In the past 48 hours, Congress and the Obama Administration have taken steps to significantly expand the scope of U.S. sanctions against Iran. Most importantly, both houses of Congress passed legislation on 1 August 2012 that would make broad changes to U.S. law, including the application of U.S. sanctions against Iran to companies owned or controlled by U.S. persons, as described below. President Obama is expected to sign the legislation. In addition, on 31 July 2012, President Obama and the Treasury Department’s Office of Foreign Assets Controls (OFAC) announced additional sanctions primarily aimed at financial institutions and other persons engaged in transactions involving Iran’s petroleum sector. Global companies should take immediate steps to assess the effects of these developments on their operations.

New legislation targeting Iran

On 1 August 2012, Congress passed legislation significantly expanding the scope of U.S. economic sanctions against Iran. This bill, referred to as the “Iran Threat Reduction and Syria Human Rights Act of 2012” (the Bill), was passed by the House of Representatives by a vote of 421-6 and was approved by the Senate via a voice vote. Congress now awaits President Obama’s signature for the Bill to become law.

The Bill is aimed at strengthening sanctions against Iran (and at applying sanctions against human rights violators with respect to Syria). Various additional sanctions that would be imposed under the Bill concern particular industries in Iran, including the petroleum, petrochemical, oil and natural gas, financial, and energy sectors. In addition, there are prohibitions applicable to those providing insurance or re-insurance to Iran’s oil sector, or to the National Iranian Oil Company (NIOC) or the National Iranian Tanker Company (NITC), as well as other prohibitions tied to specific sectors, including shipping.

While the Bill provides additional legal authorities, global companies must consider that there are even more significant changes to U.S. law, reaching beyond the energy and financial sectors. For example, the Bill would, among other measures:

  • Make non-U.S. entities owned or controlled by U.S. companies subject to U.S. sanctions against Iran under OFAC’s Iranian Transactions Regulations and related Executive Orders. The Bill states that the term “own or control” means (1) holding more than 50 percent of the equity interest by vote or value in the entity; (2) holding a majority of seats on the board of directors of the entity; or (3) otherwise controlling the actions, policies, or personnel decisions of the entity. This provision would be effective no later than 60 days from the enactment of the Bill. Companies should immediately assess whether their subsidiaries are engaging in restricted activities, determine whether there are contractual provisions that would support non-performance, assess the ability to obtain OFAC licenses, and evaluate next steps.
  • Require all companies that trade on the U.S. stock exchange to disclose certain Iran-related business to the Securities and Exchange Commission.
  • Impose sanctions on individuals and companies that transfer or facilitate the transfer of, goods or technologies to Iran (or provide certain support services) that could be used to commit human rights abuses in Iran (e.g., firearms, tear gas, rubber bullets, surveillance equipment, etc.).
  • Impose sanctions on those who provide insurance or re-insurance to NIOC, NITC, or otherwise insure or re-insure investments in Iran’s oil sector.
  • Codify certain executive orders requiring sanctions against the Central Bank of Iran to include enablers and facilitators.
  • Define “financial transaction” for purposes of the Bill to include any transfer of value involving a financial institution, including the transfer of forwards, futures, options, swaps, or precious metals such as gold, silver, platinum, and palladium.
  • Support the ability of individual states and local governments to implement laws regarding how investment assets are valued for purposes of safety and soundness of financial institutions, in addition to insurers that are consistent with the Bill and U.S. economic sanctions against Iran. 
  • Broaden the grounds for denial of visas, including the denial of visas to Iranian citizens seeking a course of study or a career in the energy sector, nuclear science, nuclear engineering, or a related field in Iran.
The Bill raises a number of interpretative issues. For example, companies will want OFAC to clarify its position on transactions conducted pursuant to licenses issued by OFAC that are consistent with U.S. foreign policy and national security obligations (such as licenses for medicine, medical supplies, and other activities).
New Executive Order targeting Iran

On 31 July 2012, President Obama signed an Executive Order (the E.O.) granting new sanctions authorities to the Treasury Department and the State Department targeting Iran’s energy and petrochemical industries.

  1. New sanctions on foreign financial institutions

Under the E.O., the Treasury Department is authorized to impose certain financial sanctions on foreign financial institutions found to have knowingly conducted or facilitated certain “significant financial transactions,” as follows:

  1. transactions with NIOC or Naftiran Intertrade Company (NICO), except for sales of refined petroleum products to NIOC or NICO that are below the dollar thresholds that could trigger sanctions under the Iran Sanctions Act (US$1 million for an individual sale or US$5 million for the aggregate value of a series of transactions during a 12-month period);
  2. transactions for the purchase or acquisition of petroleum or petroleum products from Iran through any channel; and
  3. transactions for the purchase or acquisition of petrochemical products from Iran.  

Foreign financial institutions found to have engaged in such transactions may be prohibited from maintaining a correspondence account or a payable-through account in the United States.

The term “significant financial transactions” is not defined in the E.O. However, OFAC has issued guidance stating that it expects to apply the same framework under this E.O. that is has applied under existing laws, including section 1245 of the NDAA and section 104 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). Under that framework, OFAC may consider a number of factors related to the transactions or services, in determining whether transactions are significant, including, but not limited to: size, number, and frequency; type, complexity, and commercial purpose; the level of awareness or involvement by the bank’s management; whether the activity or payment illustrates a pattern or practice, or is an isolated event; the ultimate economic benefit conferred upon the sanctions target; and whether the transactions involved the use of deceptive financial practices to obscure the identities of the parties involved.

For the purpose of these provisions, “foreign financial institution” is defined to have the same meaning as CISADA, and thus does not include insurance companies.

As this measure is aimed at deterring the establishment of workaround payment mechanisms to circumvent National Defense Authorization Act (NDAA) oil sanctions, the existing exception rules under NDAA apply to the transactions described in (i) and (ii) above. Therefore, countries determined by the Secretary of State to have significantly reduced their purchases of Iranian crude oil will qualify for the exception to this new measure.  

  1. New sanctions on any person providing certain material support to Iran

The E.O. authorizes the Treasury Department to block the property of any person determined to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of:

  • NIOC, NICO, or the Central Bank of Iran; or
  • the purchase or acquisition of U.S. bank notes or precious metals by the Iranian government.
  1. New sanctions on any person purchasing Iranian petroleum and petrochemical products

Finally, the E.O. authorizes the State Department to impose additional extraterritorial sanctions against any person found to be knowingly engaged in significant transactions for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran. Such persons may be subject to the same sanctions imposed under the Iran Sanctions Act, as amended in 2010 by CISADA (see our Client Alert dated 1 July 2010).

For further information on the Executive Order, please click here.

Additional entities sanctioned under CISADA

On 31 July 2012, OFAC announced the imposition of extraterritorial sanctions under CISADA against Bank of Kunlun in China and Elaf Islamic Bank in Iraq for knowingly facilitating significant transactions or providing significant financial services for designated Iranian banks. The Bank of Kunlun and Elaf Islamic Bank are now prohibited from directly accessing the U.S. financial system. Financial institutions may not open correspondent or payable-through accounts for these two entities in the United States, and any financial institutions that currently hold such accounts must close them within 10 days of the announcement.