• New Sanctions Against Iran: President Obama Signs the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, and the United Nations and the European Union Announce New Sanctions Against Iran
  • July 23, 2010 | Author: Jeffrey D. Gerrish
  • Law Firms: Skadden, Arps, Slate, Meagher & Flom LLP - Washington Office ; Skadden, Arps, Slate, Meagher & Flom LLP - New York Office
  • On July 1, 2010, President Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the Act). The Act is in response to the national security threat posed by Iran’s illegal nuclear program and contains a number of measures aimed at restricting companies from conducting business with Iran. Significantly, the Act expands the scope of the existing Iran Sanctions Act (ISA) by expanding the sanctions imposed by the ISA and by imposing new sanctions, including sanctions targeting persons that export refined petroleum products to Iran or that otherwise support Iran’s capacity to maintain or expand its domestic production of refined petroleum.1 In addition, the Act (1) mandates sanctions against foreign financial institutions that engage in certain activities, including activities that assist in supporting international terrorism or in developing weapons of mass destruction (WMD); (2) codifies and expands the blocking of assets and trade embargo related to Iran; and (3) expands Iran-related export and re-export restrictions. Furthermore, the Act provides a legal framework by which U.S. states, local governments and certain other investors can divest their portfolios of holdings in non-U.S. companies involved in Iran’s energy sector.

    The Act, in conjunction with other recent Iran sanctions measures announced by the United Nations (UN) and the European Union (EU), severely restricts companies from conducting business with Iran. In light of the heightened sanctions environment, companies that directly or indirectly conduct business with Iran should carefully review these new sanctions.

    I. Key Provisions of the Act

    A. Amends the ISA to Expand Existing Sanctions and to Add New Sanctions Against Iran

    • Broadens the Scope of Sanctions for Investments in the Development of Iran’s Petroleum Resources. Under the existing ISA, an investment in the development of Iran’s petroleum resources is sanctionable. The Act revises the term “petroleum resources” to expand it from “petroleum and natural gas resources” to “petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas.” In addition, the Act changes the knowledge requirement to include not only actual knowledge but instances where a person “should have known.” The Act further expands the definition of persons who may be subject to sanctions to include financial institutions, insurers, underwriters and any other business organizations.

    • Imposes Sanctions on Persons that Export Refined Petroleum Products to Iran or That Otherwise Support Iran’s Domestic Production of Refined Petroleum. The Act requires the President to impose sanctions on any person that:

      • sells, leases or provides goods, services, technology, information or support valued at $1 million or more (or $5 million or more in the aggregate over a 12-month period) that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products;

      • sells or provides refined petroleum products to Iran valued at $1 million or more (or $5 million or more in the aggregate over a 12-month period); or

      • sells, leases or provides goods, services, technology, information or support valued at $1 million or more (or $5 million or more in the aggregate over a 12-month period) that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products, including underwriting, insuring/reinsuring, financing or brokering the sale, lease or provision of such goods, services, technology, information or support and providing ships or shipping services to deliver refined petroleum products to Iran.2

    • Clarifies When Related Parties May Be Sanctioned. The Act provides for sanctions against parent companies for the prohibited activities of their subsidiaries if the parent knew or should have known about the activities even if the parent did not participate in the activities. In addition, sanctions will be imposed on a company that "knowingly engaged" in the prohibited activities of its parent or affiliate.

    • Adds Three New Types of Sanctions. The Act adds three new types of sanctions to an existing “menu” of six sanctions available under the ISA.3 These new sanctions would allow the President to:

      • prohibit any transactions by U.S. parties in foreign exchange with the sanctioned person;

      • prohibit any transfers of credit or payment through a U.S. financial institution if any interest of the sanctioned person is involved; and

      • block assets of the sanctioned person that are subject to U.S. jurisdiction.

    Under the existing ISA, the President was required to impose two of the six sanctions listed on the menu of sanctions. The Act now requires the President to impose three of the nine sanctions available on the menu of sanctions.

    • Imposes Government Contracting Restrictions. The Act requires each prospective contractor submitting a bid to the U.S. government to certify that neither the contractor nor any person owned or controlled by the contractor engages in sanctionable activities under the ISA. False certifications can result in termination of the contract, debarment or suspension from federal contracting for up to three years.

    • Imposes Mandatory Sanctions Relating to the Transfer of Nuclear Technology. The Act provides that where a person is subject to sanctions for an activity that relates to nuclear weapons, missiles or related weapons, the restrictions are applied against the country with jurisdiction over the sanctioned person. These restrictions prohibit the transfer to that country of any nuclear material or related goods, services or technologies.

