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New Executive Order Extends Extraterritorial Reach of U.S. Iran SanctionsJune 7, 2013
President Obama has issued Executive Order 13645, “Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Freedom and Counter-Proliferation Act of 2012 and Additional Sanctions With Respect to Iran.” Exec. Order No. 13645, 78 Fed. Reg. 33945 (June 5, 2013). Consistent with other recent legislative and executive actions, the new Order further tightens the economic embargo against Iran by targeting the activities of non-U.S. financial institutions and commercial businesses. It breaks new ground, however, by threatening to freeze the U.S. assets of non-U.S. persons who engage in transactions with certain Iranian governmental agencies and enterprises or other sanctioned persons. Further, while U.S. sanctions penalizing foreign persons were previously aimed primarily at activities involving Iran’s energy sector, EO 13645 expands the threat of sanctions to Iran’s automotive sector.
Although the effective date of EO 13645 is July 1, 2013, sanctions may be applied to payments or other activities arising from transactions entered into prior to that date.
Like the existing laws and regulations on which it builds, EO 13645 aims to increase economic pressure on Iranian authorities by further discouraging non-U.S. persons from doing business in Iran, particularly with Iran’s governing elite and critical industrial sectors. The Order’s frank threat to impose severe penalties on foreign persons for doing business with Iran ‒ business that may be lawful in their own countries ‒ reflects both a strong desire to make sanctions an effective tool for change, and political sentiment that foreign 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 activity covered by EO 13645 could face a wide range of adverse economic consequences, ranging from a freeze of their assets held in the United States to severe constraints on doing business in the U.S. market.
Further Details on Executive Order 13645
The Context: Policy of Targeting Non-U.S. Persons
With limited exceptions, since 1995 the United States has prohibited U.S. companies and individuals from exporting to, importing from, or investing in Iran. Seeking to promote a global embargo, the United States has periodically extended the reach of U.S. sanctions in three principal ways: (1) foreign companies that continue to do certain business in Iran (e.g., investing in the energy sector) may be denied various privileges of doing business in the United States or involving the U.S. Government; (2) U.S. assets of Iranian Government entities and related parties have been frozen; and (3) foreign affiliates of U.S. companies must comply with the U.S. sanctions, and their U.S. owners may be penalized if they do not. The push to force adherence to U.S. sanctions’ rules and policies by persons not subject to U.S. jurisdiction has accelerated during the past three years. While some of the United States’ major trading partners (most notably, the European Union and Canada) initially voiced strong objections to the United States’ unilateral, extraterritorial assertions of U.S. authority in the Iran sanctions context, those objections have been muted over the last three years as those partners have aligned their Iran sanctions policies with the United States. Indeed, Canada has recently implemented a full trade embargo against Iran, and the EU has imposed significant energy-related sanctions on Iran. The United States’ trading partners in Asia, which currently have greater business interests in Iran, remain critical of the U.S. measures.
The Iran Sanctions Act of 1996 (“ISA”) first mandated an extraterritorial sanctions regime concerning Iran. The ISA was significantly broadened through the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). A succession of executive orders and statutes followed, including Executive Order 13599, 77 Fed. Reg. 6659 (February 8, 2012), the National Defense Authorization Act of 2012, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”).
For more information on Iran sanctions measures leading up to the adoption of EO 13645 and IFCA, please see O’Melveny & Myers’ client alerts available here, here, and here.
The Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”)
President Obama signed IFCA on January 2, 2013. It will be fully effective on July 1, 2013. IFCA authorizes sanctions in response to certain activities related to (i) Iran’s energy, ports, shipping, and shipbuilding sectors; (ii) the sale, supply, or transfer to or from Iran of precious and certain other metals, graphite, coal, and industrial software; (iii) the provision of underwriting services, insurance, or reinsurance to activities and persons targeted by U.S. sanctions against Iran; (iv) financial transactions involving sanctioned Iranian individuals and entities; and (v) the diversion of goods intended for the Iranian people.
Executive Order 13645
EO 13645 implements several statutory provisions of IFCA, but goes further by targeting transactions related to Iran’s currency (the rial) and Iran’s automotive sector, and transactions involving material assistance to specific Iranian persons who are already subject to U.S. sanctions.
Consistent with IFCA, EO 13645 is effective on July 1, 2013. It does not include any exceptions for the performance of contracts entered into prior to that date. The Department of the Treasury will issue regulations to implement provisions of the Order.
