Overview
Portions of this article appeared in Law360.
Over the last several weeks, there have been a number of notable developments concerning existing and potential sanctions against Iran. These developments include new US legislation concerning Iran sanctions, a new UN Security Council resolution, and agreement to considerably strengthen EU-Iran sanctions.
I. United States: Proposed Revisions to Iran Sanctions Act
Last week, a US Congress conference committee agreed to legislation to strengthen Iran sanctions. The bill is titled the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (H.R. 2194), as described in H. Conf. Rep. 111-512. The conference committee bill creates a unified version of legislation that was passed, in somewhat different forms, by the House and Senate in December 2009 and January 2010 (the earlier legislation is discussed in detail in our February 26, 2010 alert). The Senate and House of Representatives each voted overwhelmingly to approve the legislation on June 24, 2010, and the bill is expected to be sent to the President and signed into law shortly.
The legislation will expand the scope of the Iran Sanctions Act (“ISA”) to impose sanctions on non-US companies that provide refined petroleum products and related services to Iran. (This law was originally implemented in 1996 and also applied to Libya, known as the Iran and Libya Sanctions Act or ILSA. However, the ISA was amended to narrow its application only to Iran, following the easing of US-Libya sanctions in 2005.) The legislation also expands Iran-related export and re-export restrictions and imposes other new measures. Notably, the legislation will also reduce the President’s authority to waive ISA sanctions – a measure intended by Congress to change the Presidential practice to-date of not enforcing ISA sanctions. (The existing ISA sanctions were never enforced by Presidents Clinton and Bush, and have yet to be enforced by President Obama, despite a number of publicized cases in which companies are engaged in business in Iran that ostensibly fall within the scope of ISA restrictions).
Important aspects of the bill, and changes to the initial legislation passed by the House and Senate several months ago, are summarized herein.
Petroleum-Related Sanctions
Sanctionable Activity
One of the key features of the legislation is that it requires the President to impose sanctions against any “person” who has knowingly:
- made an “investment” of $20 million or more (or any combination of investments where the total adds up to this amount in a 12-month period) that directly and significantly contributes to Iran’s ability to develop its own petroleum resources. The term “petroleum resources” includes petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas as explicitly covered.
- provided, sold, or leased refined petroleum products to Iran valued at over $1 million (or $5 million in aggregate over a 12-month period). “Refined petroleum products” is likewise subject to a broad definition to include diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel), and aviation gasoline.
- provided, sold, or leased goods, services or other support to Iran valued at over $1 million (or $5 million in aggregate over a 12-month period) that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic petroleum refining capabilities.
Similar to the existing ISA, these restrictions will apply directly to non-US companies on an extraterritorial basis – there will be no need to prove that the companies’ business with Iran had any link to the United States. Indeed, the definition of “persons” has been expanded to cover a financial institution, insurer, underwriter, guarantor, or any other business organization, including a parent and its foreign subsidiary or affiliate. The applicable knowledge standard under the ISA has been revised, moreover, to establish a violation on the basis not only of actual knowledge, but also where the person or entity “should have known” of the conduct in question. Accordingly, a European or Asian parent company that has either actual knowledge or “should have known” that its subsidiary or affiliate engaged or is engaging in activities violating ISA could now be subject to ISA sanctions.
Services and support under these sanctions could include underwriting or entering into a contract to provide insurance or reinsurance that could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products. However, the bill creates an exception for underwriting or entering into contracts for insurers or reinsurers that, as determined by the President, practice due diligence in establishing policies, procedures, and internal controls to ensure that they do not contribute to or enhance Iran’s ability to import refined petroleum products.
Potential Penalties
The amendments add three new types of sanctions to an existing “menu” of six sanctions available under the current version of the ISA, and require the President to impose at least three of the nine types of sanctions on violators of the refined petroleum provisions. This aspect of the legislation thus represents a significant shift from the original House and Senate bills, which mandated the imposition of the three new penalties for "persons" covered by the refined petroleum sanctions. The revisions were made following significant commentary from interested parties, who felt that the automatic application of the three new sanctions could have significant unintended effects on companies who had no direct connection to Iran-related business.
