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The United States Broadens Economic Sanctions Targeting Iran in Parallel with United Kingdom and Canadian Measures

In response to the United Nations International Atomic Energy Agency’s November 8, 2011 announcement that it had “credible” information regarding continued Iranian efforts to develop a military nuclear program, the United States, the United Kingdom and Canada announced expanded economic sanctions against Iran. It is expected that the European Union will shortly impose additional Iran-related sanctions. These new and pending parallel and coordinated measures are signs of an increasingly robust multilateral response to Iran’s nuclear program.

What is New

In the United States: With an embargo in place that has long restricted the activities of US companies in Iran, the new US sanctions are consistent with a recent trend of a heightened focus on the activities of non-US persons and the international financial sector. These new measures sanction persons whose activities are deemed to directly or indirectly benefit Iran’s nuclear and ballistic missile programs. Executive Order 13590 of November 21, 2011, expands US sanctions against Iran by targeting persons that supply goods, services, technology, or support (above certain monetary thresholds) to Iran for the development of its petrochemical industry or petroleum resources. It also sanctions additional Iranian entities engaged in the proliferation of weapons of mass destruction, and identified Iran as a “Primary Money Laundering Concern.” Legislation to further expand sanctions against Iran is also pending in Congress.

In the United Kingdom: On November 21, 2011 the United Kingdom required all UK credit and financial institutions (including all branches of a UK credit or financial institution wherever located) to cease business relationships and transactions with all Iranian banks, including their branches and subsidiaries (wherever located), and the Central Bank of Iran. UK credit and financial institutions are now prohibited from entering into new transactions or business relationships or continuing existing transactions and business relationships with these institutions without a license. The sanctions prohibit UK credit and financial institutions from transferring funds to or from an Iranian bank, acting as an agent for an Iranian bank or acting pursuant to any contract or other obligation owed to an Iranian bank.

In Canada: Canada implemented similar measures prohibiting the provision of financial services to Iran, and restricting the export of goods for use in Iran’s energy sector.

The Context

The United States has maintained broad economic sanctions against Iran since 1995. The EU, Canada and other US allies have recently expanded their sanctions regimes, in parallel with UN measures targeting Iran’s nuclear and ballistic missile program. These most recent sanctions were prompted by this month’s report by the UN’s International Atomic Energy Agency regarding its serious concerns regarding possible “military dimensions” to Iran’s nuclear program, most notably its determination that there was “credible” information showing that activity relevant to the development of a “nuclear explosive device continued after 2003, and that some may still be ongoing.”

The Implications

US companies are already significantly restricted as to activities in Iran, and this status quo remains unchanged. These new sanctions accordingly impact non-US companies more directly. US-based companies, however, will need to understand how these developments will affect their international operations and non-US business partners. These new sanctions measures will also have significant ramifications for the financial sector world-wide.

Further Details on the New Developments

US Developments

Current Sanctions: US economic sanctions against Iran are principally implemented through three programs. The first two are the Iranian Transactions Regulations (“ITRs”) and the Weapons of Mass Destruction Proliferators Sanctions Regulations (“NPWMD Regulations”). There are significant possible civil and criminal penalties for violations of either of these programs’ restrictions. These two programs principally applied only to US persons.

The third existing program is directed principally at non-US companies and is embodied in the Iran Sanctions Act, as amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). CISADA provides for sanctions to be imposed on persons engaging in a range of specific activities deemed to be supportive of Iran’s ballistic missile and nuclear programs and its energy sector. Most notably, it provides for the imposition of sanctions on any person determined to have made certain investments in Iran’s energy sector, provided refined petroleum to Iran, or provided certain goods, services, technology, information, or support to Iran related to the importation or development of refined petroleum (if above specified monetary thresholds).

New Sanctions Targeting Iran’s Energy Sector: Executive Order 13590 authorizes the Secretary of State to impose additional sanctions on persons engaging in activities in the petroleum sector that are currently not sanctionable under CISADA. The Secretary of State is authorized to impose sanctions on any person that engages in the sale, lease, or provision of goods, services, technology, or support to Iran that could directly and significantly contribute to either the maintenance or enhancement of: (1) Iran’s ability to develop Iranian petroleum resources (if such activities exceed $1 million for a given transaction, or $5 million in a given year); or (2) Iran's domestic production of petrochemicals (if such activity exceed $250,000 for a given transaction, or $1,000,000 in a given year).

As with CISADA, these new sanctions apply both to US and foreign persons, although their effect will be felt more directly by non-US companies who are not subject to the United States’ comprehensive embargo against Iran. Notably however, US companies could also face sanctions under the new Executive Order if they “had actual knowledge or should have known” that a foreign subsidiary was engaged in sanctionable activity.

