U.S. Government Expands Iran Sanctions

I. Introduction

On July 1, 2010, President Barack Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”).[1] The law, which was passed by the U.S. Senate (by a vote of 99-0) and the U.S. House of Representatives (by a vote of 408-8) on June 24, 2010, expands the range of sanctions that may be imposed pursuant to the Iran Sanctions Act of 1996 (the “ISA”).[2]

The existing ISA allows the President to impose sanctions on certain non-U.S. companies dealing with Iran. Nevertheless, the U.S. government has exercised extensive waiver authority and has never imposed any sanctions pursuant to the ISA. That may change because CISADA both expands the scope of the sanctions and contains measures designed to limit the President’s discretion to issue waivers. Overwhelming bi-partisan U.S. political support for CISADA may also increase the probability that President Obama may take aggressive enforcement actions. In these circumstances, there could be substantial consequences, especially for non-U.S. entities and individuals that conduct business in and with Iran.

II. Summary of Selected Provisions

The CISADA expands the scope of conduct subject to sanctions to include any of the following activities:

1) Providing goods, services, technology, information or support with a fair market value of $1 million or more, or with an aggregate fair market value of $5 million or more during a 12-month period, that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products;

2) Providing refined petroleum products (i.e, diesel, gasoline, jet fuel, and aviation gasoline) in amounts set forth in point (1) above; or

3) Sell, lease or provide to Iran goods, services, technology, information or support in amounts set forth in point (1) above, that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products. Subject to certain exceptions, sanctionable conduct includes (i) underwriting, insuring, and/or reinsuring the sale, lease, or provision of refined petroleum products to Iran (see exception below) (ii) financing or brokering such sale, lease, or provision, or (iii) providing ships or shipping services to deliver refined petroleum products to Iran.

Under the ISA, sanctions could be imposed only where the conduct was “knowing,” which was defined to mean having actual knowledge. Under CISADA, the standard is expanded by defining the term “knowingly” to mean “that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”[6] Moreover,the more expansive knowledge standard applies to corporate parents, subsidiaries, or other affiliates of a company whose actions are subject to sanction. (The CISADA maintains the existing ISA provision establishing liability for any successor of a company whose actions are subject to sanction.) For example, a parent company can face penalties, even if not involved in conduct subject to CISADA, if the parent company has “actual knowledge or should have known” that its subsidiary was engaged in activities subject to sanction.[7] In addition, an affiliate of a company engaged in activities subject to CISADA can also be penalized if it “knowingly engaged” in activities subject to sanction.[8]

B. Additional sanctions added to the list

Like the ISA, the CISADA provides a menu of sanctions to be imposed on persons or entities found to be engaging in sanctionable conduct. The ISA required imposition of two sanctions out of a list of six. Under the new law, unless a waiver is issued, the President must impose at least three sanctions out of an expanded list of nine sanctions. The nine possible sanctions are outlined below (the newly added sanctions are listed as items 7 – 9 ):

1) Deny any guarantee, insurance, or extension of credit from the U.S. Export-Import Bank to the sanctioned person;

2) Deny licenses for the export of U.S. military or militarily useful technology;

3) Prohibit U.S. bank loans exceeding $10 million in a single year;

4) If the entity is a financial institution, prohibit its service as a primary dealer in U.S. government bonds, and/or on its serving as a repository for U.S. government funds (each counts as one sanction);

5) Prohibit U.S. government procurement from the entity;

6) Restrict imports from the entity;

7) Prohibit transactions in foreign exchange subject to U.S. jurisdiction in which the sanctioned person has any interest;

8) Prohibit transfers of credit or payments through financial institutions to the extent that such transfers or payments are subject to U.S. jurisdiction and involve any interest of the sanctioned person; and

9) Prohibit the sanctioned person from acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting of any property subject to U.S. jurisdiction and with respect to which the sanctioned person has any interest, or dealing in or exercising any right, power or privilege with respect to such property, or conducting any transaction involving such property.

C. More mandatory investigations required

The ISA provides that the President “should” launch an investigation upon receipt of credible evidence of conduct subject to sanction. By contrast, under CISADA, the President “shall” immediately investigate a person upon receipt of credible information that the person is involved in conduct subject to sanction unless he (i) certifies in writing to Congress that the party that would be investigated has stopped engaging in or has taken verifiable steps towards stopping conduct subject to sanction, and (ii) has received assurances that the target will not engage in such conduct in the future.[9]

Within 180 days of commencing an investigation, the President must determine if the subject person is involved in sanctionable activity and notify Congress of the basis of that determination. There is no guidance in the statute about what an investigation would entail, including what agency of the U.S. government would conduct the investigation, and whether parties subject to investigation would be permitted to respond.

The statute requires the President to issue periodic reports describing diplomatic efforts to dissuade non-U.S. persons from engaging in sanctionable activity and listing each investigation conducted during the reporting period.

D. Waivers and exceptions

Following an investigation, the President may invoke exceptions and waivers in certain circumstances including the following:

1) Underwriting/insurance/reinsurance sanctions: due diligence safe harbor. If a person is under investigation for providing underwriting, insurance, or reinsurance support to Iran’s petroleum importing capability, the President may waive sanctions if that person has exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that it does not enter into contracts covering the provision of goods, technology or services that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products. To be eligible for this waiver, the due diligence measures must include written procedures and controls and the appointment of a compliance official to monitor and enforce those procedures and controls.

2) Cooperating country waiver. Sanctions against a specific party may be waived for up to 12 months where the President certifies that the government exercising primary jurisdiction over the person under investigation is closely cooperating with the United States in multilateral efforts to prevent Iran from: (1) acquiring or developing chemical, biological or nuclear weapons or related technologies; or (2) acquiring or developing destabilizing numbers and types of advanced conventional weapons.[10] Further 12-month waivers also are possible.

