On August 10, 2012, the Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Act") was signed into law. In addition to imposing numerous new sanctions measures against Iran and its Revolutionary Guard Corps (the "IRGC"), the Act amended and expanded existing sanctions regimes targeting Iran, notably including the Iran Sanctions Act ("ISA"), the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 ("CISADA") and Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 ("NDAA 2012"). The Act also imposes sanctions and additional measures relating to human rights abuses in Iran and Syria, which are the subject of a separate advisory.
The sweeping new sanctions will impact a broad range of industries, including those that have been the focus of previous sanctions against Iran (i.e., the financial, insurance, maritime, petroleum, and petrochemical industries). U.S. persons who own or control non-U.S. entities doing business with Iran also will become subject to sanctions upon promulgation of new regulations required by the Act.
Key Iran Sanctions Act Amendments
The Act amends the ISA by (i) increasing from 3 to 5 the minimum number of sanctions that must be imposed with respect to a person who engages in sanctionable activity; (ii) increasing the number of available sanctions from 9 to 12 and imposing additional certification requirements for U.S. government contractors; (iii) adding new categories of sanctionable activities; (iv) expanding several key definitions; and (v) tightening the waiver standard.
The new sanctions that may be imposed for sanctionable conduct occurring after the effective date of the Act include (i) a ban on "significant amounts" of U.S. person investment in equity or debt of sanctioned persons and (ii) exclusion from the United States of corporate officers, principals and controlling shareholders of sanctioned persons who are not U.S. citizens. In addition, any of the sanctions on the enhanced "menu" may now be imposed on the principal executive officers (or equivalent) of a sanctioned entity.
New categories of sanctionable activity include (i) participation in joint ventures established on or after January 1, 2002 with respect to the development of petroleum resources outside of Iran if the Government of Iran is a substantial partner or investor or if Iran could, through a direct operational role in the joint venture or by other means, receive technological knowledge or equipment not previously available to Iran that could directly and significantly contribute to the enhancement of Iran's ability to develop petroleum resources in Iran (the "petroleum joint venture sanctions"); (ii) codification and expansion of the sanctions against persons providing goods, services, technology or support that could directly and significantly contribute to the maintenance or enhancement of Iran's ability to develop petroleum resources located in Iran or Iran's domestic production of petrochemical products authorized by Executive Order 13590 of November 20, 2011 (the "expanded petroleum and petrochemical sanctions"); (iii) ownership, operation, control or insurance of a vessel used to transport crude oil from Iran to another country (the "oil transport sanction"); (iv) concealing the Iranian origin of crude oil or refined petroleum products (the "concealment sanction"); (v) export, transfer or facilitation of transshipment of goods, services or technology to Iran, directly or indirectly, that would contribute materially to Iran's WMD and conventional military capabilities; and (vi) participation in certain joint ventures involving Iran relating to the mining, production or transportation of uranium (the "uranium joint venture sanctions"). Furthermore, the term "services" as used in throughout the ISA now is defined broadly to include "software, hardware, financial, professional consulting, engineering, and specialized energy information services, energy-related technical assistance, and maintenance and repairs" and examples of sanctionable support for Iran's ability to import refined petroleum products have been expanded to include bartering or contracting by which goods are exchanged for goods, including the insurance or reinsurance of such exchanges, as well as purchasing, subscribing to, or facilitating the issuance of sovereign debt of the Government of Iran, including Government bonds.
The expanded petroleum and petrochemical sanctions broaden the categories of sanctionable support described in E.O. 13590 to cover support for Iran's domestic production of refined petroleum products, including by provision of direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries or directly associated infrastructure, including construction of port facilities, railways and roads, the primary use of which is to support the delivery of refined petroleum products.
The oil transport sanction applies effective as of November 8, 2012, but only during the currency of a determination under the NDAA 2012 that there is a sufficient supply of petroleum and petroleum products produced in countries other than Iran to permit significant reductions of purchase from Iran. The sanction does not apply to transportation to countries for which an exception granted under the NDAA 2012 is in effect at the time the transportation occurs. While a controlling beneficial owner of the vessel may be sanctioned only if it had actual knowledge that the vessel was used to transport oil from Iran, persons who otherwise own, operate, control or insure the vessel may be sanctioned if they knew or ought to have known the vessel was so used.
