On July 1, 2010, President Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). Congress enacted the CISADA in order to help “prevent Iran from developing nuclear weapons,” thereby protecting “the essential security interests of the United States.” Among other things, Congress expressed its sense that “international diplomatic efforts to address Iran’s illicit nuclear efforts and support for international terrorism are more likely to be effective if strong additional sanctions are imposed on the Government of Iran.”  

The CISADA supplements and amends the Iran Sanctions Act of 1996 (“ISA”) by expanding the list of sanctionable activities, providing for additional types of sanctions, and requiring the government to conduct investigations should it receive “credible information” about a violation of the sanctions programs.  

The new law places restrictions on financial institutions and energy-related businesses that are meant to weaken the Iranian banking and energy sectors. The statute requires the Treasury Department to implement regulations that accomplish these goals within 90 days of the enactment of the new law, that is, by September 29, 2010. The CISADA itself is generally effective as of the day of enactment.  

On August 16, 2010, in order to implement Sections 104(c) and 104(d) of the CISADA, the United States Department of the Treasury issued the Iranian Financial Sanctions Regulations (the “IFSR”).1 According to the press release issued by the Office of Foreign Assets Control, the regulations are meant to restrict the access of foreign financial institutions to the United States if such institutions engage in activities that support Iran’s weapons proliferation or its support of terrorism. The regulations were immediately effective, but are subject to comment until October 15, 2010.  

THE CISADA’S SANCTIONS ON FINANCIAL INSTITUTIONS

The CISADA requires the Treasury Department to promulgate regulations that are aimed at preventing financial institutions2 from assisting Iran’s nuclear weapons programs or its support for international terrorism.

Within the Act’s Congressional findings, the CISADA acknowledges the recent significant steps taken by both the Financial Action Task Force (“FATF")3 and the United Nations Security Council4 to impose greater economic sanctions on Iran. The Act specifically discusses FATF’s February 2010 meeting, among other FATF initiatives, in which the task force called on FATF members to apply counter measures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing risks emanating from Iran. Similarly, the CISADA points to the added limitations in UN Security Council Resolution 1929 on transactions involving Iranian financial institutions, including the Central Bank of Iran. The aspects of the CISADA relating to financial institutions arise in part out of these FATF and United Nations initiatives.  

Sanctions on foreign financial institutions

In Section 104(c), the CISADA calls for the Secretary of the Treasury to promulgate regulations that will “prohibit, or impose strict conditions on” the opening or maintenance of correspondent or payable-through accounts5 in the United States by any foreign financial institution that engages in the following:  

  • Facilitating efforts of the Government of Iran and the Iranian Revolutionary Guard Corps (“IRGC”) in support of weapons of mass destruction (“WMD”) or activities related to international terrorism;  
  • Facilitating activities of a person subject to financial sanctions pursuant to certain Iran-related United Nations Security Council resolutions;6  
  • Engaging in money laundering to aid WMD programs, support international terrorism or provide support to those sanctioned by the UN Security Council;7  
  • Facilitating efforts by the Central Bank of Iran or any other Iranian financial institution to aid WMD programs, support for international terrorism or provide support to those sanctioned by the UN Security Council; or  
  • Facilitating a significant transaction or transactions or significant financial services for IRGC, its agents or affiliates, or other Iranian institutions that are subject to the International Emergency Economic Powers Act (“IEEPA”) or other Iranian institutions that are subject to the U.S. Department of Treasury’s blocking order in connection with WMD programs or Iran’s support for international terrorism.8  

Restrictions on domestic financial institutions

Liability for acts of subsidiaries: In Section 104(d), the CISADA calls for the Treasury Department to promulgate regulations prohibiting any entity owned or controlled by a domestic financial institution from “knowingly engaging in a transaction ... with or benefiting [IRGC] or any of its agents or affiliates whose property or interests in property are blocked pursuant to [IEEPA].” The domestic financial institution will be liable for its subsidiary’s actions if the domestic financial institution “knew or should have known that the [subsidiary] violated, attempted to violate, conspired to violate, or caused a violation of such regulations.”9  

In other words, this provision permits financial institutions in the United States to be sanctioned for the activities of their subsidiaries (wherever the subsidiaries are located) if the parent knew or should have known about the sanctionable activities. The fact that the parent company may not have participated in the sanctioned activities is not a defense, nor is the absence of actual knowledge.  

