Congress Sets Stage for Expanded Sanctions against Iran under the National Defense Authorization Act for Fiscal Year 2013

On January 2, 2013, President Obama signed the National Defense Authorization Act for Fiscal Year 2013 (NDAA 2013) (H.R. 4310) expanding US extraterritorial sanctions targeting Iran.  The provisions impose more stringent sanctions on: 

• Iran’s energy, shipping and shipbuilding sectors
• Persons that provide precious metals and certain other materials to Iran
• Persons that provide underwriting services, insurance, or reinsurance relating to sanctionable activities
• Foreign financial institutions that facilitate financial transactions on behalf of specially designated nationals (SDNs)
• Persons involved in human rights abuses in Iran
• Persons involved in the diversion of goods intended for the people of Iran

The types of sanctions that could be imposed for these activities would be those currently available under the Iran Sanctions Act (ISA), as amended, as well as the blocking of property of sanctioned persons in certain cases.  Furthermore, as a new development, the statute purports to authorize the use of monetary penalties available under the International Emergency Economic Powers Act (IEEPA), though as explained below, it is unclear to what extent the President could in practice impose such penalties.

Background

Congress and President Obama have been active over the last year in expanding sanctions targeting Iran in response to Iran’s continuing human rights abuses, support for international terrorism, proliferation of weapons of mass destruction, and development of nuclear technology.  We have previously advised on several of these measures, including, among others: 

• The National Defense Authorization Act for Fiscal Year 2012 (NDAA 2012), signed in December 2011, which imposed sanctions on foreign financial institutions that knowingly conduct or facilitate “significant financial transactions” with the Central Bank of Iran and Iranian financial institutions listed as SDNs
• Executive Order 13599, issued in February 2012, which blocked the property of the Government of Iran (GOI), the Central Bank of Iran (CBI), and all Iranian financial institutions
• Executive Order 13622, issued in July 2012, imposing sanctions on persons that engage in transactions relating to the purchase of Iranian petroleum, petroleum products, and petrochemical products
• The Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA), signed in August 2012, which codified Executive Order 13599 and expanded the petroleum-related and financial sanctions set forth in the ISA, as amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA).

As described in detail below, Subtitle D of the NDAA 2013, the “Iran Freedom and Counter-Proliferation Act of 2012,” expands certain sanctions established by the above-referenced laws, and provides for sanctions covering conduct not previously addressed by Congress or the President.

Sanctions Relating to Iran’s Energy, Shipping, and Shipbuilding Sectors

Blocking Provisions

Section 1244 of the NDAA 2013 designates as “entities of proliferation concern” those Iranian organizations that operate ports in Iran and that are involved in the energy, shipping, and shipbuilding sectors of Iran.  Specifically, section 1244 requires the President to block and prohibit all transactions in respect of property of any person he determines: 

• Is part of the energy, shipping, or shipbuilding sectors of Iran
• Operates a port in Iran
• Knowingly provides significant support—including financial, material, or technical support, or goods or services—for the benefit of such persons, or for Iranian persons that have been designated as SDNs

Specific entities that the statute designates as covered by this blocking provision include the National Iranian Oil Company (NIOC), National Iranian Tanker Company (NITC), the Islamic Republic of Iran Shipping Lines (IRISL), and their affiliates.  Property and interests in property of these entities have already been blocked by other Executive Branch action.  However, section 1244 authorizes the President to also block the property of non- US persons that engage in certain transactions with these entities.

An exception provides that the President is not authorized to block the importation of goods into the United States.  The Senate added this exception, as well as certain exclusions described below, in response to comments from the House of Representatives that import-related sanctions would have an effect on tariffs and revenue and thus could only originate in the House under the Constitution.  The intended scope of this import exception, however, remains unclear in the context of a blocking provision. One interpretation of the exception is that goods that are imported into the United States cannot be blocked under section 1244.  Further guidance regarding the exception may be necessary.

