U.S. Trade Sanctions Expanded For Parties Dealing With Iran

Iran Freedom Support Act Signed Into Law

On September 30, 2006, President Bush signed into law the Iran Freedom Support Act (“IFSA”) which revises and replaces the Iran and Libya Sanctions Act of 1996 (“ILSA”). With a view toward placing continued pressure on Iran and its means of funding and developing weapons of mass destruction, the new law extends and expands U.S. trade sanctions on parties dealing with Iran.

To begin with, IFSA codifies existing sanctions on Iran (i.e. The Iranian Transaction Regulations administered by OFAC, 31 CFR Part 560). Instead of acting unilaterally under the International Emergency Economic Powers Act (“IEEPA”) as heretofore, the President now may only terminate these sanctions with 15 days prior notice to Congress. However, in “exigent circumstances,” the President may immediately terminate the sanctions and notify Congress within 3 business days of such action. Though the meaning of “exigent circumstances” is certainly not clear, IFSA still grants the President flexibility to terminate the existing sanctions, but now requires that an explanation be provided to Congress.

In addition to codifying the ITR, the new law revises ILSA in several ways. IFSA removes the restrictions that had been in place on Libya under ILSA, because Libya's designation as a state sponsor of terrorism has recently been rescinded due to its cooperation in eliminating weapons of mass destruction.

Further, IFSA introduces new trade sanctions on companies assisting Iran in the development of weapons of mass destruction or other military capabilities. The law states that the President shall impose sanctions on any person that has exported, transferred or otherwise provided to Iran any goods, services, technology, or other items knowing that the provision of such goods, services, technology, or other items would contribute materially to the ability of Iran to (1) acquire or develop chemical, biological, or nuclear weapons or related technologies; or (2) acquire or develop destabilizing numbers and types of advanced conventional weapons. Once a determination is made that a violation has occurred, the President must select which two or more of the six possible sanctions to impose. These possible sanctions--which are the same as are applicable to investment in the Iranian petroleum industry under ILSA--include:

• withholding U.S. Export-Import Bank financing assistance in connection with the export of any goods or services to the sanctioned person;
• denying export licenses for goods, services and technologies to the sanctioned person;
• prohibiting loans from U.S. financial services to the sanctioned person in excess of $10,000,000 in a 12-month period;
• where the sanctioned person is a financial institution, prohibiting the designation of such person as a primary dealer in U.S. debt instruments or allowing such person to serve as an agent of the U.S. government or as a repository for U.S. government funds;
• prohibiting the U.S. government from procuring goods or services from the sanctioned person; and
• imposing any other sanctions to restrict imports available under the International Emergency Economic Powers Act.

These sanctions are to apply with respect to actions taken on or after June 6, 2006.

In addition, IFSA extends the ILSA sanctions against investment in Iran's petroleum industry but states that the President “should” (note the word “must” is not used) initiate investigations into the possible imposition of sanctions upon receipt of “credible information” that a person is engaging in such investment activity in Iran. And Congress has also imposed a deadline for such investigations if initiated by the President. Here, the term investment means the entry into a contract that includes responsibility for the development of petroleum resources, the purchase of a share of ownership in that development, or the entry into a contract providing for royalties or profits in that development.

Although Congress suggests that the President investigate potential investment violations, the President still retains the authority he had under ILSA to waive the need for investigation and imposition of sanctions for a period of 6 months if he certifies to Congress that the waiver is “vital to the national security interests of the U.S.” This modification of the waiver provision raises the threshold for the President to justify exercising such waivers, but does not eliminate the ability to do so. Once the President concludes that a waiver is appropriate, he may renew the waiver for subsequent periods of 6 months each.

IFSA does not call on the President to institute investigations into potential violations with respect to weapons of mass destruction. Therefore, it would seem that the President will have broader discretion to abstain from initiating these investigations and determining whether the provisions aimed at weapons of mass destruction have been violated.

If the President does determine that a person or entity has made an investment in Iran's petroleum industry or contributed to Iran's ability to develop weapons of mass destruction, the President may still waive the imposition of sanctions when such waiver is deemed important to the national interest of the U.S. and the President has reported as much to the appropriate congressional committees. The new law has not altered this provision which had been in effect under ILSA.

Finally, IFSA extends the effectiveness of these sanctions on Iran until December 31, 2011.