Effective February 27, 2012, the U.S. Office of Foreign Assets Control (OFAC) issued a final rule (the “Rule”) implementing Section 1245(d) of the National Defense Authorization Act for Fiscal Year 2012 (NDAA), which requires the imposition of sanctions on the Central Bank of Iran and designated Iranian financial institutions (see Alston & Bird LLP International Trade & Regulatory Group Advisory “Congress Finalizes New Sanctions Legislation Aimed at Foreign Banks Over Iran Trade” (Dec. 16, 2011)). The Rule amends OFAC’s Iranian Financial Sanctions Regulations (31 C.F.R. Part 561) and reissues them in their entirety. It also implements certain provisions of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA).
Highlights of the Rule
Highlights of the Rule include the following points:
- Section 561.201 of the Rule implements CISADA sanctions on foreign financial institutions designated under that statute. A separate section, 561.203, implements sanctions on foreign financial institutions designated under the NDAA. Although provisions of the two separate statutes are implemented by the Rule, it specifically makes civil and criminal penalties under the International Emergency Economic Powers Act (IEEPA) applicable to violations of the provisions of both statutes implemented by the Rule. These penalties are in addition to any sanctions under the two statutes and thus represent an express application to IEEPA authorities to both CISADA and the NDAA. Civil penalties under IEEPA include fines of up to the greater of $250,000 or twice the value of the transaction per violation, and criminal penalties include imprisonment for up to 20 years and fines of up to $1 million per violation.
- Section 561.701 of the Rule extends the IEEPA civil penalty liability under both statutes to a U.S. financial institution parent whose subsidiary (including any offshore subsidiary) attempts to violate or conspires to violate or cause a violation of the NDAA or CISADA prohibitions contained in the Rule. The Rule thus has extraterritorial reach.
- Sections 561.318 through 561.327 of the Rule define the terms used in Section 561.203 implementing the NDAA, including such key terms as “petroleum,” “petroleum products” and “food, medicine and medical devices.”
Importantly, Section 561.404 sets forth the factors that Treasury will consider in determining whether a transaction is “significant” for purposes of both the NDAA and CISADA. Those factors include:
- the size, number and frequency of the transactions over a period of time, including whether they are increasing or decreasing;
- the nature of the transactions, including their type, complexity and commercial purpose;
- the level of awareness by management and whether the transactions were part of a pattern of conduct or the result of a business development strategy;
- the proximity between the foreign financial institution engaged in the transactions and the blocked person (direct versus indirect or tertiary relationships);
- the impact of the transactions on the objectives of the NDAA or CISADA, including the economic benefit conferred and whether the transactions contribute to proliferation of weapons of mass destruction or support for international terrorism, or to suppression of human rights, or whether they increase Iran’s crude oil revenues or support humanitarian activity;
- whether the transactions involve deceptive practices;
- whether the transactions involve the mere passive holding of Central Bank of Iran reserves by a foreign financial institution; and
- other relevant factors on a case-by-case basis.
- OFAC clarifies that it may exercise the same IEEPA authorities that are used in OFAC’s other IEEPA-based sanctions programs, in addition to authorities under Section 104 of CISADA, to investigate, regulate or prohibit transactions under the Rule.
- The Rule establishes a “List of Foreign Financial Institutions Subject to Part 561” (the “Part 561 List”), which will be a new list maintained on OFAC’s website and published in the Federal Register. The Part 561 List will contain the names of foreign financial institutions designated under the NDAA and/or CISADA.
- An amendment to Section 561.504 of the Rule authorizes a 10-day wind-down period for transactions to close a correspondent or payable-through account for a Part 561 List foreign financial institution, beginning on the effective date of the institution’s designation under the NDAA or CISADA.
- The Rule provides for case-by-case specific licensing for wind-down transactions not otherwise specifically authorized by the Rule or which occur beyond the 10-day period authorized by the Rule.
- A U.S. financial institution that maintains a correspondent or payable-through account for a foreign financial institution designated on the Part 561 List must file a report with OFAC that provides full details of the account within 30 days after its closure.
- In an assertion of extraterritorial jurisdiction, Section 561.202 of the Rule states that any person owned or controlled by a U.S. financial institution (including an offshore controlled subsidiary) is prohibited from knowingly engaging in any transaction with or benefitting Iran’s Islamic Revolutionary Guard Corps (IRGC) or any of its agents or affiliates whose property is blocked pursuant to IEEPA. “Knowingly” specifically includes “reason to know.” Moreover, the Rule subjects any U.S. financial institution to IEEPA civil penalties if any person that it owns or controls (including any such person offshore) violates this prohibition and if the U.S. financial institution parent knew or should have known of the violation.
- The Rule incorporates and sets forth the relevant menus of sanctions under the NDAA and CISADA.
- The Rule also sets forth the effective date (February 29, 2012) for sanctions against “privately owned foreign financial institutions” with respect to “significant financial transactions” that are not for the purchase of petroleum or petroleum products from Iran. It also sets forth the effective date (June 28, 2012) for sanctions with respect to similar transactions by privately owned financial institutions for the purchase of petroleum or petroleum products from Iran. Finally, it sets forth the effective date (June 28, 2012) and various presidential determinations for imposition of sanctions on government-owned or controlled foreign financial institutions, including foreign central banks, for “significant financial transactions” for the sale or purchase of petroleum or petroleum products to or for Iran.
- The Rule makes clear that sanctions shall not be imposed for the sale of food, medicine or medical devices to Iran. It adopts commonly used definitions of “medicine” and “medical devices” and makes clear that “food” includes vitamins, minerals and food additives and supplements.
- Unlike other OFAC sanctions programs, Section 561.309 of the Rule defines “U.S. financial institution” not to include such an institution’s foreign branches.
- Section 561.320 of the Rule defines the term “Iranian financial institution” to mean any financial institution organized under the laws of Iran or “any jurisdiction within Iran.” Thus, like the statutory language in the NDAA, it appears to cover within the definition any third-country bank or institution operating “within Iran,” although the wording is not entirely clear on this point and may require clarification from OFAC as to its intended scope.