The statute does not define the terms “energy sector,” “shipping sector,” or “shipbuilding sector.”  In section 201 of CISADA, Congress defined “energy sector of Iran” as “activities to develop petroleum or natural gas resources or nuclear power in Iran.” It is unclear whether that same definition would be used here.

The prohibition on providing support to Iranian SDNs, as applied to Iranian financial institutions, applies only to dealings with those Iranian financial institutions that have been designated based on their proliferation activities, support for terrorism, or involvement in human rights abuses.  This prohibition, and others described below that relate to Iranian SDNs, do not extend to dealings with other Iranian financial institutions that were designated as SDNs under Executive Order 13599.  The significance of this limitation is that non-US persons, such as non-US financial institutions, that are engaged in financial transactions with Iranian banks will not face the prospect of sanctions under section 1244 as long as they avoid dealing with certain (but not all) Iranian banks.  We note, however, that many of the principal Iranian banks engaged in international commerce have been designated by the US government as engaged in weapons proliferation and terrorist activities. 

Imposition of ISA Sanctions

Furthermore, section 1244 requires the President to impose sanctions on persons that knowingly sell, supply, or transfer to or from Iran “significant” (which is not defined) goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran, including NIOC, NITC, and IRISL.  Specifically, the President must impose five of the twelve sanctions available under the ISA, except for those restricting the importation of goods from certain sanctioned persons.

Moreover, the President is required to impose sanctions on foreign financial institutions that knowingly conduct or facilitate significant financial transactions relating to significant goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran.  These sanctions include the prohibition on the opening of, and imposition of “strict conditions” on the maintenance of, US-based payable-through and correspondent accounts for the sanctioned financial institution.  Section 1242(b) states that in determining what constitutes a “significant” financial transaction or “significant” financial services, the President should refer to the criteria set forth in the Iranian Financial Sanctions Regulations, 31 C.F.R. section 561.404, or any similar regulation or ruling.

Section 1244 provides for certain important limitations and exceptions relating to the activities that can trigger sanctions involving the energy, shipping, and shipbuilding sectors of Iran.  First, activities related to the provision of certain humanitarian assistance, food, agricultural products, medicine and medical devices do not trigger sanctions under this provision.  Second, activities related to reconstruction assistance or economic development of Afghanistan may be excepted from sanctions under certain conditions.  Third, the sanctions under section 1244 can be applied to transactions relating to exports of Iranian petroleum or petroleum products only if the President has found there to be sufficient supply of non-Iranian petroleum and petroleum products in the global market to permit buyers to reduce their purchases from Iran.  This exception essentially ties back into the sanctions regime set forth in the NDAA 2012, on which we have previously advised.  However, even if the President makes such a determination, sanctions cannot be imposed for transactions involving exports of Iranian petroleum or petroleum products to countries that, at the time of such export, have received an exception under NDAA 2012.  The US Department of State has granted exceptions to several countries as a result of their having significantly reduced their imports of crude oil from Iran, including Japan, South Korea, and China.

Of significance, a foreign financial institution providing financial services for goods or services trade relating to the energy, shipbuilding and shipping sectors of Iran will not be subject to sanctions under section 1244 if: (a) the country with primary jurisdiction over the foreign financial institution has an exception under the NDAA 2012, (b) the trade transaction for which financial services are provided is otherwise not subject to US sanctions (e.g., a transaction involving a reexport of US origin goods to Iran could be one example of such a trade transaction), (c) the trade transaction is between Iran and the country with primary jurisdiction over the foreign financial institution, and (d) any funds owed to Iran (e.g., a purchase from Iran) are credited to an account within the country having primary jurisdiction over the foreign financial institution (this appears to be a requirement similar to establishing a blocked account under US law).  It is not clear if condition (b) above only relates to trade transactions subject to the prohibitions of the ITSR, or if it is meant to also include trade transactions otherwise subject to the various extraterritorial sanctions of the ISA, CISADA, NDAA, ITRA, and related Executive Orders (e.g., the supply of non-US goods or services to Iran by a non-US person that would significantly enhance Iran’s petroleum refining capability).  From a policy perspective, it would likely be interpreted to include any transaction triggering any type of sanction under US law.

