September 2010

New tighter US sanctions against companies doing business with Iran took effect in July and apply not only to US citizens and companies, but also to many foreign companies.

The new law — called the “Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010” — is targeted principally at non-US entities.

Americans have been prohibited since March 1995 from investing in the petroleum industry in Iran under an executive order issued by President Clinton. A second executive order issued in May 1995 banned essentially all other new investment in Iran by US entities. The bans in the two executive orders have been extended every year since then by the Bush and Obama administrations.

In addition, a separate statute –- originally called the “Iran and Libya Sanctions Act” but now called the “Iran Sanctions Act” — has been on the books since 1996 that bars any person from making investments in the Iranian petroleum sector. Libya was dropped as a target, as well as from the name of the law, in 2006.

Congress was not happy with enforcement of the existing sanctions and moved to tighten them in the new statute. The new law took effect on July 1, 2010.

Iran Sanctions Act

The Iran Sanctions Act required the President to impose two or more sanctions from a list of six sanctions upon determination that a person made an investment of at least $20 million that contributes to development of Iranian petroleum resources.

The onshore oil fields and oil industry infrastructure in Iran were past peak and in need of substantial investment. Iran openly sought foreign investment in these areas in November 1995, and Congress sensed an opening to apply pressure by banning investment in petroleum resource development.

An investment could include entering in to a contract to provide services or guaranteeing performance by someone else.

The Iran Sanctions Act was later amended also to make it illegal to provide Iran technology related to chemical, biological or nuclear weapons of mass destruction or to provide a “destabilizing number and types” of advanced conventional weapons. However, the statute did not bar the purchase of oil, petroleum or natural gas from Iran. 

One problem with the existing statute was that a person had to have actual knowledge that a sanctioned activity was undertaken. It was not enough to show that the person should have known he was dealing with Iran had he made even modest inquiries.

However, sanctions could be imposed on a parent of the company violating the sanctions if it could be shown that the parent had actual knowledge or should have known.

New Statute

The new law is still focused on investments in the Iranian petroleum sector.

The sanctions can now be triggered for investments or assistance of at least $1 million in value in any one transaction or at least $5 million over a 12-month period, although the threshold remains $20 million for help to Iran with developing its oil and gas fields.

Investments must “directly and significantly” contribute to Iran’s ability to develop its petroleum resources to be covered by the sanctions.

Petroleum resources have been expanded from “petroleum and natural gas resources” under the Iran Sanctions Act to include refined petroleum products, oil and liquefied natural gas. tankers for transporting such products, natural gas resources, and equipment used to construct or maintain pipelines that transport oil or liquefied natural gas.

The new law expands the list of sanctioned activities in three ways.

First, sanctioned activity now includes any sale, lease or provision of goods, services, technology, information or support to maintain or expand Iran’s ability to produce “refined petroleum products,” including any direct and significant assistance constructing or modernizing refining facilities.

Second, sanctioned activity includes any export of refined petroleum products to Iran, or provision of goods, services, technology, information or support for Iran’s ability to import refined petroleum products. Refined petroleum products include diesel, gasoline, jet fuel (naphtha- and kerosene-type) and aviation gasoline.

Third, sanctioned activity includes the sale, lease, or provision of goods, services, technology, information or support to Iran that could directly and significantly improve Iran’s capability to import refined petroleum products. This includes underwriting or providing insurance for, or providing financing or brokering for, the sale, lease or provision of such items, or providing ships and shipping services to deliver refined petroleum products to Iran. An underwriter or insurer may not be sanctioned for activities described above if the President determines that it establishes proper due diligence policies and procedures to avoid providing financial support to sanctioned activity.

Sanctioned activities must still be committed knowingly by a party, but it will be easier for the US government to prove knowledge. A person will be treated as having knowledge of what he should have known had he done proper diligence. Thus, a US parent company will be treated as having knowledge of what a foreign subsidiary is doing if it should have known about the activity. 

The President must now impose at least three out of a list of nine possible sanctions.

     The sanctions are:

  1. Bar the US Export-Import Bank from issuing any guarantees or insurance or extending credit in connection with the export of any goods or services to any sanctioned person.
  2. Order US government agencies not to approve licenses for sensitive technologies, goods or services that require a US license to export (or re-export).
  3. Prohibit US financial institutions from making loans of more than $10 million to the person in any 12-month period.
  4. If the person is a financial institution, bar it from being designated as a primary dealer for US government securities or from acting as a repository of government funds.
  5. Forbid US government agencies from buying any goods or services from the person.
  6. Prohibit transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest.
  7. Prohibit banks and other financial institutions that can be reached by US law from transferring money or extending credit where such transfers involve the sanctioned person.
  8. Freeze assets belonging to the person and bar others from engaging in any transactions with the sanctioned person that involve property within the reach of US law.
  9. Restrict US imports from the person.

Sanctions must be imposed for a fixed period of at least a year. They will be kept in place longer if the sanctioned activity does not cease. 