The three new types of sanctions prohibit:
- any transactions in foreign exchange by the sanctioned person;
- any transfers of credit or payments between, by, through, or to any financial institution (to the extent subject to US jurisdiction of the United States) that involve any interest of the sanctioned person; or
- acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property (subject to US jurisdiction) to which the sanctioned person has any interest, or dealing in or conducting any transaction involving such property.
The above sanctions are in addition to the existing ISA “menu” of sanctions, which includes export and import restrictions; denial of US Export-Import Bank loans, credits, or credit guarantees; denial of US bank loans exceeding $10 million in one year; restrictions on dealing in US government bonds; restrictions on serving as a repository for US government funds (each counts as one sanction); and government procurement restrictions. The President must, therefore, choose three of the various pre-existing and new sanctions in the ISA.
The bill preserves the President’s right – which exists in the current ISA – to waive the ISA sanctions against foreign entities. However, under the new legislation, the waiver authority would extend only to cases where the waiver is “necessary to the national interest,” a more restrictive standard than the “important to the national interest” language in the current version of the ISA. The new waiver standard may mean that application of the ISA could result in actual implementation of sanctions.
Additionally, the President may waive the imposition of sanctions on a person for up to a 12 month period based upon a finding that the government with primary jurisdiction over that person is deemed to be “closely cooperating” with the United States in multilateral efforts to prevent Iran from acquiring or developing chemical, biological, or nuclear weapons. (Six factors for determining such cooperation are not provided in the text of the legislation, but rather in the joint explanatory statement accompanying the conference committee report.) Such a waiver must be “vital to the national security interests of the United States,” and submitted to appropriate congressional committees. Presumably, major US trading partners will be considered as cooperating, but it is unclear how broadly the President will be willing to exercise this certification provision for specific governments.
Sanctions on Financial Institutions
As one of the most sweeping parts of the legislation, “foreign financial institutions” can now be subject to U.S. sanctions if they:
- facilitate the Iranian government’s efforts to acquire weapons of mass destruction (WMD) or support international terrorism,
- deal with Iranian companies sanctioned by the UN Security Council,
- help launder money to aid Iran’s WMD programs, support terrorism, or those sanctioned by Security Council,
- help the Central Bank of Iran aid Iran in any of the activities listed above, or
- conduct significant business with the IRGC, its front companies, or other Iranian financial institutions blacklisted by the US Department of Treasury.
If foreign financial institutions engage in these activities, “domestic financial institutions” must immediately sever their “correspondent” or “payable through” account services,as defined by 31 U.S.C. § 5318A, with these institutions.
Moreover, domestic financial institutions that have correspondent or payable through accounts with foreign financial institutions will be required by regulations to (1) conduct audits of these accounts; (2) report on transactions relating to activities described immediately above; (3) certify that foreign financial institutions holding such accounts are not engaged in sanctionable activities; and/or (4) establish adequate due diligence polices, procedures, and controls to protect against engaging in the foregoing sanctionable activities. The US Department of the Treasury has authority to define the meaning of foreign financial institution and domestic financial institution, and can waive sanctions if it is in the national interest of the United States to do so.
Domestic financial institutions that violate the above are subject to the same penalties as those under Title III of the USA PATRIOT Act; a civil maximum of $250,000 or an amount twice the value of the actual transaction, and a criminal maximum of $1 million per transaction and/or prison sentences of up to 20 years. The stated goal of this provision is to ultimately sever international commerce with Iranian businesses that threaten US security.
US Government Contracting Restrictions
A new section on US government contractors has been added. Each prospective contractor submitting a bid to the USG is now required to certify that the contractor or any person owned or controlled by the contractor does not engage in sanctionable activities under ISA. If the contractor submits a false certification, that contractor will be made ineligible for federal contracts for up to 3 years.
The legislation also establishes that the US government may not award contracts to entities that export to Iran “sensitive technology”, defined as “hardware, software, telecommunications equipment, or any other technology that the President determines is to be used specifically (1) to restrict the free flow of unbiased information in Iran; or (2) to disrupt, monitor, or otherwise restrict speech of the people of Iran.”
Import and Export Restrictions
The legislation prohibits all imports into the United States from Iran except for informational materials and “accompanied baggage for personal use”. This provision eliminates the existing exceptions for carpets, foodstuffs, and gifts under $100 currently allowed under the Iranian Transaction Regulations, 31 CFR 560.
