On Nov. 21, 2011, the Obama administration announced that it would impose new sanctions against Iran. The new sanctions are directed at Iran’s financial sector and petroleum and petrochemical sectors.
With respect to the financial sector, the U.S. Secretary of Treasury has announced that there are reasonable grounds to conclude that Iran is a “jurisdiction of primary money laundering concern” under the USA PATRIOT Act. Based on this finding, the Financial Crimes Enforcement Network (“FinCEN”), a constituent of the Department of the Treasury, has issued a notice of proposed rule making that will, if promulgated as final rules, potentially lead to sanctions against financial institutions doing business directly or indirectly with any financial institutions in the Iranian banking sector. All Iranian financial institutions would be presumed to have involvement with money laundering and terrorism finance because they do business in a jurisdiction of primary money laundering concern subject to special measures.
With respect to the petroleum and petrochemical sectors, the new sanctions target entities and persons supplying goods and services to these sectors in amounts exceeding certain thresholds. Prior sanctions were limited to “investment” in the petroleum and refined petroleum sectors, so these new sanctions are targeted not only to new sectors of the Iranian economy, but also to a broader range of activities in the economic sectors against which the sanctions are directed.
The United States has long-standing sanctions in place against Iran. These sanctions arise under legislation passed by Congress as well as under Presidential Executive Orders and administrative agency regulations. In essence, the sanctions consist of two main features: — 1) sanctions restricting “U.S. persons”1 (including both natural persons and legal entities) from engaging in most types of business activities with Iran2 and 2) sanctions primarily directed at non-U.S. persons aimed at discouraging such persons from doing business with Iran in certain particular economic sectors. There are also lists of specially designated persons and entities (“SDNs”) with whom trade in U.S. goods and services, as well as financial and other transactions‚ are prohibited — whether the commercial activity originates in the U.S. or abroad. The primary objectives of these sanctions are to undermine Iran’s support for terrorist activities and to discourage Iran from pursuing the development of weapons of mass destruction.
The latest sanctions proposed and imposed by the Obama administration are supplementary to prior actions taken by the U.S. government. In the case of the proposed new financial sanctions, these new sanctions would, if issued as final rules, be promulgated pursuant to authority established in the Bank Secrecy Act, as amended by the USA PATRIOT Act. In the case of the new sanctions against Iran’s petroleum and petrochemical sectors, these new sanctions supplement prior sanctions that were enacted in the Iran Sanctions Act of 1996 (“ISA”)‚ as supplemented and amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”).
The New Financial Sanctions
In October 2011, FinCEN issued final rules in for implementation of certain CISADA provisions requiring U.S. financial institutions maintaining correspondent accounts for a foreign bank to require certifications from the foreign bank and report to FinCEN certain information with respect to transactions or accounts relating to certain Iranian-linked persons or financial institutions. These Iranian-linked persons or financial institutions were limited to those persons or institutions already identified as SDNs under the International Emergency Economic Powers Act. Upon receipt of a request from FinCEN, the U.S. financial institution is required to inquire of its foreign correspondent and seek a certification from the foreign bank as to whether or not the foreign correspondent maintains a correspondent account for a designated Iranian-linked financial institution and report on certain transactions with such Iranian-linked financial institution and other designated Iranian linked persons. The U.S. institution providing the report must also certify that “to the best of its knowledge‚” it has no information inconsistent with the information provided by the foreign correspondent. Notably, these rules did not require U.S. financial institutions to make any reports to FinCEN‚ except in response to a written request from FinCEN, nor do these rules nominally require the U.S. financial institutions to take any other measures, except as may otherwise be required by law (such as for other Bank Secrecy Act compliance purposes).
On Nov. 25, 2011, FinCEN published in the Federal Register a finding that “reasonable grounds exist for concluding that the Islamic Republic of Iran is a jurisdiction of primary money laundering interest.” Based on that finding, FinCEN published a notice of proposed rule-making (“NPRM”) in the Federal Register on Nov. 28, 2011‚ proposing implementation of still more sanctions (“special measures”) that would result from FinCEN’s finding. Unlike the sanctions imposed in the Executive Order‚ which were effective as of Nov. 21, 2011, and the FinCEN rules that were finalized in October 2011, these new proposed financial sanctions can only take effect after completion of a formal rule making process.
If ultimately adopted, the new rules would prohibit U.S. financial institutions from opening and maintaining correspondent accounts for, or on behalf of, Iranian banking institutions. In addition, U.S. financial institutions would be required to take reasonable steps to apply special due diligence to all of their correspondent accounts to help ensure that no such account is being used indirectly to provide services to an Iranian banking institution.
