Executive Summary
The collapse of last week’s multilateral talks with Iran makes it clear that US and multilateral sanctions imposed to date have not resulted in Iran giving up its nuclear ambitions. However, Iran’s demand that United Nations sanctions be lifted before it engages in negotiations on nuclear-related issues has been seen by some as an indication that the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) and related Iranian sanctions are having a tangible effect. CISADA and related US sanctions on Iran are also affecting Iran both directly and indirectly, through influencing the actions of Iran’s business counterparties. As one commentator notes, “numerous major international firms have become unwilling to risk their position in the U.S. market to do business with an increasingly isolated Iran.”1 Since the passage of CISADA, funding for Iranian energy projects has become more scarce as companies weigh the reputational risk and risk of being denied access to the US financial system and US government procurement process against the benefits associated with participating in Iran’s energy projects. In the next six months, one should expect to see continued US outreach by the US Departments of State and Treasury (as well as by the US Securities and Exchange Commission (“SEC”)) toward foreign companies doing business in or with Iran, as well as vocal calls in the US Congress for broadening and strengthening US sanctions on Iran and its business partners.
CISADA and Related US Sanctions on Iran
On July 1, 2010, President Obama signed into law H.R. 2194, aka the CISADA. This was the latest US move to ratchet up sanctions against Iran, which have been in place since 1995, in response to Iran’s growing nuclear ambitions.
Since 1995, US persons and corporations (although not foreign subsidiaries of US corporations) have been prohibited from entering into virtually all trade and investment activities by the Iranian Transactions Regulations.2 The Iran and Libya Sanctions Act ("ISA"), later amended by CISADA, was enacted in 1996, and was designed to discourage non-US persons and corporations from investing in Iran’s energy sector or selling items or technology to Iran that would assist it in developing weapons of mass destruction or advanced conventional weapons. Although many companies have been fined for violating the Iranian Transactions Regulations, none have been sanctioned under the ISA. The US government waived imposition of sanctions on the only company found to have violated the ISA, Total SA of France.
In the past few years, there has been a gradual move toward multilateral sanctions, including United Nations Resolution 1929, which are focused primarily on halting Iran’s buildup of weapons of mass destruction. CISADA represented an escalation of US sanctions principally aimed at strengthening sanctions for sales of products, services and technology that would enhance Iran’s petroleum sector and halting sales of refined petroleum to Iran to put further economic pressure on Iran to abandon its nuclear ambitions. For reasons of international comity and respect for foreign dependence on Iranian exports of petroleum, CISADA stopped short of imposing sanctions on foreign companies that purchase and refine Iranian crude oil. With the exception of certain US government contractors, it also did not prohibit foreign subsidiaries of US corporations, some of whom refine Iranian crude oil offshore, from entering into transactions with Iran, which the US has previously done in the case of the Cuban embargo.
The European Union followed CISADA with its own set of comprehensive sanctions against Iran, which like CISADA targeted the energy sector. To date, however, we are unaware of any European company that has been penalized for violating those sanctions.
As a reminder, under the CISADA, the following activities could result in an imposition of US sanctions on a foreign company:
A. Development of Petroleum Resources of Iran. Investments of $20 million or more (or investments of $5 million or more aggregating over a 12-month period to $20 million or more) in the development of petroleum resources of Iran are subject to sanctions under CISADA.
B. Production of Refined Petroleum Products. Sale, lease or provision to Iran of goods, services, technology, information or support with a fair market value of $1 million or more (or during a 12-month period with a fair market value aggregating $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” is activity subject to sanctions.
C. Exportation of Refined petroleum Products to Iran. Sale or provision to Iran of refined petroleum products with a fair market value of $1 million or more (or during a 12-month period with a fair market value aggregating $5 million or more) or sale, lease or provision to Iran of goods, services, technology, information or support with a fair market value of $1 million or more (or during a 12-month period with a fair market value aggregating $5 million or more) that “could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products” is activity subject to sanctions.
D. Weapons. Sale of goods, services, technology or other items contributing materially to the ability of Iran to acquire or develop chemical, biological or nuclear weapons or related technologies; or acquire or develop certain advanced conventional weapons is an activity subject to sanctions.
