Expansive executive order tightens Iran sanctions as labyrinth of front companies surfaces

June 18, 2013 Authors: Stephen M. McNabb, Marsha Z. Gerber, Stefan Reisinger, Kimberly Hope Caine

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Recent actions of the Obama Administration and Congress mark an escalation in diplomatic and economic pressure on the Iranian government.  On June 3, 2013, the President signed Executive Order (“E.O.”) 13645 (the “Executive Order”),  significantly expanding the jurisdictional reach of U.S. sanctions against Iran.  The Executive Order has two main objectives: (i) it implements certain sections of the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”) and (ii) it authorizes additional sanctions against Iran, primarily targeting certain transactions and activities related to the Iranian rial, Iran’s automotive sector, and persons who materially assist Iranian persons on the list of Specially Designated Nationals and Blocked Persons (“SDN List”).  Although E.O. 13645 does not take effect until July 1, 2013, sanctions may be imposed for payments and other activities arising out of transactions entered into prior that date.  The Executive Order was followed by an announcement by the U.S. Department of the Treasury on June 4, 2013 that it identified a shadowy network of front companies hiding assets on behalf of Iran’s leadership.   This flurry of sanctions activity took place amidst ongoing efforts in Congress to pass legislation calling for harsher Iran sanctions.   Collectively, these actions demonstrate that the United States is continuing to constrict the Iranian economy and will flex its extraterritorial muscles to do so.  A growing number of international actors should be concerned about their potential exposure under the Iran sanctions.  Following is a summary of the principal provisions of the Executive Order as well as Treasury’s announcement.

I. Implementation of sanctions under IFCA

IFCA was signed into law on January 2, 2013 as part of the National Defense Authorization Act for Fiscal Year 2013.  It authorizes broad sanctions against certain activities related to (i) Iran’s energy, shipping, and shipbuilding sectors; (ii) the sale, supply, or transfer to or from Iran of precious and certain other metals, graphite, coal, and industrial software; (iii) the provision of underwriting services, insurance, or reinsurance to activities and persons targeted by U.S. sanctions against Iran; (iv) financial transactions involving sanctioned Iranian individuals and entities; and (v) persons involved in the diversion of goods intended for the Iranian people.  Most of the IFCA provisions target conduct occurring on or after July 1, 2013.  The Executive Order implements the following sanctions under IFCA:

A. Sanctions related to foreign financial institutions that facilitate transactions with SDNs

The Executive Order implements sanctions under section 1247 of IFCA applicable to foreign financial institutions.  Specifically, section 3(a)(i) of the Executive Order authorizes sanctions against such institutions that knowingly conduct or facilitate “significant” financial transactions on behalf of an Iranian person on the SDN List or any other person included on the SDN List whose property and interests in property are blocked pursuant to E.O. 13599 of February 8, 2012  and the Executive Order.  With respect to such institutions, the Treasury Secretary may prohibit the opening or impose strict conditions on the maintenance, in the United States, of a correspondent account or a payable-through account.  Additionally, the Treasury Secretary may block the institution’s property and interests in property that are in the United States or later come into the United States.  The Treasury Secretary has considerable discretion in determining whether a transaction is “significant,” and may consider any relevant factors, including, for example, the size, number, and frequency of the transaction; the type, complexity, and commercial purpose of the transaction; the level of awareness of management; and whether the transaction is part of a pattern of conduct.  
There are exceptions for certain transactions related to the purchase of petroleum or petroleum products from Iran; the sale, supply, or transfer to or from Iran of natural gas; and the provision of certain humanitarian assistance.  Specifically, under the exception for petroleum and petroleum products, the restrictions only apply to the purchase of petroleum products from Iran if the President determines under subsection 1245(d) of the National Defense Authorization Act for Fiscal Year 2012 that there is a sufficient supply of petroleum from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.  Under the natural gas exception, the restrictions do not apply when the transaction is for the sale, supply, or transfer of natural gas to or from Iran, the transaction is solely for trade between Iran and the country with primary jurisdiction over the foreign financial institution conducting or facilitating the transaction, and 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.  Under the humanitarian exception, the restrictions do not apply to transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran.

B. Sanctions related to the diversion of goods

The Executive Order implements sanctions pursuant to section 105C of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (“CISADA”) of 2010, as amended by section 1249 of IFCA.  Specifically, section 8(a) of the Executive Order blocks the property and interests in property and suspends the entry into the United States of any person determined to have engaged (on or after January 2, 2013) in corruption or other activities relating to the diversion of goods—such as agricultural commodities and medicine—intended for the Iranian people or the misappropriation of proceeds from the sale or resale of such goods.  These sanctions extend to any person who provides material support for such activities or is owned, controlled by, or acting on behalf of any person engaged in such activities.

C. Additional IFCA sanctions

The Executive Order implements a number of additional sanctions pursuant to various IFCA provisions.  Specifically, section 7(a) of the Executive Order authorizes sanctions related to the supply of goods and services in connection with the Iranian energy, shipping, or shipbuilding sectors, pursuant to IFCA section 1244(d)(1)(A); the supply of goods and services in connection with precious metals, graphite, raw or semi-finished metals, and industrial process software, pursuant to IFCA section 1245(a)(1); and the provision of insurance and reinsurance services, pursuant to IFCA section 1246(a)(1).

