On January 2, 2013, President Obama signed a law significantly expanding existing US economic sanctions against Iran and targeting non-US third parties that do business with Iran. The Iran Freedom and Counter-Proliferation Act of 2012 (the “IFCPA”), codified at Subtitle D, §§ 1241-1255 of the National Defense Authorization Act for Fiscal Year 2013 (H.R. 4310) (the “2013 NDAA”), overwhelmingly passed the House and Senate in late December 2012. This memorandum examines the US government’s continued reliance on such extraterritorial sanctions and summarizes key provisions of the IFCPA, as well as potential implications these new sanctions measures hold for multinational companies.
US economic sanctions against Iran have been a major feature of US foreign policy since the 1979 Islamic revolution. Originally focused on countering Iran’s support for terrorism, sanctions have been refined since the mid-1990s to compel Iran to limit the scope of its nuclear program by intensifying economic pressure on the country’s regime.
This latest round of sanctions measures is intended to further isolate (and thus weaken) key sectors of the Iranian economy with the threat of punitive measures that the President would be required to impose on persons who continue to deal with Iran. As a practical matter, existing US sanctions, based principally on the International Emergency Economic Powers Act, as amended (“IEEPA”), prohibit US persons anywhere in the world (recently extended to cover non-US subsidiaries that are owned or controlled by US persons) from dealing with Iran, and require that Iranian government assets in the control of US banks and other US persons be blocked.
Over the years, the United States has increasingly relied on extraterritorial measures, especially against persons and entities outside the United States that persist in trading with Iran. These measures are principally contained in the Iran Sanctions Act of 1996, as amended (the “ISA”), the Comprehensive Iran Sanctions and Divestment Accountability Act of 2010 (“CISADA”), the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), other legislation, and several Presidential executive orders.1
To varying degrees, and subject to increasingly limited Presidential flexibility as to their imposition, these sanctions consist of a menu of measures that the President is required or authorized to impose under prescribed circumstances to restrict or deny access on the part of sanctioned persons to the US commercial and financial sectors. For example, ISA § 6(a) prescribes several sanctions measures available to be imposed under specific circumstances (five or more of these measures are required to be imposed against a person that engages in activities prescribed in the ISA and in subsequent US sanctions laws and legal authorities). These measures prohibit: (i) export assistance from the Export-Import Bank of the United States; (ii) the issuance of US export licenses; (iii) private US bank loans exceeding $10 million in any twelve-month period; (iv) if the sanctioned person is a financial institution, designation as a primary dealer in US government debt instruments or service as a repository of US government funds; (v) participation in US government contracts; (vi) foreign exchange transactions subject to US jurisdiction; (vii) financial transactions subject to US jurisdiction; (viii) transactions regarding property subject to US jurisdiction; (ix) US persons from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person; (x) entry into the United States of key officers or investors of a sanctioned company; and (xi) imports into the United States from the sanctioned person. In addition, the President may also impose any of the foregoing sanctions on a principal executive officer or other key official of a sanctioned entity.
Initially, extraterritorial sanctions measures were directed at prescribed activities undertaken in relation to Iran’s energy sector and the proliferation of weapons of mass destruction. However, in recent years the scope of activities that could trigger the imposition of extraterritorial sanctions has widened to include, for example, dealings with entities linked to the Iranian Revolutionary Guard Corps (the “IRGC”) and other designated Iranian governmental entities; transactions related to Iranian shipping; activities that facilitate Iranian censorship, cyber-suppression, or human rights abuses; and activities deemed to evade sanctions (e.g., concealing the participation of Iranian parties in a transaction).
Building on momentum created by the perceived success that US sanctions have had in exerting pressure on the Iranian economy, the US Congress passed ITRSHRA earlier this year, and in an attempt to build on that momentum, inserted the IFCPA into the 2013 NDAA.
