Fulbright Briefing : The United States and Other Nations Expand Sanctions Against Iran

By: Stephen M. McNabb, Marsha Z. Gerber, Stefan Reisinger and Mary Beth Balhoff

On November 21, 2011, the United States announced three measures designed to enhance sanctions on Iran. The President issued an Executive Order authorizing the Secretary of State to impose sanctions on foreign parties that provide goods, services, technology or support of certain value to Iran's energy or petrochemical sectors; the Secretary of the Treasury designated Iran as a jurisdiction of "primary money laundering concern" under Section 311 of the U.S. Patriot Act; and Treasury's Office of Foreign Assets Control added Iranian entities and individuals involved in Iran's suspected nuclear weapons program to the Specially Designated Nationals List.

In announcing these new measures the United States joined the United Kingdom, Canada and the European Union, each of which have implemented, or are planning to implement, additional sanctions on entities in, or doing business with, Iran:

• The United Kingdom imposed a direction under Schedule 7 to the Counter-Terrorism Act 2008 requiring U.K. credit and financial institutions to cease all business with banks incorporated in Iran, including the Central Bank of Iran (Bank Markazi), and their branches and subsidiaries unless licensed to do so by HM Treasury.[1]
• Canada issued new sanctions prohibiting financial transactions with Iran, expanding the list of prohibited goods to include all goods used in the petrochemical, oil and gas industry in Iran or items that could be used in Iran's nuclear program, and adding new individuals and entities to the list of designated persons found in Schedule 1 of the Special Economic Measures Act regulations.[2]
• The European Union has agreed in principle to sanction some 200 Iranian individuals, companies and organizations related to Iran's nuclear, petrochemical and financial industries. If the E.U. sanctions are implemented as expected, European companies will be banned from doing business with the listed Iranian companies and organizations, and individuals will be subject to asset freezes and Visa bans.

I. Authorization of Sanctions on Foreign Parties Engaging In Certain Transactions Relating To Iran's Energy and Petrochemical Sectors

Pursuant to Executive Order 13590,[3] President Obama authorized the imposition of sanctions on foreign entities that provide goods, services, technology or support of certain value to Iran's energy or petrochemical sectors. The Executive Order essentially expands the reach of sanctions available under the Comprehensive Iran Sanctions, Accountability, and Divestment Act ("CISADA"). More specifically, the Secretary of State is now authorized to impose sanctions on persons or entities that knowingly, on or after November 21, 2011:

• Sell, lease, or provide to Iran goods, services, technology, or support that have a fair market value of $1,000,000 or more or that, during a 12-month period, have an aggregate fair market value of $5,000,000 or more, and that could directly and significantly contribute to the maintenance or enhancement of Iran's ability to develop petroleum resources located in Iran. CISADA requires that sanctions be imposed on foreign entities that engage in investments with a far larger threshold amount.[4]
• Sell, lease or provide to Iran goods, services, technology or support that have a fair market value of $250,000 or more or that, during a 12-month period, have an aggregate fair market value of $1,000,000 or more, and that could directly and significantly contribute to the maintenance or expansion of Iran's domestic production of petrochemical products.  CISADA requires that sanctions be imposed for similar conduct but only where it exceeds far larger dollar thresholds.[5] 

The Executive Order also authorizes, in certain circumstances, sanctions on successor entities as well as related entities that are owned or controlled by, or own or control, a sanctioned entity.

The Secretary of State, in consultation with other agencies, has the authority to impose sanctions similar to those available under CISADA, including prohibitions on: (1) foreign exchange transactions; (2) banking transactions; (3) property transactions in the United States; (4) U.S. Export-Import Bank financing; (5) U.S. export licenses; (6) imports into the United States; (7) loans of more than $10 million from U.S. financial institutions; (8) U.S. government procurement contracts; and (9) for financial institutions, designation as a primary dealer or repository of U.S. government funds. The Secretary of State has discretion to impose any or all of the available sanctions. The Executive Order expresses the President's willingness to impose sanctions on parties when not required by CISADA. 

II. Designation of Iran as a "Primary Money Laundering Concern"

The Secretary of the Treasury designated Iran's entire banking sector, including its Central Bank, as a "primary money laundering concern" under Section 311 of the Patriot Act.  Section 311 authorizes the U.S. Secretary of Treasury to require certain domestic financial institutions and financial agencies (defined as "covered financial institutions") to take "special measures" against the primary money laundering concern. Such special measures are typically used to require covered financial institutions to gather and provide the U.S. government with specific information regarding their account holders' direct and indirect operations with the primary money laundering concern. Examples of available special measures include requiring: (1) recordkeeping and reporting of certain financial transactions; (2) collection of information relating to beneficial ownership; (3) collection of information relating to certain payable-through accounts; (4) collection of information relating to certain correspondent accounts; and (5) a prohibition or conditions on the opening or maintaining of correspondent or payable accounts.