II. Authorization of new sanctions and broadening of existing sanctions

A. Prohibitions on dealings in Iranian rials

The Executive Order authorizes new sanctions targeting foreign financial institutions that deal in Iranian rials.  Specifically, section 1(a)(i) of the Executive Order authorizes the sanctioning of such institutions that knowingly conduct or facilitate any significant transaction related to the purchase or sale of Iranian rials or derivatives, swaps, or other contracts whose value is based on the exchange rate of the Iranian rial.  Additionally, section 1(a)(ii) authorizes sanctions against foreign financial institutions that maintain significant funds or accounts outside the territory of Iran denominated in the Iranian rial.  The Treasury Secretary may prohibit or restrict the opening or maintenance of a correspondent account or a payable-through account by such an institution, or block the property and interests in property of such an institution that are in or later come into the United States.

B. Prohibitions related to Iran’s automotive sector

The Executive Order authorizes new sanctions against persons involved in transactions related to Iran’s automotive sector.  Specifically, section 5(a) of the Executive Order authorizes the sanctioning of any person who knowingly engages in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.  These sanctions extend to successor entities of such a person as well as certain individuals or entities who own or control or are owned or controlled by such a person.  Sections 6 and 7 of the Executive Order provide a lengthy list of sanctions applicable to such persons.  This list includes, for example, the denial of U.S. Export-Import Bank guarantees, denial of U.S. export and re-export licenses, prohibition on U.S. government procurement, denial of visas to corporate officers or controlling shareholders, prohibition of certain transactions in foreign exchange, and blocking of property or interests in property in the United States.
Similarly, section 3(a)(ii) of the Executive Order authorizes the sanctioning of any foreign financial institution that knowingly conducts or facilitates any significant financial transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.  Such institutions may face barriers to opening or maintaining correspondent or payable-through accounts in the United States.

C. Prohibitions related to material assistance to SDNs

The Executive Order broadens existing sanctions related to the provision of material or other support to SDNs and certain other blocked persons.  Specifically, section 2(a)(i) of the Executive Order authorizes the blocking of property of any person who materially assists, sponsors, or supports any Iranian person on the SDN List or any other person whose property and interests in property are blocked under E.O. 13599 and the Executive Order.

D. Miscellaneous

The Executive Order broadens existing sanctions related to exports of petroleum or petroleum products from Iran.  Specifically, section 16 of the Executive Order expands the prohibitions under E.O. 13622 of July 30, 2012  to include the “sale, transport or marketing” of petroleum or petroleum products from Iran in addition to the purchase and acquisition of such products.

III. Designation of Iranian-controlled front companies

Following the issuance of the Executive Order, the Treasury announced that it has taken action “to expose a major network of front companies controlled by Iran’s leadership.”   According to the Treasury, the Execution of Imam Khomeini’s Order (“EIKO”) “oversees a labyrinth of 37 ostensibly private businesses, many of which are front companies. The purpose of this network is to generate and control massive, off-the-books investments, shielded from the view of the Iranian people and international regulators.”   EIKO and the 37 companies identified are subject to sanctions pursuant to E.O. 13599.  U.S. persons are generally prohibited from engaging in any transactions with these entities, and any assets these entities may have subject to U.S. jurisdiction are frozen.

IV. Conclusion

Although not all recent U.S. measures have been restrictive,  the Executive Order, in particular, signals that the United States is committed to tightening the pressure on Iran and will cast a wide jurisdictional net in order to carry out its sanctions program against Iran.  The Executive Order has dramatically expanded the number of individuals and entities U.S. authorities can legally target with sanctions.  Now, more than ever, the significance of a robust due diligence program, designed to detect and prevent sanctionable conduct, cannot be overstated.

For additional information, please see the Legal Update, “Foreign insurers should be aware of new US sanctions.


The full text of Executive Order 13645 can be found here.
The Treasury Department's press release, "Treasury Targets Assets of Iranian Leadership" (June 4, 2013), can be found here.
3 Examples include the Nuclear Iran Prevention Act of 2013 (H.R. 850), introduced February 27, 2013 by Representative Edward Royce (R-CA) and unanimously approved by the House Foreign Affairs Committee on May 22, 2013; the Iran Export Embargo Act (S. 1001), introduced May 21, 2013 by Senator John Cornyn (R-TX); the Iran Sanctions Implementation Act of 2013 (S. 965), introduced May 15, 2013 by Senator James Inhofe (R-OK); the Iran Sanctions Loophole Elimination Act (S. 892), introduced May 8, 2013 by Senator Mark Kirk (R-IL); and the Iran, North Korea, and Syria Nonproliferation Accountability Act of 2013 (H.R. 893), introduced February 28, 2013 by Representative Ileana Ros-Lehtinen (R-FL).
4 The full text of Executive Order 13599 can be found here.
The full text of Executive Order 13622 can be found here.
"Treasury Targets Assets of Iranian Leadership" (June 4, 2013), supra.
Id.
General License D can be found here.  It authorizes the exportation to Iran of certain services, software, and hardware incident to personal communications.
9 The authors would like to acknowledge the contributions of Anne Marie Carson, a J.D. candidate at Georgetown University Law Center and summer associate in the Washington, D.C. office of Norton Rose Fulbright.