Overview
On September 20, 2019, OFAC announced the designation of the Central Bank of Iran (“CBI”), the National Development Fund of Iran (Iran’s sovereign wealth fund), and an Iran-based company allegedly involved in concealing financial transactions on behalf of Iran’s military. These designations were made under Executive Order 13224, as recently amended, which is OFAC’s main counterterrorism sanctions authority. OFAC said in its press release that “Iran’s Central Bank has provided billions of dollars to the Islamic Revolutionary Guards Corps (IRGC), its Qods Force (IRGC-QF) and its terrorist proxy, Hizballah.” These designations were announced in response to aerial strikes against oil facilities in Saudi Arabia, although a designation of the CBI may not come as a complete surprise given the multiple U.S. sanctions designations in the past several months of senior CBI officials including the CBI Governor for alleged involvement in financial support to the IRGC-QF and Hizballah. President Trump tweeted that, in response to the strikes in Saudi Arabia, he had directed Secretary of the Treasury Steven Mnuchin “to substantially increase Sanctions on the country of Iran.” Secretary of State Mike Pompeo called the attacks an “act of war.” At a press event President Trump characterized these sanctions as “[t]he highest sanctions ever imposed on a country. We've never done it to this level.” Secretary of the Treasury Steven Mnuchin specified that “this is very big — we've now cut off all source of funds to Iran.”
So what do these new sanctions against the CBI actually do? To be clear, the CBI was previously subject to U.S. sanctions, including secondary sanctions that apply to non-U.S. persons. However, these previous sanctions against the CBI were imposed only under OFAC’s authority targeting parties associated with the Government of Iran. Now an additional layer of sanctions have been imposed on the CBI – this time under OFAC’s counterterrorism authority in EO 13224. The conventional wisdom seems to be that this added layer of counterterrorism sanctions against the CBI will now make it unlawful or sanctionable to deliver humanitarian goods to Iran. In practice, that could be the way things develop, as this additional sanctions designation against the CBI could heighten the already considerable level of anxiety many international banks face in considering whether to engage with Iran, by creating yet more complexity and uncertainty. However, it is worth examining more closely the extent to which U.S. law still contemplates lawful humanitarian trade with Iran in agricultural commodities, medicine and medical devices.
Section 560.530 of OFAC’s Iranian Transactions and Sanctions Regulations (“ITSR”) authorizes (in some cases only through specific licensing by the agency) this type of humanitarian trade with Iran pursuant to a detailed set of regulatory conditions. However, Section 560.530 provides that “no specific license will be granted for the exportation or reexportation of [agricultural commodities, medicine and medical devices] . . . to any entity or individual in Iran promoting international terrorism . . . [or] to any individual or entity designated pursuant to Executive Order . . . 13224.” This echoes the language in the related statute, the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”), which states that “procedures shall be in place to deny licenses for exports to any entity within [a country such as Iran that is designated as a State Sponsor of Terrorism] . . . promoting international terrorism.” TSRA provides specifically that its statutory prohibitions on any “unilateral” agricultural or medical sanctions that the executive branch may otherwise contemplate do not limit other legal restrictions on “the unlawful export of any agricultural commodity, medicine, or medical device to . . . a foreign organization, group, or person designated pursuant to Executive Order No. 13224.” However, it is not clear that any of these provisions are relevant, as, presumably, companies and humanitarian organizations would not be exporting goods “to” the CBI, though the CBI could potentially be involved in a direct or indirect financial intermediary role.If the CBI were involved in such an export transaction, a related provision of the ITSR, Section 560.532, does not clearly impose any explicit limitations on the financial side – it states that exports of agricultural commodities, medicine, or medical devices lawfully licensed pursuant to Section 560.530 (i.e., excluding shipments “to” entities sanctioned under EO 13224) can be conducted using the following payment terms:
(1) Payment of cash in advance;
(2) Sales on open account, provided that the account receivable may not be transferred by the person extending the credit;
(3) Financing by third-country financial institutions that are not United States persons, entities owned or controlled by United States persons and established or maintained outside the United States, Iranian financial institutions, or the Government of Iran. Such financing may be confirmed or advised by U.S. financial institutions and by financial institutions that are entities owned or controlled by United States persons and established or maintained outside the United States; or
(4) Letter of credit issued by an Iranian financial institution whose property and interests in property are blocked solely pursuant to this part. Such letter of credit must be initially advised, confirmed, or otherwise dealt in by a third-country financial institution that is not a United States person, an entity owned or controlled by a United States person and established or maintained outside the United States, an Iranian financial institution, or the Government of Iran before it is advised, confirmed, or dealt in by a U.S. financial institution or a financial institution that is an entity owned or controlled by a United States person and established or maintained outside the United States.