Initially, the Obama Administration signaled strong opposition to both ITRSHRA and the IFCPA as impediments to the President’s ability to conduct foreign policy. For example, although the European Union (the “EU”) has strengthened its own reliance in recent years on economic sanctions as a tool to compel Iran to alter its stance on nuclear development, the prospect of even broader mandatory US extraterritorial sanctions threatens European firms that continue to deal with Iran, including major multinational firms that are largely in the process of winding down activities related to Iran, but which nevertheless have legacy interests they wish to preserve. The Administration has expressed the view that an inflexible application of extraterritorial sanctions could impair cooperation with the EU and other key international partners whose support is vital to advance US security and foreign policy interests.
Notwithstanding the Administration’s initial reluctance, the President signed both ITRSHRA and the IFCPA into law, and issued several executive orders further tightening sanctions against Iran and non-US parties doing business with Iran.
The IFCPA Raises the Bar
The latest round of sanctions measures contained in the IFCPA is intended to target other key sectors of the Iranian economy with the threat of punitive measures that the President would be required to impose on persons who continue to deal with Iran. Key aspects of the IFCPA are as follows:
- Energy, shipping, shipbuilding, and port operations targeted. IFCPA § 1244(a) finds that Iran’s energy, shipping, and shipbuilding sectors, as well as its ports, facilitate the country’s nuclear proliferation activities. Entities that operate ports in Iran or that are associated with these industrial sectors are therefore designated as entities of proliferation concern. IFCPA § 1244(b) specifically identifies the National Iranian Oil Company (“NIOC”), the National Iranian Tanker Company (“NITC”), and the Islamic Republic of Iran Shipping Lines (“IRISL”), as well as their affiliates, as falling within the scope of the designation.
IFCPA § 1244(c) requires the President, 180 or more days after the IFCPA’s enactment, to block all property and property interests subject to US jurisdiction of any person that the President determines, as of on or after 180 days from enactment: (i) is part of the energy, shipping, or shipbuilding sectors of Iran; (ii) operates a port in Iran; or (iii) knowingly provides significant financial, material, technological, or other support to either any person determined to fall within the scope of (i) or (ii) above, or any Iranian person on the List of Specially Designated Nationals and Blocked Persons (“SDN List”) maintained by the US Treasury Department, Office of Foreign Assets Control (“OFAC”) (except for certain Iranian financial institutions that have not been designated specifically in connection with the proliferation of weapons of mass destruction, terrorism, or human rights abuses).
IFCPA § 1244(d) requires the President to impose at least five of the sanctions measures prescribed by the ISA upon any entity or individual that, 180 days or more after the IFCPA’s enactment, knowingly sells, supplies, or transfers significant goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran, including NIOC, NITC, and IRISL. Moreover, the President is required to impose prohibitions on access by foreign financial institutions to the US financial sector for knowingly conducting or facilitating significant financial transactions in connection with the activities described above.
Exempt from sanctions under IFCPA § 1244 are certain activities related to providing humanitarian assistance to the people of Iran, as well as activities related to conducting or facilitating the sale of agricultural commodities, food, medicine, or medical devices to Iran, and the sale, supply, or transfer to or from Iran of natural gas (however, the exemption for natural gas does not extend to foreign financial institutions that conduct or facilitate financial transactions related to the sale, supply, or transfer of natural gas, except as described further below). In addition, the President is authorized to provide an exception for the imposition of sanctions for certain activities related to reconstruction assistance or economic development for Afghanistan.
Furthermore, transactions for the exportation of petroleum or petroleum products from Iran to any country that has been granted the so-called “substantial reduction” exception under the 2012 NDAA2, as limited by ITRSHRA, are exempt from the imposition of sanctions under IFCPA § 1244. In addition, the sanctions described above pertaining to foreign financial institutions do not apply if the foreign financial institution is subject to the primary jurisdiction of a “substantial reduction” country and the financial transaction in question: (i) is only for trade in goods or services; (ii) is not otherwise subject to US sanctions; (iii) is only between Iran and the home country of the foreign financial institution; and (iv) any funds owed to Iran as a result of such trade are credited to an account in that country. Likewise, foreign financial institutions, whatever their home country, that conduct or facilitate a financial transaction for the sale, supply, or transfer to or from Iran of natural gas are potentially subject to sanctions unless the transaction: (i) is only for trade in goods or services; (ii) is not otherwise subject to US sanctions; (iii) is only between Iran and the country with primary jurisdiction over the foreign financial institution; and (iv) any funds owed to Iran as a result of such trade are credited to an account in that country.
