On July 1, 2010, President Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “CISADA”). CISADA amends and expands the scope of the United States’ Iran Sanctions Act1 (the “ISA”), which has been in effect since 1996. Its provisions will impose new sanctions on businesses in the U.S. and abroad that supply Iran with refined petroleum or the goods, technology and services needed to produce it. The law also provides for sanctions on financial institutions outside the borders of the U.S. that do business with the Iranian Islamic Revolutionary Guard Corps (“IRGC”) or with Iranian banks that have themselves been sanctioned by the United States. In addition to these trade- and banking-related sanctions provisions, the law also governs such issues as U.S. State and local governments’ divestment from companies that invest in Iran, and the prevention of diversion of certain goods, services and technology to Iran.
CISADA is much tougher than the recently agreed United Nations sanctions which have a nuclear non-proliferation focus, but it shares similarities with recently-passed European Union sanctions, which cover certain banking, insurance and shipping services, and prohibit “new investment, technical assistance and transfers of technologies, equipment and services” in the gas and oil sector. President Obama called the legislation a “powerful tool against Iran’s development of nuclear weapons.2 ” He also noted the law permits the President to exercise his authority to impose or waive the petroleum-related sanctions “…flexibly, as warranted, and when vital to the national security interests of the United States.”
The legislation’s major provisions include:
1) Expanding the Iran Sanctions Act’s (“ISA”) prohibition on substantial investment in Iran’s petroleum industry to cover other business activities that support that industry. ISA’s sanctions, as in effect prior to July 1, 2010, were triggered by major investments in Iran’s petroleum sector. Although CISADA’s amendments to the ISA do not sanction all sale of goods to Iran, the revisions substantially expand the number of foreign companies whose business activities could now be subject to U.S. sanctions.
a. Development of Iran’ Petroleum Resources. Prior to its amendment, the ISA specifically excluded the entry into, performance, or financing of a contract to sell or purchase goods, services, or technology from its definition of “investment.”3 The earlier ISA definition of “petroleum resources” as “petroleum and natural gas resources”4 was expanded by CISADA to include “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 liquified natural gas.”5 The removal of the exception and the expanded definition of petroleum resources now make significant sales6 of goods, services or technology that “directly and significantly” contribute to the “enhancement of Iran’s ability to develop petroleum resources” a sanctionable activity.7 This increased scope reflects Congress’s express intent to deter a larger group of foreign companies from doing business in Iran’s energy sector.
b. Production of Refined Petroleum Products. CISADA’s scope of sanctionable activities also includes companies that sell Iran “goods, services, technology, information, or support 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.”8 Companies making such sales valued at more than $1 million (or in the aggregate, more than $5 million in 12 months) could be subject to U.S. sanctions.
c. Exporting Refined Petroleum Products to Iran or Enhancing Iran’s Refined Petroleum Import Capability. Selling refined petroleum products to Iran as well as providing goods and services that significantly enhance Iran’s ability to import refined petroleum products can also render the selling parties subject to U.S. sanctions.9 Companies making such sales valued at more than $1 million (or in the aggregate, more than $5 million in 12 months) could be subject to U.S. sanctions. There are certain exceptions to the imposition of sanctions granted to underwriters and insurance providers who conduct appropriate due diligence.
2) Adding three sanctions the President may impose on foreign persons making substantial investments in or sales to Iran’s domestic petroleum production industry or significant sales of refined petroleum or goods and services that improve Iran’s ability to produce or import refined petroleum products. The CISADA added three new sanctions10 to the menu of existing ISA sanctions. These three new possible sanctions could prohibit (a) conducting transactions in foreign exchange, (b) making transfers of credit or payments between financial institutions, and (c) holding property or conducting property transactions in the United States. The President would be required to impose three of the now nine available sanctions, and could waive imposition of sanctions only if “vital to the national security interests of the United States.”11
3) Identifying foreign banks that do business with prohibited parties and prohibiting U.S. financial institutions from engaging in financial transactions with those foreign banks. The CISADA requires the U.S. Treasury to publish regulations within 90 days of July 1, 2010 that will prohibit or impose strict conditions on the opening of a correspondent account, or a payable-through account by foreign financial institutions that “facilitate” the IRGC in acquiring or developing weapons of mass destruction or supporting terrorist organizations. The law’s definition of a “financial institution” is quite broad, including not only banks, but also securities firms, insurance companies and companies providing similar financial services.”12 The regulations will also prohibit foreign-based financial institutions that “facilitate a significant transaction” or provide “significant financial services” for the IRGC or its agents, the Iranian central bank, or those persons subject to U.N. or U.S. sanctions13 from opening or maintaining such accounts. The U.S. Treasury is also required to publish regulations prescribing the activities U.S. financial institutions maintaining accounts for foreign financial institutions must undertake in connection with such accounts.14
4) Prohibiting foreign subsidiaries of U.S. banks from doing business with the IRCG or its agents. The CISADA requires the U.S. Treasury to publish regulations that would prohibit “persons owned or controlled by a domestic financial institution from knowingly engaging in a transaction or transactions with or benefitting [the IRGC] or any of its agents or affiliates whose property or interests in property are blocked by the US.”15 This provision will expand the current prohibitions on transactions between U.S. persons and the IRGC to cover foreign subsidiaries of U.S. banks in addition to their foreign branches.
The CISADA also includes provisions:
The law also requires the Administration to submit to Congress an annual report on the dollar value amount of trade, including in the energy sector, between Iran and each country maintaining membership in the Group of 20 Finance Ministers and Central Bank Governors.
We note that the CISADA is only one instance of recent U.S. government actions that have significantly broadened the scope of U.S. sanctions on Iran since the United Nations Sanctions were approved in June. The U.S. has also placed a number of new persons and entities involved in Iran’s nuclear and missile programs on the U.S. Treasury Department’s list of “Specially Designated Nationals.” Remarks by U.S. Treasury Secretary Timothy Geithner regarding those U.S. sanctions indicated that these are only the “first steps” that the U.S. will be taking to build on the latest U.N. Security Council sanctions on Iran.
For more information, please contact the following attorneys:Carl A. Valenstein, Partner
1 Iran Sanctions Act, Public Law 104-172; 50 U.S.C. 1701 note, as amended. (Hereafter, the ISA.)
2 Statement by the President on H.R. 2194. July 1, 2010. Available at: http://www.whitehouse.gov/the-press-office/statement-president-hr-2194.
3 ISA, Section 14(9).
4 ISA, Section 14(14).
5 CISADA, Section 102(f)(6), available at http://www.hcfa.house.gov/111/press_062410e.pdf.
6 Investments/sales of $20,000,000 or more (or investments/sales of $5,000,000 or more aggregating over a 12 month period to $20,000,000 or more).
7 CISADA, Section 102(f)(2).
8 CISADA, Section 102(a)(2)(B).
9 CISADA, Section 102(a)(3)(A)-(B).
10 Each of the new sanctions is applicable to the extent the transaction penalties in question can be imposed through exercise of US jurisdiction.
11 ISA, as amended by CISADA, Section 4(c)(1)(A).
12 CISADA Section 104(i)(C).
13 CISADA, Section 104(c).
14 CISADA, Section 104(e).
15 CISADA, Section 104(d).