    • Requires Mandatory Investigations. Contrary to the existing ISA, the Act requires the President to: (1) initiate an investigation upon receipt of credible information indicating that a person is engaged in sanctionable conduct and (2) conclude such an investigation within 180 days. The Act provides that the President need not initiate an investigation, and may terminate an investigation, if the President determines and certifies that the target is no longer engaging in sanctionable activities (or is taking verifiable steps toward stopping the activities) and the President has received reliable assurances that the target will not engage in such activities in the future.

    • Revises Presidential Waiver Authority. The Act preserves the President’s general authority to waive sanctions against foreign entities. However, under the Act, the general waiver authority would extend only to cases where the waiver is “necessary to the national interest,” a more restrictive standard than the “important to the national interest” standard in the existing ISA. Furthermore, the Act creates additional waiver authority for the President under certain circumstances.

    B. Imposes Sanctions on Financial Institutions

    • Restricts Certain Interactions Between Domestic Financial Institutions and Foreign Financial Institutions That Assist the Iranian Government With Certain Sanctionable Activities. “Foreign financial institutions” will be prohibited from, or subject to strict conditions on, opening or maintaining "correspondent" or "payable through" accounts in the United States if they:

      • facilitate the Iranian government’s efforts to acquire WMD or to support international terrorism;

      • provide support for Iranian persons sanctioned by the UN Security Council;

      • help launder money to aid Iran’s WMD programs, provide support to international terrorism or provide support to those sanctioned by the UN Security Council;

      • facilitate efforts by the Central Bank of Iran or any other Iranian financial institution to aid Iran’s WMD programs, provide support to international terrorism or provide support to those sanctioned by the UN Security Council; or

      • facilitate significant transactions for, or provide financial services to, Iran’s Revolutionary Guard Corps (IRGC), its blocked agents or affiliates, or other Iranian financial institutions that are subject to the U.S. Department of Treasury’s blocking orders in connection with Iran’s WMD program or Iran’s support for international terrorism.

    • Requires Domestic Financial Institutions to Conduct Audits and Due Diligence, Report Certain Transactions and Provide Certifications Relating to the Accounts of Foreign Financial Institutions that Assist the Iranian Government With Certain Sanctionable Activities. Domestic financial institutions that have correspondent or payable through accounts with foreign financial institutions will be required to:

      • conduct audits of these accounts;

      • report on transactions relating to the sanctionable activities described above;

      • certify that foreign financial institutions holding correspondent or payable through accounts are not engaging in sanctionable activities; and/or

      • establish adequate due diligence polices, procedures and controls to detect whether the foreign financial institutions are engaging in sanctionable activities.

    • Prohibits Any Person Owned or Controlled by a Domestic Financial Institution From Knowingly Engaging in Transactions With the IRGC or Any of its Blocked Agents or Affiliates. Under the Act, violations of this prohibition by any person owned or controlled by a domestic financial institution can be attributed to the domestic financial institution if it knew or should have known of the prohibited transactions with the IRGC or any of its blocked agents or affiliates.

    • Penalties. Domestic financial institutions that violate any of the above are subject to a maximum civil penalty of $250,000, or an amount twice the value of the actual transaction, and a maximum criminal penalty of $1 million per transaction and/or prison sentences of up to 20 years.

    C. Freezes Assets of Iranians Involved in Sanctionable Activities

    The Act permits the President to freeze the assets of certain persons in Iran, including diplomats or representatives of government, military or quasi-governmental institutions of Iran, who engage in activities sanctioned under the International Economic Emergency Powers Act (e.g., terrorism, narco-trafficking and activities contributing to the proliferation of nuclear weapons or WMD). The assets of such persons’ family members or associates may also be frozen.

    D. Codifies and Expands Iranian Trade Embargo and Asset-Blocking Measures

    The Act codifies the existing Iranian trade embargo and certain asset-blocking measures already administered by the U.S. Department of Treasury’s Office of Foreign Assets Control. Under the Act, the President may freeze the assets of certain Iranian parties that are designated as supporting weapons proliferation, terrorism or other sensitive activities. The Act also codifies a general prohibition on trade between the United States (or U.S. persons) and Iran, with certain exceptions for, among other things, personal communications, transactions incident to travel, informational materials and certain humanitarian assistance.

    The Act prohibits all imports into the United States from Iran except for informational materials and “accompanied baggage for personal use.” This provision eliminates the existing exceptions for carpets, food and gifts under $100.

