President Obama has issued a new Executive Order that goes into effect July 1, 2013. The Executive Order targets new areas of the Iranian economy for sanctions, including exchange transactions involving Iranian Rials and Iran’s automotive industry.
Further, OFAC has issued long-awaited guidance on the sweeping sanctions against the energy, shipping and shipbuilding sectors of Iran, as well as Iranian port operators, under the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA), which also comes into effect July 1, 2013. (See our prior "Iran Sanctions Update," January 16, 2013.)
These latest actions follow previous U.S. sanctions imposing potentially severe sanctions on non-U.S. companies that engage in, finance, or insure trade with Iran in sanctionable cargo, deal with specific Iranian sanctioned entities, or aid Iranian entities in evading U.S. financial and other sanctions.
New Executive Order 13645: Implementing IFCA and Imposing Additional Sanctions
Effective July 1, 2013, the major provisions of Executive Order 13645 will impose the following new sanctions and tighten certain existing sanctions:
Iranian Rials. Foreign financial institutions that conduct or facilitate significant transactions related to the purchase or sale of Iranian Rials, including derivatives, swaps, or maintaining significant accounts denominated in Iranian Rials, are subject to sanction.
Providing Assistance to Iranian SDNs. Any person that provides material assistance, technological support, or goods or services to Iranian persons or entities identified as Specially Designated Nationals (SDNs) (other than certain Iranian banks) will be subject to sanction. This will expand greatly the extraterritorial application of sanctions to transactions with Iranian government-owned entities.
Iranian Automotive Sector. The Executive Order imposes sanctions on any person that engages in significant transactions relating to the sale of significant goods or services for use by Iran’s automotive sector, including goods used in the manufacture or assembly of trucks, cars, motorcycles and other vehicles in Iran.
Tightening Sanctions on Exports of Petroleum/Petrochemicals from Iran. Executive Order 13622, issued in July 2012, targeted persons who engaged in significant transactions involving the acquisition of petroleum and petrochemicals from Iran. Executive Order 13645 expands and clarifies the scope of Executive Order 13622 to make clear that the provisions also apply to those entities involved in the transport or marketing of these Iranian export products.
New OFAC Guidance on IFCA Sanctions
On June 3, 2013, OFAC posted answers to a number of questions regarding the new Executive Order and the IFCA provisions that go into effect July 1, 2013, noting that OFAC regulations and guidance from the State Department would be forthcoming. While many of the answers are so general that they are of little practical value, there is some useful information:
Offshore Activity. OFAC clarifies that the Iranian sectors include activities that may occur offshore in areas where Iran claims jurisdiction (e.g., the exclusive economic zone and continental shelf).
Designation of Iranian Entities in Iran’s Energy, Shipping, Shipbuilding Sectors and Port Operators. OFAC confirmed that under IFCA §1244(c), the sanctions apply to those individuals and entities specifically identified as SDNs. Such a clearly defined list will make compliance easier. However, be cautioned that the reach of the sanctions almost certainly includes any entity owned or controlled by such designated entities.
Iranian Shipping Sector. OFAC guidance implies that the "Iranian shipping sector" is likely limited to seagoing vessels owned, controlled, or chartered directly or indirectly by the Government of Iran or flying an Iranian flag. OFAC provides examples of the types of activities that may be sanctionable, including sale, charter of a vessel, provision of registry, classification, repair, survey, issuance of certificates or provision of maintenance, supply, bunkering, docking, etc., to or for the benefit of vessels in the Iranian shipping sector.
Prohibited Metals and Precious Metals. OFAC gives a detailed list of what types of metals and metal alloys are sanctionable, as well as a list of precious metals that could trigger sanctions under IFCA.
Contract Sanctity. While stating that there is no grandfathering of pre-existing contractual obligations, OFAC infers that the pre-existing nature of the contract may be a factor mitigating against a finding that a particular transaction was “significant” and therefore sanctionable.
Impact of New Sanctions
The pending IFCA sanctions have already had a chilling effect on foreign trade with Iran. In particular, the uncertainty regarding what transactions will be considered "significant" under IFCA raises concerns even for the transport of non-sanctioned cargo. Hence, except for trade related to humanitarian goods and expressly exempt oil/natural gas transactions, there are no clear safe harbors.
Further, in recent months, OFAC and the U.S. State Department appear to be increasingly willing to sanction non-U.S., non-Iranian entities not clearly owned or controlled by Iran for their collusion in assisting Iranian entities in evading sanctions.
Non-U.S. companies that intend to continue trade with Iran after July 1, 2013, face not only potential sanction by the U.S., but also commercial risks such as:
denial of coverage by insurers unwilling to risk sanction
refusal by banks to process transactions related to Iran
counterparties that may claim force majeure or other contractual basis to refuse to perform on contracts that involve potentially sanctionable conduct
For non-U.S. companies, particularly those in shipping, insurance and financial services, there are only a few weeks left to implement changes in policy or enhance compliance procedures to comply with these new sanctions.