The concealment sanction will apply to any persons who own, operate or control vessels in a manner that conceals the Iranian origin of the products transported, including by permitting the operator of the vessel to suspend the operation of the vessel's satellite tracking device, or by obscuring or concealing ownership of the vessel by the Government of Iran or entities it owns or controls, including the Islamic Republic of Iran Shipping Lines ("IRISL") and the National Iranian Tanker Company ("NITC"). In addition to subjecting persons engaging in this category of sanctionable activity to a minimum of 5 sanctions, the Act provides that the vessel involved may be banned from landing at a port in the United States for up to two years.
The oil transport sanction and the concealment sanction are subject to a safe harbor for underwriters and insurers who exercise due diligence, and, to the extent necessary for implementation, will be the subject of regulations or guidelines to be issued not later than November 8, 2012, the date the sanctions become effective.
The petroleum and uranium joint venture sanctions will not apply to participants in joint ventures established prior to August 10, 2012 who cease participation within 180 days after the effective date of the Act (i.e., on or before February 6, 2013).
Significant New Sanctions Measures
The Act requires imposition of a minimum of 5 sanctions from the ISA menu of sanctions, and otherwise makes subject to key provisions of the ISA, two new categories of sanctionable activity, namely: (i) the provision of underwriting services or insurance or reinsurance for the National Iranian Oil Company ("NIOC"), the NITC, or any successor entity to either of them; and (ii) the purchase of, subscription to, or facilitation of the issuance of Iranian sovereign debt or debt of Iranian state owned or controlled entities. The sanctions for dealings with NIOC and NITC are subject to the same safe harbor provided in the ISA for underwriters and insurers exercising due diligence. In addition, the Act provides that these sanctions may not be imposed for activities relating solely to the provision of agricultural commodities, food, medicine or medical devices to Iran or the provision of humanitarian assistance to the people of Iran.
Perhaps the most far-reaching new sanction imposed by the Act is the requirement that within 60 days after enactment of the Act (i.e., on or before October 9, 2012), the President must prohibit, foreign entities owned or controlled by U.S. persons from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited by orders or regulations issued under the International Emergency Economic Powers Act ("IEEPA") if the transaction were engaged in by a U.S. person or in the United States. Civil penalties will be imposed against the U.S. person who owns or controls the foreign entity that violates, attempts to violate, conspires to violate or causes a violation of the prohibition, unless the U.S. person divests or terminates its business with the foreign entity on or before February 6, 2013 (180 days from enactment).
The Act amends the Securities Exchange Act of 1934 to compel issuers required to file annual or quarterly reports to disclose and separately provide notice of detailed information regarding certain activities of the issuer or its affiliates that are sanctionable under the ISA or certain provisions of CISADA or involve blocked persons or the Government of Iran. Such notices are to be transmitted to the President and certain congressional committees, and the President must undertake an investigation and determine within 180 days whether sanctions should be imposed under the ISA, CISADA, or any other applicable U.S. laws relating to sanctions with respect to Iran.
The Act also requires the continuation of certain sanctions previously imposed by Executive Order, as well as blocking of property of any person determined by the President to have knowingly sold, leased or provided a vessel or provided insurance or reinsurance or any other shipping service (including operation of vessels or conduct or facilitation of significant financial transactions with port operators in Iran) for the transportation to or from Iran of goods that could materially contribute to Iran's proliferation of weapons of mass destruction or support for acts of international terrorism. Successor entities must also be blocked, as well as affiliates with the requisite level of knowledge. The Act defines "financial transaction" to mean the transfer of value involving a financial institution, including the transfer of forwards, futures, options, swaps, or precious metals, including gold, silver, platinum, and palladium.
