International Trade Alert
September 15, 2010
Authors:
Jerome J. Zaucha
jerome.zaucha@klgates.com
+1.202.778.9013
Vanessa C. Edwards
vanessa.edwards@klgates.com
+44.(0)20.7360.8293
Stephen P. Roberts
steve.roberts@klgates.com
+1.202.778.9357
Chase D. Kaniecki
chase.kaniecki@klgates.com
Implementation of the Iran Sanctions Act:
Many Risks Still Unknown
On July 1, 2010, President Obama signed the Comprehensive Iran Sanctions,
Accountability, and Divestment Act of 2010, Pub. L. 111-195 (the “Act”), which,
among other measures, provides for new U.S. sanctions against: (i) any person,
including any non-U.S. person, that engages in certain activities relating to the
development of petroleum resources or the maintenance or expansion of petroleum
refining in Iran or the supply of refined petroleum products to Iran, and (ii) non-U.S.
financial institutions that provide services for certain activities or entities targeted
under various Iranian sanctions. The Act is in the process of being implemented and
many details concerning how it will be administered are not yet available. The Act
likely will create sanctions risks and/or compliance challenges for many U.S. and
non-U.S. businesses and financial institutions, but in particular for:
+1.202.778.9354
1. Businesses, including outside the U.S., involved in the supply of refined
petroleum products or goods or services used in the production or supply of
refined petroleum products.
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
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sector entities. For more information,
visit www.klgates.com.
2. Businesses, including outside the U.S., involved in the shipment or the provision
of services relating to the shipment of refined petroleum products.
3. Businesses, including U.S. parent companies, that have a subsidiary or affiliate
that is involved in the supply or shipment of refined petroleum products or the
supply of goods or services used in the production or supply of such products,
particularly if the company is a U.S. Government contractor.
4. Non-U.S. financial institutions that have correspondent or payable-through
accounts in the U.S. and U.S. financial institutions that maintain such accounts.
As described below, to be subject to sanctions, activities relating to the supply,
production or shipment of refined petroleum products must involve transaction
values over specified amounts and must be undertaken knowingly. Also, to be
sanctionable, the activities by financial institutions must involve certain Iranianrelated activities or entities. However, uncertainties concerning how many of the
provisions of the Act will be implemented and administered make it difficult to fully
assess risks associated with the sanctions provisions. Indeed, depending on how the
Act is implemented and administered, it could create risks and/or compliance
challenges for many businesses involved in activities relating to the refined
petroleum industry and financial institutions with correspondent or payable-through
accounts in the U.S., even absent direct dealings with Iran.
The following provides a brief summary of the most significant provisions of the
Act, and information available to date concerning the implementation of those
provisions. Also provided below is a brief summary of certain new EU sanctions
relating to Iran.
International Trade Alert
Sanctions for Involvement in Activities
Relating to Petroleum or Refined
Petroleum Products in Iran
The Act mandates the imposition of sanctions
against any person, including a non-U.S. person, that
does any of the following after July 1, 2010:
•
•
•
Knowingly makes a single investment of $20
million or, over a 12-month period, a
combination of investments of at least $5
million each and totaling at least $20 million in
the aggregate that directly and significantly
contributes to the enhancement of Iran’s ability
to develop petroleum resources;
Knowingly “sells, leases or provides to Iran
goods, services, technology, information, or
support” any of which have a fair market value
of $1 million or more or which, during a 12month period, have an aggregate fair market
value of $5 million or more “that could directly
and significantly facilitate the maintenance or
expansion of Iran’s domestic production of
refined petroleum products, including any direct
and significant assistance with respect to the
construction, modernization, or repair of
petroleum refineries”; or
Knowingly sells or provides to Iran refined
petroleum products that have a fair market value
of $1 million or more or, during a 12-month
period, have an aggregate fair market value of
$5 million or more, or sells, leases, or provides
to Iran goods, services, technology, information,
or support that have a fair market value of $1
million or more or, during a 12-month period,
have an aggregate fair market value of $5
million or more that could directly and
significantly contribute to the enhancement of
Iran’s ability to import refined petroleum
products. “Goods, services, technology,
information, or support” are described broadly
to include underwriting or entering into a
contract to provide insurance or reinsurance for
the sale, lease, or provision of such goods,
services, technology, information, or support,
financing or brokering such sale, lease, or
provision, or providing ships or shipping
services to deliver refined petroleum products
to Iran (with a narrow exception for
underwriters and insurance providers that can
demonstrate the establishment and enforcement
of appropriate internal due diligence systems).