In addition to its trade-related sanctions provisions related to the ISA, CISADA also included the following additional provisions:
CISADA Implementing Regulations and Executive Orders Issued to Date and Other Iranian Sanctions Measures
Since its passage, the following actions have been taken by the US government either to implement CISADA or to tighten pre-existing US sanctions on Iran:
(1) The Iranian Financial Sanctions Regulations (31 CFR Part 561), were issued August 16, 2010, and became effective the same day. These regulations restrict the ability of US financial institutions to enter into transactions with foreign financial institutions that deal with certain parties in Iran, such as the Islamic Revolutionary Guard Corps, or with parties that assist Iran in acquiring weapons of mass destruction. Since these regulations became effective, OFAC has designated additional entities and persons pursuant to them.
These regulations have arguably led to a significant curtailment of trade with Iran that would not otherwise be subject to sanctions under CISADA. Many foreign banks have weighed the benefits of providing services to parties trading with Iran against the risk of being denied access to the U.S. financial system and have decided to take very conservative approaches to such trade, in some cases declining to issue letters of credit or provide other financing for it. This is not a new policy goal for the United States. One Congressional Research Service expert on Iran sanctions noted that Treasury and State Department officials reported in early 2010 that they had persuaded at least 80 banks not to provide financing for exports to Iran or to process dollar transactions for Iranian banks.4
(2) Amendments to the Iranian Transaction Regulations (31 CFR Part 560) that removed the general licenses that formerly authorized importation into the US of Iranian carpets and certain foods.5
The Civilian Agency Acquisition Council and the Defense Acquisition Regulation Council have issued an interim rule amending the Federal Acquisition Regulation (“FAR”) to implement the requirement under CISADA section 102 that contractors supplying the US government certify that they and their subsidiaries are not subject to sanctions under the Iran Sanctions Act, and Section 106’s ban on US government procurement from companies that have exported sensitive telecommunications jamming or monitoring technology to Iran. A final rule has not yet been issued.
CISADA-Mandated Government Reports
CISADA required various executive branch agencies and departments to make periodic reports to Congress. Most of these reports are not specifically required to be released to the public, and except for the report on Human Rights Violators, none of these reports have, to date, been made publicly available.
CISADA Enforcement Actions
To date, the US Department of State has announced imposition of CISADA sanctions on only one entity: Naftiran Intertrade Company (“NICO”), effective as of October 13, 2010. According to the Department of State, Naftiran is a Swiss company owned and controlled by Iranian interests. The Department of State has also announced it has decided to waive applicability of sanctions to four international oil companies: Total of France, Statoil of Norway, Eni of Italy, and Royal Dutch Shell of the United Kingdom and the Netherlands. According to James Steinberg, Deputy Secretary of State, these companies “pledged to end their investments in Iran’s energy sector. By making this pledge, companies are eligible to avoid sanctions under the so-called Special Rule in CISADA that is designed to encourage companies with activity in Iran to withdraw.”6 The State Department has also cited “…estimates [that] Iran may be losing as much as $50-60 billion overall in potential energy investments, along with the critical technology and know-how that comes with them.”7
In addition to CISADA-specific Executive Orders and new regulations, since July 1, 2010, the Department of the Treasury has designated numerous entities and individuals as Blocked Persons/Specially Designated Nationals (“SDNs”) under other OFAC regulations due to those individuals’ activities in providing Iran assistance in developing weapons of mass destruction, promoting terrorism or similar activities.8
Finally, we note that the Securities Exchange Commission’s Office of Global Compliance has been actively examining the websites of foreign companies that trade their shares on US exchanges, and inquiring about their activities in countries subject to US sanctions, including Iran. OFAC has been engaged in similar outreach activities.