The legislation also prohibits all exports to Iran from the US or by a US person, subject to certain limited exceptions. These export restrictions are already established under various administrative regulations, so the revision to the ISA will not result in a practical change for US organizations, entities, and individuals. (The legislation dropped a proposed amendment to extend sanctions to persons or entities “owned or controlled” by US persons.) However, existing regulatory export restrictions will now be codified as statutory law.
Blocking Authority
The legislation permits the President to freeze the assets of certain persons in Iran, including diplomats or representatives of another government or military or quasi-governmental institution of Iran, who meet criteria for designation by engaging in activities sanctioned under the International Economic Emergency Powers Act, e.g., terrorism, narco-trafficking, and nuclear or weapons of mass destruction proliferation. Asset freezes may be extended to the family members or associates of such sanctioned Iranian persons.
Divestment from Companies that Invest in Iran
The legislation permits state and local governments to divest their assets from entities they determine to have invested $20 million or more in the Iranian energy sector or to have extended $20 million or more in credit to an entity that used the funds to invest in the Iranian energy sector. “Investment” is defined as “(A) a commitment or contribution of funds or property; (B) a loan or other extension of credit; and (C) the entry into or renewal of a contract for goods or services.” The reference to “goods or services” could be read as referring to any part of trade, including the buying or swapping Iranian crude oil.
Destinations of “Diversion Control”
The legislation requires the Director of National Intelligence to submit to the President and Secretaries of Defense, Commerce, State, Treasury, and appropriate congressional committees a report that identifies each country that is allowing the diversion of U.S.-origin goods, services, or technology that: (1) materially contribute to Iran’s nuclear, biological, chemical, ballistic missile, or advanced weapons systems capabilities, or its support for international terrorism, and (2) are on the Commerce Control List or United States Munitions List. If a country allows “substantial” diversion of such goods, services, or technology, the Director of National Intelligence shall designate it a “Destination of Diversion Concern”, triggering enhanced export licensing controls relating to those countries.
II. Additional UN and EU Measures
Contemporaneous with the new ISA legislation, there also have been notable Iran sanctions developments in the United Nations and European Union.
On 9 June, the UN Security Council passed Security Council Resolution 1929, which enhances Security Council sanctions against Iran through a number of new measures, including the designation of new entities for asset freezing restrictions (including a number of Iranian shipping entities and financial institutions that are frequently used by foreign companies).
Shortly after the UN measures were implemented, on June 17, European Union heads of state and governments (meeting as the European Council) met and endorsed a policy statement announcing that new EU restrictive measures with respect to Iran would be imposed. The statement notes that the new EU sanctions would go beyond the sanctions imposed by the UN Security Council in Resolution 1929 earlier this month, and will include new restrictions focusing on the oil and gas sector. Specifically, the further enhanced sanctions will focus on:
the areas of trade, especially dual use goods and further restrictions on trade insurance; the financial sector, including freeze of additional Iranian banks and restrictions on banking and insurance; the Iranian transport sector, in particular the Islamic Republic of Iran Shipping Line (IRISL) and its subsidiaries and air cargo; key sectors of the gas and oil industry with prohibition of new investment, technical assistance and transfers of technologies, equipment and services related to these areas, in particular related to refining, liquefaction and LNG technology; and new visa bans and asset freezes especially on the Islamic Revolutionary Guard Corps (IRGC).
These sanctions could represent a significant enhancement of European measures against Iran. Currently, the European Union restricts dealings with certain Iranian entities (including those designated under UN Security Council Resolutions and a number of entities that the EU has designated on a unilateral basis), and prohibit the export of a subset of products that have potential military or nuclear-related end uses. Although some of those sanctions have affected companies who do business with Iran in other sectors – for example, some of the goods restricted for export to Iran are commonly used in oil and gas applications – the new sanctions summarized above could, depending upon how they are implemented, represent the European Union’s first effort at imposing broad trade restrictions on Iran in areas outside of the military and WMD context.
Although the EU sanctions were backed in principle by the Summit last week, the final details of the measures remain the subject of technical discussions and redrafting. The European Council views implementation of the sanctions a political priority and have indicated that they expect the sanctions to be finalized by August after the meeting of the Foreign Affairs Council, which will take place in late July.