(emphasis added)
We are unaware of any announcements or notices
by the Administration to date concerning the
implementation of these sanctions provisions. In
addition, there has been no indication of when any
such announcements or notices may be issued.
Two significant elements of the sanctions are that:
(i) they may be extended under certain
circumstances to parent and affiliate companies, and
(ii) prospective U.S. Government contractors will be
required to certify that neither the contractor nor any
owned or controlled affiliate of the contractor
engages in activities that may result in the
imposition of sanctions under the Act.
1. Imposition of sanctions on parent and affiliate
companies. Under the Act, sanctions can be
extended to: (i) a successor to any person
determined to engage in activities subject to
sanctions, (ii) anyone who owns or controls
such a person if they had actual knowledge or
should have known the owned or controlled
person was engaging in activities subject to
sanctions, and (iii) anyone that is owned or
controlled by, or under common ownership or
control with, a person that “knowingly”
engages in activities subject to sanctions.
2. U.S. Government contractor certification
requirement. The Act also requires the Federal
Acquisition Regulations (FAR) to be revised
not later than September 29, 2010 (90 days
after the date of enactment) to require a
certification from each person that is a
prospective government contractor that
neither the contractor nor any owned or
controlled affiliate of the contractor engages in
any activity that may result in the imposition of
sanctions. If a contractor submits a false
certification, the head of the agency must
terminate the contract or suspend such person
from eligibility for contracts for a period of up
September 15, 2010
2
International Trade Alert
to 3 years, in addition to any other remedies for
a false certification.
We are unaware of any announcements or notices by
the Administration further clarifying the standards
for extending sanctions to parent or affiliate
companies. However, as noted above, regulations
implementing the Government contractor
certification requirement should be published by
September 29, 2010.
The Act also provides for three new sanctions (in
addition to the existing six sanctions available under
the Iran and Libya Sanctions Act of 1996, Pub. L.
104-172) and requires imposition of at least three
sanctions in response to a determination that a
person is engaging in an activity subject to
sanctions. The three new sanctions allow the
President to prohibit:
•
Transactions in a foreign exchange that are
subject to the jurisdiction of the U.S. and in
which the sanctioned person has any interest;
•
Transfers of credit or payments between
financial institutions or by, through, or to any
financial institution to the extent that such
transfers or payments are subject to the
jurisdiction of the U.S. and involve any interest
of the sanctioned person; and
•
Transactions regarding property or rights to
property, including acquiring, selling, importing,
exporting, dealing in or exercising any right,
power or privilege, or conducting any
transaction involving property subject to the
jurisdiction of the U.S. and with respect to
which the sanctioned person has any interest.
Finally, the Act allows for the grant of waivers from
the sanctions in certain cases, although the Act
suggests the waivers must be granted on a personby-person basis. We are unaware of any
announcements or notices having been released, or
other details being made available, concerning how
the waiver provisions might be implemented.
However, the President, in his signing statement on
the Act, noted that “it provides new authority for
addressing the situation of those countries that are
closely cooperating in multilateral efforts to
constrain Iran. The Act appropriately provides this
special authority to waive the application of
petroleum-related sanctions provisions to a person
from such a closely cooperating country, out of
recognition for the key role such a country plays in
ongoing multilateral efforts to constrain Iran.” If
the Administration follows the practices currently
used in connection with determining and imposing
sanctions under certain other sanctions statutes
administered by the U.S. Department of State,
detailed implementation regulations or guidelines
may never be issued.
Accordingly, how numerous aspects of the refined
petroleum-related sanctions provisions will be
implemented remains unclear, including:
1. The extent to which ongoing activities relating
to contracts entered into prior to the adoption of
the Act or that are not directly with Iran may be
subject to sanctions. (Although the Act appears
to make clear that most activities subject to
sanctions under the pre-existing Iran and Libya
Sanctions Act of 1996 that continue after
adoption of the new Act will become subject to
sanctions under the new Act, the Act also
appears to suggest that the other types of
activities must have been commenced
subsequent to the adoption of the Act to be
subject to sanctions.)
