May 2011 saw multiple, coordinated developments in the multilateral drive to prevent nuclear weapons proliferation by Iran. The United States and the European Union (EU) announced new sanctions targeting the Iranian government and international commercial entities engaged in business with the Islamic Republic. Both chambers of the U.S. Congress, meanwhile, continued to develop legislation designed to impose additional restrictions on Iran, while also ratcheting up political pressure on the Obama administration to implement the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA). (See June 25, 2010 Alston & Bird advisory.)
U.S. Executive Branch Actions – Targeting Iran’s Energy Sectors
The United States announced a series of sanctions coordinated with the EU effort (discussed below) on May 23 and 24 that further target Iranian nuclear proliferation activities. New Executive Order 13574 On May 23, President Obama issued Executive Order 13574, “Authorizing the Implementation of Certain Sanctions as Set Forth in the Iran Sanctions Act of 1996, as Amended.” Executive Order 13574 delegates to the Secretary of the Treasury authority to implement certain sanctions upon parties determined to have made prohibited investments in Iran’s energy sector or to have engaged in certain prohibited activities relating to Iran’s refined petroleum sector. The Executive Order gives effect to elements of CISADA, which both expanded the range of sanctionable energy-related activities and potentially imposed new sanctions on private sector actors. The Executive Order applies broadly to U.S. persons and transactions subject to the jurisdiction of the United States, and its sanctions measures, as described below, particularly impact financial institutions in the United States. Notwithstanding the above jurisdictional limitations, a target person designated under the Iran Sanctions Act of 1996, as amended by CISADA, could be located anywhere, and therefore the Executive Order helps to implement the extraterritorial reach of CISADA. Thus, it could affect U.S. offices of foreign financial institutions engaged in transactions with designated persons if those transactions touch the United States.
Executive Order 13574 provides for the Secretary of the Treasury, in consultation with the Secretary of State, to impose any of the following sanctions, as determined by either the President or the Secretary of State, on a designated person:
- prohibit any United States financial institution from making loans or providing credits to the designated person consistent with Section 6(a)(3) of ISA;
- prohibit any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the designated person has any interest;
- prohibit any transfers of credit or payments between financial institutions or by, through or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States and involve any interest of the designated person;
- block all property and interests in property1 that are in the United States, that come within the United States, or that are or come within the possession or control of any U.S. person, including any overseas branch of the designated person, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn or otherwise dealt information; or
- restrict or prohibit imports of goods, technology or services, directly or indirectly, into the United States from the designated person.
New Designations of Sanctioned Parties
Following the issuance of Executive Order 13574, the Obama administration immediately put it touse. On May 24, Secretary of State Hillary Clinton designated under CISADA seven foreign companies engaged in supplying or transporting refined petroleum products, including gasoline, to Iran. The seven companies subject to sanctions implemented by Treasury under the new Executive Order are:
- Petrochemical Commercial Company International (Jersey)
- Royal Oyster Group (United Arab Emirates)
- Speedy Ship (United Arab Emirates and Iran)
- Tanker Pacific (Singapore)
- Ofer Brothers Group (Israel)
- Associated Shipbrokering (Monaco)
- Petróleos de Venezuela (Venezuela)
The sanctions imposed on the above entities are tailored to the specific circumstances of each targeted company. For example, the sanctions on Petróleos de Venezuela (PDVSA) are limited to a ban on competing for U.S. government procurement contracts, securing financing from the U.S. Export-Import Bank and obtaining U.S. export licenses. The ban does not apply to PDVSA subsidiaries and does not prohibit the export of crude oil to the United States.
Guidelines Regarding Services to Shippers of Refined Petroleum Products to Iran
The Department of State released related guidelines under CISADA for the provision of goods and services, including insurance, to entities that ship refined petroleum products to Iran. The guidelines, issued May 23, provide clear examples of activities that are sanctionable under CISADA.2 These include:
- Use of a ship, controlled by ownership or charter agreement, to provide shipping services to supply Iran with gasoline, diesel, jet fuel or aviation gasoline.
- Charter of a ship to another company that is using the ship to supply Iran with gasoline, diesel, jet fuel or aviation gasoline. The ship owner may still have engaged in sanctionable activity even if it does not have full control of the ship under the charter agreement.
- Facilitation (e.g. by brokering) of the provision of the ship, either by sale or charter, to a company for the transportation of refined petroleum products to Iran. Brokers are considered to be facilitating or “providing” the goods or services that they have sourced for clients. In the case of a ship sale or provision of insurance, the broker is considered to have provided the entire value of the goods and services.
- Provision of insurance to a company for the transportation of refined petroleum products to Iran, if the insurance premiums are above threshold amounts. Insurance can include cargo insurance, P&I insurance, hull insurance and contract frustration insurance.
- Facilitation (e.g., by brokering) of the provision of insurance for the transportation of refined petroleum products to Iran.
- Use of a ship, controlled by ownership or charter agreement, to provide shipping services for the purpose of supplying goods to be used to maintain or expand Iran’s refineries, such as refinery equipment.
- Facilitation (e.g., by brokering) of the provision of cargo or insurance to a company for the purpose of supplying goods or to facilitate the transportation of goods to maintain or expand Iran’s refineries.