- Transactions involving precious metals and economically significant materials targeted. IFCPA § 1245 requires the President to impose at least five of the sanctions measures prescribed by the ISA upon any entity or individual that, 180 days or more after the IFCPA’s enactment, knowingly sells, supplies, or transfers, directly or indirectly, to or from Iran, precious metals or certain materials to be: (i) used in the energy, shipping, or shipbuilding sectors of Iran, or any sector of the economy determined to be controlled by the IRGC; (ii) sold, supplied, or transferred to or from any Iranian person on the SDN List (except for certain Iranian financial institutions that have not been designated specifically in connection with the proliferation of weapons of mass destruction, terrorism, or human rights abuses); (iii) used in connection with Iran’s nuclear, military, or ballistic missile programs; or (iv) resold, retransferred, or otherwise supplied for purposes covered by (i)-(iii).
Covered materials include graphite, raw or semi-finished metals, such as aluminum and steel, metallurgical coal, and industrial process software. IFCPA § 1245(e) requires the President to submit periodic reports to the Congress describing: (i) whether covered materials are being used as a barter or payment medium or listed as Iranian governmental assets on its national balance sheet; (ii) which sectors of the Iranian economy are controlled by the IRGC; and (iii) whether covered materials are being used in connection with Iran’s nuclear, military, or ballistic missile programs.
IFCPA § 1245(c) requires the President to impose prohibitions on access by foreign financial institutions to the US financial sector for knowingly conducting or facilitating significant financial transactions in connection with the activities described above. However, IFCPA § 1245(f) establishes a potential safe harbor for persons that the President has determined have exercised due diligence by establishing and enforcing internal controls to prevent either the sale, supply, or transfer of such items, or associated financial transactions.
- Underwriting, insurance, and reinsurance activities targeted. IFCPA § 1246 requires the President to impose at least five of the sanctions measures prescribed by the ISA upon any entity or individual that, 180 days or more after the IFCPA’s enactment, knowingly provides underwriting services or insurance or reinsurance for activities sanctionable under the IFCPA, as well as a wide range of already sanctionable activities under preexisting US sanctions laws and legal authorities, with an exception for certain humanitarian activities as described further above. However, IFCPA § 1246(d) establishes a potential safe harbor for persons that the President has determined have exercised due diligence by establishing and enforcing internal controls to prevent the furnishing of such underwriting, insurance, or reinsurance services in connection with most of the activities described above.
- Foreign financial institutions that facilitate financial transactions on behalf of Iranian persons on the SDN List. IFCPA § 1247(a) requires the President to impose prohibitions on access by foreign financial institutions to the US financial sector for knowingly conducting or facilitating significant financial transactions on behalf of Iranian persons on the SDN List (except for certain Iranian financial institutions that have not been designated specifically in connection with the proliferation of weapons of mass destruction, terrorism, or human rights abuses). As with other IFCPA sanctions provisions, IFCPA § 1247 provides an exception for certain humanitarian activities. In addition, the 2012 NDAA “substantial reduction” and natural gas exceptions apply to financial transactions under IFCPA § 1247 in a manner similar to their applicability to IFCPA § 1244, as described further above.
