The United States Increases - and, in One Case, Eases - Sanctions Against Iran

by BakerHostetler
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Over the last week, the United States has taken a number of significant sanctions actions involving Iran.

THE NEW EXECUTIVE ORDER

Most significantly, on June 3, 2013, President Obama issued Executive Order 13645 (78 Fed. Reg. 33945) that, effective July 1, 2013, implements provisions of the Iran Freedom and Counter-Proliferation Act of 2012 (click here for our January 14, 2013, Executive Alert regarding this statute) and imposes a whole series of new sanctions against Iran in an effort to curb that country's nuclear-related activities. The Executive Order provides, inter alia, for blocking the property of -- or, in some cases -- imposition of other financial and related restrictions against:

  1. foreign financial institutions that knowingly conduct or facilitate any significant transaction related to the purchase or sale of Iranian rials or a derivative, swap, future forward, or other similar contract whose value is based on the exchange rate of the Iranian rial, or that maintain significant funds or accounts outside of Iran denominated in rials.
  2. persons that (i) materially assist, sponsor or provide financial, material or technological support for, or goods or services to, or in support of, most Iranian/Iran-related Specially Designated Nationals (SDNs), or (ii) are identified as being part of the Iranian energy, shipping or shipbuilding industries, are port operators in Iran, or knowingly provide 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 such persons or most Iranian SDNs.
  3. foreign financial institutions knowingly conducting or facilitating any significant financial transaction (i) on behalf of most Iranian/Iran-related SDNs, or (ii) for the sale, supply or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.
  4. persons (including successor entities and, in certain cases, parent companies and certain other related entities) that knowingly engage 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.
  5. persons that (i) knowingly sell, supply or transfer to or from Iran significant goods or services used in connection with the energy, shipping or shipbuilding sectors of Iran, including the National Iranian Oil Company, the National Iranian Tanker Company and the Islamic Republic of Iran Shipping Lines, (ii) in certain cases, knowingly sell, supply or transfer, directly or indirectly, to or from Iran, precious metals, graphite, raw or semi-finished metals, such as aluminum and steel, coal and software for integrating industrial processes, and (iii) knowingly provide underwriting, insurance or reinsurance services for certain sanctionable activities, to or for certain sanctionable persons, or to or for certain Iran-related SDNs.
  6. persons who (i) have engaged, on or after January 2, 2013, in corruption or other activities relating to the diversion of goods, including agricultural commodities, food, medicine and medical devices intended for the people of Iran, (ii) have engaged, on or after January 2, 2013, in corruption or other activities relating to the misappropriation of proceeds from the sale or resale of such goods, (iii) have materially assisted, sponsored or provided financial, material or technological support for, or goods or services to, or in support of such activities, or any person blocked pursuant to these provisions, or (iv) are owned or controlled by, or who act or purport to act for, or on the behalf of, directly or indirectly, any such blocked person.

While implementing regulations are expected to be issued shortly, the Executive Order and Office of Foreign Assets Control (OFAC) statements made in connection with its issuance, clarify a number of issues and provisions in the Executive Order, as follows:

  1. "Significant transactions" and "significant services" will be evaluated based on a variety of criteria, including (a) their size, number and frequency; (b) their type, complexity and commercial purpose; (c) the level of awareness of management and whether the transactions are part of a pattern of conduct; (d) the nexus of the transactions/services and blocked persons; (e) the impact of the transactions/services, on statutory objectives; (f) whether the transactions/services involve deceptive practices; (g) whether the transactions solely involve the passive holdings of Central Bank of Iran (CBI) reserves or repayment by the CBI of official development assistance or the transfer of funds required as a condition of Iran's membership in an international financial institution; and (h) other relevant factors.
  2. Goods or services used in connection with Iran's automotive sector will include those that contribute to (i) Iran's ability to research, develop, manufacture and assemble light and heavy vehicles, and (ii) the manufacturing or assembling of original equipment and after-market parts used in Iran's automotive industry. The "automotive sector of Iran" is defined as the manufacturing or assembly 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.
  3. "Knowingly" means actual knowledge or "should have known."
  4. Sanctions "safe harbors" are provided for:

    (i) persons that mistakenly sell, supply or transfer to or from Iran, or foreign financial institutions that mistakenly facilitate significant transactions with Iran, of precious metals, graphite, raw or semi-finished metals such as aluminum and steel, and software for integrating industrial processes, and

    (ii) (re)insurers mistakenly providing sanctionable (re)insurance services, where such persons/(re)insurers have exercised due diligence in establishing and enforcing official policies, procedures and controls to ensure that they do not engage in the sanctionable activity. The Departments of the Treasury or State, as appropriate, will determine the applicability of the safe harbor, on a case-by-case basis, as part of an investigation or enforcement.
  5. There will be no general exception for post July 1, 2013, payments, sales, deliveries or transfers arising out of contracts entered into prior to July 1, 2013.

DESIGNATION OF ADDITIONAL SDNS

In addition to the issuance of the new Executive Order, over the last week, OFAC has also identified, as SDNs, a number of significant Iranian entities in its energy, petrochemical and insurance industries. In addition, the Administration has designated as SDNs, a number of Kyrgyz, Ukraine and UAE individuals and companies that are leasing and selling aircraft to SDNs, Mahan Air and Iran Air, in an attempt to circumvent sanctions and to move illicit cargo to Syria for use in the Assad Regime's crackdown on the Syrian population. OFAC has also identified Cyprus and Ukraine-based Ferland Company Limited, as a sanctions evader for facilitating deceptive transactions for or on behalf of the National Iranian Tanker Company, and is barring transactions with that company by US persons or that are otherwise subject to US jurisdiction. The Department of State is also imposing sanctions against the company under the Iran Sanctions Act.

These new sanctions make it incumbent on all foreign companies engaged in transactions with Iran to (i) review the nature and scope thereof to make sure that they do not make them subject to the new sanctions, and (ii) strengthen their compliance processes to try to take advantage of the due diligence safe harbors provided.

A NEW GENERAL LICENSE

In the one case where sanctions have been eased, on May 30, 2013, in order to foster greater contact by Iranian citizens with the rest of the world, OFAC issued a general license for exports and reexports to Iran of (i) fee-based services incident to the exchange of personal communications over the Internet, including social networking, (ii) EAR99 or ECCN 5D992.c. fee-based software necessary to enable such services, (iii) certain software and hardware subject to the EAR and incident to personal communication and related services, and (iv) consumer-grade Internet connectivity services and the provision, sale or leasing of capacity on telecommunication transmission facilities incident to personal communications. This new general license will allow the (re)export to Iran of such items as mobile phones (including smart phones), certain satellite phones, modems, routers, laptops, tablets, and anti-virus and anti-tracking software. The general license does not authorize shipments to the Government of Iran or SDNs, of commercial grade Internet connectivity services or telecommunications transmission facilities, or of web hosting services for commercial endeavors.

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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