and Imports

Section 103(b)(2) of the bill contains a flat prohibition on exports and reexports of U.S.-origin “articles” to Iran. The only exceptions are for agricultural commodities, food, medicine and medical devices subject to Trade Sanctions Relief Act (TSRA) licensing, humanitarian assistance exports, certain information and informational materials, exports related to safe operation of aircraft, exports to the IAEA and exports to support activities of non-governmental organizations promoting democracy in Iran.

This provision is similar to the ban on U.S. exports to Syria enacted by the U.S. Congress in 2003. As with Syria, it presumably would vest enforcement authority in the Department of Commerce rather than the Office of Foreign Assets Control (OFAC), and would eliminate OFAC’s longstanding “general inventory” and “substantial transformation” exceptions for reexports of EAR 99 items by third countries to Iran.1 Its impact on the 10 percent de minimis rule for reexports of U.S.-origin content to Iran is less clear. Read literally, it would eliminate the exception; however, if the Department of Commerce implements the prohibition as it did the similar one on exports and reexports to Syria at General Order No. 2 at Supplement No. 1 to Part 736 of the Export Administration Regulations, the 10 percent de minimis rule would be retained. Nonetheless, the net effect of the provision still will be to eliminate much of the existing trade in low technology U.S.-origin goods to Iran through third countries (a trade that has increasingly been criticized by advocates of tougher sanctions as a sanctions loophole).

In addition, Section 103(b)(1) of the bill provides a similar total prohibition on direct or indirect imports of articles of Iranian origin into the United States, thereby effectively resurrecting an earlier ban on imports of carpets and pistachios from Iran.

Expansion of Sanctions Under Iran Sanctions Act, 50 U.S.C. § 1701 Note (ISA)

Section 102 of the bill contains three provisions that would expand and deepen sanctions under the existing ISA. First, the bill would impose mandatory sanctions under the ISA extraterritorially on any person who makes an investment of $20 million or more (or a combination of investments, each of which is at least $5 million and that equal or exceed $20 million in the aggregate in any 12-month period) in the development of “petroleum resources” in Iran. Second, it would do the same to any person who sells, leases or provides to Iran any goods, services, technology, information or support valued at $200,000 or more, or with an aggregate fair market value of $1 million or more during any 12-month period, that could “directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products.” Third, it would impose mandatory sanctions on any person who (i) provides Iran with refined petroleum products valued at $200,000 or more, or having an aggregate fair market value of $1 million or more during any 12-month period; or (ii) who sells, leases or provides to Iran any goods, services, technology, information or support that “could directly and significantly” contribute to the enhancement of Iran’s ability to import refined petroleum products, subject to the above low dollar thresholds. In connection with the third prohibition, the bill specifically cites covered “services” to include underwriting or providing insurance or reinsurance, financing or brokering, as well as providing ships or shipping services to deliver refined petroleum products (the prohibitions thus could directly affect non-U.S. insurers, banks, shipping lines and leasing companies that service Iranian imports of refined petroleum products).

Section 102(b) also adds three new mandatory sanctions under the ISA: (i) a prohibition on foreign exchange transactions by the sanctioned person; (ii) a prohibition on “banking transactions,” defined to mean “transfers of credit or payments” between, by, through or to “any financial institution” (presumably meaning any U.S. financial institution, but this is not expressly stated in the bill); and (iii) a prohibition on “property transactions” (thus effectively blocking assets of the sanctioned party, again presumably to the extent such assets are subject to U.S. jurisdiction, although this is not expressly stated in the bill).

Prohibition on U.S. Government Contracting

Section 103(b)(4) of the bill also would separately bar any U.S. government contracts with a party sanctioned under the ISA.

Report on Sanctionable Activities Under ISA

Section 107 of the bill requires that within 180 days of its enactment, the President must submit to Congress a detailed report on investments and activities that would be sanctionable under the ISA, including by non- U.S. persons. The report is retroactive to January 1, 2009, and is required semi-annually after the initial report. The purpose behind the report is to enable Congress to try to force the President to impose sanctions under the ISA and to break the current practice under which successive U.S. administrations have declined to enforce the ISA because of the questionable legality of its provisions under the WTO rules and because of the diplomatic furor that it caused when it was initially enacted. Other provisions in the House companion bill would seek to make ISA investigations and enforcement by the President mandatory.  

Waivers  

Most of the ISA sanctions provisions in the bill contain a waiver authority that would allow the President not to impose sanctions that are otherwise mandatory, provided he determines that the waiver is in the “national interest” of the United States and he submits a report to Congress describing the reasons for the waiver. Consequently, under the terms of the bill, there may be some flexibility in practice for the President not to apply penalties under the ISA, but he nonetheless would be under increased scrutiny and pressure from Congress to enforce the statute. Other provisions in the bill, such as the export and import ban, do not contain comparable waiver authority.

Liability of Parent Companies for Violations of Sanctions by Foreign Subsidiaries

Section 104(b) of the bill would hold U.S. person parent companies liable for violations of OFAC’s Iran sanctions if they establish or maintain a subsidiary2 outside the United States “for the purpose of circumventing” OFAC sanctions, and if that subsidiary “engages in an act that, if committed in the United States or by a United States person, would violate” OFAC’s sanctions. Holding a U.S. parent liable for the acts of offshore subsidiaries would be a major expansion of the reach of U.S. sanctions on Iran and could be a potential source of friction with U.S. allies and trading partners. How this plays out may depend in large part on how OFAC interprets the language “for the purpose of circumventing.” The inclusion of what appears to be an intent standard in the bill may make enforcement of this provision difficult.