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New Iran and Syria Sanctions Pose Compliance Challenges for both U.S. and non-U.S. Businesses

May 15, 2012

 

President Obama has issued two new Executive Orders that further expand the already broad sanctions against Iran and Syria. Consistent with other recent measures that have threatened foreign companies with penalties for engaging in business that is barred for U.S. persons, these new sanctions seek to tighten the economic embargoes aimed at both Iran and Syria by explicitly targeting certain activities of non-U.S. firms involving those countries.

What is New

The new Executive Orders authorize the Treasury Department to prohibit U.S. persons from dealing with non-U.S. persons engaging in activity deemed contrary to U.S. foreign policy and national security interests. 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 activities. For example, supplying email monitoring hardware or software to a sanctioned government may result in sanctions under this Order. Executive Order 13608 targets “Foreign Sanctions Evaders,” who are persons that engage in “deceptive” practices that result in the obscuring or withholding of information about an Iranian or Syrian link to a given transaction. For example, deleting references to Iran in a funds transfer transiting the U.S. banking system would be unlawful under current regulations, but may now earn the initiating foreign institution additional sanctions as an evader. Together, these new orders address two increasingly publicized challenges to effective embargos: securing continued flows of information to and from the populations of the targeted countries, while attacking channels of commerce that circumvent the economic sanctions and sustain the regimes.

The Implications

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 orders directly 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

Iran has faced longstanding criticism and economic sanctions from the United States as both a state sponsor of terrorism and for its alleged nuclear weapons program. Since 1995, the United States has maintained comprehensive sanctions against Iran which prohibit U.S. companies and persons from exporting, importing, or investing in Iran. Many Iranian entities are also targeted under U.S. economic sanctions 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 strengthen these sanctions, and these efforts have borne fruit in the last two years. In addition to UN 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 the EU oil embargo that was announced in January and which went into effect in March 2012.

Syria

The United States has maintained sanctions targeting Syria for a number of years. Most notably, in 2004, it imposed a virtual ban on the export and re-export of U.S.-origin goods and technology to Syria. In 2011, responding to the repressive violent actions of President Bashar Al-Assad’s regime, the President imposed significant additional measures, including a comprehensive ban on trade in goods and services, as well as 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 in 2010, the United States took a more aggressive approach to Iran sanctions policy, moving beyond restrictions on U.S. persons to sanctions that instead target non-U.S. persons that do business in Iran. The principle behind these newer sanctions is that non-U.S. persons should not be allowed to use U.S. banks or participate in the U.S. economy if they also engage in activities inconsistent with U.S. foreign policy or national security interests. This principle was first put into operation for Iran in the Iran Sanctions Act of 1996, a statute which was significantly strengthened in 2010 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 with U.S. companies.

Other Iran sanctions measures have built on this theme:

  • 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.

The New Measures

The two recent executive orders are consistent with the principle that non-U.S. persons 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. If a designated non-U.S. person engages in activities described in the orders, U.S. persons cannot engage in any dealings with them anywhere and that they are effectively banned from the U.S. market.

Executive Order 13606 – Activities Related to Information Technology

EO 13606, effective April 23, 2012, targets persons that facilitate the Iranian and Syrian Governments’ efforts to engage in activities that are believed to restrict the free flow of information and enable human rights abuses, including computer and network disruption, as well as monitoring and tracking activities.

Although the order only initially designates only six entities, the potential scope of the order is much wider. News reports over the past year have spotlighted international sales by many western companies of products that enable telecommunications surveillance. While these products are made for lawful law enforcement purposes, there are increasing concerns about the procurement and deployment of such equipment by unsavory regimes and for the suppression of human rights. This allegedly has occurred in Syria, and previously in Libya.

EO 13606 targets three areas of activity that “could assist in or enable serious human rights abuses by or on behalf of the Government of Iran or the Government of Syria”:

  1. persons who operate information or communications technology that facilitate computer or network disruption, or facilitate in monitoring or tracking activities;
  2. persons who provide (directly or indirectly) goods, services or technology to Iran or Syria that are likely to be used in such disruption, monitoring or tracking activities;
  3. persons who finance or otherwise support the activities described in (1) and (2).

The prohibitions apply notwithstanding any contract, license or permit that predates the effective date of the order.

Consequently, non-U.S. IT and telecom service and equipment providers risk losing their U.S. market and opportunities with U.S. firms world wide if they supply Iran and Syria. Further, if designated under this order, their assets in U.S. financial institutions will be frozen.

Executive Order 13608 ‒ “Foreign Sanctions Evaders”

EO 13608, issued on May 1, 2012, defines a new category of sanctioned parties ‒ “Foreign Sanctions Evaders” ‒ persons who engage in “deceptive” practices that result in obscuring or withholding information about an Iranian or Syrian link to a given transaction that contravenes U.S. sanctions regulations covering those countries. The order targets two areas of activity. First, any non-U.S. person who has violated, attempted or conspired to violate, or has caused a violation of the Iran and Syria sanctions may be designated under the order and would thus effectively be barred from engaging in business with U.S. firms. Second, persons who have “facilitated deceptive transactions” may be designated under the order and thereby effectively barred from engaging in business with U.S. firms. “Deceptive transactions” are defined as “any transaction where the identity of any person subject to United States sanctions concerning Iran or Syria is withheld or obscured from other participants in the transaction or any relevant regulatory authorities.”

The combination of the “facilitation” prohibition and the definition of “deceptive transactions” will enable the Treasury Department’s Office of Foreign Assets Control (“OFAC”) to reach far abroad into the chain of activities that connects a foreign transaction to U.S. commerce subject to the sanctions regulations. For example, the new regulation will cover a distributor who fails to disclose an Iranian destination for U.S. goods, or a non-U.S. borrower who fails to disclose to its U.S.-based financial institution its intent to apply its loan to Iranian business ventures. Prior large enforcement actions have revealed the sometimes complex steps taken to obscure the interests of sanctioned parties in payment transactions. The new order appears to respond specifically to news reports indicating that as the UN sanctions increasingly take hold globally, Iranian entities are ranging ever further afield in attempts to replace former banking and other commercial partners.

Implications

For non-U.S. companies, the new orders introduce another factor to calibrate when weighing access to the importance of the U.S. market against shorter-term business opportunities involving Iran or Syria. The orders mark an evolution away from a more circumspect “water’s edge” approach to sanctions that has largely been followed for the past three decades 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 Iran and Syria sanctions, such discord may be avoided. Nevertheless, financial institutions (particularly those in Asian countries, which have not followed the EU’s alignment with the United States on Iran and Syria) that do not currently have a U.S. presence may be particularly vulnerable to crippling U.S. sanctions under the “evaders” order in circumstances where previously they were not within the reach of direct OFAC 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. 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. 

The new measures, however, provide a potentially helpful compliance tool for U.S.-based companies. U.S.-based companies seeking to mitigate economic sanctions risks often face resistance from non-U.S. business partners who view themselves as beyond the jurisdiction of those laws. The two new executive orders make it clear that while a non-U.S. company may be beyond U.S. jurisdiction for purposes of any monetary penalty, it is always vulnerable to a dealing prohibition or blocking order, which can be very devastating to a company with significant U.S. ties. U.S.-based companies may, accordingly, use the prospect of such measures as leverage to obtain reliable representations and warranties covering sanctioned country involvement.