GovCon OnDemand: U.S. Sanctions on Trade with Iran - Update on Restrictions Applicable to U.S. and Non-U.S. Persons

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1 GovCon OnDemand: U.S. Sanctions on Trade with Iran - Update on Restrictions Applicable to U.S. and Non-U.S. Persons April 20, 2012 John Barker, Partner Washington, DC Baruch Weiss, Partner Washington, DC

2 Overview Prohibitions applicable to persons subject to U.S. jurisdiction Iranian Transaction Regulations Transactions involving Specially Designated Nationals Executive Order Prohibitions applicable to persons not otherwise subject to U.S. jurisdiction CISADA Executive Order NDAA Section 1245 State divesture statutes 1

3 Prohibitions Applicable to U.S. Persons Iranian Transactions Regulations ( ITR ) (31 C.F.R. pt. 560) administered by Office of Foreign Assets Control ( OFAC ) Exports to Iran from the U.S. and imports from Iran to the U.S. are generally prohibited without an OFAC license U.S. persons wherever located may not export to Iran (includes partial participation in a transaction) Includes overseas branches of U.S. persons, but not overseas subsidiaries of U.S. persons U.S. subsidiaries overseas may export to Iran, but U.S. persons may not participate in or have knowledge of the transaction Exporting from the U.S. with knowledge or intent that items will be shipped to Iran is prohibited 2

4 Prohibitions Applicable to U.S. Persons (con t) Financial transactions involving Iran or the Government of Iran are prohibited without a license No facilitation of transactions if you can t do it yourself, you can t help someone else do it Specially Designated Nationals transactions of any kind involving a Specially Designated National are prohibited without a license For example: Bank Saderat, Bank Refah, Bank Melli Listed on the Specially Designated Nationals List ( SDN List ) 3

5 Iran Sanctions under E.O E.O (February 5, 2012) -- blocks all property or interests in property of the Iranian government or any Iranian financial institution that comes into the U.S. or into the possession or control of a U.S. person U.S. financial institutions (including overseas branches) must block any funds associated with an Iranian financial institution Central Bank of Iran is subject to these sanctions, along with any other Iranian financial institution OFAC s General License A -- transactions authorized by OFAC prior to E.O remain authorized through their listed expiration dates (including TSRA licenses) 4

6 Prohibitions Applicable to Non-U.S. Persons: CISADA CISADA -- Comprehensive Iran Sanctions, Accountability, and Divestment Act (July 1, 2010) Petroleum-related prohibitions Prohibits knowingly making an investment of $20 million or more in Iranian petroleum industry, or $5 million or more adding up to $20 million in a 12-month period Prohibits knowingly providing goods or services to the Iranian petroleum refining industry valued at $1 million or more or $5 million in a 12-month period Prohibits knowingly selling or providing refined petroleum products to Iran valued at $1 million or more or $5 million in a 12-month period 5

7 Prohibitions Applicable to Non-U.S. Persons: CISADA CISADA s banking-related prohibitions Prohibits transactions by non-u.s. financial institutions involving the Iranian Revolutionary Guard Prohibits transactions related to Iranian efforts to obtain weapons of mass destruction CISADA s banking prohibitions implemented in the Iranian Financial Sanctions Regulations ( IFSR ) (31 C.F.R. pt. 561) Sanctions can include: Prohibiting or limiting the use of a U.S. correspondent account or payable-through account of the foreign financial institution Can include placing monetary limits on the transactions processed through these accounts and/or limits on the types of transactions that may be processed 6

8 Prohibitions Applicable to Non-U.S. Persons: E.O E.O November 21, 2011 Authorizes sanctions on U.S. and non-u.s. persons who knowingly sell, lease, or provide goods, services, technology, or support to Iran that could contribute to the maintenance or enhancement of Iran s ability to develop Iranian petroleum resources Items provided to Iran must be valued at least $1 million or an aggregate value of $5 million in a 12- month period State Department is the enforcing agency 7

9 Prohibitions Applicable to Non-U.S. Persons: E.O E.O expands the prohibition on sales of goods, technology, and services to Iran beyond CISADA Covers articles that will enhance Iran s ability to develop petroleum resources (such as oil field equipment) State Department confirms that E.O is intended to sanction upstream oil and gas activities that go beyond investment [i.e., CISADA] to the provision of goods and services 8

10 Prohibitions Applicable to Non-U.S. Persons: NDAA Section 1245 National Defense Authorization Act for Fiscal Year 2012 Section 1245 enacted December 31, 2011 Prohibits privately-owned foreign financial institutions that have knowingly conducted or facilitated a significant financial transaction with the Central Bank of Iran or other designated Iranian financial institutions from opening or maintaining correspondent accounts or payable-through accounts in U.S. financial institutions Prohibition began February 29, 2012 Implemented in the IFSR and enforced by U.S. Treasury Department 9

