This week, in the face of advancement of Iran's nuclear program, the United States government announced a series of enhanced and expansive sanctions against Iran that target financial institutions and the energy sector. This significant change in US enforcement follows substantial political and diplomatic attention by the US, United Kingdom and allied governments in recent weeks.

SNR Denton has composed a detailed analysis of current sanctions against Iran and further pending developments in this evolving sanctions landscape.

Highlights of the new US sanctions on Iran include:

  • Requiring financial institutions to use enhanced due diligence procedures to ensure that they do not have any improper exposure to, or nexus with, the Iranian financial sector. Pursuant to the USA PATRIOT Act, the US has determined that Iran - including the Central Bank of Iran - is a "jurisdiction of primary money laundering concern."
  • The expansion of extraterritorial sanctions on involvement in Iran's energy sector. These new measures prohibit any person - US or foreign - from providing certain types of goods, services, technology or support for Iran's ability to develop petroleum resources. The sanctions also reach, for the first time, the provision of goods, services, technology or support for Iran's domestic production of petrochemical products.

You can download the complete analysis here, or read the full text below.

Introduction

This Memorandum outlines recent developments with respect to the United States sanctions affecting the Islamic Republic of Iran ("Iran"). The focus on Iran sanctions by the US Government and its allies continues to intensify, with an ever more vigorous campaign to identify and make public the names of the various front companies and individuals involved in attempts to evade the sanctions. The US has also placed particular focus on identifying linkages between Iranian commercial enterprises and the Iranian Revolutionary Guard Corps ("IRGC"). The impact of these efforts has extended beyond the US, and served to further tighten commercial restrictions on Iran globally.

Overview of US Sanctions

US sanctions generally prohibit US persons1 from engaging in, or otherwise facilitating or being involved in, nearly all commercial transactions with or involving Iranian parties. US sanctions broadly restrict US persons, wherever located, from doing business with individuals or entities located in Iran or owned or controlled, directly or indirectly, by the Government of Iran. Separate and apart from these restrictions, US persons are also prohibited from doing business with any individuals or entities on the list of Specially Designated Nationals (the "SDN list") administered by the US Treasury Department's Office of Foreign Assets Control. The SDN list includes many Iran-related designees - including commercial enterprises - targeted because of their linkages to the Government of Iran, its weapons of mass destruction activities, its human rights abuses, or its support for terrorism. Notably, all of Iran's major air carriers are on the SDN list, as is the operating company of several of Iran's largest seaports. In addition to imposing direct restrictions on US persons, the SDN list is also used as a central due diligence screen by financial institutions around the world.

US sanctions also assert extraterritorial application, although the actual enforcement of such measures often involves a very complex and sensitive political and foreign policy calculation in addition to jurisdictional issues associated with foreign parties. Extraterritorial sanctions authorize penalties on any person, regardless of nationality or location, who knowingly (including constructive "should have known" knowledge) makes certain investments in, or provides other designated types and levels of support for, Iran's energy sector. Extraterritorial sanctions apply to:

  • investing $20 million or more annually (or makes a combination of investments of at least $5 million each, which amount to at least $20 million in total in a 12-month period) in Iran's ability to develop petroleum resources2;
  • providing goods, services, information, technology or support valued at $1 million or more (or that, during a 12-month period, has an aggregate fair market value of $5 million) that facilitates the maintenance or expansion of Iran's domestic production of refined petroleum products3; or
  • providing goods, services, information, technology or support valued at $1 million or more (or that, during a 12-month period, has an aggregate fair market value of $5 million) that contributes to Iran's ability to import refined petroleum products, including the provision of financing, shipping, insurance, or reinsurance.

US sanctions also authorize the Treasury Department to restrict the opening or maintenance of US correspondent or payable-through accounts for foreign banks that know, or should know, that they provide certain significant transactions or financial services in support of entities involved in Iran's proliferation and terrorist activities. Additionally, special restrictions apply to all persons - US or foreign - who have, or seek to obtain, US Government contracts.

Sanctions violations can trigger civil and/or criminal liability, with penalties including substantial fines as well as possible imprisonment. In addition, violations (actual and perceived) of Iran sanctions are also frequently the subject of intense Congressional and media focus, both of which present significant reputational and business risks.

Recent Developments

In addition to SDN designations of more Iranian linked persons, amid growing pressure by the US Congress and stakeholder groups to impose stricter sanctions on Iran, there have been several recent developments shaping the sanctions landscape.

