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Broad New Legislation Further Expands Economic Sanctions Against Iran and Syria

The President has signed the Iran Threat Reduction and Syria Human Rights Act (“ITRSHRA”), following Congressional enactment on July 30. The law introduces a broad range of measures that both expand existing Iranian and Syrian sanctions and introduce new mechanisms designed to further thwart Iran’s nuclear program and support of terrorism.

Concurrent with ITRSHRA, President Obama issued Executive Order 13622 (July 31, 2012), which further expands the already broad energy-related sanctions against Iran by targeting Iran’s petroleum and petrochemical exports. Consistent with other recent measures that have threatened foreign companies with penalties for engaging in business that is barred for U.S. persons, these two new sanction measures seek to tighten the economic embargoes against Iran and Syria by explicitly encompassing certain activities of non-U.S. firms involving both countries. Activities subject to sanctions include participation in the export of petroleum and petrochemicals from Iran; activities that facilitate the transportation of petroleum products, such as the sale or lease of vessels; and joint ventures with Iran for the development and production of petroleum and uranium. Two other notable provisions of the new law are the extension of the long-standing comprehensive Iranian trade embargo to foreign subsidiaries of U.S. companies, and new mandatory disclosure rules for public companies regarding certain activities that are related to Iran.

The Implications

Like the existing laws and regulations on which they build, the new measures reflect a strong U.S. political sentiment that non-U.S. persons and companies should not be allowed to participate in the U.S. economy if they also engage in activities inconsistent with U.S. foreign policy or national security interests. Persons engaging in any of the various areas of activity targeted by these new measures could face a wide range of severe economic consequences, the most draconian of which are a blocking of assets held in the United States and a ban on dealings with U.S. persons.

With limited exceptions, U.S. and foreign companies doing business in the United States have been virtually barred from doing business in or with Iran and Syria under existing sanctions regulations. The new measures further raise the risks of such business for persons operating outside of U.S. jurisdiction, while adding new compliance challenges for those operating within the rules.

Further Details on the New Developments

The Context

Iran

Since 1995, the United States has prohibited U.S. companies and U.S. persons from exporting to, importing from, or investing in Iran. Many Iranian entities are also targeted under U.S. economic sanction measures aimed at persons involved in the proliferation of weapons of mass destruction. The United States has consistently sought to convince the international community to join in multilateral sanctions, and these efforts particularly have borne fruit in the last two years. In addition to United Nations measures targeting Iran’s nuclear and ballistic missile programs, the European Union and Canada have imposed significant sanctions targeting Iran’s financial and energy sectors. Perhaps the most notable measure is an EU oil embargo, which was announced in January 2012 and then put into effect in March of 2012.

Syria

The United States also has targeted Syria with sanctions in recent years. Since 2004, there has been a virtual ban on the export and re-export of goods and technology originating in the United States to Syria. In 2011, responding to the repressive violent actions of President Bashar Al-Assad’s regime, President Obama ordered a comprehensive ban on U.S. trade in goods and services with Syria, including an investment ban. The EU also has implemented sanctions against Syria that primarily target the energy sector.

Policy of Targeting Non-U.S. Persons

Beginning more than a decade ago, the United States has periodically extended the extraterritorial reach of the Iranian sanctions policy, moving beyond restrictions on U.S. persons to sanctions that target non-U.S. persons doing business in Iran. In addition to strengthening the effectiveness of the sanctions, these actions reflect a strong sentiment that foreign persons should not be allowed to use U.S. banks or to participate in the U.S. economy if they also engage in activities inconsistent with U.S. foreign policy or national security interests. The Iran Sanctions Act of 1996 (“ISA”) first mandated an extraterritorial sanctions regime concerning Iran. The ISA was significantly strengthened through the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”).

Under CISADA, sanctions may be imposed on a non-U.S. person if an investigation concludes that certain “sanctionable” activity has occurred. Sanctionable activities include large investments in the Iranian energy sector or activities that support Iran’s production or importation of refined petroleum products. Possible sanctions include prohibitions on foreign exchange transactions in the United States, prohibitions on the transfer of credits or payments by financial institutions in the United States, and a prohibition on any dealings in property in the United States ‒ a sanction that effectively forecloses any business dealings with U.S. companies.

Other such Iran sanctions measures leading up to the adoption of Executive Order 13622 and ITRSHRA include:

• November 2011 – Executive Order 13590 expanded the CISADA energy sector sanctions against Iran by targeting persons that supply Iran’s petrochemical and petroleum industries.
• December 2011 – Provisions of the National Defense Authorization Act for Fiscal Year 2012 target financial institutions that do business in Iran. Financial institutions may be prohibited from maintaining correspondent accounts in the United States if such firms engage in or facilitate transactions with the Central Bank of Iran. Foreign financial institutions that engage in transactions involving Iranian petroleum are also subject to such sanctions, although the President may waive sanctions to avoid the disruption of global petroleum supplies.
• April 2012 – Executive Order 13606 directs the freezing of assets of persons whom the United States believes facilitate the Iranian and Syrian Governments’ efforts to engage in activities that restrict the free flow of information and enable human rights abuses, including computer and network disruption as well as monitoring and tracking the activities of people and business entities.
• May 2012 – Executive Order 13608 targets “Foreign Sanctions Evaders,” who are persons that engage in “deceptive” practices in order to obscure or withhold information about an Iranian or Syrian link to a given transaction.

The New Measures

1. Executive Order 13622 “Authorizing Additional Sanctions With Respect to Iran”

This new Executive Order expands the sanctions against Iran, focusing on persons who “knowingly” engage in “significant transactions” related to the purchase of Iranian petroleum or petrochemical products, as well as persons that have dealings with the principal government-owned Iranian entities that support the energy sector.

Dealing in Iranian Petroleum and Petrochemical Products: Executive Order 13622 targets persons who enter into transactions involving Iranian petroleum, petroleum products, and petrochemicals, as well as financial institutions that facilitate such transactions. The sanctions can also be extended to parent companies if the parent is aware of the sanctionable activity. There are no specific dollar thresholds triggering the sanctions, and the term “significant” is not defined.

Persons who engage in such activity could be the subject of a range of sanctions that are similar to those available under CISADA. These sanctions include: (1) denial of Export-Import Bank loans, credits or guarantees; (2) denial of any necessary U.S. export licenses; (3) prohibition on U.S. financial institutions making loans or providing credit of more than U.S. $10 million in any twelve-month period (with minor exceptions); (4) prohibition on obtaining U.S. Government procurement contracts; (5) restrictions on imports into the United States; (7) denial of any foreign exchange transactions in the United States; (8) denial of the ability to conduct banking transactions in the United States; and (9) the blocking of a sanctioned person’s property interests held by a U.S. person, which effectively precludes the sanctioned person from engaging in any transactions in the United States or transactions involving a U.S. person, anywhere in the world.

Other sanctions that may be imposed on financial institutions include: (1) a prohibition on holding correspondent banking relationships in the United States; and (2) a prohibition on being designated as a primary dealer in U.S. Government debt and/or prohibition on acting as an agent for U.S. Government funds.

Dealings with Certain Iranian Entities Critical to the Energy Sector: Separately, Executive Order 13622 authorizes sanctions against government entities that control the energy trade in Iran. These include the National Iranian Oil Company (“NIOC”), its subsidiary, the Naftiran Intertrade Company (“NICO”), and the Central Bank of Iran. The Order provides for sanctions against any person that “has materially assisted, sponsored, or provided financial, material or technological support for, or goods or services in support of such entities, or has otherwise assisted the Government of Iran to acquire U.S. bank notes or precious metals. Persons engaging in such activities will have their property interests blocked; as noted above, a blocking order would effectively bar a sanctioned entity from virtually all business activities in the United States or with U.S. persons.

2. The Iran Threat Reduction and Syria Human Rights Act (“ITRHSRA”)

This sweeping new law broadens existing sanctions targeting Iran’s nuclear program, its energy sector, and Iran’s support for terrorism, while introducing new measures focusing on human rights abuses in Iran and Syria. The principal provisions are summarized below.

Expansion of the Iran Sanctions Act and CISADA

One of the principal aspects of ITRSHRA is the further expansion of the ISA. ITRSHRA amends the ISA to create additional categories of activities that could subject non-U.S. firms to sanctions, and it creates new types of sanctions that can be imposed on such firms.

Newly subject to sanctions are: (1) persons who support and supply Iran’s petrochemical and petroleum industries, including refineries (a measure which expands on Executive Order 13590 of November, 2011, effectively codifying and broadening such sanctions); (2) persons who engage in joint ventures with the Government of Iran related to the development of petroleum resources; (3) persons involved in the transportation of Iranian crude oil, including those that conceals the Iranian origin of the cargo; (4) persons who provide insurance and reinsurance to NIOC or the National Iranian Tanker Company (“NITC”); (5) persons who facilitate the issuance of Iranian sovereign debt; and (6) persons involved in joint ventures with Iran related to the mining and production of uranium.