Section 1244 does not apply to the sale, supply, or transfer of natural gas to or from Iran.  Foreign financial institutions, however, that conduct or facilitate financial transactions for the sale, supply, or transfer of natural gas may be subject to sanctions, unless: (a) the financial transaction is for trade in goods or services not otherwise subject to US sanctions, (b) between Iran and the country with primary jurisdiction over the foreign financial institution, and (c) any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution.

Sanctions Relating to the Transfer of Certain Materials to or from Iran

Section 1245 of the NDAA 2013 requires the President to impose at least five of the twelve sanctions available under the ISA (except for import-related sanctions) on persons that sell, supply, or transfer, directly or indirectly, the following materials to or from Iran: 

• Precious metals
• Graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes, to the extent such materials are:
• Used by Iran for barter transactions or listed on the “national balance sheet of Iran” (defined as “the ratio of the assets of the Government of Iran to the liabilities of that Government”), as determined by the President
• To be used in connection with the energy, shipping, or shipbuilding sectors of Iran, or any sector that the President determines to be controlled by Iran’s Revolutionary Guard Corps (IRGC)
• Transferred to or from an Iranian person designated as an SDN
• To be used in connection with Iran’s nuclear, military, or ballistic missile programs, as determined by the President

Foreign financial institutions that conduct or facilitate significant financial transactions for the sale, supply, or transfer of the above materials are subject to sanctions.  These sanctions include the prohibition on the opening of, and imposition of “strict conditions” on the maintenance of, US-based payable-through and correspondent accounts for the sanctioned institution.

There is an exception for all persons that exercise due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not transfer covered materials, or conduct or facilitate related financial transactions.  The significance of this provision, as was evident from the original CISADA sanctions relating to the insurance industry, is that non-US persons who engage in international transactions, deal through third parties, or have a broad customer base, should adopt appropriate compliance policies and tools in order to protect themselves from sanctions in the event of accidental, inadvertent, or indirect dealings with Iran that involve these covered products and materials. 

Sanctions Relating to the Provision of Underwriting Services, Insurance, and Reinsurance

Section 1246 of the NDAA 2013 requires the President to impose at least five ISA sanctions (except for import-related sanctions) on persons that knowingly provide underwriting services, insurance, or reinsurance services: 

• For any activity with respect to Iran for which sanctions have been imposed under any relevant provision of US law, including the IEEPA, ISA, CISADA, ITRA, the NDAA 2013, the Iran, North Korea, and Syria Nonproliferation Act, and other related laws
• To or for any person:
• With respect to, or for the benefit of, any activity in the energy, shipping, or shipbuilding sectors of Iran for which sanctions have been imposed under NDAA 2013
• For the sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes, if such materials are subject to sanctions under the NDAA 2013
• That has been designated for sanctions under the International Emergency Economic Powers Act (IEEPA) in connection with Iran’s WMD proliferation activities or support for terrorism
• To or for any Iranian SDN (except for Iranian financial institutions designated for a reason other than proliferation activities, support for terrorism, or involvement in human rights abuses)

There is an exception for persons that exercise due diligence, as well for transactions relating to the provision of agricultural commodities, food, medicine, medical devices, or humanitarian assistance.

Sanctions on Foreign Financial Institutions That Facilitate Certain Transactions

Section 1247 of the NDAA 2013 imposes sanctions on foreign financial institutions that knowingly facilitate transactions on behalf of specified Iranian SDNs.  Again, this prohibition does not extend to facilitation of transactions with Iranian financial institutions generally, but extends only to dealings with those financial institutions that have been designated based on WMD proliferation, support for terrorism, or human rights abuses.

Sanctioned institutions are subject to prohibition on the opening of, and imposition of “strict conditions” on the maintenance of, US-based payable-through and correspondent accounts.