Expansion of Extraterritorial Sanctions

On November 21, the US released Executive Order 13590, expanding extraterritorial sanctions to a wider range of activities involving Iran's energy sector. Executive Order 13590 targets assistance to Iran's upstream oil and gas activities. It also, for the first time, imposes sanctions on involvement in Iran's petrochemical industry, a key sector of the Iranian economy which accounts for nearly half of Iran's noncrude oil exports.

These new extraterritorial sanctions cover any person, regardless of nationality or location, who knowingly (including both actual knowledge and constructive "should have known" knowledge):

  • provides goods, services, technology, or support valued $1 million or more (or that, during a 12- month period, has an aggregate fair market value of $5 million or more) for Iran's ability to develop petroleum resources4 located in Iran; or
  • provides goods, services, technology or support valued at $250,000 or more (or that, during a 12- month period, has an aggregate fair market value of $1 million or more) for the maintenance or expansion of Iran's domestic production of petrochemical products.5

Iran (including the Central Bank of Iran) is a "primary money laundering concern"

On November 21, acting under Section 311 of the USA PATRIOT Act, the Treasury Department issued a finding that Iran, including the Central Bank of Iran, is a "jurisdiction of primary money laundering concern." As such, the Treasury Department will prohibit the opening or maintenance of correspondent accounts for, or on behalf of, any foreign banking institutions, if the correspondent account involves Iran. Covered financial institutions will also be required to take special due diligence procedures to ensure that no correspondent accounts are indirectly providing services to an Iranian banking institution.

While the actual legal impact of this so-called "special measure" is limited because other US laws already in existence prohibited such relationships, the money laundering finding could have a substantial impact on the international banking community and foreign banking regulators. Such findings are issued very rarely, and have historically been followed by a precipitous international withdrawal from the institution at issue.

New Sanctions Legislation

In response to ongoing concern that the current sanctions will not prevent Iran from obtaining a nuclear capability, legislation has been introduced in both the US House of Representatives and the US Senate to expand sanctions against Iran and to limit the discretion of the Administration not to investigate or punish sanctionable conduct. While there are some differences in approach between the House and Senate bills, they also have much in common, including, for the first time as a matter of law, a declaration that it is US policy to prevent Iran from acquiring or developing a nuclear weapon.

House Bills H.R. 1905 and H.R. 2105

In the House, H.R. 1905, the Iran Threat Reduction Act, and H.R. 2105, the Iran, North Korea, and Syria Nonproliferation Modernization and Reform Act, are working their way through the legislative process. Currently, H.R. 1905 has 352 co-sponsors; and H.R. 2105 has 9. On November 2, the House Foreign Affairs Committee marked up and favorably reported both bills.

Among the key provisions of H.R. 1905 are measures that would:

  • impose sanctions on the foreign subsidiaries of US companies that do business with Iran;
  • impose sanctions on foreign firms that engage in certain commercial or financial transactions with the IRGC;
  • amend the 1934 Securities Exchange Act to require issuers to disclose whether they or their affiliates have engaged in certain types of transactions related to Iran, and direct the SEC to make this information public;
  • require a report on the Central Bank of Iran's role in terror finance and Iran's nuclear weapons proliferation, and impose sanctions if the report finds that the bank is involved in these activities; and
  • prohibit the issuance of licenses that would allow for the repair of Iran's US-origin aircraft.

H.R. 2105 would substantially expand sanctions on Iran, North Korea, and Syria, including by prohibiting landing rights in the US to any vessels that have called upon Iranian, North Korean, or Syrian ports in the preceding 180 days.

Senate Bill S. 1048

In the Senate, S. 1048, the Iran, North Korea, and Syria Sanctions Consolidation Act, has been referred to the Banking Committee. S. 1048 currently has 80 co-sponsors. Its key provisions include language that would:

  • authorize the President to sanction foreign entities that acquire certain materials mined in, or extracted from, Iran;
  • impose sanctions on companies that participate in certain joint ventures with Iran that are located outside of the country;
  • impose sanctions on foreign entities that engage in certain commercial and financial transactions with the IRGC;
  • require companies that report to the SEC to disclose if they conduct certain types of business with Iran;
  • require a report on the involvement of the Central Bank of Iran in terrorism and nuclear proliferation;
  • prohibit foreign banks from operating in the US if they do business with sanctioned banks related to Iran, North Korea, or Syria; and
  • prohibit US landing rights for any vessel that has called upon Iranian, North Korean, or Syrian ports in the preceding 180 days.

