A host of changes to U.S. sanctions on Iran,many of which come into effect on 1 July 2013, were issued in May and June. The changes are primarily targeted at non-U.S. companies that are conducting transactions with Iran, but also include an easing of sanctions for U.S. technology companies. In this Client Alert, the following subjects are covered:
- Lifting of sanctions on certain communications products, such as mobile phones, laptops, internet connectivity equipment, and other equipment, software, and services;
- Sanctions on Iran’s automotive industry;
- Sanctions for conducting business with blocked Iranian entities and the resulting new due diligence requirements for non-U.S. persons;
- Restrictions on the sale of precious and non-precious metals to Iran;
- Additional restrictions on the provision of underwriting, insurance, and reinsurance services for Iran-related transactions;
- New restrictions on banking transactions in Iranian Rials;
- Sanctions on Iran’s shipping, shipbuilding, and energy sectors; and
- Enforcement targeting Iran’s petrochemicals industry.
Three primary actions in May and June of this year have led to a host of changes to sanctions on Iran. Beginning on 30 May 2013, the U.S. Government announced a policy change and issued a general license allowing the export and re-export to Iran of personal communications products. The next day, OFAC sanctioned a host of new companies, with an explicit focus on the Iranian petrochemicals industry. Most importantly, on 3 June, the U.S. President issued an Executive Order to implement and expand the Iran Freedomand Counter-Proliferation Act (“IFCA”), which was enacted last January but for themost part does not come into effect until 1 July 2013.
Background to Expanded Sanctions
The new sanctions continue to expand and rely on three tools with which the U.S. President can penalize non-U.S. persons conducting certain types of transactions with Iran:
First, the U.S. President can freeze the assets of and block transactions with non-U.S. persons by adding the person to the U.S.’s Specially Designated Nationals List.
Second, non-U.S. persons can be denied access to the U.S. economy under the Iran Sanctions Act, as amended by the Comprehensive Iran Sanctions, Accountability and Divestment Act (“CISADA”). CISADA sanctions can be imposed on a non-U.S. person (and parent and sister companies in certain cases), and the list of potential penalties includes denial of access to the U.S. financial system, such as Ex-ImBank financing; prohibiting loans in excess of $10 million; denial of access to capital markets; prohibiting foreign exchange transactions; denial of visas for corporate officers; and prohibiting U.S. government procurement.
Third, for non-U.S. financial institutions, the U.S. President can deny or close U.S. correspondent bank accounts, thereby restricting the institution’s ability to conduct U.S. dollar-denominated transactions. The recent changes in U.S. sanctions expand the U.S. Government’s ability to impose these three types of sanctions to new industries and transactions, as summarized below.
The U.S. Government has sanctioned Iran’s automotive manufacturing industry. Effective 1 July, CISADA sanctions can be imposed on any person that conducts a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.
However, the definition of “automotive sector” includes only the domestic Iranianmanufacturing industry, and does not include the sale to Iran of finished vehicles. The sanctions define “automotive sector” to be themanufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses,minibuses, pick-up trucks, andmotorcycles, as well as original equipmentmanufacturing and after-market partsmanufacturing related to such vehicles.
Exports to Iran of finished spare parts are not explicitly addressed in the sanctions or guidance issued by OFAC, and the key factor for determining whether such exports would be subject to penalty will likely be the end-use and end-user.
Sales to Iran of Personal Communications Products Now Permitted
In an effort to facilitate freedom of expression via social networking and other internet-based communications, the U.S. has eased sanctions (through the issuance of a broad general license) on the export and re-export of personal communications products to Iran, such as laptops andmobile phones. U.S. persons are now permitted to sell specifically identified products and services to Iran, and non-U.S. persons can sell U.S.-origin equipment to Iran. Ancillary banking services for such transactions are likewise permitted.
Effective 30May 2013, the following activities with Iran are among those that are now permitted: internet communication services, such as instant messaging, email, blogging, networking, and web-hosting, as well as the export of software to enable such services; consumer-grade internet connectivity services and transmission capacity leasing; and export and re-export of products specifically listed in the annex to the general license, such as mobile phones,modems, routers, consumer satellite equipment, laptops, tablets, anti-virus, anti-tracking, and anti-censorship software, and virtual private networks. Prohibitions however continue to apply to commercial-grade equipment and services, as well as sales to Specially Designated Nationals, such as the Government of Iran.
Additionally, non-U.S. financial institutions determined to have facilitated a transaction described in this section can be denied a U.S. correspondent account. The imposition of this restriction on ancillary services (banking) in support of the primary prohibition (no exports) is a recurring provision in the sanctions addressed in this Client Alert.
Transactions with Specially Designated Nationals—Due Diligence Requirements
In a change that could affect all types of non-U.S. persons globally, the U.S. has effectively imposed due diligence requirements on non-U.S. persons that are conducting any type of transaction with Iran, directly or indirectly. Non-U.S. persons that deal with a Specially Designated National (“SDN”) from Iran, regardless of industry, now risk also being designated as an SDN. Prior to this change, this penalty was only applicable to transactions with a subset of SDNs, namely those involved in nuclear proliferation, terrorism, and other stringently targeted activities.
Effective 1 June, any company that assists or provides financial,material, or technological support for, or goods or services to or in support of, any Iranian Person on the SDN list can also be designated as an SDN.