2. The exact parameters of the requirement for
prospective U.S. Government contractors to
certify that the contractor, and any person
owned or controlled by the contractor, “does
not engage in any activity for which sanctions
may be imposed.” (Particularly unclear is the
nature of the due diligence that may be required
in connection with possible activities by nonU.S. affiliates.)
3. How the phrase “should have known” will be
applied in connection with determining whether
to extend sanctions to a parent of a person that
engages in activities subject to sanctions, on the
basis that the parent had actual knowledge of
the activities or “should have known” the
activities were occurring. (Given the existing
prohibition against a U.S. parent company
approving or facilitating activities by a nonU.S. affiliate involving Iran, it is particularly
unclear how this provision will be applied in the
case of a U.S. parent company.)
4. How the various waiver provisions will be
applied and, regardless of the requirement
September 15, 2010
3
International Trade Alert
under the Act that waivers be person-specific,
whether the Obama Administration may pursue
an approach to waivers that has the effect of
granting waivers to categories of persons,
including based on country location.
Codification of Certain Restrictions
Currently or Previously Imposed under
the OFAC Iranian Transactions
Regulations
The Act also mandates the imposition of penalties
for the following activities subsequent to September
29, 2010 (90 days after enactment):
•
Importing goods or services from Iran into the
U.S.; and
•
Exporting goods, services or technology from
the U.S. to Iran (exceptions: personal
communications; articles to relieve human
suffering; information and informational
materials; transactions incident to travel; food;
medicine; humanitarian assistance; services,
hardware, software or technology related to
internet communications; goods, services or
technology necessary to ensure the safe
operation of commercial aircraft; goods,
services or technology exported to support
international organizations; and exports in the
national interest).
These restrictions were largely already incorporated
into the U.S. Department of Treasury’s Office of
Foreign Assets Control’s (“OFAC”) Iranian
Transactions Regulations (31 C.F.R. Part 560).
Any person violating these prohibitions will face the
following sanctions:
•
If an Iranian entity, available assets will be
frozen; and
•
Other persons will be subject to a civil fine of
the greater of $250,000 or twice the amount of
the transaction resulting in a violation, and/or a
criminal penalty of up to $1 million and up to
twenty years in prison.
New Restrictions on the Activities of
Financial Institutions
The Act requires the Department of Treasury to
promulgate regulations within 90 days of enactment
(September 29, 2010) that proscribe or restrict nonU.S. financial institutions knowingly engaging in
the following activities from opening or maintaining
a correspondent or payable-through account in the
U.S.:
•
Facilitating the efforts of the Government of
Iran (including efforts of Iran’s Revolutionary
Guard Corps or any of its agents or affiliates)
to:
o
Acquire or develop weapons of mass
destruction or delivery systems for
weapons of mass destruction; or
o
Provide support for terrorist organizations
or acts of international terrorism;
•
Facilitating the activities of a person subject to
financial sanctions for violating any U.N.issued Iran sanction;
•
Engaging in money laundering to carry out an
activity described above;
•
Facilitating efforts by the Central Bank of Iran
or any other Iranian financial institution to carry
out an activity described above; or
•
Facilitating a significant transaction or
transactions or providing significant financial
services for:
o
Iran’s Revolutionary Guard Corps or any of
its agents or affiliates that are subject to
sanctions; or
o
A financial institution subject to sanctions
in connection with Iran’s proliferation of
weapons of mass destruction and delivery
systems for weapons of mass destruction or
its support for international terrorism.
To ensure compliance with the prohibitions or
restrictions, the new regulations will also require
U.S. financial institutions to undertake certain due
diligence steps in order to maintain a correspondent
or a payable-through account for a non-U.S.
financial institution, including performing audits,
September 15, 2010
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International Trade Alert
providing reports to the U.S. Department of
Treasury, and certifying that the non-U.S. financial
institution is not knowingly engaged in any of the
above activities.
The Act also prohibits any person owned or
controlled by a domestic financial institution from
knowingly engaging in certain Iranian-related
transactions, and provides for the imposition of
penalties on the parent domestic financial institution
if it knew or should have known that the owned or
controlled affiliate was violating, attempting or
conspiring to violate, or causing violations of the
prohibitions.
OFAC issued regulations implementing these
provisions, the Iranian Financial Services
Regulations (31 C.F.R. Part 561), on August 16,
2010. 75 FR 49835-43.
