New EU Sanctions Against Iran
On October 27, 2010, the European Council published Council Regulation (EU) No 961/2010 (“the Regulation”)1, imposing enhanced economic sanctions against Iran. The Regulation represents the culmination of several months of deliberation by the European Union on Iran sanctions (as summarised in our June 28 and August 3 client alerts), and represents a significant expansion of the pre-existing EU-Iran sanctions regime, which dates back to 2007. The Regulation is effective as of October 27, 2010, and is directly applicable in all EU Member States.
The Regulation expands the pre-existing EU-Iran sanctions regime in several areas, including export controls (with a particular focus on export restrictions for oil and gas companies), and various restrictions on insurance and other financial services. The principal elements of the new EU-Iran sanctions regime are summarized below.
Scope of regulation
The jurisdictional scope of the Regulation is set out in Article 39. The scope of the Regulation is consistent with the standard approach taken by the EU in other financial sanctions measures: the Regulation will extend to any EU entity or individual on a worldwide basis and to any activities by any person or entity (regardless of nationality) that occurs within the territory of an EU Member State. The Regulation also extends to activities on board any aircraft of vessel that is subject to the jurisdiction of a Member State.
Consistent with other EU financial sanctions measures, the Regulation will be administered and enforced by the individual Member States. Accordingly, penalties for violations of the Regulation will vary, depending upon the implementing laws of the Member State that holds jurisdiction over the infraction.
Export and import control restrictions
The Regulation contains multiple annexes, five of which specify a range of products and materials that are either prohibited for export to Iran, or require case-by-case export licensing.
- Annex I includes goods, software, and technology that fall within the EU Dual Use List,2 with the exception of certain items controlled for telecommunications or encryption reasons. Dual use items previously were subject to case-by-case licensing for export to Iran (and many EU Member States granted licenses for dual use exports to Iran as a matter of routine), but are now prohibited outright. Notably, the Regulation includes no “grandparenting clause” for Annex I items that would permit exports of products covered under contracts that predate the Regulation. Accordingly, it would appear that any pre-existing export licenses for Annex I items may no longer be valid.
- Annex II sets forth additional items that are not on the EU Dual Use List, but which have potential applications relative to Iran’s efforts to develop weapons of mass destruction (“WMD”). Annex II items are also prohibited for export to Iran. Annex IV includes additional items with potential WMD applications, but for which case-by-case licensing will apply. The Annex II and IV items were previously restricted under the EU-Iran sanctions regulations issued in 2007 (formerly Annex I and Annex II items).
- Annex III items, which likewise are subject to an export prohibition, include certain firearms, explosives, and other military, police, and paramilitary-related items and devices that have been identified as having potential application for internal repression purposes.
- Annex VI contains a new list of goods, software, and technology that are specific to the oil and gas sector. Annex VI contains a very broad range of items relevant to oil and gas exploration and refining activities and should be reviewed carefully by any EU entities who conduct oil and gas-related business with Iran. In contrast to Annex I, the export controls on Annex VI items are subject to a grandfathering provision in Article 10 of the Regulation. Pursuant to Article 10, sales of items under a contract concluded before October 26, 2010, or a contract or agreement concluded and relating to an investment in Iran made before July 26, 2010 will not be prohibited. However, in order to take advantage of the grandparenting clause, the exporting party must provide a 20-day notice to the competent authority in the EU Member State where it is established. (In the United Kingdom, the Department for Business, Innovation & Skills’ Export Control Organisation has publishedguidance on its website explaining how the grandparenting clause notification procedure will be administered for exports by UK entities.)
- Items on Annexes I, II, and III also may not be imported from Iran into the EU. This restriction applies irrespective of whether the items originated in Iran or elsewhere.
Technical assistance and brokering services relating to the above products also may not be provided to Iranian entities or in Iran, and financing and financial assistance are likewise restricted.
- “Technical assistance” includes “any technical support related to repairs, development, manufacture, assembly, testing, maintenance, or any other technical service, and may take forms such as instruction, advice, training, transmission of working knowledge or skills, or consulting services; including verbal forms of assistance.”
- “Brokering” services is defined to include “the negotiation or arrangement of transactions for the purchase, sale, or supply of goods and technology from a third country to any other third country,” or “the selling or buying of goods and technology that are located in third countries for their transfer to another third country.”
The Regulation does not define the terms “financing” or “financial assistance.” The concepts of “technical assistance,” “brokering services,” and “financing” or “financial assistance” will encompass at least some technical services and sales-related tasks relating to items that are restricted for export to Iran. Notably, these services-related restrictions apply to any EU persons and entities, even if the products in question are exported from locations outside of the European Union. The restrictions also apply to Iranian nationals located outside of Iran, excluding Iranian nationals who do not currently reside in Iran. Accordingly, the “technical assistance” restriction effectively imposes a restriction on sharing controlled technical information with Iranian residents, even if the information is shared among individuals within a given country (a restriction similar, in effect, to the “deemed export” rule that prevails in the US export controls regulations).