An “Iranian Person” is defined as an individual who is a citizen or national of Iran or an entity organized under the laws of Iran or otherwise subject to the jurisdiction of the Government of Iran.
The effect of being designated as an SDN can not be overstated. All U.S. citizens and companies, regardless of location, are required to freeze any assets of an SDN within their possession and are prohibited fromany dealings with an SDN. Under the new sanctions, non-U.S. persons are theoretically forced into the same restrictions vis-à-vis transactions with SDNs.
Non-U.S. persons conducting significant international transactions should now conduct due diligence on their business partners, primarily by screening names against the SDN List. However, for non-U.S. persons with high risk activities or products, this due diligence requirement could extend beyond SDN List screening to include employee training to identify red flags and due diligence to investigate whether the business partner is acting as a front or agent for an Iranian SDN.
IFCA incentivizes the establishment of these compliance programs by providing a safe haven for persons exercising due diligence in establishing and enforcing official policies, procedures, and controls to prevent activity that would subject the person to penalty. This safe haven is a recurring exception in IFCA.
Precious and Non-Precious Metals
In response to the perceived use by Iran ofmetals as amedium for exchange to evade financial sector sanctions, IFCA imposes complicated sanctions on trade inmetals with Iran. These sanctions come into effect on 1 July.
With regard to preciousmetals, any non-U.S. person that sells, supplies, or transfers a preciousmetal to Iran after 1 July, directly or indirectly, can be subject to CISADA sanctions. OFAC has tentatively provided an expansive list of preciousmetals that includes various forms of silver, gold, platinum, iridium, osmium, palladium, rhodium, ruthenium, and waste and scrap of preciousmetal.
With regard to non-preciousmetals, the sanctions are contingent on certain Presidential determinations.Within the coming days (prior to 1 July), the U.S. President is required to issue a determination on whether Iran is using graphite, raw and semi-finishedmetals, and coal (as well as software for integrating industrial processes) as amedium for exchange or an asset for purposes of its national balance sheet. In the event of a positive determination, any person that sells, supplies, or transfers the specifiedmaterial can be subject to CISADA sanctions.
OFAC has tentatively provided an expansive list ofmetals that includes various forms and alloys of steel, aluminum, titanium, beryllium, boron, cobalt, tungsten, copper-beryllium, germanium, graphite, hastelloy, inconel,magnesium,molybdenum, neptunium-237, nickel, niobium, plutonium, porous nickel, tantalum, tellurium, titanium, and zirconium.
Again, non-U.S. financial institutions determined to have facilitated a transaction described in this section can be denied a U.S. correspondent account, and IFCA provides a safe haven for persons exercising due diligence.
Underwriting, Insurance, and Reinsurance
Prior to IFCA, the insurance industry had been severely limited by other U.S. and E.U. sanctions in its ability to provide services to Iran; accordingly, IFCA's additional prohibitionsmight have limited applicability. IFCA authorizes the imposition of CISADA sanctions on any non-U.S. person that, broadly, provides underwriting, insurance, or reinsurance services to any activity or entity that is subject to sanction under the Iran sanctions laws.
As is typical for restrictions on the insurance industry, IFCA again provides a safe haven for persons exercising due diligence.
In an Executive Order issued on 3 June, the U.S. President supplemented the IFCA sanctions by authorizing the imposition of penalties on non-U.S. financial institutions conducting transactions in Iranian Rials.
Effective 1 July, non-U.S. financial institutions can be denied a U.S. correspondent account if the U.S. Government determines that the institution (1) conducted or facilitated any significant transaction related to the purchase or sale of Iranian Rials or a derivative, swap, future, forward or other similar contract based on the Iranian Rial or (2)maintained significant funds or accounts outside of Iran that are denominated in Iranian Rial.
Shipping, Shipbuilding, and Energy
With Iran increasingly relying on its domestic resources to transport its petroleum and petroleum products, IFCA extends U.S. sanctions on Iran’s petroleum industry to the remainder of the Iranian energy sector, as well as shipping and shipbuilding. These sanctions will go into effect on 1 July.
IFCA permits the U.S. Government to penalize non-U.S. persons that provide significant financial, material, technological, or other support to, or goods or services in support of, the Iranian energy, shipping, shipbuilding or port operations sectors. The penalties that can be imposed are CISADA sanctions and designation as an SDN.
OFAC has provided a tentative definition for the “energy sector.” The energy sector is expected to include activities involving the exploration, extraction, production, refinement, or liquefaction of petroleum, natural gas, or petroleum products in Iran, with limited exceptions.
Again, non-U.S. financial institutions determined to have facilitated a transaction falling into the prohibitions described in this section can be denied a U.S. correspondent account, with several large exceptions.
On 31 May 2013, the U.S. Government announced a set of new SDN designations that explicitly focused on the Iranian petrochemicals industry. In its press release, the U.S. Government stated that the Government of Iran is increasingly using its petrochemicals industry tomake up for the drop in revenue fromthe petroleum sector and that the petrochemicals sector has become Iran’s second biggest generator of foreign currency. The SDN designations included eight Iranian petrochemical companies and two non-Iranian companies that are alleged to havemade significant purchases from the Iranian petrochemicals industry.
The new designations raise the profile and risk-level of persons that continue to transact business with the Iranian petrochemicals industry. Combined withminor amendments to sanctions laws to allow for the sanctioning of persons that transport or market Iranian petrochemicals, the U.S. Government is signaling a new enforcement priority.