Today the US Department of State published a Federal Register notice finding that Naftiran Intertrade Company (“NICO”) has engaged in a sanctionable investment under section 5(a)(1) of the Iran Sanctions Act of 1996 (“ISA”), 50 U.S.C. § 1701 note. (See 75 Fed. Reg. 62,916 (Oct. 13, 2010).) The ISA targets foreign companies and entities involved in sanctionable conduct regarding the Iranian petroleum, nuclear, and advanced weapons sectors, even if the conduct occurs offshore and has no connection to the United States. Prior to this determination, no other investments or projects by foreign persons had ever been found sanctionable under the ISA. In 1998, President Clinton determined that a proposed $2 billion investment by Total of France, Gazprom of Russia, and Petronas in Malaysia involving Iran’s South Pars gas field could be sanctionable under the ISA. However, the President waived sanctions after receiving assurances from the European Union and Russia about helping efforts to stop Iran’s development of weapons of mass destruction and promotion of terrorism.

The notice does not describe the specific investment activity by NICO that has been determined to be sanctionable under the ISA. During a press briefing on September 30, 2010, James B. Steinberg, Deputy Secretary of State, announced that the United States would impose sanctions against NICO. Mr. Steinberg stated that NICO, which is based in Switzerland, is an international trading company and a wholly owned subsidiary of the National Iranian Oil Company. Reportedly, NICO has provided millions of dollars of financing for development projects in Iran’s petroleum sector.

The notice states that NICO’s investment was in effect on the day before the enactment of recent amendments to section 5(a) of the ISA, pursuant to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), Pub. L. No. 111-195 (July 1, 2010). Therefore, under section 6 of the ISA, the President had six optional sanctions available to impose on NICO. (As a result of amendments effected by the CISADA, three additional sanctions options are now included in ISA.) The Secretary of State imposed on NICO the following four sanctions, even though only two sanctions were required by the language of the ISA:

  1. Denial of US Export-Import Bank assistance in approving, guaranteeing, insuring, extending credit, or participating in the extension of credit regarding the export of any goods or services to NICO;
  2. Denial of US government licenses or other approvals required to export or reexport goods or services to NICO;
  3. Prohibition of loans or credits to NICO by US financial institution totaling more than $10 million in any twelve-month period, unless the loans or credits are provided as assistance to NICO’s activities to relieve human suffering; and
  4. Ban on the US government procuring, or entering into any contract for the procurement of, any goods or services from NICO.

Because NICO was an offshore subsidiary of the National Iranian Oil Company, NICO was already off limits to US companies, US foreign assistance, and the US economy. Therefore, the additional sanctions imposed under the ISA do not materially affect NICO vis-à-vis US business opportunities and access to US resources. Furthermore, this action does not involve the expanded sanctions as authorized by the CISADA.

Nevertheless, this decision represents a significant step. As evident from press reports and letters from members of Congress, foreign companies with business ties to Iran remain under scrutiny. The US government apparently will use the ISA as a tool to impose sanctions against foreign persons if they do not cease their sanctionable conduct involving Iran. For example, in the same press statement involving NICO, Mr. Steinberg of the US State Department announced that Total of France, Statoil of Norway, Eni of Italy, and Royal Dutch Shell of the United Kingdom and the Netherlands have promised to end their investments in Iran’s energy sector. These companies reportedly have provided assurances to the US government about stopping, or taking significant steps to stop, their business activities in Iran. By so doing, the US government apparently is using the “Special Rule” enacted by the CISADA in order to forego a determination of sanctionable conduct by these companies. (The Special Rule allows firms to avoid sanctions by taking steps to curtail and eliminate covered business involving Iran, generally requiring written assurances about current and future activities that are transparent, credible, and verifiable by the US government.)