On July 1, 2013, a broad array of additional sanctions on non-US companies that engage in activities in Iran will take effect. The new sanctions were authorized under the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) (Subtitle D, §§ 1241-1255), which was enacted on January 2, 2013, as part of the National Defense Authorization Act for Fiscal Year 2013 (NDAA 2013), and under Executive Order 13645 (EO 13645), which was signed by the President on June 3. Together, IFCA and EO 13645 add an additional layer of penalties for non-US companies and financial institutions that provide support to Iran’s energy, shipping, or port sectors; provide certain precious metals to Iran; provide insurance services for sanctionable activities; engage in transactions with certain Specially Designated Nationals (SDNs); or engage in transactions relating to goods or services used in Iran’s automotive sector.
The IFCA requires the State Department to sanction foreign parties for providing significant financial or material support to Iranian entities in key economic sectors, including energy, shipping, ports, precious metals, and other materials. The Treasury Department must also impose sanctions on non-US entities engaging in transactions with Iranian persons on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). The IFCA further imposes sanctions on companies that provide underwriting services, insurance, or reinsurance with respect to sanctioned Iran-related activities.
EO 13645 implements IFCA and authorizes the Treasury Department to impose additional sanctions on foreign financial institutions that knowingly conduct or facilitate any significant transactions relating to or based upon Iran’s currency (the rial), to its automotive sector, and to its petroleum exports. It also expands sanctions against persons that materially assist or provide support to any Iranian person on the SDN List.
Sanctions on Transactions Involving the Energy, Shipping, and Shipbuilding Sectors
IFCA section 1244(c) requires the President to block all transactions subject to US jurisdiction involving any person – including non-US parties – that the President determines:
- is part of the energy, shipping, or shipbuilding sectors of Iran;
- operates a port in Iran; or
- knowingly provides significant financial, material, technological, or other support to parties that either (i) are part of the energy, shipping, or shipbuilding sectors of Iran or (ii) operate a port in Iran.
The third category of sanctionable activity may be most significant for non-US companies doing business in Iran. Under this category, the Treasury Department can block the property of and transactions involving any non-US party that engages in transactions with the specified Iranian parties. Section 1244(c) also requires the President to block any transaction involving a non-US party and any Iranian person on the SDN List (other than Iranian financial institutions that have not been designated for sanctions in connection with the proliferation of weapons of mass destruction, terrorism, or human rights abuses). A blocked transaction is one in which the US party that comes into possession of property in which the blocked non-US party has an interest must hold that property until authorized by the US government to return it to the blocked party. This provision has the effect of freezing the US-based assets and property of sanctioned non-US entities.
The “knowingly” standard under the IFCA requires that the Treasury Department find that a non-US party either knew or should have known that it was engaging in a sanctionable transaction. The “should have known” standard is potentially highly expansive, as the Treasury Department, in the first instance, decides what a non-US party “should have known” about a particular Iranian counterparty or transaction. The “should have known” standard places non-US parties engaging in any transactions in Iran at substantial risk of US sanctions.
The IFCA does not define the term “energy, shipping, or shipbuilding sectors of Iran.” Past Iran sanctions statutes have focused energy sector-related sanctions on Iran’s petroleum, natural gas, and petrochemical industries, as well as on nuclear technology. We believe it is likely the US government will continue to focus on these industries in implementing the IFCA sanctions. The IFCA specifically identifies the National Iranian Oil Company (NIOC), the National Iranian Tanker Company (NITC), the Islamic Republic of Iran Shipping Lines, and their affiliates as entities in the energy, shipping, or shipbuilding sectors of Iran.
To determine whether a transaction is “significant,” the IFCA focuses upon the factors in section 561.404 of the Iranian Financial Sanctions Resolutions (IFSR) (31 C.F.R. pt. 561) (the subject of a previous Arnold & Porter LLP client alert). These factors include the size, number, and frequency of the transaction; the impact of the transaction on the objectives of the Iran sanctions; and whether the transaction involved an attempt to conceal the parties to avoid sanctions.