Additional Provisions of the Act
New Prohibitions on Those Abusing Human
Rights
President Obama is required to submit to Conress
within 90 days after enactment (by September 29,
2010) a list of Iranian government officials, or those
acting at their direction, that are in some way
responsible for human rights abuses against citizens
of Iran or their family members. Those individuals
will: (i) be prohibited from entering the U.S., (ii)
have their property frozen, and (iii) be subject to
new prohibitions on financial transactions and the
import-export of property.
Government Contracts
In addition to the certification requirement for U.S.
Government contractors described above,
subsequent to 90 days following the adoption of the
Act (September 29, 2010), the head of an agency
may not enter into or renew a procurement contract
with a person that exports “sensitive technology”
to Iran, defined as equipment or technology used
specifically to restrict the free flow of unbiased
information in Iran or disrupt, monitor or otherwise
restrict speech of the people of Iran.
Certain Divestments Authorized
The Act also permits State and local governments to
divest from, or prohibit the investment of assets of
the State or local government in, a person that: (i)
has an investment of $20 million or more in the
energy sector of Iran, including in a person that
provides oil or liquefied natural gas tankers, or
products used to construct or maintain pipelines
used to transport oil or liquefied natural gas, for the
energy sector of Iran; or (ii) is a financial institution
that extends $20 million or more in credit to another
person, for 45 days or more, if that person intends to
use the credit for investment in the energy sector of
Iran.
U.N. Security Council Sanctions
The Act further increases the penalty for violations
of U.N. Security Council sanctions to a maximum
fine of $1 million and increases maximum criminal
penalties to 20 years in prison.
Licenses Required for “Destinations of
Diversion Concern”
Within 45 days of any report submitted by President
Obama identifying a country as a “Destination of
Diversion Concern” for products to Iran (that is, it is
determined that the country allows substantial
diversion of goods, services, or technologies
through the country to Iranian end-users or Iranian
intermediaries), a license will be required for goods
exported to the designated country if that same good
is prohibited for export to Iran, with the
presumption that any application for such a license
will be denied.
New EU Iran Sanctions
On June 26, 2010, the EU Council imposed new
Iran sanctions, expanding sanctions previously
adopted in 2007. The 2007 sanctions essentially:
•
Prohibited exports of nuclear or military goods,
technology or related technical assistance to
Iran;
•
Prohibited the entry/transit of persons identified
as involved with nuclear activities or weapon
delivery systems;
•
Required Member States to exercise vigilance
over the activities of Iranian financial
institutions and to inspect cargo to and from
September 15, 2010
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International Trade Alert
•
Iran if they had grounds for believing sanctions
were being breached; and
•
The opening of new Iranian bank branches,
subsidiaries or representative offices in the EU.
Froze funds owned or controlled by, and
prohibited making funds available to, persons
and entities involved with nuclear activities or
weapon delivery systems.
•
Bunkering or ship supply services where there
are reasonable grounds to believe that the
vessels are breaching sanctions.
The 2010 sanctions prohibit:
•
The export of dual-use goods and technology.
•
The export of equipment and technology, the
use of vessels or aircraft, or the provision of
technical or financial assistance, for key sectors
of Iran’s oil and national gas industry in Iran, or
to Iranian-owned enterprises engaged in those
sectors outside Iran.
•
Investment by Iran or Iranian nationals/entities
in any commercial activity in the nuclear sector.
•
Financing or participating in key sectors of the
Iranian oil or gas industry.
•
Providing insurance and reinsurance to the
Government of Iran or Iranian entities or
individuals.
•
Selling, purchasing, brokering or assisting in the
issuance of bonds by the Government of Iran or
Iranian banks.
The 2010 sanctions also require:
•
Strengthened monitoring of Iranian financial
institutions, with new requirements for
notification or authorization of certain transfers
of funds.
•
Stronger cargo inspection measures.
•
Freezing funds of (and prohibiting making
funds available to) individuals in the Iranian
Revolutionary Guard Corps and Islamic
Republic of Iran Shipping Lines.
•
Provisions applying to Iranian entities normally
also apply to persons or entities acting on their
behalf or at their direction and to entities owned
or controlled by them.
If you have any questions regarding the expansion
of U.S. and EU sanctions against Iran discussed
above, please contact any lawyer in K&L Gates’
International Trade Practice.
September 15, 2010
6
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