Required procedures for correspondent or payable-through accounts: In Section 104(e), the Secretary of the Treasury is also directed to promulgate regulations that will require a domestic financial institution maintaining a correspondent or payable-through account in the United States for a foreign financial institution to take one or more of the following steps:  

  • Perform an audit to determine whether the foreign financial institution is engaged in any sanctionable activity;  
  • Report to the Treasury Department with respect to transactions or other financial services provided with respect to any such activity;  
  • Certify to the best of the financial institution’s knowledge that the foreign financial institution is not engaged in sanctionable activity; and  
  • Establish due diligence policies, procedures, and controls, such as the due diligence policies under Section 312 of the USA PATRIOT Act of 2001, with respect to correspondent and payable-through accounts, reasonably designed to detect whether the Secretary of the Treasury has found the foreign financial institution to knowingly engage in sanctionable activity.  

THE IRANIAN FINANCIAL SANCTIONS REGULATIONS (“IFSR”)

There are two central provisions in the IFSR that implement Sections 104(c) and 104(d) of the CISADA. No regulations have been promulgated as of yet to implement Section 104(e) of the CISADA. The Treasury Department is required to promulgate implementing regulations within 90 days of the statute’s enactment as to Sections 104(c) and 104(d), (i.e., September 29, 2010). The CISADA, however, does not provide a deadline to implement regulations under Section 104(e), and the Treasury has yet to do so.  

First, with respect to Section 104(c), the regulations provide that sanctions may be imposed on foreign financial institutions that engage in one or more of the five types of prohibited activities itemized in Section 104(c).10 As noted above, one of the prohibited activities is to “facilitate[] a significant transaction or transactions or provide[] significant financial services” to IRGC or another financial institution whose property and interest in property are blocked due to its support for Iran’s weapons proliferation or international terrorism. The CISADA did not define either “facilitation” or “significant,” leaving these terms to be defined by implementing regulations.  

The new regulations define “facilitation” as “the provision of assistance by a foreign financial institution for those efforts, activities, or transactions, including, but not limited to, the provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; or the provision of other services of any kind; or the provision of personnel; or the provision of software, technology, or goods of any kind.”11

 The IFSR also provides examples of the types of factors that will be relevant in determining whether a transaction or financial service is “significant.” These factors include the following:  

  • The size, number and frequency of transactions or financial services provided over a period of time, including whether they are increasing or decreasing over time;  
  • The nature of the transaction or financial services, including the type, complexity and commercial purpose;  
  • Whether senior management or clerical personnel are approving the transactions;  
  • Whether the transaction or financial services are part of a pattern of conduct or the result of business development strategy;  
  • The proximity between the provider of the service and the blocked person;  
  • The impact of the transaction or financial services on support for weapons proliferation or terrorism; and  
  • Whether the provider attempted to obscure or conceal the actual parties or true nature of the transactions.  

This list is non-exhaustive, and the IFSR specifically leave open the possibility of considering other factors to be relevant in individual cases.12  

Second, also with respect to Section 104(c), the particular foreign financial institutions that engage in the sanctionable activities will be identified in a list that OFAC has yet to promulgate, which will be set forth in Appendix A to the IFSR. Once a foreign financial institution is included on this forthcoming list, OFAC will either (i) impose conditions on the ability of the foreign financial institution to open or maintain a correspondent account or payable-through account in the United States or (ii) completely prohibit United States financial institutions from opening such accounts for sanctioned foreign financial institutions (and require any existing accounts to be closed within 10 days from the date the Treasury Department prohibits the activity).13  