Title III of the Act imposes a variety of new sanctions on the IRGC, including (i) identification (within 90 days) and blocking the property and exclusion from the United States of foreign persons who are officials, agents or affiliates of the IRGC; (ii) identification (within 90 days) of and imposition of ISA sanctions against foreign persons who support or engage in significant transactions (including barter transactions) with the IRGC and its sanctioned officials, agents or affiliates or engage in significant transactions with persons subject to U.N. Iran sanctions or persons acting at their direction or owned or controlled by them; and (iii) among other sanctions, denial of foreign assistance or arms sales to, and export licenses involving, foreign government agencies determined to have knowingly and materially supported or engaged in material transactions with sanctioned IRCG officials, agents or affiliates or U.N. sanctioned persons.
Other significant provisions of the Act (i) authorize imposition of sanctions under CISADA or IEEPA with respect to persons who continue, on or after November 8, 2012, to provide specialized financial messaging services to, or knowingly enable or facilitate direct or indirect access to such messaging services for the Central Bank of Iran or a financial institution sanctioned under CISADA; and (ii) require the Administration to publish a list of certain senior officials of the Government of Iran and their family members and deny visas to and exclude them from the United States, except as required to comply with U.N. and other international obligations.
Additional Financial Sanctions
Through amendments to CISADA and the NDAA 2012, the Act imposes a number of new sanctions aimed at financial institutions.
The Act amends the CISADA prohibitions and conditions with respect to financial institutions maintaining correspondent or payable-through accounts in the United States to expand the list of sanctionable activities to include facilitation of the activities of persons acting on behalf of or at the direction of or owned or controlled by persons subject to U.N. Iran sanctions and all persons (not only financial institutions) whose property is blocked under IEEPA in connection with Iran's proliferation activities or support for international terrorism. To the extent necessary to carry out these amendments, the Iranian Financial Sanctions Regulations are to be amended within 90 days. The Regulations also are to be amended to extend sanctions to foreign financial institutions that (i) knowingly facilitate or participate or assist in activities sanctionable under CISADA and the Regulations, including by acting on behalf of, at the direction of or as an intermediary for another person; (ii) attempt or conspire to facilitate or participate in such activities; or (iii) are owned or controlled by a foreign financial institution that knowingly participates in such activities. Furthermore, the Act requires the Administration to determine, on or before September 24, 2012, whether NIOC or NITC is an agent of the IRGC, and, if so, to extend the financial sanctions to significant transactions or financial services knowingly facilitated for NIOC or NITC for the purchase of petroleum products from Iran (but only during the currency of a determination under the NDAA 2012 that there is a sufficient supply of petroleum and petroleum products produced in countries other than Iran to permit significant reductions of purchase from Iran, and not if the country with primary jurisdiction over the financial institution has been granted an exception under the NDAA 2012 that is in effect at the time the transaction or service occurs). In addition, the new regulations must prohibit entities owned or controlled by domestic financial institutions from knowingly engaging in transactions with or for the benefit of the IRGC or persons blocked under IEEPA, and provide for imposition of penalties on the domestic financial institution if it knew or should have known of the sanctionable conduct. Finally, the new regulations must require domestic financial institutions maintaining a correspondent account or payable-through account for foreign financial institutions to implement due diligence procedures, conduct audits, or implement other measures to ensure that the foreign financial institutions are not engaging in sanctionable activity.
The Act amends the NDAA 2012 to clarify that sanctions may not be imposed against foreign financial institutions thereunder for conducting or facilitating transactions for the sale of agricultural commodities (transactions for the sale of food, medicine or medical devices were previously exempted). This amendment is retroactive to the enactment of the NDAA 2012.
Effective February 6, 2012, financial transactions permitted to be exempt from sanctions under the NDAA 2012 are limited to those for trade in goods or services between Iran and the country with primary jurisdiction over the foreign financial institution, provided that any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution. Furthermore, countries previously determined by the President to have significantly reduced their volume of crude oil purchases from Iran must reduce their purchase to zero in order for the financial institutions over which they have primary jurisdiction to be exempted from the imposition of sanctions for subsequent 180 day periods, and those countries seeking an initial determination of "significant reduction" will be subject to the new definition providing that the term includes "a reduction in such purchases in terms of price or volume toward a complete cessation of such purchases." However, the sanctions will no longer apply to foreign government owned or controlled financial institutions other than central banks.
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