New Law Expands Scope of Iran Sanctions In New Ways

by Sheppard Mullin Richter & Hampton LLP
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As the new year brings in a new term for the Obama Administration, the pace of Iran sanctions shows no sign of slowing.  As we reported in October and November, Washington’s commitment to denying Iran the ability to advance its nuclear weapons program remains steadfast.  We expect the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA), included in the National Defense Authorization Act for Fiscal Year 2013, to deal another powerful blow to large sectors of the Iranian economy and significantly expand the universe of “persons” to be placed on OFAC’s List of Specially Designated Nationals and Blocked Persons (the SDN List).

Energy, Shipping, and Shipbuilding

Section 1244 of the IFCPA authorizes U.S. sanctions on entities participating in activities related to the Iranian energy, shipping, and shipbuilding sectors.  Specifically, § 1244 authorizes the use of five or more of the twelve sanctions available under the Iran Sanctions Act of 1996 (ISA) against any person that the President determines knowingly sells, supplies, or transfers to or from Iran “significant goods or services” related to the energy, shipping, and shipbuilding sectors of Iran.  Additionally, § 1244 places particular emphasis on the activity of the National Iranian Oil Company, the National Iranian Tanker Company, and the Islamic Republic of Iran Shipping Lines.  Further, § 1244 instructs the President to designate as an SDN any person determined to be (i) participating in the Iranian energy, shipping, or shipbuilding sectors; (ii) operating an Iranian port; or (iii) knowingly providing significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction on behalf of or for the benefit of a person designated under (i) or (ii).  The section also exempts from sanctions those activities related to (i) the purchase or exportation of petroleum and petroleum products; (ii) sale, supply, or transfer to or from Iran of natural gas (under certain conditions); (iii) sales of agricultural commodities, food, medicine, or medical devices or for humanitarian assistance to Iran; and (iv) reconstruction assistance or economic development in Afghanistan.

Although the full impact of § 1244 remains to be seen, it is a potentially enormous expansion of the activities and entities subject to U.S. sanctions.  Notably, Congress did not define the “energy, shipping, and shipbuilding sectors of Iran” and that ambiguity could mean that previously non-sanctioned activities (e.g., civilian power generation) are now within the scope of U.S. sanctions.  On the other hand, Congress was unambiguous in its expansion of the scope of the SDN List, which now encompasses those who engage in significant transactions with previously-designated SDNs.  In other words, those companies who do business with SDNs are now subject to the SDN designation and the attendant range of sanctions.

Precious Metals, Raw or Semi-Finished Materials, Coal, Graphite, and Certain Industrial Software

Section 1245 directs the President to impose at least five of the twelve ISA sanctions on any person that he determines knowingly sells, supplies, or transfers, directly or indirectly, to or from Iran precious metals, graphite, raw or semi-finished metals (e.g., aluminum and steel), coal, and “software for integrating industrial processes.”  While sanctions are available in every case involving precious metals, sanctions could only apply to cases involving the other enumerated materials if the President determines Iran is (i) using the material for barter or other transactional purposes; (ii) listing the material as an asset on its national balance sheet; or (iii) using the material in connection with the country’s nuclear, military, or ballistic missile programs.  Alternatively, sanctions could apply if the non-precious material is (i) used in the energy, shipping, or shipbuilding sectors of the Iranian economy or in any other economic sector controlled by Iran’s Revolutionary Guard; (ii) sold, supplied, or transferred by anyone on the SDN List; or (iii) resold, retransferred, or otherwise supplied to any person or sector described in (i) or (ii) or for the nuclear, military, or ballistic missile programs of Iran.

Section 1245 does, however, provide an exemption from sanctions for any person determined to have exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure compliance with the Act’s provisions.

Underwriting, Insurance, and Reinsurance Activities

Under § 1246, the President is directed to impose five or more of the twelve ISA sanctions on any person that he determines knowingly provides underwriting services, insurance, or reinsurance for or to (i) any Iran-related activity for which sanctions have been imposed under the U.S. sanctions program; (ii) any person for the benefit of or related to any activity connected with the energy, shipping, or shipbuilding sectors for which sanctions are imposed under § 1244; (iii) any person for the sale, supply, or transfer of materials (other than precious metals) for which sanctions are imposed under § 1245; (iv) any person designated for sanctions under the International Emergency Economic Powers Act (“IEEPA”); and (v) any Iranian person on OFAC’s SDN List.

Facilitation by Foreign Financial Institutions

Under §§ 1244 and 1247, foreign financial institutions may be denied access to U.S. correspondent accounts if the President determines the institution knowingly conducts or facilitates a significant financial transaction (i) for the sale, supply, or transfer to or from Iran of significant goods or services related to the energy, shipping, or shipbuilding sectors of Iran; or (ii) on behalf of any Iranian person on the SDN List.  Foreign financial institutions are exempt from sanctions if the transaction in question relates to (i) trade between an oil-importing country and Iran; (ii) the sale, supply, or transfer to or from Iran of natural gas if the end-use of the natural gas is not a sanctionable activity and the funds owed to Iran as a result of the transaction are held in an account located in the country with primary jurisdiction over the foreign financial institution; and (iii) sales of agricultural commodities, food, medicine, or medical devices to Iran or for humanitarian assistance to the people of Iran.

Further, under § 1245(c), a foreign financial institution will face the imposition of correspondent account sanctions if it knowingly conducts or facilitates a significant financial transaction for the sale, supply, or transfer to or from Iran of materials sanctionable under § 1245.  The due diligence exemption (described above) also applies to foreign financial institutions, but no other exemptions are available (e.g., the humanitarian assistance exemption would not apply).

The sanctions against Iran are growing in scope and sophistication as Washington seeks new ways to put pressure on the Ahmadinejad regime. The provisions in the IFCPA are the latest, but we do not expect them to be the last.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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