The regulations also specifically address the transactions that are authorized in connection with the closing of an account.14 In essence, the financial institution is permitted to process only those transactions that are necessary to close the account and to transfer the remaining funds to a financial institution location outside of the United States.15 Specific licenses may be issued on a “case-by-case basis” to authorize other transactions, or to permit the financial institution to have longer than 10 days to take the steps necessary to close the account.16  

Should OFAC decide not to place a complete prohibition on the opening of such accounts for an identified foreign financial institution, the IFSR identifies four specific types of conditions that may be imposed on the opening of such accounts:  

  • Prohibiting any provision of trade finance through the correspondent or payable-through account;  
  • Restricting the transactions that may be processed through the correspondent or payable-through account;
  • Placing monetary limits on the transactions that may be processed through the correspondent or payablethrough account; and  
  • Requiring pre-approval from the United States financial institution for all transactions processed through the account.17  

With respect to Section 104(d) of the CISADA, the IFSR provide that “any person that is owned or controlled by a U.S. financial institution is prohibited from knowingly engaging in any transaction with or benefiting [IRGC] or any of its agents or affiliates whose property and interests in property are blocked pursuant to [IEEPA].”18 This regulation tracks the statutory language in Section 104(d).  

The IFSR contain some other important provisions. Notably, the definition of “U.S. financial institution” in the IFSR specifically includes not only the financial institutions themselves, but also “U.S. holding companies, U.S. affiliates, or U.S. subsidiaries” of financial institutions.19 This means that some entities may be subject to the new regulations on correspondent and payable-through accounts simply by virtue of being an affiliate of a financial institution.  

Additionally, the IFSR state that “[a] person whose property and interests in property are blocked pursuant to [IEEPA] has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest.”20 Accordingly, “[t]he property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to [IEEPA].”21  

Finally, the provisions of Section 104(e) of the CISADA requiring, inter alia, audits to determine whether a particular foreign financial institution is engaged in sanctionable activity and the establishment of due diligence policies, have not yet been the subject of proposed regulations. Because Section 104(e) may require significant action by domestic institutions, the promulgation of further regulations bears watching.  

SANCTIONS REGARDING PETROLEUM RESOURCES

The CISADA imposes broad and far-reaching sanctions regarding Iran’s energy sector. There are several important aspects to the new sanctions provisions.  

First, the CISADA includes a broadened definition of “petroleum resources,” drawing within its scope tankers and pipelines used to transport oil or natural gas.22 This broadens the prohibition against investment in the development of Iranian petroleum resources that was already in place under the ISA.  

Second, the CISADA prohibits a person from making an investment when the person knew or should have known that the invested funds would be used to support Iran’s development of its petroleum resources.23  

Third, the CISADA calls for sanctions on persons who export refined petroleum resources to Iran or otherwise support its domestic production within Iran. There are three aspects to these sanctions: (i) No person may sell, lease or provide goods and services that “significantly facilitate” maintaining or expanding Iran’s domestic production of refined petroleum. The sanctions apply to support valued at $1 million in a single transaction or $5 million or more in all transactions during a 12-month period. (ii) No person may sell or provide refined petroleum products to Iran with a fair market value of $1 million in a single transaction or $5 million or more during a 12-month period. (iii) No person may sell, lease or provide goods and services that could “directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products.”24 Such prohibited services include financing or brokering the sale or leasing of equipment, providing shipping services to deliver refined petroleum products to Iran or providing insurance for prohibited transactions.  

There is a narrow exception to this final provision for insurers, reinsurers and underwriters that can be applied if the government determines that the person “exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not underwrite or enter into a contract to provide insurance or reinsurance for the sale, lease, or provision” of goods or services.25 Accordingly, it will be essential for businesses to implement due diligence programs that will be able to take advantage of this safe harbor should it become necessary.  

