On June 3, 2013, the Obama Administration issued a far-reaching and complex Executive Order (E.O. 13645) implementing certain provisions of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA)1 and imposing additional, separate sanctions on Iran. E.O. 13645 significantly increases U.S. sanctions on Iran, with particular emphasis on holding and dealing in Iranian rials, on involvement in the Iranian automotive industry and on doing business with persons or entities on the Specially Designated Nationals and Blocked Persons List (“SDN List”). The Executive Order, like other recent U.S. sanctions on Iran, applies to non-U.S. financial institutions and other non-U.S. persons who become subject to an array of potential measures if the President determines they have engaged in sanctionable conduct. The effective date of E.O. 13645 is July 1, 2013, which coincides with the 180-day effective date of IFCA, which was enacted January 2, 2013.

On the same day that the Administration issued E.O. 13645, it also designated to the SDN List a network of 37 companies that manages billions of dollars of investments in Iran, including for Iran’s Supreme Leader Ayatollah Ali Khamenei.

A summary of the principal prohibitions contained in the Executive Order, as well as a description of separate Iran legislation moving through Congress, follow below.

Prohibitions on Dealing in Iranian Rials

Section 1(a) of E.O. 13645 authorizes the Secretary of the Treasury to impose on a foreign financial institution certain proscribed sanctions if, on or after the effective date of the Executive Order, it “knowingly conducted or facilitated any significant transaction” related to the “purchase or sale of Iranian rials or a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial” or “maintained significant funds or accounts outside the territory of Iran denominated in the Iranian rial.”

The potential sanctions specified at Section 1(b) are draconian and consist of a prohibition on the opening or maintenance of correspondent or payable-through accounts in the United States by the foreign financial institution or blocking of all property in the United States of the foreign financial institution. As with most of the prohibitions in the Executive Order, these prohibitions apply except to the extent provided by statutes or in regulations or licenses issued pursuant to E.O. 13645 and notwithstanding any contract entered into or license or permit granted prior to the effective date of the Executive Order.

E.O. 13645 does not define “significant transaction” or “significant funds or accounts.” Consistent with prior use of the term “significant” in other Executive Orders and regulations, the intent appears to leave this term undefined in order to allow OFAC to have flexibility in interpretation.2 The prohibition on foreign exchange transactions involving rials appears at least in part to be an effort by the Administration to anticipate legislation currently pending in the Congress that would prohibit certain foreign exchange transactions involving Iran (see discussion below). Because of the severe consequences of violating these prohibitions, foreign financial institutions should immediately review their foreign exchange transactions involving Iranian rials and their holdings of that currency.

Prohibited Dealings with Specially Designated Nationals

Section 2(a) of the Executive Order authorizes the Secretary of the Treasury to impose certain specified sanctions on any person determined to have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any Iranian person” blocked under IFCA as an entity in the Iranian energy, shipping or shipbuilding sector or included on the SDN List (other than an Iranian depository institution designated solely with the [IRAN] tag). The prohibition at Section 2(a) is extraterritorial in its effect because it globally applies U.S prohibitions on dealing with SDNs and IFCA-blocked entities to foreign financial institutions in transactions that may be entirely outside the United States. However, in doing so, it is merely implementing the statutory requirement.

As with Section 1 above, the penalties are draconian and in this case consist of blocking of all the property of the violator subject to U.S. jurisdiction.

The wording of Section 2(a) raises an ambiguity as to its effective date because there is no statement in the prohibition comparable to the one in Section 1(a) above that it is effective “on or after the effective date” of the Executive Order. However, the underlying statutory prohibition at Section 1244(c)(1) of IFCA states that the President shall block property of violators “on or after the date that is 180 days after the date of the enactment of this Act.”

Compliance with the statutory IFCA provision underlying Section 2(a) initially appeared to present a difficult challenge because the SDN List is not organized or searchable by reference to “Iranian person,” thus making it very difficult for persons trying to comply to know whether a designated person is in fact “Iranian.” For example, Iranian persons could be designated under other country or functional programs, in which case there is no particular way to know that they are “Iranian.” Moreover, Section 14(h) of the Executive Order defines “Iranian person” to mean “an individual who is a citizen or national of Iran or an entity organized under the laws of Iran or otherwise subject to the jurisdiction of the Government of Iran.” Thus, it could reach an individual or entity which is either inside or outside Iran. The potential compliance problem with “Iranian person” has been brought to the attention of OFAC, and, although it remains unaddressed in the Executive Order, OFAC issued FAQs on its website simultaneously with the Executive Order, Number 289 of which states that OFAC anticipates publishing on its website a list to assist in identifying Iranian persons on the SDN List.

