US Administration Explains Which Industries Need to Worry About the Latest Round of US Economic Sanctions on Iran—and Hints at What Can Be Done to Reduce Risk—Due Diligence

On June 3, 2013 President Barack Obama signed a lengthy new Executive Order 13645 “Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA)1  and Additional Sanctions with Respect to Iran.”2

The new Executive Order, which takes effect on July 1, 2013, does two things:

  • It implements certain sections of IFCA, which authorized broad sanctions on certain activities related to certain specified industrial sectors in Iran such as energy, shipping, shipbuilding, precious metals, and more; and
  • It authorizes additional sanctions on new industrial sectors, including the Iranian automotive sector and foreign financial transactions denominated in the Iranian Rial.

The full text of the Executive Order 13645 can be found here.

Also on June 3rd, the Department of Treasury Office of Foreign Assets Control (OFAC) issued FAQ guidance on both IFCA and the new Executive Order, which can be found here. Please see FAQs 287 through 312.

In their essence, these new sanctions (and implementation of IFCA sanctions) mean that non-U.S. companies who are active in a far broader set of industries need to be worried about screening their transactions to make sure they are not directly or indirectly supporting the Iranian sectors in question thereby triggering the potential application of the future U.S. sanctions. Indeed, because certain of the IFCA sanctions explicitly create a defense for exercising “due diligence in establishing and enforcing official policies, procedures and controls” to ensure that the sanctionable conduct does not occur, companies active in these sectors should pay special attention to the due diligence procedures in their trade compliance programs.

Below is a list identifying the industries of concern and the types of goods and services companies need to watch out for:  

IFCA section 1244 makes it a sanctionable act to knowingly sell, supply, or transfer to or from Iran “significant” goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran, the National Iranian Oil Company (NIOC), the National Iranian Tanker Company, and the Islamic Republic of Iran Shipping Lines (IRISL).

“Shipping Sector” means:

  • Activities involving the transportation of goods by seagoing vessels, including oil tankers and cargo vessels, flying the flag of the Islamic Republic of Iran, or owned, controlled, chartered, or operated directly or indirectly by the Government of Iran (GOI). Two examples are the National Iranian Tanker Company and the Islamic Republic of Iran Shipping Lines (FAQ 293).

Goods and services used in connection with the shipping sector means:

  • The provision of crude and product tankers to Iran;
  • The provision of registry, flagging, or classification services of any kind;
  • The supervision of and participation in the repair of ships and their parts;
  • The inspection, testing, and certification of marine equipment materials and components;
  • The carrying out of surveys, inspections, audits and visits, and the issuance, renewal or endorsement of the relevant certificates and documents of compliance, as they relate to ships and shipping; and
  • Any other goods or services relating to the maintenance, supply, bunkering, and docking of vessels flying the flag of the Islamic Republic of Iran, or owned, controlled, chartered, or operated directly or indirectly by, or for or on behalf of the GOI or an Iranian person (FAQ 295).

Note: OFAC will identify persons who are part of Iran’s energy, shipping or shipbuilding sectors or who are port operators in Iran on the Specially Designated Nationals (SDN) list (FAQ 294).

Energy Sector” means:

  • Activities involving the exploration, extraction, production, refinement, or liquefaction of petroleum, natural gas, or petroleum products in Iran (FAQ 293).

Goods and services used in connection with the energy sector means:

  • Iran’s ability to develop its domestic petroleum resources;
  • The maintenance or expansion of Iran’s domestic production of petroleum products; and
  • Iran’s ability to import or export petroleum or petroleum products (FAQ 295).

Note:  OFAC will identify persons who are part of Iran’s energy, shipping or shipbuilding sectors or who are port operators in Iran on the SDN list (FAQ 294).

“Shipbuilding Sector” means:

  • Activities involving the construction of seagoing vessels, including oil tankers and cargo vessels, in Iran (FAQ 293).

Goods and services used in connection with the energy sector means:

  • The building and refit of vessels;
  • The provision or refit of items such as (i) steam turbines and their parts for marine propulsions, (ii) marine propulsion engines and parts used solely or principally with them, (iii) other gas turbines for marine propulsion, (iv) ship or boat propellers and blades, and (v) direction finding compasses and other navigational instruments and appliances solely for the maritime industry;
  • Other goods used in connection with building and propulsion of vessels and relating to, and financing of, the building, maintenance or re-fitting of vessels (FAQ 295).

Note:  OFAC will identify persons who are part of Iran’s energy, shipping or shipbuilding sectors or who are port operators in Iran on the SDN list (FAQ 294).

“Automotive Sector” 4  means:

  • The manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing related to such vehicles (FAQ 310).

Goods and services used in connection with the automotive sector are those that contribute:

  • To Iran’s ability to research, develop, manufacture, and assemble light and heavy vehicles; and
  • The manufacturing or assembling of original equipment and after-market parts used in Iran’s automotive industry (FAQ 311).  

IFCA section 1245(a)(1)(A) makes it a sanctionable act to knowingly sell, supply, or transfer to or from Iran a precious metal.

“Precious metals” will include:

  • silver (including silver plated with gold or platinum) unwrought, in semi-manufactured forms, or in powder form; gold (including gold plated with platinum) unwrought, in semi-manufactured forms, or in powder form; base metals or silver, clad with gold, not further worked than semi-manufactured; platinum, unwrought, in semi-manufactured forms, or in powder form; iridium; osmium; palladium; rhodium; ruthenium; base metals, silver or gold, clad with platinum, not further worked than semi-manufactured; waste and scrap of precious metal or of metal clad with precious metals, other waste and scrap containing precious metal or precious-metal compounds, of a kind used principally for the recovery of precious metal (FAQ 299).

IFCA section 1245(a)(1)(B) makes it a sanctionable act to knowingly sell, supply, or transfer to or from Iran graphite, raw or semi-finished metals such as aluminum and steel, coal and software for integrating industrial processes if those materials will be used in the energy, shipping or shipbuilding sectors, or any sector of the Iranian economy controlled by the Iran’s Revolutionary Guard Corps (“IRGC”)5 , by an SDN, or for nuclear, military or ballistic missile programs of Iran. The due diligence exception applies to this IFCA provision.

“Graphite, raw, or semi-finished metals” will include:

  • steels; aluminum metal and its alloys; base metals of single or complex borides of titanium; beryllium metal and its alloys; boron metal and its alloys; cobalt metal and its alloys; copper infiltrated tungsten metal; copper-beryllium metal; germanium metal and its alloys; graphites; hastelloy; inconel; magnesium metal and its alloys; molybdenum metal and its alloys; neptunium-237 metal and its alloys; nickel metal and its alloys; nickel aluminide metals; niobium metal and its alloys; niobium-titanium filaments; plutonium metal and its alloys; porous nickel metal; silver infiltrated tungsten metal; tantalum metal and its alloys; tellurium metal and its alloys; titanium aluminide metals; titanium metal and its alloys; tungsten metal, tungsten carbide metal, and their alloys; uranium titanium alloy metals; and zirconium metal and its alloys and compounds (FAQ 298).  

“Insurance, reinsurance, or underwriting” services are sanctionable if:

  • Provided to individuals on the SDN List.
  • Exceptions:
    • Transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran or for the provision of humanitarian assistance to the people of Iran can be insured, reinsured, or underwritten.
    • Treasury can determine that a person providing insurance, reinsurance, or underwriting to an SDN has established and enforced official policies, procedures, and controls to ensure that the person does not underwrite or enter into a contract to provide insurance or reinsurance for activities targeted under section 1246 of IFCA (FAQs 303 and 304).

The due diligence exception applies to this IFCA provision.

What goods and services are “significant” for purposes of IFCA and Executive Order sanctions employing that qualifier? Apparently OFAC will know it when it sees it. FAQ 289 states that OFAC intends to rely on the interpretation set forth in 31 CFR 561.404 of the Iranian Financial Sanctions Regulations, which provides a list of broad factors that can play a role in the determination whether transactions, financial services, and financial transactions are significant, including:

  1. the size, number, and frequency of the transactions, financial services, or financial transactions;
  2. the type, complexity, and commercial purpose of the transactions, financial services, or financial transactions;
  3. the level of awareness of management and whether the transactions are part of a pattern of conduct;
  4. the nexus of the transactions, financial services, and financial transactions and blocked persons;
  5. the impact of the transactions, financial services, and financial transactions on statutory objectives;
  6. whether the transactions, financial services, and financial transactions involve deceptive practices;
  7. whether the transactions solely involve the passive holdings of Central Bank of Iran (CBI) reserves or repayment by the CBI of official development assistance or the transfer of funds required as a condition of Iran’s membership in an international financial institution; and
  8. other relevant factors that the Secretary of the Treasury deems relevant.

Implementation of IFCA

The Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”) was signed into law on January 2, 2013 as part of the National Defense Authorization Act for Fiscal Year 2013. IFCA authorizes broad sanctions against activities related to a variety of Iranian industries including the energy, shipping, and shipbuilding sectors. IFCA also targets the sale of precious and other certain metals, graphite, coal, and industrial software.

OFAC’s new FAQs provide some guidance on the meanings of these terms, as we indicated in the above chart. Otherwise, the Executive Order does a couple things to implement specific portions of IFCA.

IFCA sanctions related to the diversion of goods (e.g. agricultural commodities and medicine) for the Iranian people:  The part (Section 8) of the Executive Order that implements IFCA focus on the implementation of section 105C of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) as amended by section 1249 of IFCA. This provision authorizes the blocking of property and interests in property and suspends the entry into the United States of persons determined to have engaged, on or after January 2, 2013, in corruption or other activities relating to the diversion of goods—such as agricultural commodities, food, medicine, and medical devices—intended for the Iranian people, or the misappropriation of proceeds from the sale or resale of such goods.  The reach of this section is broad—it applies to anyone providing material support to persons engaged in such corruption and to persons owned or controlled by, or acting on behalf of, persons engaged in corruption.

IFCA related sanctions on foreign financial institutions doing “Significant Financial Transactions” with SDNs or the Iranian Automotive Sector (New Sanction):  Additionally, Section 3 of the Executive Order tightens financial sanctions applicable to foreign financial institutions under section 1247 of IFCA by sanctioning foreign financial institutions that knowingly conducted or facilitated significant financial transactions on behalf of Iranian individuals on OFAC’s SDN list, or a transaction related to goods or services used in connection with the automotive sector of Iran.

For such institutions, the Secretary of Treasury may “prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account.” The Secretary may also block all the institution’s property and interests in property that are in the United States or later comes into the United States.

The order does provide for a few exceptions to the restrictions on “significant financial transactions.” The exceptions include the following:

  • Petroleum and Petroleum Products: The significant financial transaction restrictions only apply to the purchase of petroleum products from Iran if the President determines under subsection 1245(d) of the National Defense Authorization Act for Fiscal Year 2012 (2012 NDAA) that there is a sufficient supply of petroleum from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.
  • Natural Gas: The significant financial transaction restriction does not apply when the transaction is for the transfer of natural gas to or from Iran and the transaction is solely for trade between Iran and the country with primary jurisdiction over the foreign financial institution conducting or facilitating the transaction.
  • Humanitarian Exception: The restrictions do not apply to transactions for the provision of agricultural commodities, food, medicine, and medical devices to Iran.

Menu of sanctions for various IFCA provisions:  Additionally, Section 7 of the Executive Order provides a menu of the sanctions options that the agencies may use against individuals sanctioned under both Section 5 of this new Executive Order (discussed further below) or sanctioned under the following IFCA sections:

  • 1244(d)(1)(A) (sanctions on the supply of goods and services in connection with the Iranian energy, shipping or shipbuilding sectors),
  • 1245(a)(1) (sanctions on the supply of goods and services in connection with precious metals, graphite, raw or semi-finished metals, and industrial process software), and
  • 1246(a)(1) of IFCA (provision of insurance and reinsurance services).

New Sanctions Related to Foreign Financial Institutions and the Iranian Rial

In addition to implementing the IFCA sanctions, the Executive Order authorizes the sanctioning of foreign financial institutions in multiple ways. One important new sanction is related to foreign financial institutions that use the Iranian rial for transactions. Specifically, the Executive Order sanctions foreign financial institutions that knowingly conducted or facilitated a “significant” transaction related to the purchase or sale of Iranian rials or other financial transactions whose value is based on the exchange rate for rials, or that maintains significant funds or accounts outside the territory of Iran denominated in the Iranian rial.

For such institutions, the Secretary of Treasury may “prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account.” The Secretary may also block all the institution’s property and interests in property that are in the United States or later comes into the United States.

New Sanctions Related to the Automotive Sector of Iran

The Executive Order authorized the imposition of new sanctions against persons, meaning business entities or individuals, involved in transactions related to the automotive sector of Iran. The sector had until now escaped the focus of the US Government’s sanctions efforts, but now will be under intense scrutiny. Specifically, section 5(a) of the Executive Order expands sanctions to persons that:

[O]n or after the effective date of this order, knowingly engaged in 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.

Section 5 also identifies additional individuals for sanctions as they relate to those identified under section 5(a), namely:

  • successor entities;
  • persons that own or control the  person;
  • persons that are owned or controlled by the person; and
  • executive officers of those entities (or the equivalent thereof).

Section 14(a) defines “Automotive sector of Iran” as “the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing related to such vehicles.”

The Executive Order authorizes the Secretary of State and the Secretary of Treasury to impose any of a number of penalties and restrictions on persons meeting the Section 5 criteria. Below are just some of the possible penalties and restrictions that sections 6 and 7 of the order authorize. Under the order the respective Secretaries may:

  • Prevent the export-import bank from issuing guarantee, insurance, or extensions of credit to the sanctioned person;
  • Prevent agencies from granting specific licenses or other permission for exporting and importing;
  • Prevent agencies from entering procurement contracts for goods or services from a sanctioned person;
  • Deny a visa to, and exclude from the United States, any alien that is determined to be a corporate officer or principal of, or a shareholder with a controlling interest in, a sanctioned person.
  • Prohibit US financial institutions from making loans or providing credits to a sanctioned person totaling more than $10,000,000 in any 12-month period;
  • Prohibit any transactions in foreign exchange subject to the jurisdiction of the United States and in which the sanctioned person has any interest;
  • Block the property or interests of property in the US of a sanctioned person.

Companies engaged in the activities described in Section 5 have until July 1, 2013 to wind down business with the “Automotive Sector of Iran” or risk the imposition of the above described sanctions.

Other Persons Subject to Sanction – Persons Helping SDNs

In addition to foreign financial institutions and the automotive sector of Iran, the new Executive Order identifies other activities that, if engaged in, will trigger additional sanctions. For example, Section 2 of the order authorizes the blocking of property of persons that have materially assisted, sponsored, or provided support for, or goods or services to or in support of, any Iranian person on the OFAC SDN list (other than Iranian depository institutions whose property interests are blocked solely pursuant to E.O. 13599).

Conclusion

This new Executive Order and the OFAC FAQs are noteworthy because they:

  • Give some degree of definition to the IFCA sanctions, providing to the affected industries the specific areas where they need to implement additional controls to avoid unwittingly becoming a target of U.S. sanctions, and explaining that due diligence is a defense, at least to two of the sanctions.
  • Target directly Iran’s currency, which is reportedly suffering greatly due to international sanctions, by authorizing the imposition of actions on foreign financial institutions that continue to support transactions involving the Iranian Rial.
  • Adds substantial sanctions against the automotive sector of Iran, which the US government had not previously targeted for sanctions by authorizing sanctions on third country companies supporting that sector.

The Executive Order is likely the result of US government efforts to increase pressure on the Government of Iran while at the same time as it continues efforts, as evidenced in the issuance of General License D on May 30, 2013 (see here), to provide avenues to support the personal communication of the Iranian people.