Persons bidding on or entering into contracts with the US government will have to certify in the future that neither the contractor nor any person owned or controlled by the contractor is engaging in sanctioned activity. A false statement will lease to cancellation of any contract issued and will cause the person be barred from other federal contracts for up to three years.

Separate Bank Sanctions

New US Treasury regulations prohibit US financial institutions from establishing, maintaining, administering or managing correspondent or payable-through accounts in the United States on behalf of any non-US financial institution that engages in prohibited transactions with Iran. These regulations have been in place since August.

The list of prohibited transactions includes any transaction that assists Iran in acquiring or developing weapons of mass destruction or in supporting terrorist organizations. The list also includes any transaction that benefits persons subject to financial sanctions under UN Security Council resolutions that target Iran. Any money laundering activity or assistance provided to any Iranian financial institution related to prohibited transactions are also prohibited. Financial assistance and services provided to the Islamic Revolutionary Guard, any of its agents or affiliates or any financial institution whose property interests have been blocked on account of aiding Iran are also prohibited.

Foreign financial institutions that do this type of business with Iran risk having their names placed on a public list. The Treasury may prohibit US persons from having accounts with institutions on the list. Instead of publishing the name of the institution and barring all account activity, the Treasury may impose any of four listed strict conditions on maintenance of an account with a sanctionable non-U.S. financial institution. These conditions include prohibiting trade finance through the account, restricting the types or dollar amounts of transactions that may be processed through the account, and requiring pre-approval for all transactions processed through the account.

Financial institutions that violate the Treasury regulations can be fined up to $250,000 or twice the transaction value and subjected to additional criminal penalties up to $1 million and 20 years in jail.

The new sanctions law requires US banks that maintain correspondent accounts or payable-through accounts in the United States for foreign financial institutions to do internal audits to check for prohibited activities by the account holders, to report any transactions or financial services provided with respect to these activities and to certify to the best of their knowledge that the foreign financial institution who opened the account is not knowingly engaging in a prohibited activity.

Tighter Noose

One problem with the earlier sanctions under the Iran Sanctions Act was the President had to make a formal finding that someone violated the sanctions, but there was no deadline or means to force the administration to act, even if there were newspaper articles about the sanctions violations.

The sanctions act was amended in 2006, but only to urge the President to investigate — “the President should initiate an investigation” was the statutory language — upon the receipt of credible information. If the President actually did initiate an investigation, a report was required to Congress within 180 days.

The new law goes father. It says the President must investigate upon receipt of credible information.  This new standard generally took effect in July 2010, but will not take effect until July 2011 for sales of refined petroleum to Iran or provision of goods or services that help maintain or upgrade refineries in Iran.

The President must impose sanctions under the new law, unless he declares not doing so is necessary to the national interest.

The new law broadly prohibits both US imports of any good or service of Iranian origin and exports to Iran of any good, service or technology of US origin. Certain exceptions apply for food, medicine, humanitarian aid, internet communication, goods to support the safe operation of aircraft and exports in the national interest. Civil penalties up to $250,000 or twice the transaction value and criminal penalties up to $1 million and 20 years in jail may be imposed.

The new law prohibits the US issuance of export licenses related to nuclear material, facilities, components or other goods or services to any country if a sanctionable person under that country’s jurisdiction has engaged with Iran in transactions related to nuclear weapons or the delivery of nuclear weapons. It will be interesting to see whether this is applied to Russia. Exceptions apply if the country’s government does not know or have reason to know of the sanctioned activity, or is taking all reasonable steps to penalize the sanctioned person and prevent further sanctioned activity.

New or renewed US government procurement contracts are denied to any person that exports communications equipment to Iran that is used to monitor or disrupt the free speech or the free flow of unbiased information to Iran. 

Enforcement History

Sanctions enforcement has been lax. Sanctions have been in place against Iran since 1995, but the US government has not charged anyone with having violated them.

The closest the US came was in 1998 when the Clinton administration determined that a project involving major international exploration companies to develop a natural gas field in Iran was sanctioned activity. However, the administration waived sanctions to avoid a trade confrontation with the European Union.

Secretary of State Hillary Clinton testified before the House Foreign Affairs Committee in February 2010 that the State Department had conducted a preliminary review of a series of investments in Iran, and that some of the investments “deserve[] more consideration” and would be scrutinized further. In June 2010, Assistant Secretary of State William Burns testified before the Senate Foreign Relations Committee that there were “less than 10” cases that, in the State Department’s view, could be considered sanctioned activity under the existing sanctions and that the State Department was conferring with other agencies about possible action.

Several countries have expressed concern to the United States about the new statute. India’s foreign secretary said his country was concerned that “unilateral sanctions recently imposed by individual countries [could] have a direct and adverse impact on Indian companies and, more importantly, on our energy security.” US officials have reportedly been talking to Turkey about Turkish companies who deal with Iran on refined petroleum products.