Treasury's Financial Crimes Enforcement Network ("FinCEN") issued a notice of proposed rulemaking which proposes prohibiting covered financial institutions from opening or maintaining correspondent accounts for, or on behalf of, Iranian banking institutions.[6]  The proposed rule would also require covered financial institutions to take specified additional due diligence steps to help ensure that no such account is being used indirectly to provide services to an Iranian banking institution. At a minimum, covered financial institutions would be required to perform the following two expanded due diligence steps:

• If a covered financial institution knows or has reason to know that a correspondent account holder provides services to Iranian banking institutions, it must notify the correspondent account holder that it may not provide any Iranian banking institutions with access to the correspondent account maintained at the covered financial institution
• Take reasonable steps to identify any indirect use of correspondent accounts by Iranian banking institutions, to the extent that such indirect use can be determined from transactional records maintained by it in the normal course of business such as through its screening software

Because U.S. financial institutions were already prohibited under existing U.S. sanctions from providing correspondent account services for banking institutions in Iran, the impact of these new measures on U.S. financial institutions may be limited.  However, foreign entities with correspondent accounts in the United States should be aware that by designating Iran as a primary money laundering concern, the U.S. has now declared it will be more aggressive in policing any of their potential direct or indirect ties to Iran. 

III. Addition of Iranian Entities and Individuals to OFAC's SDN List

The U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC") added eleven Iranian entities and an Iranian individual involved in Iran's suspected nuclear weapons program to the Specially Designated Nationals List ("SDN List").  The assets of the identified SDN List individuals and entities that are under U.S. jurisdiction are now frozen and U.S. persons are banned from doing business with them.[7]

IV. Conclusion

The newly imposed U.S., U.K., Canadian and potential E.U. sanctions could have significant effects on foreign companies and financial institutions that engage in transactions directly or indirectly with Iran. Moreover, the United States has signaled that other countries may impose similar measures against Iran in the near future and that the U.S. will continue to "actively consider a range of increasingly aggressive measures" against Iran. Companies and financial institutions that engage in transactions that directly or indirectly involve Iran or Iranian entities should analyze the potential impact that both the new sanctions, and potential future sanctions, may have on their current or contemplated activities and take appropriate steps to avoid potential risk to themselves or their affiliated companies. Fulbright's International Trade Practice Group will continue to monitor the situation and provide additional updates as warranted.

This article was prepared by Stephen M. McNabb (smcnabb@fulbright.com or 202 662 4528), Marsha Z. Gerber (mgerber@fulbright.com or 713 651 5296), Stefan H. Reisinger (sreisinger@fulbright.com or 202 662 4698) and Mary Beth Balhoff (mbalhoff@fulbright.com or 713 651 5652) from Fulbright's International Trade Practice Group. Stephen M. McNabb is a partner in Fulbright's Washington D.C. office and is Head of Fulbright's International Trade Practice Group. Marsha Z. Gerber is a partner in Fulbright's Houston, Texas office and is a member of the International Trade Practice Group. Stefan H. Reisinger and Mary Beth Balhoff are attorneys in the International Trade Practice Group.

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[1] http://www.hm-treasury.gov.uk/d/fin_restrictions_iran_order2011.pdf

[2] http://www.international.gc.ca/sanctions/iran_regs_2011.aspx?lang=eng&view=d

[3] http://www.whitehouse.gov/the-press-office/2011/11/21/executive-order-iran-sanctions

[4] CISADA requires that sanctions be imposed on any person or entity "knowingly making an investment of $20,000,000 or more, or making a combination of investments if each such investment is of at least $5,000,000 and such investments equal or exceed $20,000,000 in the aggregate and directly and significantly contribute[] to the enhancement of Iran's ability to develop petroleum resources in Iran." 

[5] CISADA requires that sanctions be imposed on any person or entity "knowingly selling, leasing or providing goods, services, technology, information or support to Iran with a fair market value of $1 million or more, or with an aggregate fair market value of $5 million or more during a 12-month period, that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products.

[6] http://www.fincen.gov/statutes_regs/patriot/pdf/Irn311RulemakingProposalSpecialMeasure.pdf

[7] The additional names added to the SDN list can be found at: http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20111121.aspx