Prohibitions on Financing SDNs or the Iranian Automotive Sector

Section 3(a) of E.O. 13645 authorizes the Secretary of the Treasury to impose on a foreign financial institution certain specified sanctions if it determines that it has “knowingly conducted or facilitated any significant financial transaction” either (i) on behalf of any Iranian person included on the SDN List (other than one designated solely with the [IRAN] tag) or (ii) on or after the effective date of the Executive Order, for the “sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.” Section 14(a) of the Executive Order defines “automotive sector of Iran” to mean the “manufacturing or assembling in Iran or 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.” It thus appears to target only the manufacture or assembly of vehicles in Iran, as well as parts related to such vehicles, but does not target the supply of fully assembled and operational vehicles exported to Iran.

The first prohibition above is in implementation of Section 1247(a) of IFCA. The second prohibition is new and not based on IFCA but on other statutory authorities.

As with Section 2(a) above, the first of these prohibitions appears without reference to the effective date of the Executive Order, but the underlying statutory authority is explicit as to its 180-day (i.e., July 1) effective date. Both prohibitions are broadly worded, and the observations about the vagueness of the term “significant” made above apply equally to Section 3.

The applicable sanctions at Section 3(b) for affected foreign financial institutions consist of a prohibition on opening or maintaining correspondent or payable-through accounts in the United States.

Subsections (c) through (e) of Section 3 qualify the prohibition at Section 3(a)(i) as not applying to “significant financial transactions” conducted by a foreign financial institution for the purchase of petroleum products subject to a waiver under Section 1245(d) of the National Defense Authorization Act of 2012 (NDAA 2012) or for certain natural gas purchases from Iran by the country with primary jurisdiction over the foreign financial institution or for transactions involving the provision of medicine, medical devices, agricultural commodities or food to Iran.

Additional Sanctions on Iranian Automotive Sector

In addition to the Section 3(a) sanctions on foreign financial institutions involving the Iranian automotive sector, Section 5 of E.O. 13645, again through an independent action of the President and not in implementation of IFCA, authorizes the Secretary of State to impose a range of penalties against any person determined to have, on or after the effective date of the Executive 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 in Iran” [emphasis added]. There is no clear definition of either “significant transaction” or “significant goods or services.” Additionally, the Secretary of State may impose various penalties against a person who is a “successor entity” to a person so named by the Secretary of State, who owns or controls a person so named by the Secretary of State (provided such parent had knowledge that the person engaged in the subject activities) or who is owned or controlled by, or under common ownership or control with, a person so determined by the Secretary of State and who knowingly participated in the subject activities. Section 5 thus potentially reaches a broad range of upstream, downstream and sister affiliates—anywhere in the world. The applicable sanctions under Section 5 are spelled out at Section 6 and include one or more of the following:

  • denial of U.S. Export-Import Bank guarantees;
  • denial of U.S. export and re-export licenses to the sanctioned person;
  • if the sanctioned person is a financial institution, denial of primary dealer status in the United States and denial of eligibility to act as a repository for U.S. government funds;
  • prohibition on U.S. government procurement from the sanctioned person;
  • denial of visas to corporate officers or controlling shareholders of the sanctioned person; or
  • application of the above sanctions to the “principal executive officer or officers or persons performing similar functions” of the sanctioned person.

Additional Sanctions

In connection with certain IFCA-based prohibitions and those contained at Section 5 of E.O. 13645 as discussed above, Section 7 of the Executive Order authorizes one or more of the following additional sanctions:

  • prohibition on any U.S. financial institution making loans or providing credits to the sanctioned person totaling more than $10 million in any 12-month period (except for activities to relieve human suffering);
  • transactions in foreign exchange that are subject to U.S. jurisdiction in which the sanctioned person has any interest;
  • prohibition on any transfers of credits or payments between U.S. financial institutions that involve any interest of the sanctioned person;
  • blocking of all property of the sanctioned person subject to U.S. jurisdiction;
  • prohibiting any U.S. person from investing in the sanctioned person;
  • restricting or prohibiting imports into the United States from the sanctioned person; or
  • imposition on the principal executive officer or person performing similar functions of the sanctioned person of the above additional sanctions.