In addition to expanding the range of potentially sanctionable activity, the Act increases the magnitude of the sanctions themselves. CISADA provided that if the President determines that a person has engaged in activities subject to sanctions, he must impose on such person or entity at least three of nine possible sanctions (unless the circumstances merit a Presidential waiver). The new Act increases the minimum number of sanctions from three to five, and provides three new sanctions options, including (i) a ban on U.S. investment in or the provision of financing to sanctioned persons, (ii) the exclusion of corporate officers from the United States, and (iii) the imposition of sanctions on individuals who are the principal executive officers of entities engaging in sanctionable activity.

Closing the Foreign Subsidiary “Loophole”

ITRSHRA extends the long-standing comprehensive Iranian trade embargo to foreign subsidiaries of U.S. companies. Under the new law, foreign subsidiaries are prohibited from engaging in any transaction that is prohibited as to a U.S. person. Perhaps recognizing that such foreign subsidiaries might be beyond U.S. jurisdictional reach, or that foreign governments may object to such a direct assertion of extraterritorial U.S. regulatory authority, the law also authorizes the imposition of civil penalties against the U.S. parent company for the acts of its subsidiaries. This provision takes effect 60 days after the date of enactment, and provides a 180 day grace period for termination of Iranian business.

New Mandatory Disclosure Rules for Public Companies

In an effort to prod non-U.S. entities that trade securities on U.S. exchanges into ceasing activities in Iran, the Act requires public companies that engage in the range of activities that are subject to sanctions, or who engage in transactions with person subject to blocking orders, to provide detailed information concerning such activities in their annual and quarterly reports. The Act also directs the President to investigate such companies to determine if sanctions are warranted.

Human Rights Sanctions

The Act codifies the provisions of Executive Order 13606, which directs the freezing of assets of persons whom the United States believes facilitate the Iranian and Syrian Governments’ efforts to engage in activities that restrict the free flow of information and enable human rights abuses, including computer and network disruption, as well as monitoring and tracking activities of individuals and business entities..

With respect to both Syria and Iran, the Act calls for sanctions against persons responsible for human rights abuses, censorship and other acts of political repression, as well persons who supply goods and technology to be used to commit human rights abuses by those regimes.

Other Measures

A series of other measures in ITRSHRA build on the theme of both codifying recent Obama Administration actions (such as the May 2012 Executive Order 13608 targeting “Foreign Sanctions Evaders”) and requiring the Administration to take new steps, often through the mechanism of mandatory reports to Congress. For example, one provision calls for the President to develop and report to Congress on a comprehensive strategy to promote Internet freedom in Iran. Another requires the President to investigate and report to Congress regarding the possibility that certain Iranian entities might have ties to the Islamic Revolutionary Guard Corps.

The Implications

For non-U.S. companies, the new measures introduce another factor to calibrate when weighing the importance of access to the U.S. market against shorter-term business opportunities involving Iran or Syria. The orders notably mark a further evolution away from a more circumspect “water’s edge” approach to sanctions that has largely been followed for the past three decades in order to avoid jurisdictional clashes, a distraction that itself may diminish the effectiveness of U.S. policy. With major U.S. trading partners generally aligned on Iranian and Syrian sanctions, such discord may be avoided. Nevertheless, financial institutions (particularly those in Asian countries, which have not followed the EU’s lead with the United States on Iran and Syria) may be vulnerable to crippling U.S. sanctions under these measures in circumstances where previously they were not within the reach of direct enforcement action.

For U.S. businesses, the orders require heightened awareness of the risks of dealing with otherwise legitimate non-U.S. business partners that in turn do business in Iran or Syria. The Act’s direct application to foreign subsidiaries of U.S. companies also raises the bar for corporate compliance programs — the Act makes it vitally important to implement a single, global approach to sanctions compliance (while taking into account local law). A business partner may become a sanctioned party for its indirect dealings with Iran or Syria independent of its U.S. business, placing it on a par with terrorists and narcotics traffickers on OFAC’s “List of Specially Designated Nationals and Blocked Persons.” While the impact of such measures is felt most acutely by the sanctioned entity, a U.S. company can also suffer a significant business disruption if it has long term ties (e.g., through a joint venture) with the newly-sanctioned party.

The new sanctions thus warrant enhancement of counterparty due diligence. Many financial institutions — both U.S. and non-U.S. based — are already starting to ask more questions about ties to firms that do business in Iran and Syria. Multinationals in other sectors would do well to emulate such practices.