Trade Compliance Flash: United States Announces New Secondary Sanctions on Iran's Iron, Steel, Aluminum, and Copper Sectors
On May 8, 2019, President Trump issued a new Executive Order "Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran" (the Iran Metals E.O.). The Iran Metals E.O. is the first round of new sanctions imposed on Iran since the full re-imposition of sanctions in November 2018 and the first Iran sanctions targeting a new sector of the Iranian economy since before the Joint Comprehensive Plan of Action (JCPOA a/k/a the Iran Nuclear Deal).
The new sanctions apply not only to Iranian persons operating in the iron, steel, aluminum, and copper sectors of Iran (the "covered metals sectors") but potentially to any person—either Iranian or non-Iranian—who (i) knowingly engages in a "significant transaction" for the sale, supply, or transfer of significant goods or services used in connection with the covered metals sectors; (ii) knowingly engages in a "significant transaction" for the purchase, acquisition, sale, transport, or marketing of the covered metals of Iran or products made from them; or (iii) materially assists, sponsors, or provides financial, material, or technological support for, or goods or services in support of, persons sanctioned under the Iran Metals E.O. The Iran Metals E.O. also targets foreign financial institutions (FFIs) that conduct or facilitate "significant financial transactions" in connection with such activities.
Like previous secondary sanctions targeting the Iranian oil, natural gas, petrochemicals, shipping, shipbuilding, and automotive sectors, the Iran Metals E.O. authorizes the Office of Foreign Assets Control (OFAC) to impose "blocking" sanctions that target individuals and companies, as well as correspondent/payable-through account sanctions that apply only to FFIs. Both blocking sanctions and correspondent/payable-through account sanctions serve to cut off non-U.S. individuals, companies, and FFIs from the U.S. economy and financial system.
Guidance issued by OFAC establishes a 90-day wind-down period that will allow non-U.S. persons to avoid sanctions exposure by winding down potentially covered transactions by August 6, 2019. Importantly, the guidance makes clear that any new business entered into during this 90-day window that would be sanctionable under the Iran Metals E.O. will not be considered wind-down activity and could be sanctionable, including during the wind-down period itself.
The Iran Metals E.O. represents another attempt by the U.S. to stifle an important source of revenue for the Government of Iran and marks an expansion of sanctions that could have a tremendous impact on remaining non-U.S. business in or connected to Iran. As discussed in our most recent Focus on Iran publication, the U.S. government has previously targeted precious metals and raw or semi-finished metals, including aluminum and steel. The Iran Metals E.O. expands upon those prior sanctions by targeting iron and copper, as well. From this point forward, any non-U.S. business in or connected to the covered metals sectors has a significantly increased sanctions risk profile.
The relevant provisions of the E.O. and our analysis of noteworthy points is provided below.
Blocking Sanctions Targeting Non-U.S. Companies in Connection with Covered Metals Sectors
Section 1 of the Iran Metals E.O. sets forth the "blocking" sanctions that target both Iranian individuals and entities operating in the covered metals sectors, but also non-U.S., non-Iranian entities that do business in those sectors. Specifically, Section 1 authorizes OFAC to impose blocking sanctions on any person who:
- Operates in the iron, steel, aluminum, and copper sectors in Iran, as well as anyone that owns, controls, or operates an entity that is part of the covered metals sectors;
- Knowingly engages in a "significant transaction" for the "sale, supply, or transfer" to Iran of significant goods or services used in connection with the covered metals sectors;
- Knowingly engages in a "significant transaction" for the "purchase, acquisition, sale, transport, or marketing" of covered metals or products made from such metals from Iran;
- Materially "assists, sponsors or provides financial, material, or technological support" for, or goods or services in support of, any person blocked under Section 1 of the Iran Metals E.O.;
- That is owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, any person blocked under Section 1 of the Iran Metals E.O.
These provisions are substantially similar to past sanctions targeting the Iranian oil, natural gas, and petrochemicals sectors, notably the provisions targeting significant transactions for the "purchase, acquisition, sale, transport, or marketing" of covered metals and provisions targeting material assistance, sponsorship, financial/material/technical support, or goods and services to or in support of sanctioned persons. However, the new metals sanctions cover a slightly broader set of actors than prior sector-specific blocking sanctions—i.e., persons that own, control, or operate an entity in one of the targeted sectors. That language suggests that foreign investment firms, for example, with ownership interests in companies operating in any of the covered metals sectors may now be at risk of being sanctioned themselves.
Correspondent and Payable-Through Sanctions Targeting FFIs in Connection with the Covered Metals Sectors
Section 2 of the Iran Metals E.O. sets forth correspondent or payable-through account sanctions that target FFIs that knowingly conduct or facilitate a "significant financial transaction" in connection with the covered metals sectors. Specifically, Section 2 authorizes OFAC to impose such sanctions on any FFI that conducts or facilitates a significant financial transaction:
- For the sale, supply, or transfer to Iran of significant goods or services used in connection with the iron, steel, aluminum, or copper sectors of Iran;
- For the purchase acquisition, sale, transport, or marketing of these metals or products of these metals from Iran; or
- For or on behalf of any person blocked under the E.O.
Again, these sanctions on significant transactions conducted or facilitated by FFIs are substantially similar to several prior sanctions targeting, for example, Iranian SDNs, the Iranian state-owned oil company National Iranian Oil Company (NIOC) and its Switzerland-based trading company Naftiran Intertrade Company Sàrl (NICO), or the purchase, acquisition, sale, transport, or marketing of petroleum, petroleum products, or petrochemicals from Iran.
The Iran Metals E.O. is noteworthy in several respects:
- Connection Between Targeted Sectors and Financing for Malign Activity: The Iran Metals E.O. continues a pattern of targeting sectors of Iran's economy that are export-focused and generate significant revenue for the Government of Iran. The best examples of such targeted sectors are petroleum, natural gas, and petrochemicals, which have traditionally provided a sizable portion of the Government of Iran's revenue and thus, in the eyes of the U.S. government, the funding for malign activity such as weapons of mass destruction or international terrorism. However, as the United States has focused intensely on the aforementioned sectors of the Iranian economy, the Government of Iran appears to be seeking to generate revenue from alternate sources, such as iron, steel, aluminum, and copper. Sanctions on additional export-focused, high-revenue sectors may be on the horizon in the near future.
- Clock is Ticking for Safe Wind-Down: As noted above, the issuance of the Iran Metals E.O. started the clock on the 90-day wind-down period, after which companies, individuals, and FFIs could face sanctions for certain business dealings in the covered metals sectors. This 90-day wind-down period ends on August 6, 2019. Even well-planned wind-downs can go awry in connection with Iran, as multiple non-Iranian partners may be seeking to wrap up transactions within a compressed time period, creating serious logistical, operational, and financial challenges. Non-U.S. companies and FFIs seeking to minimize sanctions risk in winding down business potentially covered by the new E.O. should consider doing so as expeditiously as possible and factor in likely delays.
- No Designations as of Yet: Finally, OFAC did not take the step of adding any entities or individuals to the SDN List in connection with the Iran Metals E.O. Notably, OFAC has not yet designated any Iranian entities for "operating" in the iron, steel, aluminum, and copper sectors in Iran. As such, it is not possible, at least for now, to either (i) materially assist, sponsor, or provides financial, material, or technological support" for, or goods or services in support of any person blocked under Section 1 of the Iran Metals E.O. or (ii) be owned or controlled by, or act or purport to act for or on behalf of, directly or indirectly, such a person. Foreign companies operating in this space should monitor the SDN List closely in the coming months, as an initial wave of designations seems likely at or near the end of the wind-down period.
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