    E. Restricts U.S. Government Contracts

    The Act also establishes that the U.S. government may not award contracts to entities that export “sensitive technology” to Iran. Sensitive technology is defined as “hardware, software, telecommunications equipment, or any other technology that the President determines is to be used specifically (1) to restrict the free flow of unbiased information in Iran; or (2) to disrupt, monitor, or otherwise restrict speech of the people of Iran.”

    F. Combats the Diversion of Sensitive Goods, Services and Technologies to Iran

    The Act requires the Director of National Intelligence to present a report that identifies countries that allow the diversion of U.S.-origin goods, services and technology that (1) materially contribute to Iran’s nuclear, biological, chemical, ballistic missile or advanced weapons systems capabilities or to Iran’s support for international terrorism and (2) are on the Commerce Control List or United States Munitions List. If a country allows “substantial” diversion of such goods, services or technology, the Director of National Intelligence shall designate it as a “Destination of Diversion Concern,” thereby triggering enhanced export licensing controls relating to that country.

    G. Authorizes State and Local Governments and Certain Other Investors to Divest Their Holdings in Companies That Invest in Iran

    The Act permits U.S. state and local governments and certain other investors to divest their holdings in any entity that has investments of $20 million or more in the energy sector of Iran or has extended $20 million or more in credit to an entity that used the funds for investments in the energy sector of Iran. The term “investment” is defined as “(A) a commitment or contribution of funds or property; (B) a loan or other extension of credit; and (C) the entry into or renewal of a contract for goods or services.”

    H. Harmonizes Criminal Penalties for Violations of Sanctions

    Under the Act, the maximum criminal penalties for persons violating U.S. or UN sanctions are increased to $1 million (per violation) and 20 years in prison.

    II. The UN and EU Sanctions Against Iran

    There also have been recent Iran sanctions developments in the UN and EU.

    On June 9, 2010, the UN Security Council passed Security Council Resolution 1929, which enhances the Security Council’s sanctions against Iran. In Resolution 1929, the UN authorized countries to inspect and seize Iranian cargo if the country has reasonable grounds to believe that the cargo contains materials related to Iran’s nuclear program. It also calls for countries to freeze the assets of the IRGC and the Islamic Republic of Iran Shipping Line (IRISL). Additionally, Resolution 1929 calls upon countries to prohibit financial institutions from both opening accounts in Iran and providing any financial services that could contribute to Iran’s nuclear program.

    On June 17, 2010, the European Council issued a declaration expanding the EU’s economic sanctions against Iran. The declaration goes beyond simply implementing UN Security Council Resolution 1929 by specifically targeting Iran’s oil and gas sector. While the exact scope of the new sanctions will remain unclear for several weeks, the declaration focuses on developing measures to:

    • curb investments in and the supply of technical assistance, technology, equipment and services related to key sectors of the oil and gas industry in Iran, particularly refining, liquefaction and liquefied natural gas technology;

    • target aspects of Iran’s financial sector, including a freeze on additional Iranian banks and restrictions on banking and insurance;

    • restrict operations in the Iranian transport sector, including activities of the IRISL (and its affiliated entities) and Iranian air cargo companies;

    • curb trade in additional categories of dual-use goods and impose further restrictions on trade insurance; and

    • impose a ban on new visas for, and freeze the assets of, certain Iranian individuals, with particular emphasis on members of the IRGC.

    The precise details of the EU measures remain the subject of further discussion and analysis, and such measures are expected to be finalized by August.

    1 The ISA was originally enacted as the Iran and Libya Sanctions Act (ILSA) in 1996 and also applied to Libya.  However, ILSA’s application to Libya terminated in 2004.

    2 However, the Act does create an exception for underwriters and insurance providers that, as determined by the President, practice due diligence in establishing policies, procedures and internal controls to ensure that they do not contribute to or enhance Iran’s ability to import refined petroleum products.

    3 Under the existing ISA, unless the President exercises certain waiver powers, he is required to impose at least two of the following six specified ISA sanctions on non-U.S. persons engaged in sanctionable “investments”: (1) denial of Export-Import Bank financing for exports to the sanctioned person; (2) denial of federal agency licensing, if required, for exports of goods and technology to the sanctioned person; (3) denial of access to U.S. financial institutions for loans or credit in an amount of more than $10 million in any 12-month period; (4) ineligibility to serve as a primary dealer in U.S. government securities or as an agent of the U.S. government or a repository for U.S. government funds (for financial institutions); (5) ineligibility to contract with the U.S. government as a supplier of goods or services; and (6) restrictions on imports into the United States.