IFCA section 1244(d)(1) requires the State Department to impose sanctions on non-US parties that knowingly sell, supply, or transfer “significant” goods or services for use in connection with the energy, shipping, or shipbuilding sectors of Iran. The State Department must impose at least five of the sanctions described in section 6 of the Iran Sanctions Act of 1996 (ISA) (50 U.S.C. 1701 note). These sanctions significantly can affect the ability of a non-US company to do business in the US; the most extreme sanctions can effectively prevent a company from doing business in the US altogether. The potential sanctions under the ISA include: prohibiting credit or transfer payments between the sanctioned non-US party and a US financial institution; prohibiting the sanctioned non-US party from acquiring, holding, or using any US-based property; and excluding corporate officers from the US (through visa denials). Section 1244(d)(2) requires the President to also prohibit foreign financial institutions that knowingly facilitate “significant” transactions involving goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran from opening or maintaining correspondent or payable-through accounts in the US.
Certain activities are exempt from sanctions under IFCA section 1244. These include activities related to the provision of humanitarian assistance, agricultural commodities, food, medicine, or medical devices to Iran and reconstruction assistance or economic development for Afghanistan.
Unlike other sections of the IFCA, section 1244 does not provide a safe harbor for non-US entities that perform due diligence. While the State or Treasury Departments must still find that a non-US entity knowingly engaged in sanctionable activities, performing due diligence and implementing formal compliance policies does not provide grounds for the US government to grant an exception to the sanctions under section 1244.
Sanctions on Transactions Involving Precious Metals, Raw or Semi-Finished Metals, Coal, Graphite, and Certain Industrial Software
IFCA section 1245 requires the State Department to sanction non-US parties that sell, supply, or transfer to or from Iran precious metals, graphite, raw or semi-finished metals (such as aluminum or steel), coal (specifically, metallurgical coal, coke, or fuel coke), or software for integrating industrial processes to be used (1) in the energy, shipping, or shipbuilding sectors of Iran; (2) in connection with Iran’s nuclear, military, or ballistic missile programs; or (3) for any sector of the economy determined by the US government to be controlled by Iran’s Revolutionary Guard Corps (IRGC). Section 1245 also requires the US government to impose sanctions on any non-US party that sells, supplies, or transfers such materials to or from any Iranian person on the SDN List (again, excluding Iranian financial institutions that have not been designated for sanctions in connection with the proliferation of weapons of mass destruction, terrorism, or human rights abuses).
The State Department must impose at least five of the 12 ISA sanctions (described previously) on a non-US party that engages in sanctionable activity. As with the section 1244 sanctions, section 1245 also requires the President to prohibit or impose strict conditions on the ability of foreign financial institutions to open or maintain correspondent or payable-through accounts in the US, if the foreign financial institution knowingly conducts or facilitates a significant financial transaction in connection with the sanctionable activities of section 1245.
The President must submit periodic reports to Congress describing, among other items, the sectors of the Iranian economy that are controlled by the IRGC and that form the basis for sanctions. Non-US parties can and should use these reports to determine whether they are engaged in transactions involving IRGC-controlled entities.
Unlike section 1244, IFCA section 1245(f) provides an exemption for non-US parties found by the US government to exercise due diligence by establishing and enforcing official procedures to prevent the sale, supply, or transfer of materials for use in the sanctionable activities described previously and related financial transactions. In general, companies should have policies and procedures for compliance with export control laws and trade sanctions, including Iran sanctions, as a best practice.
Sanctions on Underwriting, Insurance, and Reinsurance Services in Support of Sanctionable Activities
IFCA section 1246 requires the President to sanction any non-US party that knowingly provides underwriting, insurance, or reinsurance services for activities sanctionable under the IFCA and all other Iran sanctions laws and regulations, including the ISA (as amended).