Congressional Activities
The House Committee on Foreign Affairs held a status hearing on CISADA on December 1, 2010. At that hearing, both Republican and Democratic members made it clear that they were interested in seeing additional progress made in imposing sanctions on companies that continue to do business with Iran that may be subject to sanctions under CISADA. Representative Ileana Ros-Lehtinen (R-Fl.), who now chairs the Committee, expressed her concern that “The State Department has issued one determination under CISADA, just one, imposing the minimum number of sanctions on NICO, an Iranian subsidiary, for its role in Iran’s petroleum sector. Likewise the administration has listed and sanctioned just eight Iranian regime officials responsible for human rights abuses.”9
Given the strong Congressional support for additional implementation steps, we view it as likely that the House Committee on Foreign Affairs will schedule additional hearings on CISADA’s implementation throughout 2011 and press for concrete actions to be taken against foreign corporations that continue to do business with Iran. We also think it likely that China and Chinese corporations will continue to be a focus of Congressional discussion on Iran sanctions, as they were in the December 1 hearing.10 There may also be calls for more multilateral sanctions in the wake of the January 2011 unsuccessful negotiations with Iran.
US State and Local Activities, Private Companies and Advocacy Groups
CISADA granted US state and local governments the right to divest shares of companies that are involved in trade with Iran that could be subject to sanctions under CISADA. State divestment statutes range from relatively limited approaches such as requiring a state pension board to report investments in countries such as Iran and Sudan to California’s more comprehensive Iran Contracting Act of 2010, which restricts companies with significant investment activities in Iran from bidding on new or renewal contracts with California public entities valued at $1 million or greater.
It is also clear that many states are sharing information concerning companies with business activities in Iran, and even those whose activities do not meet the threshold are receiving multiple inquiries from state agencies and investment boards inquiring about their Iranian business.
In some cases such information-sharing is relatively informal. However, some states, such as Florida and California, use research performed by RiskMetrics Group, the American Israel Public Affairs Committee and others to evaluate the activities of companies with reported links to Iran.11
Finally, advocacy groups such as United Against Nuclear Iran maintain lists of companies with business activities in Iran and are an increasingly important public source of information, although they occasionally misreport or provide incomplete information about companies’ business activities in Iran.
Looking Ahead
In summary, as the CISADA signing anniversary approaches, we expect to see the following additional actions:
We do not expect to see a significant broadening of the sanctions to include transactions in Iranian crude oil or the foreign subsidiaries of US companies.
It is clear that the sanctions imposed to date have not resulted in Iran giving up its nuclear ambitions. However, companies are increasingly reluctant to risk their position in the US market, their access to the US financial system and their ability to do business as a supplier to the US government in exchange for the “advantages” of selling goods and services to Iran.
For more information, please contact the following lawyers:
Carl A. Valenstein, Partner1 Katzman, Kenneth, Iran Sanctions, Congressional Research Service. December 13, 2010, at 48.
2 Limited exceptions apply to transactions involving food, medicine and informational materials.
3 Required by CISADA, Section 104(c).
4 Katzman, Kenneth, Iran Sanctions, Congressional Research Service. December 13, 2010, at 32.
5 Required by CISADA, Section 103.
6 Remarks of Deputy Secretary of State James Steiberg, September 30, 2010. Text available at: http://www.state.gov/s/d/2010/148479.htm.
7 Testimony of William J. Burns, Under Secretary for Political Affairs, Statement before the House Foreign Affairs Committee. Washington, DC, December 1, 2010.
8 See, e.g.: OFAC actions taken on January 13, 2011, December 21, 2010, and similar designations. Lists of designated persons are available on the OFAC website at: http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/OFAC-Recent-Actions.aspx.
9 Statement by Rep. Ros-Lehtinen (R-Fl.) on December 1, 2010, available at: http://foreignaffairs.house.gov/press_display.asp?id=1650.
10 See, “House Members Press Administration to Probe China for Iran Violations.” Inside U.S. Trade, December 3, 2010, page 13.
11 See, “Protecting Florida’s Investments Act (PFIA) Quarterly Report,” Florida State Board of Administration, April 27, 2010, p. 5. (www.sbafla.com).
12 French President Nicolas Sarkozy called for “reinforced” sanctions on Iran on January 24, 2011. See, http://online.wsj.com/article/SB10001424052748703555804576101792649680746.html?mod=googlenews_wsj.
This article was originally published by Bingham McCutchen LLP.