Note: This is one of two alerts about the recent US sanctions against Iran. Please follow this link to read more about the July 31 Executive Order expanding US extraterritorial sanctions on Iran's petroleum sales.
On July 31, 2012, President Obama issued a new Executive Order ("Executive Order") that expands the scope of extraterritorial sanctions imposed by the US on foreign (non-US) persons who are involved in Iran's exports of petroleum, petroleum products, and petrochemicals. This order took immediate effect, and authorizes the US Treasury Department and the US State Department to impose additional sanctions on those financial institutions and other intermediaries that facilitate Iran's petroleum, petroleum products, or petrochemicals sales.
The US Treasury Department also announced the imposition of sanctions on Bank of Kunlun of China and Elaf Islamic Bank of Iraq under the financial controls provisions of the Comprehensive Iran Sanctions, Accountability, and Divestment Act ("CISADA").1 Treasury determined that these banks both knowingly facilitated significant2 transactions and provided significant financial services for Iranian banks that the US had previously placed on the list of Specially Designated Nationals ("SDN list") subject to US economic sanctions. These sanctions prohibit financial institutions from opening or maintaining correspondent or payable-through accounts in the United States for either Bank of Kunlun or Elaf Islamic Bank, thereby cutting off both banks' direct access to the US financial system. Any existing US correspondent or payable-through accounts for these banks must be closed within ten days. US financial institutions are not required by Treasury to freeze the assets of, or block or reject transactions involving, Bank of Kunlun or Elaf Islamic Bank. However, heightened due diligence is expected for any dealings with these institutions. US regulators are likely to pay especially close attention to any transactions in which these banks are involved given what Treasury says is these banks' demonstrated willingness to facilitate transactions on behalf of Iranian banks previously designated for US sanctions.
The July 31 Executive Order and CISADA sanctions come on the heels of several additional Iran sanctions enforcement announcements, most notably the July 12, 2012 addition of a substantial number of oil, banking, and shipping companies to the SDN list.3 The July 31 measures immediately preceded the new legislative package of Iran sanctions that Congress passed on August 1 to further expand the range and scope of US sanctions on Iran's energy sector, Iranian financial institutions, and the individuals and entities who continue to do business with Iran.
The July 31 Executive Order
Noting Iran's use of petroleum and petrochemical revenues "for illicit purposes," Iran's ongoing efforts to evade international sanctions through the use of deceptive practices, and "the unacceptable risk posed to the international financial system by Iran's activities," the July 31 Executive Order expands the authority of the US Treasury Department and the US State Department to deter banks and other intermediaries from attempting to circumvent US sanctions.
Extraterritorial Sanctions on Foreign Financial Institutions Facilitating Significant Iranian Oil Sales
The Executive Order authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to prohibit or impose strict conditions on the opening or maintenance of a US payable-through or correspondent account for foreign financial institutions that have knowingly4 conducted or facilitated a significant5 financial transaction:
- with the National Iranian Oil Company ("NIOC") or Naftiran Intertrade Company ("NICO"),6 except for the sale to NIOC or NICO of refined petroleum or petroleum products below a certain de minimis dollar threshold value as defined in the Iran Sanctions Act, as amended7; or
- for the purchase or acquisition of petroleum or petroleum products from Iran; or
- for the purchase or acquisition of petrochemical products from Iran.
Extraterritorial Sanctions On Any Person Engaged in Significant Transactions Involving Iranian Oil or Related Products
The July 31 Executive Order similarly authorizes the Secretary of State, in consultation with the Secretary of the Treasury and other senior US officials8 to impose several enumerated sanctions upon any person determined by the Secretary of State to have knowingly engaged in a significant transaction for the purchase or acquisition of petroleum, petroleum products, or petrochemicals from Iran ("Sanctioned Person").
In an effort to prevent Iran from circumventing the sanctions, in addition to the "Sanctioned Person," the July 31 Executive Order also authorizes the imposition of sanctions upon other persons related to the Sanctioned Person. This includes any successor entities; any person who owns or controls the Sanctioned Person if they have knowledge that the Sanctioned Person engaged in the sanctionable conduct; and any affiliates of the Sanctioned Person, if the affiliate in question knowingly participated in the sanctionable conduct.
Consistent with other US sanctions on Iran's energy sector, the Executive Order outlines a wide range of penalties that the Secretary of State is authorized to impose upon a Sanctioned Person. These measures are designed to prevent a Sanctioned Person from access to, or deriving any benefit from, the US economy. Among the sanctions available to the Secretary of State are the following:
- Denial of any US Export-Import bank guarantee, insurance, financing or other extension of credit in connection with exports of goods or services to the Sanctioned Person;
- Denial of any US export licenses for the export or reexport of goods or technology to the Sanctioned Person where the prior review and approval of the US Government is a condition for the export or reexport of such goods or technology;
- For Sanctioned Persons that are financial institutions, the denial or termination of the Sanctioned Person's status as a primary dealer in US Government debt instruments, or the prohibition of the Sanctioned Person from serving as an agent of the US Government or as a repository for US Government funds;
- The debarment of the sanctioned person from US Government contracting opportunities;
- Generally prohibiting US financial institutions from making loans or providing credits to the Sanctioned Person totaling more than $10 million in any 12-month period;
- Prohibiting the Sanctioned Person from engaging in foreign exchange transactions that are subject to the jurisdiction of the United States;
- Prohibiting any transfers of credit or payments by or through any financial institutions where the transfers or payments are subject to US jurisdiction and the Sanctioned Person has any interest;
- Freezing any property or interest in property (within US jurisdiction) of the Sanctioned Person; and
- Restricting or prohibiting imports into the US from the Sanctioned Person.
Extraterritorial Sanctions on Material Support for NIOC, NICO, Central Bank of Iran, or Iranian Access to US Currency/Precious Metals
The July 31 Executive Order also authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to freeze the property and interests in property (within US jurisdiction) of any "person that has materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, NIOC, NICO,9 the Central Bank of Iran, or the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran."
While US persons10 are already prohibited from doing business with NICO, NIOC, and the Central Bank of Iran, this provision gives extraterritorial effect to these restrictions. Under the July 31 Executive Order, any individuals and entities who provide the types of material assistance noted above can be added to the SDN List of persons subject to US sanctions. Given the centrality of NICO, NIOC and the Central Bank of Iran to that country's petroleum exports, and the fact that many international financial institutions look to the SDN list when determining whether or not to engage in a transaction, this new authority has the potential to further restrict Iran's ability to sell its oil.
Additionally, the July 31 Executive Order includes new language restricting Iran's ability to access US currency or precious metals - two stores of value that Iran has sought to use as a medium of exchange in response to the landscape of international sanctions which have caused Iran's currency to plummet in value and prevented Iran from accessing the international payments system.
Alignment with Section 1245 Sanctions on Iranian Petroleum Exports
The July 31 Executive Order is designed to deter or prevent Iran and other countries from trying to establish workaround mechanisms to circumvent existing US sanctions on Iran's exports of petroleum and petroleum products. These sanctions, pursuant to Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (P.L. 112-81) ("Section 1245 sanctions"), apply to foreign financial institutions that knowingly conduct or facilitate any significant financial transaction with the Central Bank of Iran or with any other Iranian financial institution that has been designated11 by the United States for inclusion on the SDN list.
However, notably, key exemptions to the Section 1245 sanctions also apply to certain aspects of the July 31 Executive Order - specifically, the new authority to impose sanctions on foreign financial institutions engaged in significant financial transactions with NICO or NIOC, and the new authority to impose sanctions on foreign financial institutions and any person engaged in significant transactions involving the sale of Iranian petroleum or petroleum products.
As with the Section 1245 sanctions, before these aspects of the July 31 Executive Order can be imposed, the President must first determine that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. Additionally, as with the Section 1245 sanctions, these aspects of the July 31 Executive Order would not apply to financial institutions when the country which has primary jurisdiction over such institutions has received an exemption from the Section 1245 sanctions for "significantly reducing" its imports of Iranian petroleum and petroleum products.