- Provision of insurance to a company for the transportation of goods to maintain or expand Iran’s refineries.
Iran, North Korea and Syria Nonproliferation Act
On May 23, acting under authority of the Iran, North Korea and Syria Nonproliferation Act (INKSNA) (formerly the Iran Nonproliferation Act), the Department of State sanctioned some 16 Belarusian, Chinese, Iranian, North Korean, Syrian and Venezuelan entities and individual persons for transactions with Iran, North Korea or Syria involving export-controlled equipment and technology, or for having the potential to make a material contribution to weapons of mass destruction or cruise or ballistic missile systems. The sanctions are largely symbolic because they include measures such as bans on U.S. government procurement, on U.S. government assistance and on munitions or dual-use export licenses (none of which the targeted entities or individuals would likely have benefited from in the first place).
Draft U.S. Legislation
Finally, administration efforts to step up enforcement of existing sanctions on Iran have not been enough for a growing, vocal group of congressional critics. In May, legislation was introduced in both chambers of Congress that seeks to expand U.S. sanctions on Iran. Described by supporters as an effort to tighten loopholes created by the enactment of CISADA in 2010, both bills—the Iran, North Korea, and Syria Sanctions Consolidation Act of 2011 (S 1048) and the Iran Threat Reduction Act (HR 1905)—seek to make more restrictive existing sanctions on Iran’s energy and financial sectors and to counter efforts by the Iranian government to evade international sanctions.
The bills would expand sanctions to include Iran’s crude oil sector, target human rights abusers and focus specific attention on the commercial activities of the Iranian Revolutionary Guard Corps and its affiliates.
While both pieces of legislation are similar, the Senate bill (S 1048) contains several provisions that are likely to be of concern to multinational companies. It would, among other things:
- Impose ISA sanctions on any company (U.S. or otherwise) that participates in a joint venture with respect to the development of petroleum resources outside of Iran in which Iran is a substantial partner or investor or through which Iran “could” receive “technological knowledge or equipment” that “could” contribute to the enhancement of Iran’s ability to develop petroleum resources in Iran.
- Expand ISA sanctions to include the targeting of activities that constitute any “direct or significant” assistance with respect to the construction, modernization or repair of Iranian port facilities, railroads or roads, if their “primary use” is to support the transportation of “refined petroleum products.”
- Require each “issuer” (including companies whose American Depository Receipts are traded on U.S. exchanges) to certify to the U.S. Securities and Exchange Commission on a quarterly or annual basis whether it or any of its affiliates engaged in any sanctionable activity described in Section 5 of the ISA, “knowingly” engaged in any activity described in Section 104(c)(2) of CISADA or “knowingly” conducted any transaction with certain blocked Iranian persons (if the issuer discloses such an activity, a mandatory ISA investigation would ensue).
The House measure (HR 1905) would eliminate some existing waiver authority afforded the President under the ISA and CISADA, creating instead mandatory sanctions on persons who provide the Iranian regime with the materials, technologies and other assistance to pursue nuclear, chemical, biological and missile programs. HR 1905 also would create a new, higher standard for waivers of energy sanctions by requiring the President, prior to issuing a waiver, to notify Congress and certify that failure to waive would constitute an “unusual and extraordinary threat to the national security interests” of the United States.
The bills enjoy bipartisan support in both chambers. In the Senate, Majority Leader Harry Reid (D-NV) endorsed the new sanctions proposed by S 1048, which may speed the path to a Senate vote on the legislation, possibly even prior to the August summer recess. The differences in the two bills, coupled with growing bipartisan support for another expansion of sanctions against Iran, suggest that the legislation is likely to be combined in conference committee, with inclusion of most of the measures found in each bill.
European Union Addresses Iranian Attempts to Skirt Prior Sanctions
On May 24, the EU placed sanctions on more than 100 firms with ties to Iran. The sanctions, authorized by Regulation (EU) No.503/2011, seek to prevent efforts by the Iranian government to circumvent a broad United Nations sanctions regime initiated in June 2010. The new sanctions consist of asset freezes on companies established in EU member states that allegedly serve as front companies for Iranian government agencies, including Iran’s Defense Industries Organization, the Aerospace Industries Organization and the Iranian Revolutionary Guard Corps.3 Individuals associated with the named firms are also newly subject to asset freezes and travel bans. The EU action furthermore includes a separate list of designated persons sanctioned for their involvement with human rights abuses in Iran.4
A primary target of the EU regulation was the European-Iranian Trade Bank (EIH), an Iranian-owned bank in Germany with reported ties to Iran’s illicit nuclear weapons development effort. On May 17, the U.S. Department of the Treasury issued sanctions against another Iranian bank, the Bank of Industry and Mine (BIM), which had engaged EIH to facilitate prohibited transactions with previously sanctioned Iranian state banks in order to avoid sanctions imposed by the EU in 2010. Since July 2010, BIM allowed EIH to transfer deposits it held for many of those designated banks to an account at BIM in Iran. BIM then used this account as a conduit for payments and transactions into Europe by some of the EU-sanctioned banks, including Bank Mellat and Bank Saderat.