OTHER SIGNIFICANT CHANGES TO THE SCOPE OF POTENTIAL LIABILITY, THE TYPES OF POTENTIAL SANCTIONS, AND THE INVESTIGATION AND ENFORCEMENT PROCESS

Mandatory investigations  

Under the CISADA, after receiving credible information indicating that a person is engaged in sanctionable conduct, the President is required to initiate an investigation.26 There is an exception to the mandatory investigation rule if the President certifies in writing that (i) the target of the investigation is no longer engaging in the sanctionable activities or has taken verifiable steps toward stopping those activities and (ii) has received reliable assurances that the target will not engage in such activities in the future. Investigations are to be completed within 180 days of initiation (which is a shorter time period than that in which many OFAC investigations are concluded).  

Potential sanctions

The CISADA introduces three new sanctions that can be imposed on violators of the CISADA, supplementing the six types of sanctions that were permitted under the ISA.27 These three additional types of sanctions apply to those who engage in certain violative transactions, to the extent that the transactions involve property that is subject to the jurisdiction of the United States and in which the sanctioned person has any interest. In particular, the President may prohibit the violators from engaging in (i) transactions in foreign exchange, (ii) transfers of credit or payments between financial institutions or by, through, or to any financial institution, and/or (iii) transactions involving property. The CISADA also requires the President to apply three of the potential nine sanctions. In contrast, the ISA only required the President to impose two of six potential sanctions.  

Waiver authority

Although the CISADA allows the President to waive sanctions against foreign entities, such authority will be more difficult to exercise than the waiver authority found under the ISA. Instead of the waiver being permitted where waiver is “important to the national interest,” as under the ISA, waiver now is authorized only where it is “necessary to the national interest.”28 The CISADA therefore puts greater pressure on the President to seek sanctions and to enforce all provisions of the sanctions programs in the strictest possible manner.  

No government contracts for violators

According to Section 106 of the CISADA, the U.S. government will no longer award contracts to entities that export certain “sensitive technology” to Iran. Also, effective 90 days after the enactment of the CISADA, prospective government contractors will be required to certify, on penalty of perjury, that neither the contractor nor any entity owned or controlled by it are engaged in sanctionable activities.  

Asset freezes

According to Section 103(b)(3) of the CISADA, any individual Iranian citizens who are engaged in Iran’s WMD programs or its support for international terrorism can have their assets or their family’s assets frozen.  

State and local government divestment campaigns

Pursuant to Section 202 of the CISADA, state and local governments are now permitted to divest their holdings in any entity that has (i) an investment of $20 million or more in the Iran energy sector or (ii) is a financial institution that extends $20 million or more in credit to another person for at least 45 days where that person will use the credit for investment in the Iran energy sector.29 Such divestment campaigns were not previously authorized by federal law.30  

ERISA

Section 204 of the CISADA provides that a fiduciary for an employee benefit plan may divest plan assets from, or avoid investing plan assets in, any person that the fiduciary determines engages in the type of investment activities that are now properly the subject of state and local government divestment (discussed in the preceding paragraph).31 The provision specifically states that such a determination will not constitute a breach of the fiduciary duties imposed by ERISA if the fiduciary makes the determination using credible and publicly available information and prudently determines that the result of divestment would not be expected to provide the benefit plan with either (i) a lower rate of return than alternative investments of similar risk or (ii) a higher degree of risk than alternative investments with commensurate rates of return.  

Anti-diversion measures

The Director of National Intelligence (who is an executive branch official subject to the direction of the President) is required to present a report identifying countries that permit U.S.-origin goods and services to be diverted to Iran for use in its WMD programs or its support for international terrorism.32 Such countries will face heightened export controls.  

Increased maximum criminal penalties

Under the CISADA, criminal penalties associated with violating U.S. sanctions have been increased. The maximum statutory term of imprisonment has been increased from 10 years to 20 years, and the maximum statutory fine has been raised from $10,000 to $1 million.33