So letters of credit issued by the CBI (if such a thing even exists) would not be allowed. It is less clear whether cash in advance or certain other types of bank financing may still be permitted if the CBI is involved, directly or indirectly.
There is a potentially broader restriction in Section 560.530(d)(5) (“nothing in this section authorizes any transaction or dealing with a person whose property and interests in property are blocked under, or who is designated or otherwise subject to any sanctions under, the terrorism, proliferation of weapons of mass destruction, or narcotics trafficking programs administered by OFAC, 31 CFR parts 536, 544, 594, 595, 597, and 598, or with any foreign organization, group, or person subject to any restriction for its involvement in weapons of mass destruction or missile proliferation, or involving property blocked pursuant to this chapter or any other activity prohibited by this chapter not otherwise authorized in or pursuant to this part.”) In other words, one cannot deal with the CBI, even in the course of otherwise lawful humanitarian trade. However, again, there may be many circumstances in which exporters and their banks do not deal with the CBI. An important question is whether OFAC will adopt the broad interpretation that any transactions that must be indirectly supported in some way by the CBI, such as foreign exchange transactions by commercial banks, necessarily involve a prohibited dealing with the CBI. If that were the case, Secretary Mnuchin may have been speaking literally when he said “we've now cut off all source of funds to Iran.” If that is currently U.S. policy, that would be an extraordinary use of U.S. financial sanctions in an attempt to implement a full financial embargo of another country, particularly given that Congress indicated its intent nearly 20 years ago in TSRA that this type of unilateral sanction should not unduly restrict humanitarian trade. Indeed, OFAC indicated that it may not construe these sanctions so broadly, with its press release stating that “the United States has a long standing policy of allowing for the sale of agricultural commodities, food, medicine and medical devices, and OFAC will continue to consider requests related to humanitarian trade with Iran as appropriate.” This suggests that there could be some flexibility in OFAC’s interpretation of these new restrictions, which it could express, for example, in granting specific licensing requests on a case-by-case basis.
It is also important to consider how these new sanctions on the CBI could impact trade with no link to U.S. persons, as much of Iran’s trade in basic goods is currently done entirely outside the U.S. financial system and with no other involvement by U.S. persons (or entities owned or controlled by U.S. persons). U.S. secondary sanctions, which cover such activity with no jurisdictional link to the United States, still appear to broadly allow humanitarian trade with Iran. For example, Section 1247 of the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”) provides for sanctions on foreign financial institutions that knowingly facilitate a significant financial transaction on behalf of an Iranian person on OFAC’s Specially Designated Nationals (“SDN”) list, including Iranian financial institutions designated under EO 13224, such as the CBI. However, Section 1247 also states that “the President may not impose sanctions under [Section 1247] with respect to any person for conducting or facilitating a transaction for the sale of agricultural commodities, food, medicine, or medical devices to Iran or for the provision of humanitarian assistance to the people of Iran.” There are similar limitations in many other potentially relevant secondary sanctions authorities, such as Section 5(f)(6) of the Iran Sanctions Act of 1996 (“ISA”), as amended, which is incorporated by reference into other key sanctions authorities, including Section 302 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA” or the “TRA”), which would otherwise require the imposition of sanctions for engaging in significant transactions with parties identified by OFAC as affiliates of the IRGC, as the CBI has now been labelled. These broad and generally unqualified limitations in OFAC’s key secondary sanctions authorities in this area indicate that OFAC may be constrained under the applicable legislative framework from sanctioning parties, including banks, involved in this type of humanitarian trade with Iran, even if the CBI is involved in some way. On the other hand, parties may be well-advised to be cautious in asserting that OFAC and other U.S. government agencies do not have the authority to penalize direct or indirect dealings with an entity such as the CBI that has been linked to designated Foreign Terrorist Organizations (“FTOs”) like the IRGC and Hizballah. This is a particularly fraught and high-risk area of U.S. sanctions law.