Section 1247 applies to petroleum-related transactions to the extent that the President has determined under NDAA 2012 that there is a sufficient global supply of non-Iranian petroleum.  There is an exception where the country with primary jurisdiction over the financial institution is entitled to an exception under NDAA 2012, and where: 

• The financial transaction is for trade in goods or services:
  • not otherwise subject to US sanctions, and
  • between Iran and the country with primary jurisdiction over the foreign financial institution
• Any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution

Finally, section 1247 applies to natural gas-related transactions, unless: 

• The financial transaction is for trade in goods or services 
• Not otherwise subject to US sanctions
• Between Iran and the country with primary jurisdiction over the foreign financial institution
• Any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution.

Human Rights-Related Sanctions

Section 1248 of the NDAA 2013 imposes sanctions on Islamic Republic of Iran Broadcasting and its president, while section 1249 sanctions persons involved in the diversion of goods intended for the people of Iran, including agricultural commodities, foods, medicine, and medical devices.  Each section requires the imposition of sanctions provided under section 105(c) of CISADA, which include sanctions under IEEPA, such as blocking of property, and ineligibility of sanctioned persons for visas to enter the United States.

NDAA 2012 Presidential Waiver

There are several waiver provisions within the NDAA 2013 to allow the President to refrain from imposing sanctions under the provisions summarized above.  Of note, section 1250 of the NDAA 2013 affords the President greater flexibility in issuing a waiver for sanctions imposed on foreign financial institutions under the NDAA 2012.  The section authorizes the President, in issuing a waiver, to certify to Congress that the country with primary jurisdiction over a covered foreign financial institution “faced exceptional circumstances that prevented the country from being able to reduce significantly its purchases of petroleum and petroleum products from Iran.”

Presidential Reports

Section 1252 of the NDAA 2013 requires the President, within 180 days of the enactment of the statute and annually thereafter through 2016, to issue a report to Congress listing: 

• “Large or otherwise significant” vessels that have entered seaports in Iran controlled by the Tidewater Middle East Company
• All airports at which aircraft owned or controlled by sanctioned Iranian air carriers have landed

The first report must cover the 180-day period preceding submission of the report, while the subsequent annual reports must cover the year preceding submission.

Authorization of IEEPA Penalties

Section 1253 of the NDAA 2013 authorizes the President to impose IEEPA penalties on any person that “violates, attempts to violate, conspires to violate, or causes a violation” of the Iran sanctions provisions contained in the statute.  These include civil penalties of $250,000 per violation or twice the value of the transaction at issue, and criminal penalties of $1 million per violation and/or imprisonment up to twenty years.

It is unclear whether and to what extent the President could impose penalties on a foreign person under this section.  First, the imposition of penalties would be limited to those circumstances under which the United States government could assert jurisdiction over the foreign person.  Second, it is not apparent what would constitute a “violation” of the Iran sanctions-related provisions of the NDAA 2013, as the provisions (other than the blocking provisions) do not purport to prohibit covered activity, but rather empower the President to deny certain privileges to persons who engage is specified sanctionable conduct.  Third, section 1253 appears to allow the President discretion to impose IEEPA penalties, in contrast with other provisions of the NDAA 2013, which require the President to impose certain sanctions.  It is possible that the President or OFAC will promulgate specific guidance regarding the contours of section 1253 of NDAA 2013, as well as section 601 of ITRA (which similarly provides for IEEPA penalties in certain cases), as these provisions potentially subject foreign persons to significant monetary penalties.

Conclusion

The NDAA 2013 marks a continuing trend of congressional activism in the field of Iran sanctions.  This round of sanctions focuses on foreign persons that engage in certain transactions with Iran’s energy, shipping, and shipbuilding institutions, as well as those that provide certain materials to Iran.  Furthermore, the legislation will expand existing sanctions on the provision of underwriting services, insurance, and reinsurance relating to Iran, as well on foreign financial institutions that facilitate certain transactions.  Barring improvement in relations between the United States and Iran, Congress and the President are likely to continue expanding the scope of sanctions to target sectors and activities of strategic significance to Iran.