U.S. Expands Iran Sanctions

January.03.2013

Today, the U.S. President signed legislation that further expands activities by non-U.S. persons relating to Iran that are to attract U.S. sanctions. In addition, the U.S. government has implemented regulations that broaden its embargo of Iran to forbid Iran-related activity of non-U.S. subsidiaries of U.S. companies. The new statutory and regulatory provisions are in response to Iran’s reported continuing nuclear program and, like prior measures, are intended to impede Iran’s ability to generate funding for the program.

Background

Since 1995, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) has administered a far-reaching embargo of Iran, generally forbidding business with and in Iran by “U.S. persons” – U.S. citizens and residents; entities organized under U.S. law; and all persons in the United States. The Iran embargo has grown ever broader and today is virtually comprehensive.

Building on the embargo, the United States has also developed “secondary boycott” Iran-sanctions policies, which are designed to induce non-U.S. persons to forgo Iran-related activities in a variety of areas. This process began with the Iran Sanctions Act (the “ISA”) enacted in 1996 (originally, the “Iran and Libya Sanctions Act”). The original ISA was directed principally at dissuading non-U.S. companies to pursue major oil and gas investments in Iran.

In 2010, the President signed into law the Comprehensive Iran Sanction Accountability and Divestment Act (the “CISADA”). The CISADA significantly expanded the energy-related activities that are sanctionable under the ISA to include, among other things, supply of refined petroleum products to Iran and provision of services in support of petroleum-related transactions. The CISADA also added new types of sanctions that can be imposed in an attempt to address the reported connection between Iran’s energy sector and its nuclear program. In addition, the CISADA established a variety of financial sanctions policies to impel third-country banks to withhold funding for certain Iran-related transactions under the threat of being cut-off from the U.S. banking system. These financial sanctions policies have been supplemented by statute and executive order since enactment of the CISADA.

Earlier this year, the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITRA”) 1) expanded the embargo by instructing President to punish U.S. companies for the activities of their non-U.S. subsidiaries regarding Iran and 2) expanded the types of activity by non-U.S. companies and individuals that can trigger secondary boycott sanctions by the U.S. government. Expansion of the embargo to non-U.S. subsidiaries of U.S. companies was implemented by executive order in October 2012.

National Defense Authorization Act for 2013

Newly enacted legislation that broadens Iran secondary boycott measures is included in the National Defense Authorization Act for 2013 (“2013 NDAA”). The statute establishes or strengthens secondary boycott policies in sectors such as energy, shipping, ship building, and financial services.

The 2013 NDAA is intended to restrict the ability of Iran’s energy, shipping, shipbuilding and port sectors to generate revenues to support nuclear proliferation activities. It provides for the blocking of certain property and imposition of ISA sanctions, with few exceptions, against persons who knowingly provide goods or services to the energy, shipbuilding, and shipping sectors of Iran, or to port operations there. Sanctions are also generally to be imposed on persons who knowingly provide underwriting services, insurance or reinsurance for any activity involving the energy, shipbuilding or shipping sectors of Iran. In addition, the 2013 NDAA requires blocking of U.S. banking activity of a non-U.S. bank that facilitates financial transactions for supply of these goods and services, with limited exceptions.

As to the financial services industry, the 2013 NDAA provides for prohibition or restriction of non-U.S. financial institutions' ability to maintain correspondent or payable-through accounts in the United States if they have knowingly conducted or facilitated a significant financial transaction with Iran’s Central Bank or a sanctioned Iranian financial institution, with a limited humanitarian exception. These requirements also generally apply to non-U.S. financial institutions that conduct or facilitate a financial transaction of natural gas to or from Iran. At the same time, the statute limits imposition of sanctions against government-owned third-country financial institutions to instances in which the underlying transactions with Iranian banks are for the sale of petroleum products.

Before sanctioning non-U.S. financial institutions under the NDAA for transactions that involve petroleum or petroleum products, the President must first make a determination that the quantity of petroleum products produced outside of Iran is sufficient to allow buyers of Iranian petroleum and petroleum products to significantly reduce their purchases from Iran.

In addition to sanctions in the energy and shipping sectors, the 2013 NDAA instructs the President to, in specified circumstances, impose ISA sanctions on persons who supply to Iran, among other things, precious metals or commodities for its shipbuilding and nuclear sectors, including graphite, aluminum steel, metal-lurgical coal and software for integrating industrial processes.

Embargo Regulatory Amendment

Effective 26 December 2012, OFAC amended the principal U.S. embargo regulations regarding Iran -- the Iranian Transactions and Sanctions Regulations (the ‘‘ITSR’’) -- to add a new prohibition on certain transactions by entities owned or controlled by U.S. persons and established or maintained outside the United States, thereby effectively extending the U.S. embargo to non-U.S. subsidiaries of U.S. companies.

As required by the ITRA and established by an executive order of 9 October 2012, the ITSR amendments purport generally to prohibit an entity that is owned or controlled by a U.S. person and established or maintained outside the United States to “knowingly” engage in any transaction with the Iranian government or a person who is subject to the Iranian government’s jurisdiction if the transaction would violate U.S. sanctions if undertaken by a U.S. person. A U.S. person who owns or controls the non-U.S. entity is exposed to civil penalties for actions of the non-U.S. entity.

The regulatory amendments clarify this extension of the embargo to non-U.S. entities in several respects:

  • A non-U.S. entity is encompassed by the prohibition if a U.S. person: 1) holds 50% or more of the equity interests in the non-U.S. entity, measured by voting rights or value, 2) has appointed a majority of the non-U.S. entity’s directors or 3) otherwise “controls the actions, policies, or personnel decisions” of the non-U.S. entity.
  • While actions by a non-U.S. entity must be “knowing” to implicate the prohibition, “knowing” means with “actual knowledge or reason to know.”
  • A person is subject to the Iranian government’s jurisdiction for purposes of the prohibition if the person is: 1) an entity that is organized under Iranian law, 2) an individual who is “ordinarily resident in Iran” or 3) “owned or controlled by any of the foregoing.”
Extension of the embargo to non-U.S. entities is subject to a variety of exemptions. For example, the regulations establish a window through 8 March 2013 during which OFAC has generally authorized transactions that are necessary to the winding-down of what are otherwise forbidden transactions provided the transactions do not involve a U.S. person or occur in the United States.