The UK Government has imposed fresh sanctions (on top of the existing EU sanctions against Iran1) which effectively lead to a severance of all financial ties between UK financial institutions and Iranian banks. On the basis of a recently released report on Iran by the International Atomic Energy Agency and well publicised concerns about the country’s nuclear programme, the UK Treasury has concluded that financial activities which facilitate the development or production of nuclear weapons pose a significant risk to the national interests of the United Kingdom, noting there is strong evidence that Iran’s banking sector is actively supporting the country’s nuclear weapons programme.
As a result, as of 3.00 p.m. on 21 November 2011, every UK credit and financial institution will be required to cease all transactions with banks incorporated in Iran as well as their branches and subsidiaries. The gravity of the sanctions is evidenced by the fact that this is the first occasion when the UK uses powers created under the 2008 Counter Terrorism Act2 to isolate an entire country’s banking sector in such a manner.
- Substance of the new sanctions
The new sanctions are embodied in the Financial Restrictions (Iran) Order 2011 (the “Order”).3 The Order provides that a “relevant person” must not –
- enter into, or
- continue to participate in,
any transaction or business relationship with a “designated person”.
With respect to “relevant persons”, they are the following:
- All persons operating in the UK financial sector as financial or credit institutions;4 and
- All branches of such persons, wherever they are located. (The Order does not apply to subsidiaries of UK financial or credit institutions where those subsidiaries are incorporated outside the UK.)
The Order casts a wide net by defining “designated persons” as:
- credit institutions incorporated in Iran,
- the Central Bank of Iran (also known as Bank Markazi Jomhouri Islami Iran), and
- any branch, wherever located, of the same institutions as well as subsidiaries of those wherever they be located in the world.
It is clear, therefore, that the UK financial sector must not enter into new transactions or business relationships with Iranian financial institutions and their branches and subsidiaries, unless licensed by HM Treasury (see below). Moreover, it must not continue to perform any relevant existing transaction (i.e. pre-dating 21 November 2011) or undertake any payment processing activity pursuant to an existing business relationship – even when such payments become contractually due – unless a HM Treasury licence is in place. A review of existing agreements with designated persons would, therefore, be advisable to confirm whether such a situation has been contractually anticipated. Otherwise, such contracts may be deemed to be frustrated and would need to be assessed on a case by case basis.
Guidelines accompanying the Order explain that relevant transactions include, but are not limited to, the following:
- Transmission of funds or value between a relevant person and a designated person;
- Accrual, creation or other provision of funds or value for a designated person;
- Exchange of financial or credit documents with a designated person;
- Acting upon the instructions of a designated person; and
- Acting under a contract agreed with or pursuant to an obligation owed to a designated person.
While these new sanctions create significant barriers to UK exporters intending to make or receive payments to or from Iranian banks, the UK Government has noted that the Order is not intended to serve as a trade ban with Iranian companies even if such trade is not encouraged. The UK Government does however urge UK companies to proceed with caution if trading with Iran.5
- Supervision and penalties
To ensure compliance with the Order, the UK Government urges relevant persons to ensure they have policies and procedures in place. It is anticipated that compliance will be closely monitored and supervised by a number of UK agencies, including the Financial Services Authority (FSA) for authorised credit institutions and financial institutions, the Office of Fair Trading (OFT) for consumer credit financial institutions and HM Revenue & Customs (HMRC) for money service businesses that are not considered authorised persons.
A person or entity may be penalised for a breach of the Order by either a civil penalty issued by a supervisory authority or by way of criminal prosecution. Penalties may be applied of such amount as the agency considers appropriate and a court may additionally impose a prison term of up to two years and/or a fine on any individuals deemed responsible for breaches of the Order.
Institutions affected by the Order may apply for a licence from HM Treasury, which has the authority to issue licences exempting certain individual transactions or business relationships. Given the emphasis placed by the UK Government on ensuring an effective sanctions regime in response to the risks deemed posed by the Iranian regime, however, it appears unlikely that licences will be readily issued, particularly in relation to new contracts.
To facilitate certain limited business relationships and transactions considered exempt from the Order, HM Treasury has also issued six general licences. Briefly, these cover humanitarian activities and personal remittances between individuals involving less than EUR 40,000, insurance payments, holding of frozen accounts, and completion of payments already in progress on 21 November 2011. Such (limited) transactions will still be permitted following the entry into force of the Order; however, strict conditions – including any relevant notification and reporting requirements – will apply for individuals or entities to come within the scope of such general licences.