The contemplated enhanced due diligence would require U.S. financial institutions to notify their correspondent account holders that the U.S. financial institution knows, or has reason to know, provide services to Iranian banking institutions that such correspondents may not provide Iranian banking institutions with access to the correspondent account maintained at the U.S. financial institution. The U.S. financial institutions would have to take reasonable steps to identify any indirect use of their correspondent accounts by Iranian banking institutions to the extent that such indirect use can be determined from transactional records maintained by the U.S. financial institutions. Finally, the U.S. financial institutions would be expected to “take a risk-based approach” when determining what other due diligence steps to take to protect against improper use of correspondent accounts by Iranian banking institutions. Where U.S. financial institutions identify indirect access to their correspondent accounts by Iranian banking institutions, the U.S. institutions would be expected to take steps to prevent such access, including, where necessary, terminating the account.
U.S. financial institutions covered by the proposed rule would include banks, agencies or branches of foreign banks in the United States; credit unions; savings associations; corporations operating under Section 25A of the Federal Reserve Act; certain trust banks or trust companies; certain brokers or dealers in securities; certain futures commission merchants or introducing brokers; private bankers; and mutual funds.
Unlike the rules promulgated in October by FinCEN that limit the targeted Iranian financial institutions to certain designated entities and persons (SDNs on the list published by the U.S. Department of the Treasury’s Office of Foreign Assets Control), Iranian banking institutions would be defined in the proposed new FinCEN rules to include any bank chartered by Iran, including subsidiaries, branches or offices operating in any jurisdiction; any branch or office within Iran of any bank licensed by Iran; the Central Bank of Iran (Bank Markazi Iran) [the Central Bank is also not covered by the October rules]; and any bank of which more than 50 percent of the voting or analogous interest is owned by two or more banks chartered by Iran.
The proposed rules do not contemplate any new reporting requirements for U.S. financial institutions that are not already required by law or regulation.
As noted, the foregoing financial institution rules are only “proposed” and are subject to public comments. Written comments on the proposed rules are due no later than Jan. 27, 2012. It is unclear how soon thereafter final rules may be adopted, although as a practical matter, many U.S. financial institutions will decide to comply with the special measures immediately.
The New Sanctions Against Iran’s Petroleum and Petrochemical Sectors
Although ISA and CISADA literally apply to all persons (including natural persons and legal entities), ISA and CISADA were directed in significant part at extending U.S. sanctions against Iran to non-U.S. persons3 who are doing business in certain economic sectors with Iran. Under ISA and CISADA, if persons are doing business with Iran in these proscribed sectors and in amounts exceeding certain thresholds, CISADA requires the President to impose against such persons at least three sanctions from a menu of sanctions.4
CISADA allows the President to waive imposition of sanctions under certain circumstances. This waiver authority was the subject of intense negotiation between the President and Congress when CISADA was passed by Congress in June 2010. Since the passage of CISADA less than a dozen non-U.S. companies have been the subject of sanctions imposed under CISADA.
The economic sectors targeted by ISA and CISADA are the development of petroleum resources of Iran, production of refined petroleum products and export of refined petroleum products to Iran5.
It is worth noting that CISADA was not designed to create sanctions against persons engaged in the trading of Iranian crude oil, as such sanctions would have created significant problems for U.S. allies that depend on the supply of Iranian crude oil.
On Nov. 20, 2011, President Barack Obama issued an Executive Order creating potential new sanctions expanding and tightening the types of sanctions that can be imposed under ISA/CISADA. As with ISA/CISADA, although the Executive Order literally applies to all persons (including natural persons and legal entities), the Executive Order is primarily targeted to non-U.S. persons who are doing business with Iran.9 Under the Executive Order, if persons are doing business with Iran in certain proscribed sectors and in amounts exceeding certain thresholds, the Executive Order authorizes (but unlike CISADA does not mandate) the Secretary of State to impose sanctions from a menu of sanctions against such persons. The types of sanctions that can be imposed are substantially similar to those provided in CISADA.10 However, unlike CISADA, the Secretary is not required to impose any minimum number of sanctions on persons engaged in activities that can be sanctioned under the Executive Order.
The economic sectors targeted by the Executive Order are the development of petroleum resources of Iran and maintenance or expansion of Iran’s petrochemical products.
It is important to note that these new sanctions (as well as those under CISADA) can be imposed not only on a legal entity engaging in the proscribed conduct, but also, under certain circumstances, on successor entities and entities owning or controlling the entity engaging in such conduct.
For more information, please contact the following lawyers:
This article was originally published by Bingham McCutchen LLP.