Overview
Yesterday, Secretary of State Mike Pompeo announced his intent to designate Iran’s Islamic Revolutionary Guard Corps (IRGC) as a Foreign Terrorist Organization (FTO), noting that this is the first time the US government has designated part of another government as an FTO. The announcement explains: “This action underscores that the Iranian regime’s use of terrorism makes it fundamentally different from any other government. Iran employs terrorism as a central tool of its statecraft; it is an essential element of the regime’s foreign policy.” The related State Department fact sheet notes that the designation will occur on April 15, upon publication in the Federal Register. While this long-anticipated move could increase the risk to non-US persons of doing business with Iran, at least in certain sectors or with certain partners, its primary effect at least in the short-term will probably be to add yet another deterrent to commerce with Iran rather than leading to a significant increase in legal actions against entities continuing to engage with Iran.
The US government already maintains strict sanctions on dealings with the IRGC and its agents, including secondary sanctions targeting activity with the IRGC that has no jurisdictional link to the US. Although the FTO designation does provide that US financial institutions must block all transactions involving an FTO or its agents and report them to OFAC, in practice the FTO designation does not lead to any additional “blocking” requirement under US law, because the IRGC as a whole is already listed as a Specially Designated National (SDN) under Executive Order 13224 (i.e., as a Specially Designated Global Terrorist (SDGT)). So there are already broad sanctions in place both for US persons and non-US persons in dealing with the IRGC or its agents.
However, as we’ve previously discussed on this blog, an FTO designation is qualitatively different than preexisting sanctions in that it adds the risk of criminal prosecution of “any person” for “knowingly” providing “material support or resources” to the IRGC. Other criminal law concepts may also apply, such as conspiracy. The US Attorney General highlighted this new authority in a press release accompanying the FTO designation. Indeed, the applicable statutory authority appears to make this provision of criminal law explicitly extraterritorial in scope and effect. As that same previous blog post discussed, the extraterritorial application of the FTO prohibition has already held up (at least so far) in US court, even where there is essentially no specific factual nexus to the United States, based on the (perhaps questionable) reasoning that an FTO designation inherently implies a link to the security of the United States and US nationals.
In practice, one impact of the FTO designation will be that a second set of people may now start looking to target non-US companies for IRGC-related activity with no specific link to the United States: in addition to employees of the Departments of State and the Treasury, which are primarily responsible for secondary sanctions implementation, non-US companies may now be targeted by US federal prosecutors looking to bring criminal cases against them in court – again, some US courts have found that the FTO designation may give US prosecutors the authority to do so even if a defendant’s conduct had no specific factual connection to the United States. Defendants have significant rights in a criminal case that they do not have when trying to forestall the imposition of secondary sanctions or when seeking removal from a US sanctions list. But US criminal law is a powerful tool, so companies that still engage with Iran should take careful note of this development.
Still, as before, the key hurdle – both for the US government and for non-US companies that continue to do business with Iran – is to identify any IRGC links with parties in Iran. The FTO designation does not advance that critical effort. The State Department’s announcement says that “Other governments and the private sector will also be on notice about the full scope of the IRGC’s malign activities. The IRGC is integrally woven into the Iranian economy, operating front companies and institutions around the world that engage in both licit and illicit business activity. The profits from what appear to be legitimate business deals could end up unwittingly supporting Iran’s terrorist agenda.” This could suggest that some additional announcement from the US government may be forthcoming to provide more detail about the IRGC’s “front companies.” For the time being, however, the US government has not provided any additional information about the IRGC’s alleged commercial and financial activities. So, while the FTO designation is another potential risk to be mindful of, the bottom line remains that the IRGC’s alleged commercial and financial activities are still largely a black box, except in a few widely-publicized instances, so compliance with and enforcement of the FTO restriction – as with the pre-existing sanctions – will continue to be challenging.
The dearth of information about so-called IRGC “front companies” may be particularly limiting in enforcement of the FTO provision. A US prosecutor may have a difficult time asserting in court that a non-US company had criminal intent (i.e., acted “knowingly”) in dealing with a particular Iranian bank or company unless there is reasonably clear evidence of the entity’s links to the IRGC and the defendant’s knowledge of those facts. Therefore, we would not be surprised to see, following the FTO designation, a renewed effort on the part of the Trump Administration (or at least by NGOs supportive of this effort) to identify publicly the alleged IRGC links of some of the major entities in Iran, such as the regime’s financial holding companies. Those public identifications, should they be made, may very well be the key step in increasing the level of financial pressure on Iran and the IRGC and are something to watch for closely now that the stakes have been raised with the FTO designation.
We will continue to monitor these developments.