3) Presidential waiver. Following an investigation, the President may waive sanctions if he establishes that the waiver is “necessary” to U.S. national security interests. Under the ISA, the President was authorized to waive imposition of sanctions (even without an investigation) when the waiver was “important” to U.S. national security interests.

4) Delay of sanctions. The President may delay the imposition of sanctions if he engages in consultations with the government with primary jurisdiction over the sanctioned party to take steps to terminate the sanctionable activity.

E. Additional new sanctions on financial institutions

The CISADA imposes new sanctions on banks (including non-U.S. banks) engaging in or facilitating transactions involving certain Iranian entities and activities. Non-U.S. banks determined to support or service the Iranian Revolutionary Guard (the “IRG”) and its affiliates, or facilitate transactions relating to the Iranian government’s efforts to acquire weapons of mass destruction or its support of terrorism may be prohibited or severely restricted from participating in the U.S. banking system. For example, such banks may be restricted when seeking to open or maintain a correspondent account or payable-through account in a U.S. bank.

Depending on how the U.S. Department of Treasury implements the CISADA, U.S. banks that maintain accounts for non-U.S. banks may be required to review those non-U.S. banks’ activities to certify that such non-U.S. banks are not (i) performing services for the IRG or related entities, or (ii) facilitating transactions related to Iranian efforts to acquire weapons of mass destruction or support terrorist activities. Reports may also need to be submitted to the U.S. Department of Treasury about steps U.S. banks have taken to protect against transactions with non-U.S. banks involved in activities under (i) or (ii) above. 

In addition, non-U.S. entities owned or controlled by a U.S. financial institution are prohibited from engaging in transactions with or benefitting the IRG or any of its affiliates whose property or interests in property are blocked. Importantly, if the non-U.S. bank subject to sanctions is a subsidiary of a U.S. bank, under CISADA, civil penalties under the International Emergency Economic Powers Act may be imposed against the U.S. parent if it knew or should have known about its foreign subsidiary’s sanctionable activities.

H. Restrictions on transfers of nuclear goods and technology

The CISADA expands existing U.S. sanctions on persons who aid Iran in developing weapons of mass destruction or other military capabilities. Under CISADA, no U.S. license may be issued for the export of, and no approval may be given for transfer or retransfer of, nuclear materials, components, facilities, or other goods, services, or technology to any country that has primary jurisdiction over a person already subject to sanction due to past dealings in the acquisition or development of nuclear weapons or related technology, missiles, or advanced conventional weapons.[11]

The President may waive this sanction, however, if he notifies Congress that (i) the government of the country does not know or have reason to know of the activity, or (ii) the country is taking all reasonable steps to prevent a recurrence and to penalize the sanctioned person. The President also may individually approve licenses for export if he determines it is vital to the national interest, and reports to Congress prior to the approval with justification for the determination.

J. State and local divestment rights

The CISADA specifically authorizes state and local governments to divest any public funds (e.g., state or local pension funds) from or prohibit investment in the following types of entities:[12]

1) Persons found to have invested $20 million or more in Iran’s energy sector (including providing oil or oil tankers to Iran, or products used to construct or maintain pipelines for transporting oil for Iran’s energy sector), or

2) Financial institutions found to have extended $20 million or more in credit to a person for 45 days or more for investment in Iran’s energy sector, following 90 days notice and opportunity for a hearing.[13]

K. New sanctions for Iranian human rights violations

Under CISADA, the President is required to prepare a list of Iranian government and other officials who have been responsible for serious human rights abuses in Iran since June 12, 2009. Individuals on the list will be ineligible for U.S. visas, their assets subject to U.S. jurisdiction will be frozen, and their financial transactions and imports within U.S. jurisdiction will be restricted.

In addition, like the ITR, CISADA allows the government to issue licenses authorizing exports to Iran of certain items, including food, medicine, humanitarian assistance, aircraft parts and components to ensure safety of flight, information and informational materials, and certain internet-related services, hardware, software, and technology. The CISADA also authorizes licenses for exports to Iran that are determined by the President to be in the national interest of the United States.

Moreover, the statute specifically prohibits persons from violating or causing a violation of the CISADA, and subjects such persons to civil penalties of up to $250,000 per transaction or twice the amount of the transaction, whichever is greater.[14]

III. Conclusion

The Comprehensive Iran Sanctions, Accountability and Divestment Act substantially expands the extraterritorial scope of U.S. sanctions. For example, non-U.S. companies doing business in Iran may be penalized even if they do not have operations or personnel in the United States. The law also increases the likelihood that the President will investigate and sanction companies engaged in prohibited activities.[15]

It remains to be seen how the new law will be applied in practice. In particular, the U.S. Department of Treasury is required to issue regulations within 90 days. The content of those regulations will substantially affect the way the law is implemented. Companies conducting business in or with Iran nonetheless should act now to analyze the effects the law may have on their activities and take appropriate steps to avoid sanctions or penalties under the law.

This article was prepared by J. Scott Maberry (smaberry@fulbright.com or 202 662 4693), Thaddeus R. McBride (tmcbride@fulbright.com or 202 662 0287), Stefan Reisinger (sreisinger@fulbright.com or 202 662 4698) and Gwen S. Green (ggreen@fulbright.com or 202 662 0437). Scott is co-head of Fulbright’s International Trade Practice Group. Thad, Stefan, and Gwen are also attorneys in that Group.

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[1] Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, H.R. 2194, 111^th Cong. (2^nd Sess. 2010) (hereinafter referred to as “CISADA”).