- Presidential waiver authority. A key issue of contention between the Obama Administration and Congress was the availability of Presidential waiver authority to suspend the imposition of sanctions if determined to be vital to the national interest of the United States and reported to Congress. The IFCPA provides such a waiver authority with respect to non-ISA sanctions otherwise required to be imposed under IFCPA §§ 1244-1247 for successive 180-day periods (expanded from 120 days in the prior version of the 2013 NDAA bill). However, IFCPA § 1253(c) mandates that the President is only authorized to exercise, with some limitations, the 180-day waiver authority set forth in ISA § 4(c)(1)(a) when imposing sanctions prescribed by the ISA in connection with IFCPA §§ 1244-1246. In addition, the IFCPA does not contain a “special rule” along the lines set forth in ISA § 4(e), which authorizes the President to decline to initiate or continue an investigation of potentially sanctionable conduct under the ISA upon certifying in writing to Congress that the subject of the investigation has either ceased the conduct or provided assurances to do so going forward. Furthermore, IFCPA § 1250 narrows the waiver authority initially granted to the President (and, to date, not invoked) pursuant to § 1245(d)(5) of the 2012 NDAA, which relates to sanctions applicable to foreign financial institutions that knowingly conduct significant financial transactions with the Central Bank of Iran and other designated Iranian financial institutions. In addition to the preexisting requirements attached to the use of that waiver, the President is now required to certify that exceptional circumstances prevented the country with primary jurisdiction over any such foreign financial institution from reducing its purchases of petroleum or petroleum products from Iran before granting a waiver of those sanctions.
- Other sanctions measures. The IFCPA also designates for sanctions the Islamic Republic of Iran Broadcasting and its president, as human rights abusers, for broadcasting forced confessions and show trials. In addition, IFCPA § 1249 amends CISADA to provide for penalties on persons who divert humanitarian resources intended for the Iranian people.
- Exclusion of ISA import sanctions. The IFCPA excludes from the menu of ISA sanctions required to be imposed under the new law those that relate to the importation of property. This was deemed necessary by lawmakers to avoid violating a Constitutional requirement, known as the “blue slip” rule, that bills pertaining to revenue (e.g., import sanctions would affect tariffs and revenue) must originate in the US House of Representatives.
- Monitoring requirements. IFCPA § 1252 requires the President to submit annual reports to Congress through 2016 that list, among other things: (i) vessels that have entered seaports in Iran controlled by the Tidewater Middle East Company during a specified period, including the names of the owners and operators of those vessels; and (ii) all airports at which aircraft owned or controlled by an Iranian air carrier on which sanctions have been imposed have landed during a specified period.
- Other enforcement powers. IFCPA § 1253 makes available the civil and criminal penalties prescribed by IEEPA against any person that violates, attempts or conspires to violate, or causes a violation of the IFCPA or any implementing regulations promulgated thereunder. Civil penalties under IEEPA are the greater of $250,000 or twice the transaction value per violation, and criminal penalties of up to $1 million and imprisonment of up to 20 years, or both.
Implications and Compliance Challenges for Multinational Enterprises
Among other perceived shortcomings, members of the Obama Administration and other critics have described the IFCPA’s provisions as confusing, ambiguous, and potentially inconsistent with preexisting sanctions already in effect. However, advocates of sanctions in Congress and elsewhere may well view the ambiguity and complexity of the US Iran sanctions “infrastructure” as a key contributor to their efficacy, inasmuch as they increase the risk and uncertainty for non-US persons that continue to deal with Iran.
The choice between doing business with Iran and enjoying the benefits of access to the US commercial and financial sectors is becoming starker than ever, as the United States edges closer to pursuing the total economic isolation of Iran.
As a practical matter, non-US companies with any connectivity to Iran must weigh the continued benefits and increasing risks of doing business with the country, and try to determine the impact the IFCPA will have on their operations. Providing a small measure of relief is the fact that Congress agreed to double the grace period prior to implementation from 90 to 180 days which, if nothing else, provides a more reasonable window for potentially affected parties to conduct a full evaluation of the potential implications of these new sanctions measures.
As these latest sanctions come into effect, US companies will need to ensure that they monitor with vigilance the status of their non-US business partners to ensure that they do not expose themselves to indirect legal risks by unlawfully facilitating the activities of sanctioned non-US companies.