By: Lista
M. Cannon, David
M. Harris and Nicola
Kelly
In the latest wave of sanctions
targeting Iran, the U.K. has taken steps independently of the UN Security
Council and EU regulations to cut off all ties with Iranian banks. The new
sanctions apply to all persons operating in the U.K. financial sector and place
an additional compliance burden in an area that already requires stringent
policies and procedures. The U.K. financial and credit institutions engaged in
business in the region should monitor the developments closely. Further
restrictive measures appear likely as the situation in Iran remains uncertain.
The rationale for the new
restrictive measures arises from the U.K.'s position that the activity in Iran
that facilitates the development or production of nuclear weapons poses a
significant risk to the national interests of the U.K.[1] In response, HM
Treasury has brought into effect for approval the Financial Restrictions (Iran)
Order 2011 (the "Order"). The Order is made pursuant to HM Treasury's
powers conferred by Schedule 7 of the Counter-Terrorism Act 2008 (the
"2008 Act"). The Order aims to provide counter-measures to protect
the U.K. financial sector from money laundering and financing of terrorism
risks emanating from Iran. The Order places a further level of complexity to
the existing UN and EU sanctions on Iran. According to the U.K. Written
Ministerial Statement, it is considered that the existing UN and EU financial
sanctions against Iran have demonstrated that targeting individual Iranian
banks is not sufficient.
The Order is valid as at 3 p.m. on
21 November 2011 but requires approval by resolution of each House of
Parliament within 28 days beginning with the day on which the Order was made,
subject to extension for periods of dissolution or the end of a parliamentary
session, or adjournment of both Houses for more than four days. If the approval
is not received within the time period, the Order will cease to have effect at
the end of that period. If the order is approved, it will be valid for one
year.
At the time that this action was
taken in the U.K., the U.S. and Canada also imposed further sanctions on
Iran.[2] Press articles have also reported that the EU is proposing to impose
sanctions on a further 200 Iranian firms and individuals.
Scope of the Order
The Order applies to all persons
operating as financial or credit institutions in the U.K. financial sector, as
well as branches of such persons, wherever located (the "relevant
persons"). The U.K. Export Control Organisation had confirmed that the
provisions do not apply to overseas subsidiaries or U.K. nationals working
overseas.[3] Non-U.K. companies are only subject to the requirements of the
Order for activities within the U.K.
The Export Control Organisation has
also confirmed that exporters are unlikely to be caught directly by the Order
unless they are also operating as a financial or credit institution in the U.K.
As a result, the Order is not a trade ban. However, the restrictions will
inevitably make trading with Iranian companies difficult for U.K.
businesses, especially if Iranian companies have a banking relationship
with an Iranian bank.
The Order prohibits relevant persons
from entering into, or continuing to participate in, any transaction or
business relationship with a designated person, except as licensed by HM
Treasury. Designated persons is defined in the Order as: (i) a credit
institution incorporated in Iran; (b) the Central Bank of Iran; (c) any branch
or subsidiary, wherever located, of a credit institution incorporated in Iran.
Schedule 7 of the 2008 Act defines a
business relationship as "a business, professional or commercial
relationship between a relevant person and a customer, which is expected by the
relevant person, at the time when the contact is established, to have an
element of duration". Relevant persons must cease from performing any
existing transactions or undertaking any activity pursuant to a business
relationship with a designated person unless they are authorised to do so by HM
Treasury.
HM Treasury has issued six general
licences. The licences authorise all relevant persons to participate in certain
transactions or business relationships, which HM Treasury believes it is
appropriate to exempt from the effects of the Order, for example, for
humanitarian purposes[4].
HM Treasury has confirmed that
relevant persons should ensure that they have adequate policies and procedures
in place to ensure their compliance with the Order. General guidance on the
operation of the Treasury's powers under Schedule 7 of the 2008 Act has been
prepared for financial and credit institutions by the Joint Money Laundering
Steering Group and can be found on their website at: http://www.jmlsg.org.uk/industry-guidance/article/part-i-part-ii-part-iii-and-treasury-ministal-approval.
Effect on Existing EU Sanctions
Companies are reminded that the
existing EU sanctions (including asset freezes) under EU Regulation 961/2010 as
amended (the "Regulation") remain in force, and should also be
considered when assessing the effect of the new restrictions on business relationships.
For a summary of the existing sanctions, please see our briefing of 1 November
2010.[5]
The Order goes beyond the existing
EU sanctions because it prevents transactions and business relationships with
all Iranian credit institutions compared to the existing prohibitions on making
funds or economic resources available to those subject to an asset freeze.
Consequently, any transaction involving a relevant person which requires a
payment to or from an Iranian bank will be prohibited unless a licence is issued.
Penalties
The Financial Services Authority
(for credit institutions that are authorised persons and financial
institutions), the Office of Fair Trading (for consumer credit financial
institutions), and Her Majesty's Revenue and Customs (for Money Service
Businesses that are not authorised persons)[6] will each play an active role in
supervising firms' compliance with the Order. If a relevant person breaches the
Order, they are liable either to a civil penalty or a criminal prosecution. HM
Treasury has confirmed that no penalty may be imposed nor will an offence be
committed if the person took all reasonable steps and exercised all due
diligence to ensure that the requirements of the Order would
be complied with.
With further prospective
restrictions in mind, financial and credit institutions dealing in the region
should review the provisions of the new sanctions and HM Treasury guidance
document carefully, analyse the effect they may have on their business
activities and existing compliance programmes, and monitor the situation as it
continues to develop.
This article was prepared by Lista M.
Cannon, Partner (lcannon@fulbright.com or +44 020 7832 3601), David M.
Harris, Senior Associate (dharris@fulbright.com or +44 0 20 7832 3637) and
Nicola
Kelly, Associate (nkelly@fulbright.com or +44 0 20 7832 3630) of
Fulbright & Jaworski International LLP in London. Lista, David and Nicola
are lawyers in Fulbright's International Trade Practice Group. Lista
Cannon is head of the firm's UK and EU Trade and Sanctions Practice in London. Stephen M.
McNabb (smcnabb@fulbright.com or +1 202 662 4528) is
Partner and Chair of Fulbright's International Trade Practice Group.
Fulbright's International Trade Practice Group advises clients worldwide in
matters concerning international trade laws and regulations; including economic
sanctions regulations, export/import control regulations, anti-boycott
regulations, and anti-corruption laws.
Visit
the Fulbright & Jaworski Publications page for more analysis of
international and foreign law issues.
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us through our corporate site.
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[1] http://www.hm-treasury.gov.uk/d/written_ministerial_statement_comsec211111.pdf
[2] http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=5217&site_id=494&detail=yes
[3] http://www.bis.gov.uk/assets/biscore/eco/docs/notices-to-exporters/2011/nte201127.doc
[4] http://www.hm-treasury.gov.uk/d/fin_restrictions_iran_notice2011.pdf
[5] "Iran Sanctions
Update: The European Union Implements Council Regulation on Restrictive
Measures Against Iran", Lista M. Cannon, David M. Harris and Nicola Kelly,
1 November 2010, http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=4704&site_id=494&detail=yes
[6] The Department of
Enterprise, Trade and Investment Northern Ireland for credit unions in Northern
Ireland will also be a supervisory authority, until this is transferred to the
FSA