11 Prohibitions Applicable to Non-U.S. Persons: NDAA Section 1245 Petroleum transaction prohibitions on non-u.s. financial institutions Prohibits any foreign financial institutions from knowingly engaging in significant financial transactions with CBI or other designated Iranian banks involving the purchase of petroleum or petroleum products from Iran beginning June 28, 2012 Applies to both private and government-owned or controlled foreign financial institutions (including central banks) Prohibits government-owned or controlled foreign financial institutions from engaging in sales of petroleum or petroleum products to Iran beginning June 28,

12 Prohibitions Applicable to Non-U.S. Persons: NDAA Section 1245 President must determine that global price and supply of petroleum is sufficient to allow purchasers to reduce significantly in volume purchases of Iranian petroleum before implementing the sanctions President determined on March 30, 2012 that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. Sanctions can thus proceed New determination due every 180 days thereafter 11

13 Prohibitions Applicable to Non-U.S. Persons: NDAA Section 1245 Exemptions Foreign financial institutions located in cooperating countries Transactions involving sales of food, medicine, or medical devices to Iran President may waive sanctions on non-u.s. financial institutions for if he determines that the waiver is in the U.S. national interest and provides a report to Congress Waiver may last up to 120 days and is renewable, but requires a new report to Congress 12

14 State Divestiture Statutes Several states have statutes prohibiting contracts with or investment by state funds in companies doing various types of business in Iran California: Iranian Contracting Act (2010) -- prohibits state contracts to companies that have provided goods or services of twenty million dollars ($20,000,000) or more in the energy sector of Iran New Jersey: N.J.S.A. 52:18A prohibits investment in non-u.s. companies with equity ties to Iran and is engaged in business operations with entities in the defense sector or nuclear sector of Iran, or engaged in business operations with entities involved in the natural gas or petroleum sectors of Iran 13

15 Enforcement Trends -- Criminal Banki case (S.D.N.Y., 2d Cir) (2011) personal remittances 2d Cir. overturned conviction of Iranian receiving personal remittances from Iran, citing ambiguity in 31 C.F.R regarding exemption of non-commercial remittances under the ITR Government argued that regulation required non-commercial remittances to travel through U.S. banks 2d. Cir said that regulation was ambiguous and did not clearly require non-commercial remittances to travel through U.S. banks Important implications for money transfers and foreign brokers 14

16 Enforcement Trends Banking Cases (Civil and Criminal) Long line of civil and criminal banking cases involving unauthorized processing of transactions subject to U.S. OFAC prohibitions Forfeitures and fines in some cases totaled more than a half a billion dollars Common element was the removal (stripping) of information that would have permitted U.S.-based compliance and screening programs to recognize the underlying connection with prohibited transactions For example, a dollar-denominated transaction completely offshore but the banks involved removed the designation to a prohibited country before sending the transaction through the U.S. banking system Some cases involved actions by U.S. persons Others involved activities solely by foreign persons that in turn caused U.S. persons to unwittingly process prohibited transactions Cases resulted in monitoring and audit requirements in addition to large fines Law enforcement authorities have hinted that there are more cases to come 15

17 Enforcement Trends -- Civil CISADA (May 24, 2011) -- Petrochemical Commercial Company International a/k/a PCCI (Jersey); Royal Oyster Group (UAE); and Speedy Ship a/k/a Sepahan Oil Company or SPD (UAE/Iran) Suppliers of refined petroleum products to Iran and engaged in deceptive practices to ship these products to Iran Prohibited from U.S. foreign exchange transactions, U.S. banking transactions, and all U.S. property transactions under CISADA Tanker Pacific (Singapore) and Associated Shipbroking (Monaco) Provided a tanker valued at $8.65 million to the Islamic Republic of Iran Shipping Lines (IRISL), an SDN entity designated for its role in Iran s proliferation activities Tanker Pacific barred from securing financing from the Export-Import Bank of the United States, from obtaining loans over $10 million from U.S. financial institutions, and from receiving U.S. export licenses Associated Shipbroking barred from U.S. foreign exchange transactions, U.S. banking transactions, and all U.S. property transactions 16

18 Enforcement Trends -- Civil CISADA (January 12, 2012) Zhuhai Zhenrong Company (China), Kuo Oil (S) Ptd. Ltd. (Singapore) and FAL Oil Company Limited (FAL) Companies found to have provided gasoline or refined petroleum to Iran Barred from receiving U.S. export licenses, U.S. Export-Import Bank financing, and loans over $10 million Diversion of U.S. goods (OFAC and Export Administration Regulations) Computers Microcircuits 17

19 Mitigation of Penalties Voluntary disclosures result in a base penalty reduction of 50 percent under OFAC s penalty guidelines Voluntary disclosures must be complete OFAC may view incomplete voluntary disclosures as concealment; potentially worse than no disclosure at all Implement and maintain a robust compliance program a paper program is not enough State Department does not have a formal sanctions voluntary disclosure program but there is room to negotiate 18

20 For More Information, Please Contact: Baruch Weiss Telephone: John P. Barker Telephone: