International Law Advisory - Iran Update UN and EC Impose Additional Trade Restrictions on Iran, US Congress Revisiting Iran Sanctions Act Enforcement

Further to our March 1, 2007, and March 14, 2007, advisories, the following is an update on developments in United Nations, European, and US export controls and economic sanctions policy with regard to Iran.

1. EC Adoption of Final Regulation Imposing Trade Restrictions on Iran

On April 20, the Council issued Regulation No. 441/2007  amending Regulation No. 423/2007, in furtherance of the multilateral trade restrictions imposed through UN Security Council Resolution 1737. The final regulation largely tracks the draft regulation issued by the European Commission on March 13, on which we reported in our March 14 advisory. 

The most significant departure from the draft regulation is that the regulation now includes a prohibition on “brokering services” in connection with items listed in Annex 1, in addition to the restrictions on exports, “technical assistance,” “financial assistance,” and “investment” that had appeared in the European Commission’s draft regulation. The term “brokering services” is defined broadly in Article 1 of the regulation to include “activities of persons, entities and partnerships acting as intermediaries by buying, selling, or arranging the transfer of goods or technology, or negotiating or arranging transactions that involve the transfer of goods or technology.” The introduction of a brokering restriction brings the regulation into conformity with the Council’s Common Position N° 140/2007 on Iran (reported in our March 1 advisory), which had included a brokering restriction.

Apart from that change, the trade restrictions in the final regulation are consistent with those reported in our March 14 advisory. The export bans and new license requirements (with regard to Annex I and II items, respectively), combined with the related technical/financial assistance and brokering restrictions, would introduce a wide range of new restrictions into EU export controls law that could have a significant effect on European companies. The regulation would most clearly affect companies in the energy sector, though it should be noted that the products set forth in Annex II to the regulation—which require a license for export to Iran—include a variety of items that are of broad commercial application.  Companies that do business with Iran should examine Annexes I and II carefully and ensure that sufficient internal controls are in place to identify any potential transactions with Iran that could fall within the scope of the new Council regulation.

On April 23, the Council regulation was immediately followed by Council Decision 2007/242/EC, which provides the list of persons and entities subject to a freezing of economic resources referred to in Annex V of the regulation. The listed persons and entities beyond those which have been separately identified by the UN are deemed to engage in or provide support for Iran’s proliferation—sensitive nuclear activities or for development of nuclear weapon delivery systems.  The decision takes effect in all the Member States on April 24, 2007.

With the adoption of the regulation, it is now left to the individual member states to lay down national rules imposing penalties for violations of the regulation. The substantive restrictions in the regulation are self-enforcing, and are thus now applicable to persons and companies located in the European Union. We expect that the member states will implement penalties regimes in a short timeframe.

2. UN Imposes Arms Embargo on Iran, Extends Financial Sanctions To Iranian Banks

On March 24, the United Nations Security Council implemented Security Council Resolution (“UNSCR”) 1747. This resolution imposes an embargo on the import of Iranian-origin weapons, and extends the financial sanctions in UNSCR 1737 to 28 specified Iranian entities. Notable among the entities included are Bank Sepah and Bank Sepah International, which have extensive business contacts operations throughout Europe. As a result, parties within countries that have implemented UNSCR 1737 and 1747 must now freeze any assets of Bank Sepah or Bank Sepah International of which they come into possession.

Bank Sepah had already been subject to wide-ranging trade restrictions (including an asset freeze) under US law, so UNSCR 1747 does not affect the US regulatory picture. It does, however, represent a substantial change for companies in other countries that have ongoing business with Bank Sepah entities. In fact, Annex IV to Regulation No. 423/2007—which sets for the entities subject to the regulation’s asset freeze provision—was amended on April 20, 2007 by Commission Regulation N° 441/2007 in order to list Bank Sepah and other entities designated under UNSCR 1747.   

On April 23, 2007 the Council also adopted Council Common Position N° 2007/246/CFSP amending Common Position N°140/2007 with a view to implementing UNSCR 1747. The new Common Position imposes a ban on the procurement of arms to Iran. It also extends financial and travel sanctions imposed by UNSCR 1737 to additional persons and entities engaged in or providing support for Iran’s proliferation sensitive nuclear activities or for the development of nuclear weapon delivery systems.

Accordingly, the Common Position provides a revised list of persons and entities subject to a visa ban and a freeze on assets. It also annexes a list of persons and entities meeting specific criteria set out in Common Position N° 140/2007, and which mirrors the list already adopted by the Council in Decision N°242/2007 referred to above. 

Therefore, companies operating within the EU or elsewhere (all countries are under a UN mandate to implement the restrictions in UNSCR 1737 and 1747) should review their business with Iranian entities and ensure that any such business is in compliance with the asset freeze provisions of those resolutions, as implemented by UN member states.

3. Intent to Examine ISA Enforcement Practices

Finally, we note that in recent weeks, members of the US Congress have signaled an intent to seek to examine the US Government’s enforcement practices under the Iran Sanctions Act (“ISA,” formerly known as the “Iran and Libya Sanctions Act”). The ISA authorizes the US Government to (among other things) pursue a range of penalties—including financial penalties and denial of access to US financing or regulatory licensing—against any company, including wholly non-US companies, that invest more than $20 million in the Iranian energy sector. Since the adoption of the ISA, the US Government has adopted a policy of not pursuing sanctions under those provisions, preferring to work with foreign governments to encourage companies to cease activities in Iran voluntarily.  However, members of the US Congress have expressed criticism of that policy as of late, and it has recently been reported that US officials have been in consultation with the chief executives and senior financial officers of several major non-US companies regarding their investment activity in Iran.

Although we do not expect the Bush Administration to pursue ISA enforcement, it is likely that the issue of foreign investment in Iran will be a focal point of the US-EU bilateral dialogue, including in upcoming US-EU summit in Washington, DC, in late April.  It is possible that those consultations could result in the imposition of further regulatory restrictions on Iran by the EU or member states.

The state of play with regard to Iran thus remains quite fluid.  We will continue to monitor US and foreign trade issues with regard to Iran, and will issue further advisories in the event of any significant developments.  Should you have any questions in the meantime, please contact David Lorello at +44 20 7367 8007 in London; Guy Soussan at +32 2 626 0535 or Laura Atlee at +32 2 626 0516 in Brussels; or Ed Krauland at 202.429.8083 in Washington, DC.