This section provides a humanitarian exception for transactions relating to the provision of agricultural commodities, food, medicine, medical devices, or humanitarian assistance to Iran. Moreover, non-US companies should be aware that section 1246 includes an exception for non-US parties that exercise due diligence by establishing and enforcing internal controls to prevent their engaging in sanctionable activities under section 1246. This provision again places a premium on companies implementing a rigorous compliance program to avoid sanctionable activities.
Sanctions on Foreign Financial Institutions that Facilitate Financial Transactions on Behalf of SDNs
Non-US banks and other financial institutions that knowingly engage in or facilitate “significant” financial transactions involving Iranians on the SDN List are subject to sanctions under section 1247 of the IFCA. Non-US banks engaging in such transactions are prohibited from opening correspondent or payable-through accounts in the US and are prohibited from or limited in maintaining existing accounts in the US.
Section 1247 provides exceptions to the sanctions for transactions involving Iranian financial institutions that have not been designated for sanctions in connection with weapons of mass destruction, terrorism, or human rights abuses or that engage in certain humanitarian activities. Transactions involving a foreign financial institution and the sale, supply, or transfer to or from Iran of natural gas are not sanctionable if the financial transaction is for trade in goods or services not otherwise subject to US sanctions; is between a country with primary jurisdiction and Iran; and involves payments owed to Iran that are made into an account in a bank in the country with jurisdiction over the foreign financial institution.
The IFCA also added the Islamic Republic of Iran Broadcasting and its president to the SDN List and amended the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) to require the US government to identify and sanction parties that divert humanitarian resources, including agricultural commodities, foods, medicine, and medical devices, intended for the Iranian people, or that misappropriate proceeds from the sale or resale of such goods.
Executive Order 13645 Imposes New Extraterritorial Sanctions on Transactions in Iran’s Currency, Automotive Sector, and Petroleum Exports
On July 1, 2013, in addition to the IFCA sanctions, sanctions under EO 13645 will go into effect. EO 13645 implements IFCA by authorizing the Secretaries of State and Treasury to impose the sanctions set forth in the IFCA. It also goes beyond the IFCA sanctions to authorize additional sanctions on transactional activities involving Iranian currency (the rial), the Iranian automotive sector, and Iranian petroleum exports. It also expands sanctions against persons that materially assist or provide support to any Iranian person on the SDN List.
Sanctions on Foreign Financial Institutions Dealing in Iranian Currency
Section 1 of EO 13645 authorizes the Treasury Department to sanction foreign financial institutions that knowingly conduct or facilitate any significant transaction relating to the purchase or sale of Iranian rials or a derivative, swap, or future based on the Iranian exchange rate. It also sanctions foreign financial institutions that maintain significant rial accounts outside Iran. EO 13645 does not define the term “significant transaction,” but it is likely that the US government will interpret this term in a manner consistent with the IFCA. Companies performing transactions in rials or otherwise involving rials are at greater risk from these new sanctions.
The consequences of engaging in significant transactions involving the rial are substantial. The US will block transactions involving sanctioned non-US banks and other financial institutions. In addition, the US will prohibit the opening, or impose strict conditions on the maintaining, of correspondent or payable-through accounts in the US. Sanctioned foreign financial institutions would effectively be cut off from the US banking system and would be unable to conduct business within the US.
Sanctions on the Iranian Automotive Sector
Sections 3 and 5 of EO 13645 authorize the Departments of Treasury and State to impose sanctions on any non-US party that knowingly engages in, and any foreign financial institution that conducts or facilitates, any significant transaction relating to the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran. EO 13645 defines the term “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 relating to such vehicles.” This definition does not encompass the export of complete automobiles, trucks, motorcycles, etc. to Iran; it relates to the manufacturing in Iran of such vehicles and parts for such vehicles.