Materially Assisting Specially Designated Nationals: The Treasury Department’s Office of Foreign Assets Control (“OFAC”) maintains a list of Specially Designated Nationals (“SDNs”). SDNs are entities and individuals whose assets are blocked under any of the U.S. economic sanctions programs. U.S. persons generally are prohibited from dealing with SDNs.
The SDN list includes a large number of Iranian persons and non-Iranian persons whose assets are blocked under Iran sanctions measures. EO 13599, issued in February 2012, froze the U.S. assets of all Iranian Government instrumentalities and persons acting on their behalf. Prior to EO 13599, many Iranian state-owned enterprises were named on the SDN list, but EO 13599 swept all others into the category of blocked persons. Since EO 13599, OFAC regularly has added other Iranian persons ‒ government agencies, state-owned enterprises, government officials, private-sector businesses, and private citizens ‒ to the SDN list.
EO 13645 now authorizes the Secretary of the Treasury to block “all property and interests in property” in the United States of persons determined to have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of,” any Iranian person included on the SDN list, or any non-Iranian person whose property and interests in property are blocked solely pursuant to EO 13599. The authority also extends to such transactions involving other persons whose property and interests in property are blocked pursuant to EO 13645. Any blocking order would extend to property or property interests that are outside of the United States but under the control of U.S. persons.
To illustrate the breadth of Section 2: A non-U.S. company that provides “material” services to the Iranian National Oil Company or to the Iranian National Petrochemical Company (both of which are listed as SDNs) on or after July 1, 2013, would be subject to having not only its U.S. assets frozen, but also its assets held by a foreign branch of a U.S. bank.
Certain Iranian depository institutions and activities relating to the Shah Deniz gas-field project in Azerbaijan are excepted from Section 2. The Secretary of the Treasury, in consultation with other agencies, is charged with responsibility for implementing Section 2.
Dealings with the Iranian Automotive Sector: Section 5 targets any person who “knowingly engage[s] in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.” The automotive sector of Iran is defined as the manufacturing or assembling in Iran of light and heavy vehicles, including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles.
In assessing whether any transaction is “significant,” the agencies will look to the interpretation of “significant” set forth in the Iranian Financial Sanctions Regulations. See 31 C.F.R. § 561.404. This definition adopts a “totality of the circumstances” test, examining factors such as the size, nature, and frequency of the transaction(s).
EO 13645 authorizes a range of sanctions for non-U.S. companies that continue to service the Iranian automobile sector. Potential penalties are similar to those provided under previous Iran-related measures, and include: (1) denial of Export-Import Bank extensions of credit or guarantees; (2) denial of any necessary U.S. export licenses; (3) denial of U.S. Government procurement contracts; and (4) denial of visas and exclusion from the United States of any alien corporate officer or controlling person. Other sanctions that may be imposed on financial institutions include a prohibition on being designated as a primary dealer in U.S. Government debt and/or a prohibition on acting as an agent for U.S. Government funds. The Secretary of State, in consultation with other agencies, is charged with determining whether to impose sanctions under Section 5.
Section 5 also provides for the imposition of the same sanctions listed above on the principal executives or similarly situated officers of a sanctioned person. Sanctions under this section can also be extended to parent companies if the parent had knowledge of the sanctionable activity.
Additional Foreign Financial Institution Sanctions: The Order also provides for sanctions against foreign financial institutions that engage in a range of services in Iran.
First, the Order authorizes sanctions on foreign financial institutions engaging in transactions involving Iranian rials, whether inside or outside Iran, as well as transactions in any derivative, swap, or future contracts whose value is based on the Iranian rial’s exchange rate.
Second, parallel to the sanctions targeting those that materially support Iranian SDNs or involving the Iranian automotive industry, the Order provides for sanctions against foreign financial institutions that conduct or facilitate significant financial transactions involving Iranian SDNs (with a few narrow exceptions) or the Iranian automotive industry.
Sanctions for foreign financial institutions that engage in these activities echo those provided in previously issued sanctions, including foreclosing their ability to maintain a correspondent or payable-through account in the United States. Foreign financial institutions that engage in rial-related activity also face a possible blocking order. Either of these sanctions would be crippling to any foreign financial institution, as they would effectively cut the bank off from U.S. financial markets.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O'Melveny partner licensed to practice law in Washington, DC and Georgia, Greta Lichtenbaum, an O'Melveny partner licensed to practice law in Washington, DC and Pennsylvania, and Marion Read, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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