Developments in the UK

Meanwhile, in the United Kingdom, the Government has also taken action to strengthen sanctions against the Iranian financial sector. The UK had previously implemented into its law all requirements of European Union Regulations imposing prohibitions and restrictions on dealings with Iran and Iranian people, most importantly the measures of October 2010 which, among other things, required notifications of, and sometimes licenses for, transfers of funds to any Iranian person. These measures, which apply to any UK person (including entities incorporated in the UK but operating elsewhere) and any person in the UK, cover:

  • Freezing of funds and economic resources
  • Restrictions on transfers of funds to and from an Iranian person, entity or body
  • Vigilance over activities with Iranian banks
  • Dealing with the Iranian banking sector
  • Restrictions on Iran's access to the EU's bonds markets
  • Restrictions on Iran's access to the EU's insurance and reinsurance markets and
  • Restrictions on financing certain Iranian enterprises

However, the UK Government felt the threats that Iran continues to present to financial stability in the UK warranted further measures. As a result, on November 21, 2011, it made and brought into force immediately new legislation using its powers under the Counter Terrorism Act 2008 (CTA). This Act empowers the UK Treasury to make "Directions" lasting for one year, addressed to all, or segments of, the financial sector. A Direction may impose various bans, licensing and reporting requirements. The Financial Restrictions (Iran) Order 2011 bans all persons operating in the UK financial sector from involvement in any transaction or business relationship with the Iranian banking sector.

The Direction applies to all financial and credit institutions operating in the UK financial sector, and all their branches. It covers all entities covered by the Money Laundering Regulations (banks, investment banks and brokers of most financial products, fund managers, bureaux de change and many professionals) that require institutions to conduct appropriate due diligence on customers and counterparties and also non-life insurers. It applies to transactions and business relationships with the following "designated persons":

  • All banks incorporated in Iran
  • All subsidiaries and branches of banks incorporated in Iran, wherever they may be;and
  • The Central Bank of Iran

The Direction bans any participation in any transaction or business relationship with any designated person unless Treasury grants a license. The Direction goes wider than existing financial sanctions that stem from EU measures, which institutions must also continue to comply with. Specifically, the Direction effectively bans insurance for any Iranian entity. Treasury has issued six general licenses and institutions can apply for licenses covering both the CTA and EU restrictions but may have to apply for new CTA licenses where transfers of funds under current licenses has not yet occurred. Treasury notes the Direction is not a trade ban on trade with Iranian companies but exporters will no longer be able to use UK credit or financial institutions to make or receive payments to or from Iranian banks, nor will UK institutions be able to enter into new letter of credit arrangements with Iranian banks. Treasury says it will consider applications for licenses to allow payment under transactions entered into before the Direction took effect.

Outlook

As Iran continues to defy the demands of the international community for transparency with respect to its nuclear program, the intense focus on Iran sanctions by the US Government is likely to continue for the foreseeable future.

Among the primary targets for expansion of sanctions is the Central Bank of Iran, an institution which is involved in a wide range of Iranian energy sector commerce, as well as financial support for terrorism and nuclear proliferation. In August of this year, 92 US Senators signed a letter to the President calling for "crippling sanctions on Iran's financial system by cutting off" the Central Bank of Iran. These Senators, and their many allies in the House, have expressly urged that the President undertake measures "to collapse" the Central Bank of Iran.

The enforcement of Iran sanctions by the US Government - in coordination with allied governments - is expected to remain a key priority. The US State Department is likely to identify more foreign companies as having engaged in sanctionable conduct in Iran's energy sector, although it remains to be seen how US authorities will implement these findings. From the US Treasury Department, additional SDN designations of Iranian linked entities can also be expected, particularly where there is any nexus with the IRGC.

The continued intensified focus on Iran counsels heavily in favor of enhanced due diligence and heightened compliance procedures. Active monitoring of the policy landscape is also critical as the US and its allies continue to modify and expand restrictions on Iran.

Footnotes

1 "US persons" includes any US citizen or lawful permanent resident, any entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person actually within the US.

2 "Petroleum resources" is defined to include 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.

3 "Refined petroleum products" is defined to include diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel), and aviation gasoline.

4 "Petroleum resources" includes petroleum, oil, natural gas, liquefied natural gas, and refined petroleum products.

5 "Petrochemical products" includes any aromatic, olefin, and synthesis gas, and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea.

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.