International Trade Update

President Obama Signs New Iran Sanctions Law Targeting the Petroleum and Financial Sectors

On July 1, 2010, President Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, H.R. 2194 (the “Act”). The Act, which follows recent United Nations sanctions against Iran, further extends the scope of the comprehensive U.S. embargo against Iran and comes in response to Iran’s rejection of diplomatic efforts to address its nuclear program.

The Act imposes a wide range of sanctions measures, but is aimed particularly at restricting the activities of companies that support the Iranian petroleum industry and companies that provide financial services to Iran. To that end, the Act targets not only U.S. companies, but also foreign companies, involved in these sectors. In light of the significant changes under this new law, it is important that all companies with dealings in Iran, especially those in the energy and financial industries, carefully examine the Act and any subsequent implementing regulations or Presidential directives in considering how their operations may be affected.

I. New Sanctions Impacting the Petroleum Industry

The Act amends the Iran Sanctions Act of 1996 (the “ISA”), which authorized the President to sanction foreign companies that make large investments in the Iranian petroleum industry. The Act strengthens the sanctions provided for under the ISA in several key ways:

First, the Act significantly expands the activities that are subject to sanctions under the ISA to now include:

• knowingly making “investments” of $20 million or more (or making separate “investments” of $5 million or more that total $20 million or more over twelve months) that directly and significantly contribute to Iran’s ability to develop “petroleum resources,” including petroleum, refined petroleum products, oil or liquefied natural gas. Moreover, the term “investment” now includes the entry into, performance of, or financing of a contract to sell or purchase goods, services, or technology;
  
• knowingly providing Iran with goods, services, technology or other support valued at $1 million or more (or with an aggregate value of $5 million or more over twelve months) that could directly and significantly facilitate the maintenance or expansion of Iran’s production of “refined petroleum.” The term “refined petroleum” includes diesel, gasoline, jet fuel and aviation gasoline; and
  
• knowingly providing Iran with “refined petroleum” products or any goods, services, technology or other support that could enhance its ability to import “refined petroleum” products. This sanction applies to any activities valued at $1 million or more or with an aggregate value of $5 million or more over twelve months.

A party will be deemed to act “knowingly” under the Act where it “has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”

The Act also increases the sanctions available in the event of a violation of the amended ISA. In addition to the six sanctions already provided in the ISA, the Act authorizes three new sanctions that deny a violating party access to (1) foreign exchange in the U.S., (2) the U.S. banking system or (3) transactions involving property subject to U.S. jurisdiction. Under the Act, the President is now required to select three of the available sanctions to punish prohibited activities.

Third, and significantly, the Act expands the potential for liability across the corporate structure:

• a party will now be subject to sanctions for the conduct of an entity that it owns or controls if the party knows or should know that the entity is engaging in activity sanctioned under the amended ISA; and
  
• an affiliate or subsidiary of a party carrying out activity sanctioned under the amended ISA will now be subject to sanctions if the affiliate or subsidiary was knowingly involved in the activity.

Fourth, the Act provides for increased investigation into and publicity of companies’ investments in the Iranian petroleum sector. Although the President previously had discretion to investigate potential ISA violations, the President must now initiate an investigation upon receipt of credible information that a party engaged in sanctioned activity. Reports of all such investigations must be submitted to Congress. Moreover, the Act now requires that the President issue regular reports regarding significant energy sector investments in Iran.

The Act does provide the President with special authority to waive on a case-by-case basis the application of petroleum-related sanctions provisions with respect to parties from nations that cooperate in efforts to constrain Iran’s nuclear program. As noted by the White House, this provision was included “out of recognition for the key role such a country plays in ongoing multilateral efforts to constrain Iran.” The President must notify Congress of any such waivers, however, and Republican leadership in Congress has sent President Obama a letter imploring against the exercise of this authority.

II. New Sanctions Impacting Financial Institutions

The Act also imposes substantial new obligations on U.S. and foreign financial institutions in an effort to combat the financing of weapons of mass destruction in Iran. Subject to further clarification by future Department of the Treasury regulations, the Act provides that:

• U.S. financial institutions are prohibited from maintaining correspondent accounts for foreign financial institutions that facilitate Iran’s acquisition of weapons of mass destruction, support for terrorism, and similar conduct;
  
• any person owned or controlled by a U.S. financial institution is prohibited from knowingly engaging in transactions with or benefitting Iran’s Revolutionary Guard; and
  
• U.S. financial institutions that maintain correspondent accounts for foreign financial institutions must undertake significant auditing and oversight of those foreign institutions and report the results of such activity to the Department of the Treasury.

Thus, to avoid violating the law, U.S. financial institutions are now required to investigate thoroughly their foreign partners prior to providing or continuing services. Through these provisions, the U.S. government is attempting to use U.S. financial institutions as mechanisms for denying Iran access to the entire international banking system.

III. Additional Sanctions Imposed under the Act

Although the Act focuses on the petroleum and financial services sectors, it expands sanctions against Iran in several other important ways. Most notably, the Act also:

• eliminates exceptions for importing certain luxury items and other goods that were previously exempt from the embargo against Iran;
  
• restricts the export of items that could contribute to Iran’s weapons program, defense capabilities, or support of terrorism to designated third countries that allow the diversion of U.S. items to Iran;
  
• prevents foreign companies that provide Iran with surveillance and jamming technology from obtaining U.S. government procurement contracts; and
  
• provides procedures for local governments and certain other entities to divest of their holdings in companies involved in Iran’s energy sector.