On Monday, the United States announced that it would not extend the temporary waivers that were granted to eight countries last November allowing them to purchase Iranian oil without threat of sanctions. The temporary waivers expire on May 2, 2019. This announcement comes almost six months after the United States re-imposed all “secondary sanctions” on Iran’s oil sector.

The secondary sanctions, which became effective on November 5, 2018, with the United States’ exit from the Joint Comprehensive Plan of Action, prohibit foreign persons (including foreign financial institutions, as well as foreign oil traders and dealers) from engaging with Iran’s energy, shipping, and financial sectors and dealing in Iranian crude oil. On that same day, the United States granted temporary waivers to China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey that allowed financial institutions and companies under their primary jurisdiction to continue to purchase and import Iranian oil without risking secondary sanctions. However, the temporary waivers allowed only oil traders and dealers subject to the “primary jurisdiction” of the waiver countries to purchase Iranian oil and only for limited amounts and for a limited period.

Foreign financial institutions and companies, previously acting under the temporary waivers, will risk secondary sanctions for dealing and trading in Iranian oil after May 2. Significantly, the US refusal to grant waiver extensions means that the United States seeks to exclude Iran completely from the global export market. Traders should therefore anticipate that sellers of Iranian crude may use illegitimate and fraudulent methods to bring Iran’s oil to market. Oil traders, shipping companies and financial institutions should be alert to the potential for deceptive practices and illicit third-country transactions used by Iran to export its oil and receive the proceeds of those sales.

This update discusses the key issues surrounding the US waiver denial and builds off our prior Legal Update on the re-imposition of the Iran secondary sanctions and the issuance of the temporary waivers. (Please refer to our November 13, 2018, alert for further discussion on US secondary sanctions against Iran.)

1. US refuses to renew any of the temporary waivers

Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 allows the President to grant an exemption to a country if it demonstrates a “significant reduction” of purchases of Iranian crude oil. Pursuant to a significant reduction waiver, the country (and companies under its primary jurisdiction) are permitted to continue purchasing oil from Iran even with the secondary sanctions in place without the threat of US sanctions. However, these waivers last only 180 days, with the possibility for an extension of the waiver.

Until now, Japan, India, South Korea, India and China have each been taking advantage of the waivers, with India and China being the two largest importers of Iranian oil. All of the temporary waivers are set to expire on May 2, 2019. When Secretary of State Pompeo announced on Monday that the waivers would not be renewed, the United States made it clear that foreign financial institutions and companies must end dealings in or related to Iranian oil on May 2 if they want to continue to have a presence in the US financial system.

Banks in Iranian oil importing countries that do not use the US financial system may choose to continue to transact dealings in Iranian oil. As a result, the US announcement is not expected to completely eliminate all Iran oil exports.

2. US denial of waiver extensions will increase pressure on Iran to heighten use of illegitimate methods to export oil

In view of increasing internal pressure to bring Iranian oil to market, US and non-US oil traders are at heightened risk of unwittingly dealing in sanctioned trades or transactions involving Iranian oil or Iranian interests. Iran has stated that it would continue to export its oil when the secondary sanctions were re-imposed in November and continues to deny the authority and value of the US sanctions and waivers. Meanwhile, the United States has taken note of various illegitimate methods used to conceal the source of Iranian oil, including falsification of certificates of origin and shipping documents, re-flagging and renaming of vessels, the use of front companies in third countries, and vessels that seek to evade vessel tracking by the disabling of transponders.

As long as US primary and secondary sanctions remain in place, US and foreign oil traders and dealers should conduct appropriate due diligence to identify and respond to deceptive practices utilized to facilitate trading in Iranian oil. The Financial Crimes Enforcement Network (FinCEN) has issued an advisory, placing the industry on notice of some of the ways that Iran engages in illicit transactions to circumvent US sanctions. (Please see our November 13, 2018, legal alert for further discussion of FinCEN’s advisory.)