Finally, the Regulation prohibits the provision of technical assistance related to the goods and technology in the EU Common Military List. (Other pre-existing regulations prohibit the export of military items to Iran.)
Further financial and insurance restrictions
The Regulation imposes various additional financial restrictions on doing business with Iran, including the following principal measures:
- Article 11 generally prohibits (subject to exceptions delineated in the Regulation) the investment in or establishment of a joint venture with any Iranian person, entity, or body which is engaged in the manufacture of goods listed in the Common Military List, Annex I, Annex II, Annex III, or in the exploration or production of crude oil and natural gas, fuel refining, or liquefaction of natural gas. It is also restricted to provide financing or credits to these entities. (Prior authorization for these activities is required for any Iranian entity engaged in the manufacture of Annex IV items.)
- Chapter IV of the Regulation reasserts the asset-freezing regime reflected in the earlier EU-Iran sanctions regulations in respect of any Iranian parties who are specially designated for EU financial sanctions. This list includes most of the major financial institutions in Iran and their worldwide affiliates (which, notably, includes a number of entities located within the EU).
- Article 21 requires the prior notification of payments or receipts of funds to or from Iran of more than €10,000 and prior approval for transfers above €40,000. Transfers for humanitarian purposes do not require advance approval but must be notified in advance to the authorities of the relevant Member State if they amount to €10,000 or more. These notification and approval requirements will be administered by the Member States, and a number of Member States have already issued guidance on this process.3
- Articles 22 to 25 restrict dealings with Iranian financial institutions, and impose heightened due diligence and documentation requirements for EU financial institutions in connection with Iran-related transactions. This includes a requirement that EU financial institutions ensure that in payment instructions all information fields relating to the originator and benificiary are completed, and to refuse transactions if that information is not provided. This is intended to counter a common practice of parties involved in Iran-related business to not include Iranian entities on payment-related documentation (this practice has been a source of a number of very large penalties under the United States’ economic sanctions against Iran).4
- Article 26 prohibits the provision of insurance or reinsurance to Iran, its government, public bodies, corporations, agencies, Iranian persons, entities, or bodies other than natural persons. These prohibitions concern EU-based insurers and reinsurers, (re)insurance intermediaries, as well as the activities of EU nationals on a worldwide basis. They do not apply to existing contracts concluded before October 27, 2010, until they come up for renewal. This means that activities in relation to the settlement of claims can be maintained subject to the applicable notification requirements for payments or receipt of funds under Article 21 of the Regulation. An exemption is also provided for the provision of compulsory or third party insurance to Iranian persons, entities, or bodies based in the EU. Also excluded from the restriction is the provision of personal insurance (e.g. health and travel insurance) to individuals acting in their private capacity (unless the persons are listed in Annexes VII and VIII). These prohibitions will not give rise to liability if EU entities and nationals did not know and had no reason to suspect that their action would infringe the applicable sanctions.
- Article 15 prohibits any person subject to the Regulation from “accepting” or “approving” financial transactions relating to uranium mining or enrichment in Iran or the manufacture of goods restricted under the UN Nuclear Suppliers Group or Missile Technology Control Regime lists.
- Article 27 imposes pre-arrival and pre-departure inspection requirements for cargo destined to or from Iran. This may result in delays or additional customs requirements for all shipments to/from Iran.
- Article 28 restricts the provision of bunkering or supply ship services for vessels owned/controlled by Iranians or maintenance services to cargo aircraft, where the vessels or aircraft may be carrying products restricted for export to Iran under the Regulation.
With the Regulation, the EU has imposed the most significant financial sanctions regime against a specific country since the Iraq embargo in the 1990s, and perhaps the broadest unilateral EU sanctions regime ever (although some aspects of the Regulation are required under UN Security Council Regulations, most of the measures are unilateral in nature). Many aspects of the Regulation introduce novel concepts – in particular, the broad technical assistance restrictions and many of the financial services restrictions – that have not previously been featured in EU export controls or sanctions measures. It remains to be seen how the various aspects of the Regulation will be interpreted and administered by the Member States and how aggressive the Member States will be at investigating and enforcing potential violations.
At the same time, it should be noted that the EU has declined to impose comprehensive trade sanctions on Iran, in contrast to the approach adopted by the United States.5 EU entities still may conduct business with Iran and invest in Iran (subject to the specific investment restrictions for certain sectors that are set forth in the Regulation), and EU persons generally are not restricted from “facilitating” business by other countries with Iran (again, in contrast to the US economic sanctions regulations). Nevertheless, the Regulation imposes substantial additional restrictions, and/or licensing requirements, for a wide range of EU entities who conduct business with Iran.