The Secretary of State is authorized to impose a range of potentially crippling sanctions for persons who trigger the monetary thresholds for the activities enumerated above, including a denial of access to the US financial system (e.g., loans, foreign exchange transactions, Export-Import Bank financing), inability to participate in government procurement, and restrictions on the ability to import into the United States. The most draconian sanction available is the blocking of all property and assets within the United States of the sanctioned party. Financial institutions engaging in sanctionable activity also face sanctions that would effectively prevent them from conducting any business in the United States.

Additional Designations Under the NPWMD Regulations: Currently, the assets of many Iranian entities, including the principal Iranian shipping line, many banks and the Revolutionary Guard are blocked pursuant to the NPWMD Regulations, with the goal of isolating such persons from financial and commercial markets. Many Iranian entities are targeted under this sanctions program.

Executive Order 13590 designated new Iranian entities engaged under the NPWMD Regulations, including companies affiliated with the Atomic Energy Organization of Iran.

Iran Labeled as a “Primary Money Laundering Concern”: Title III of the USA PATRIOT Act amends the anti-money laundering provisions of the Bank Secrecy Act (“BSA”), to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Under these provisions of the BSA, the Secretary of State may conclude that a foreign jurisdiction is of “primary money laundering concern,” thereby requiring domestic financial institutions and financial agencies to take additional special measures against that foreign jurisdiction.

Executive Order 13590 designates the Islamic Republic of Iran as a jurisdiction of primary money laundering concern. This is the first time Treasury identified the entire Iranian financial sector, including Iran’s Central Bank, private Iranian banks, and branches, and subsidiaries of Iranian banks operating outside of Iran, as posing illicit finance risks for the global financial system. The effect of this designation is that US financial institutions will be required to implement additional due diligence measures in order to prevent any improper indirect access by Iranian banking institutions to US correspondent accounts.

UK Sanctions

Under the new UK sanctions, all persons operating in the UK financial sector as credit or financial institutions and their branches, wherever located, must (unless licensed by the UK Treasury) cease business relationships and transactions with all banks incorporated in Iran, including all subsidiaries and branches of such banks, wherever located, and the Central Bank of Iran. The sanctions prohibit a UK credit or financial institution from making or receiving any payments to or from an Iranian bank, whether for its own account or on behalf of a customer. Any such transaction is prohibited even if made through one or more intermediaries.

These measures have broad implications for most trade between the UK and Iran. The sanctions will have a significant impact on exporters doing business with Iran because exporters will no longer be able to use a UK credit or financial institution to make or receive payments to or from Iranian bank. Additionally, exporters will not be able to use the financial services of a UK credit or financial institution in respect of a business relationship with an Iranian bank – e.g., a UK bank is now prohibited from entering into a letter of credit arrangement or other trade financing with an Iranian bank.

The UK Treasury may issue licenses to exempt transactions or business relationships either generally or on an individual basis. In parallel with the new sanctions, the UK Treasury issued six general licenses permitting certain transactions and business relationships with Iranian banks, including transfers for humanitarian purposes, personal remittances under €40,000 and certain other transfers permitted under the existing EU asset-freezing sanctions. Additionally, General License 5 permits UK credit or financial institutions already holding accounts in the name of Iranian banks to continue to hold those accounts, but the institution must report the details of those accounts to the UK Treasury which may subsequently issue a license to permit the account to be closed and the balance transferred. General License 6 permits any UK credit or financial institution to complete a payment to or from an Iranian Bank before midnight on November 28, 2011, where the instructions for that payment were given before the sanctions came into effect.

The UK Treasury may also grant individual licenses, and it has stated that it will consider applications made for a license to permit payments that are due under existing contracts. However, it has also indicated that it is unlikely to issue licenses for business with Iranian banks on an ongoing basis under new contracts.

Canadian Sanctions Measures

Parallel Canadian measures, like the US measures, focus on the Iranian banking sector and petrochemical sector. These measures broadly prohibit the export of financial services to Iran and prohibit the export of certain goods related to the energy sector.

Pending Legislation in the US Congress

Independent of the efforts of the Obama Administration, the US Congress is considering legislation designed to further isolate Iran.

Three bills – S. 1048, H.R. 1905 and H.R. 2105 – each expand the Iran sanctions in many ways. Measures include tightening the existing sanctions targeting Iran’s energy sector and Iran’s nuclear program, requiring enhanced notification to the SEC of any sanctioned activity by issuers of securities or their affiliates and sanctions targeting persons that engage with the Government of Iran in joint ventures outside of Iran that develop petroleum resources. The proposed legislation would also hold US entities liable for activity by foreign subsidiaries that would violate the Iranian embargo if committed by a US person, effectively extending the US comprehensive sanctions regime against Iran to foreign subsidiaries of US companies. In the Senate, a proposed amendment seeks broad sanctions against the Iranian Central Bank.

We will provide a detailed analysis of legislation further expanding the Iranian sanctions, if enacted.