The potential sanctions for engaging in such activities in the Iranian automotive sector are severe. The possible sanctions on non-US entities that engage in sanctionable activities can include: the denial of US export licenses; a federal procurement ban; denial of US entry visas for company officers; and imposition of the same potential sanctions on individual company executives. Foreign financial institutions engaging in sanctionable activity may be subject to a denial of primary dealer status in US government debt instruments and of eligibility to act as a repository for US government funds, and may also be prohibited from opening or maintaining a correspondent account or payable-through account in the US.
Sanctions on Persons who Materially Support SDNs
Section 2 of EO 13645 authorizes the Treasury Department to impose sanctions upon non-US parties and foreign financial institutions that have “materially” assisted, sponsored, or provided financial, material, or technological support to, or goods or services to or in support of, Iranian parties on the SDN List or entities sanctioned under EO 13599, which includes any US person identified by the Treasury Department as having acted, directly or indirectly, for or on behalf of any entity blocked under EO 13599. The sanctionable activities and potential sanctions mirror those of the IFCA. The US government will block the property and transactions of non-US parties found to have engaged in transactions involving Iranian SDNs. The Treasury Department may also prohibit the opening, or impose strict conditions on the maintaining, in the US of a correspondent account or a payable-through account by a foreign financial institution that has provided material support to Iranian SDNs. There is an exception to these prohibitions for persons conducting or facilitating a transaction for the provision of agricultural commodities, food, medicine, or medical devices to Iran.
Tightening Sanctions on Exports of Petroleum and Petrochemicals from Iran
Section 3 of EO 13645 authorizes the Treasury Department to impose sanctions on any foreign financial institution that engages in significant financial transactions involving an Iranian SDN for the purchase of petroleum or petroleum products from Iran if: (1) the President determines that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran; and (2) the President has not issued a waiver to the country with primary jurisdiction over the foreign financial institution based on that country’s significant reduction in crude oil purchases from Iran.
In addition, section 16 of EO 13645 expands the scope of Executive Order 13622’s prohibition on non-US persons engaging in transactions for the purchase of Iranian petroleum. EO 13645 expands this sanction beyond only non-US persons’ transactions for the purchase or acquisition of Iranian petroleum or petroleum products to apply to non-US persons who engage in significant transactions for the purchase, acquisition, sale, transport, or marketing of Iranian petroleum.
Prohibition on Diversion of Goods
Section 8 of EO 13645 implements IFCA section 1249 by blocking all property subject to US jurisdiction of any person that the Treasury Department determines has engaged, on or after January 2, 2013, in corruption or other activities relating to the diversion of goods, including agricultural commodities, food, medicine, and medical devices, intended for the people of Iran, or has engaged in corruption or other activities relating to the misappropriation of proceeds from the sale or resale of such goods. The prohibitions also apply to any person who the Treasury Department finds materially assisted, sponsored, or provided financial, material, or technological support for these activities or for persons blocked for diversion of goods intended for the Iranian people.
Additional Iran Sanctions on the Horizon
Congress continues to consider legislation to increase US sanctions on Iran and may enact further Iranian sanctions before the end of 2013. The Nuclear Iran Prevention Act, H.R. 850, which has been introduced in the House of Representatives, would impose sanctions on foreign companies that engage in non-oil trade with Iran. No similar legislation has yet been introduced in the Senate, although a Senate bill is expected later this summer.
Together, the IFCA and EO 13645 further extend the extraterritorial scope and reach of the Iran sanctions. Non- US companies doing business in Iran now face increased risk of engaging in sanctionable activity. The US has aggressively enforced its Iran sanctions, including against non-US parties, and, in the current political environment, is likely to continue to do so. The sanctions target new areas of activity, including transactions involving Iranian currency and the Iranian automotive sector. The new sanctions also further limit activities that non-US companies and financial institutions can pursue in the energy sector of Iran. Non-US companies must understand and be sensitive to all of the nuances of these new Iran sanctions. The risk of engaging in sanctionable activity is increasing, and the potential sanctions are severe.