OFAC’s own Frequently Asked Questions (“FAQs”) about its authorities in this area could be viewed as pointing both ways, which may be a reflection of the complex impact of these new sanctions on the CBI overlaid against years of more established U.S. sanctions policy relating to humanitarian trade. Several OFAC FAQs emphasize that the humanitarian exceptions in relevant statutes and regulations are broad and may still apply even after these sanctions on the CBI. See, for example, the following:
641. If a country with primary jurisdiction over a foreign financial institution did not receive a significant reduction exception (SRE) under section 1245(d)(4)(D) of the NDAA 2012, can funds currently held at the foreign financial institution in that country on behalf of the Central Bank of Iran be used to facilitate humanitarian trade with Iran? [Answer] Yes. Transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran involving the Central Bank of Iran are excepted from the relevant sanctions under section 1245(d)(2) of the NDAA 2012 and sections 561.203 and 561.204 of the Iranian Financial Sanctions Regulations (31 C.F.R. Part 561) (IFSR), regardless of whether the country has received an SRE. In addition, funds held on behalf of a non-designated Iranian financial institution at a foreign financial institution generally would not be subject to U.S. secondary sanctions and could be used to facilitate humanitarian trade. [11-05-2018]
254. What does section 504 of the TRA do? [Answer] . . . Effective February 6, 2013, section 504 amends the NDAA in several ways. . . . The sale of agricultural commodities, food, medicine, or medical devices to Iran (the “Humanitarian Exception”) is not impacted by section 504 of the TRA. . . . [2-6-2013]
297. Are there any exceptions to the sanctions provisions of section 1244 of IFCA? [Answer] The following transactions are excepted from the provisions of section 1244 of IFCA. a. Transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran or for the provision of humanitarian assistance to the people of Iran. . . . [08-06-18]
304. Are there exceptions to insuring, reinsuring, or underwriting sanctioned activities? [Answer] Yes. IFCA includes the following exceptions to insuring, reinsuring, or underwriting sanctioned activities. a. Transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran or for the provision of humanitarian assistance to the people of Iran can be insured, reinsured, or underwritten.
But other OFAC FAQs indicate that the humanitarian exceptions do not apply when entities designated under EO 13224, such as the CBI, are involved. See, for example:
637. Is it sanctionable for non-U.S., non-Iranian persons to engage in transactions related to the provision of humanitarian and consumer goods to Iran? [Answer] The United States maintains broad authorizations and exceptions under U.S. sanctions that allow for the sale of agricultural commodities, food, medicine, and medical devices to Iran from the United States or by U.S. persons or U.S.-owned or -controlled foreign entities. U.S. sanctions laws provide similar allowances for sales of food, agricultural commodities, medicine, and medical devices to Iran by non-U.S. persons. Broadly speaking, transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran are not sanctionable unless they involve persons on the SDN List that have been designated in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction, including designated Iranian financial institutions or the Islamic Revolutionary Guard Corps (IRGC), or activity that is subject to other sanctions. (emphasis added)
In light of the importance of continued humanitarian trade with Iran from the perspective of U.S. sanctions policy more broadly, a more clear statement from OFAC on the impact of these new sanctions against the CBI in this context would be helpful. One particular development to watch out for in the wake of these new sanctions applied to the CBI is whether they may jeopardize the proposed EU-led INSTEX mechanism for barter trade with Iran, even for otherwise non-sanctionable humanitarian goods. If so, the cycle of escalation with Iran could enter a new and more unpredictable phase.