The July 31 Executive Order represents another material expansion of US extraterritorial sanctions aimed at reducing Iran's petroleum sales by isolating Iran from the international energy markets and global financial system. These measures are designed to complement the increasingly robust international architecture of United Nations, European Union, United States and other national sanctions regimes against Iran. Specifically, as noted above, the July 31 Executive Order is intended to enhance the coverage of the Section 1245 sanctions. It does so by expanding the reach of the Section 1245 prohibitions on facilitating Iranian petroleum, petroleum product, or petrochemical exports to all foreign financial institutions and any individuals or entities, regardless of nationality.
As demonstrated by the July 31 Executive Order, the July 31 CISADA sanctions, and Congress's passage on August 1 of a new Iran sanctions law, the landscape of US sanctions against Iran is subject to frequent expansion - often without forewarning. Given the desire of the United States to ratchet up pressure upon Iran until it verifiably abandons its nuclear program, additional sanctions and enforcement actions are likely, and thus, active monitoring of this policy area remains critical.
- View the July 31 Executive Order.
- View Treasury's announcement of the CISADA sanctions imposed on Bank of Kunlun and Elaf Islamic Bank.
- View the Treasury FAQ regarding the July 31 Executive Order.
- View the Treasury FAQ regarding the Bank of Kunlun and Elaf Islamic Bank CISADA sanctions.
1Seethe Comprehensive Iran Sanctions, Accountability, and Divestment Act (P.L. 111-195) which became law in July 2010.
2 In Frequently Asked Questions and Answers released concurrently with the CISADA sanctions announcement, the Treasury Department said that the Secretary of the Treasury "may consider a number of factors" in determining whether transactions or financial services are "significant." Such factors, include but are not limited to the following: "size, number, and frequency; type, complexity and commercial purpose; the level of awareness or involvement by the bank's management; whether the activity or payment illustrates a pattern of practice or is an isolated event; the ultimate economic benefit conferred upon the designated person(s); and whether the transactions involved the use of deceptive financial practices to obscure the identities of the parties involved."
4 The July 31 Executive Order defines "knowingly" as either having actual knowledge or constructive ("should have known") knowledge.
5 In Frequently Asked Questions and Answers released concurrently with the July 31 Executive Order, the Treasury Department said that it expects to apply the same framework for defining what constitutes a "significant" financial transaction as is used under other Iran sanctions authorities. Namely, the Secretary of the Treasury "may consider a number of factors" in determining whether transactions or financial services are "significant." Such factors, include but are not limited to the following: "size, number, and frequency; type, complexity and commercial purpose; the level of awareness or involvement by the bank's management; whether the activity or payment illustrates a pattern of practice or is an isolated event; the ultimate economic benefit conferred upon the designated person(s); and whether the transactions involved the use of deceptive financial practices to obscure the identities of the parties involved."
6 Consistent with ordinary US sanctions practice, the July 31 Executive Order includes within the definition of NIOC and of NIOC any entity owned or controlled by NIOC or NICO, or any entity operating on behalf of NIOC or NICO.
7See§5(a)(3)(A)(i), imposing sanctions on persons who sell or provide to Iran refined petroleum products that have a fair market value of $1 million or more, or that, during a 12-month period, have an aggregate fair market value of $5 million or more.
8 These other senior US officials include the Secretary of Commerce, the US Trade Representative, the President of the US Export-Import Bank, the Chairman of the Board of Governors of the Federal Reserve System, and other agencies as appropriate.
9See the July 31 Executive Order and the Treasury FAQ regarding the July 31 Executive Order (noting that, notwithstanding that NICO reportedly has a 10% stake in the project, by its terms, the July 31 Executive Order does not apply to the pipeline project to supply natural gas from the Shah Deniz gas field in Azerbaijan to Europe and Turkey.)
10 Under the July 31 Executive Order, and consistent with other US sanctions, a "US person" is any "US citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States."
11 The July 31 Executive Order specifically covers those institutions that have been designated pursuant to the International Emergency Economic Powers Act (50 U.S.C. §§ 1701-1706).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.