Prohibition on “Diversion of Goods”

Section 8 of E.O. 13645, implementing Section 1249 of IFCA, blocks all property subject to U.S. jurisdiction of any person determined by the Secretary of the Treasury to have engaged, on or after January 2, 2013, “in corruption or other activities related to the diversion of goods,” including agricultural commodities, food, medicine and medical devices, “intended for the people of Iran” or to have engaged, on or after that date, “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 determined to have materially assisted, sponsored or provided financial, material or technological support for, or goods or services to or in support of, the activities described above or of any person whose property and interest in property are blocked pursuant to Section 8 or who is determined owned or controlled by, or have acted or reported to act for or on behalf of, directly or indirectly, any person whose property or interest in property are blocked pursuant to this section.

The January 2, 2013, effective date appears to have been determined by the underlying statutory authority of Section 1249 of IFCA, which amended the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA) and thus appeared not to be subject to the general 180-day effective date of IFCA. Although Congress did not state what activities it was intending to reach in terms of actual practices involving “corruption,” “diversion of goods” or “misappropriation of proceeds,” the prohibitions are sufficiently broad and vague to reach any person or entity worldwide. Moreover, the sanctions—i.e., blocking of property subject to U.S. jurisdiction—are draconian.

Prohibitions on Donations and Contributions

Section 9 of E.O. 13645 prohibits donations to any person blocked under the Executive Order, including humanitarian donations. Section 10 of the Executive Order similarly prohibits the making of any contribution or provision of funds, goods or services to or for the benefit of any person blocked under the Executive Order or the receipt of any contribution or provision of funds, goods or services from any such person.

Miscellaneous

In addition to the above provisions in implementations of IFCA, Section 16 of E.O. 13645 expands the prohibitions under Executive Order 13622 of July 30, 2012, to include the “sale, transport or marketing” of petroleum or petroleum products from Iran in addition to the “purchase” and “acquisition” of such products.

Congress Readies Further Iran Legislation

The prospects for congressional enactment of further Iran legislation this summer appear good, with at least five primary measures currently pending and others expected to be introduced.

The Iran Export Embargo Act (S. 1001) is a Republican-sponsored Senate bill introduced by Senators John Cornyn (R-TX) and Mark Kirk (R-IL) that would significantly change existing legislation by sanctioning any individual or company that imports, purchases or transfers goods or services generally (not just oil) from the Government of Iran or an entity affiliated with it. This legislation, if enacted, would change current rules under which foreign companies are allowed to continue to purchase crude oil from Iran if they demonstrate that they have made significant reductions in those purchases over time. The Obama Administration opposes this measure because of fear that it could split the coalition of countries negotiating with Iran over the nuclear issue. However, in a hearing held June 4, 2013, by the Senate Banking Committee, Senate Foreign Relations Committee Chair Robert Menendez (R-NJ), who will play a key role in shaping any legislation, expressed interest in tightening foreign countries’ purchases of Iranian petroleum products to force “complete reductions by a certain date, say the end of 2014.”

A more targeted bipartisan bill in the House, H.R. 850, which the House Foreign Affairs Committee unanimously approved last month, would apply a similar approach to Iran’s trade in crude oil by requiring countries currently purchasing crude oil from Iran to reduce their imports by a total of up to 1 million barrels per day within the next year, which approximates the roughly 1 million barrels per day that Iran currently sells.

A third bill, the Iran Sanctions Loophole Elimination Act (S. 892), also introduced by Senators Cornyn and Kirk, along with other Senators from both sides of the aisle, would block Iran’s access to foreign exchange reserves and limit the ability of designated Iranian entities like the Central Bank of Iran and the National Iranian Oil Company to conduct transactions in foreign currencies, including Euros. There are certain ambiguities in the scope of the application of this draft legislation, as it currently reads, which have caused concerns in the financial services industry.

Finally, Rep. Ileana Ros-Lehtinen (R-FL) introduced a bill (H.R. 893) that would eliminate the President’s ability to waive sanctions related to Iran’s nuclear proliferation, and Rep. Jeff Duncan (R-SC) plans to introduce legislation to require the President to report every 90 days on any decision made not to impose sanctions on companies trading in gold with Iran.

Although it is difficult to predict at this stage the content of any final legislation, the alacrity with which Congress has enacted Iran sanctions-related legislation in prior years suggest that the likelihood of further legislation over the coming months is almost certain.