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New Iran Sanctions Force Foreign Companies to Choose Between Doing Business with the U.S. or Iran
New Iran Sanctions Force Foreign Companies to Choose Between Doing Business with the U.S. or Iran
V&E Export Controls and Economic Sanctions E-communication, July 2, 2010
On July 1, 2010, the President signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “Act”). The Act is significant in its extraterritorial effect. Although it applies to all persons, it is specifically designed to influence the conduct of foreign persons, including those that have no business with or in the United States. The Act retains existing sanctions available under the Iran Sanctions Act of 1996 (ISA) for investing $20 million or more in Iran’s ability to develop petroleum resources, and it expands the ISA to include other sanctionable conduct with respect to Iran’s petroleum resources.
First, the Act requires that sanctions be imposed on any person that knowingly exports refined petroleum products to Iran. Refined petroleum products are defined as diesel, gasoline, jet fuel (including naptha-type and kerosene-type jet fuel), and aviation gasoline.
Second, the Act requires that sanctions be imposed on any person that knowingly provides goods, services, technology, information, or other support to maintain or expand Iran’s domestic production of refined petroleum, including the construction, modernization, or repair of petroleum refineries.
Third, the Act requires that sanctions be imposed on any person that knowingly provides goods, services, technology, information, or other support that contributes to Iran’s ability to import refined petroleum products.
The latter prohibitions on providing goods, services, technology, information, or other support are not clearly defined and therefore have the potential to impact manufacturers, financial institutions, service providers, exporters, and other entities whose transactions could be deemed to contribute to the production or importation of refined petroleum products in Iran. Although underwriting, financing or brokering, and shipping of refined petroleum products to Iran are specifically identified as prohibited services in connection with the importation of refined petroleum products, companies will have to undertake an analysis in order to determine what other goods, services, technologies, or information could be deemed to “directly or significantly” contribute to Iran’s ability to produce or import refined petroleum products.
Sanctions will be triggered if the fair market value of the product, good, service, technology, information, or other support provided is $1 million, or $5 million in the aggregate over a 12-month period. A person is considered to “knowingly” participate in sanctioned conduct if the person has actual knowledge or should have known about the sanctioned activity.
In a marked shift from the status quo, U.S. companies will be liable for acts of their foreign subsidiaries in violation of the Act if they knew or should have known about the activities. Under the Iranian Transactions Regulations, foreign persons are not subject to sanctions and therefore it was not problematic for a U.S. parent to have knowledge of a foreign subsidiary’s activities with Iran, provided that the U.S. parent did not facilitate the activities. Although the restrictions in the current ISA on investment in Iran’s petroleum sector do apply to foreign persons, since those restrictions only relate to investments over $20 million, the impact on U.S. parent companies was minimal. The amended Act restricts a far broader range of activities and provides for sanctions against parent companies for the prohibited activities of their subsidiaries, if the parent knew or should have known about the activities, even if the parent did not participate in the activities. Sanctions will also be imposed on an affiliate or subsidiary if the affiliate or subsidiary “knowingly engaged” in the prohibited activities of its parent/affiliate.
Prohibitions Involving Financial Institutions
The Act imposes sanctions and penalties on foreign financial institutions that facilitate Iran’s attempts to acquire weapons of mass destruction or support international terrorism; facilitate activities of persons subject to UN sanctions; engage in money laundering in furtherance of these activities; facilitate efforts by Iranian financial institutions to carry out these activities; or facilitate financial transactions or services for the Iranian Revolutionary Guard Corps or its affiliates or any entities blocked by the Office of Foreign Assets Control.
U.S. financial institutions, including owned and controlled entities, will also be prohibited from transacting with foreign financial institutions that engage in transactions with specially designated Iranian banks or other designated parties. In addition, U.S. financial institutions will be required to perform certain audit activities, establish policies, or provide certifications that the foreign financial institution with which it is transacting is not engaging in such transactions.
Sanctions
The Act requires that the President impose three or more sanctions on persons that engage in prohibited conduct. The possible sanctions already available under current law are: a prohibition on Export-Import bank assistance; a prohibition on licenses to export to the sanctioned person; a prohibition on loans from U.S. financial persons in excess of $10 million; a prohibition on designation as a primary dealer or repository of government funds; a prohibition on U.S. government contracts; and a prohibition on imports from the sanctioned person.
In addition to these possible sanctions, the Act adds three new possible sanctions: (1) a prohibition on sanctioned entities from trading in U.S. currency; (2) a prohibition on U.S. financial institutions processing payments/credits in which the sanctioned entity has an interest; and (3) a prohibition on U.S. persons participating in any type of transaction involving property in which the sanctioned entity has an interest.
If the President invokes these sanctions, U.S. persons would be prohibited from selling, financing, trading, facilitating, or otherwise participating in transactions involving goods or services provided by the sanctioned entity. For firms that conduct a significant amount of business in the U.S. or rely on U.S. financial institutions in conducting their business, these sanctions present a powerful disincentive to doing business with Iran. As a result, many companies may have to choose between doing business with the U.S. or doing business with Iran.
New FAR Certification Requirement
Prospective government contractors will be impacted by a requirement in the Act to certify that neither they, nor any of the entities owned or controlled by them, have engaged in any sanctionable activities. The certifications will be required beginning 90 days after the date of enactment. False certifications can result in termination of the contract, debarment, or suspension from federal contracting for up to three years. Accordingly, this provision will be a powerful disincentive for foreign subsidiaries to engage in prohibited conduct.
Effective Date
The new sanctions may be imposed with respect to conduct that occurs on or after the date of enactment. As there is no specific carve out for activities that were ongoing as of the date of enactment, such activities may be subject to sanctions. In addition, although the President was not previously required to investigate sanctionable conduct, beginning one year after the date of enactment, the President will be required to initiate an investigation of a person if there is “credible evidence” that the person has engaged in prohibited conduct. This requirement is waived if the entity halts the prohibited activity.
Waivers
Although the Act provides the President with waiver authority, such waivers will only be available in very limited circumstances. First, the President may waive sanctions with respect to a person if the government that has jurisdiction over the person is cooperating in multilateral efforts to prevent Iran from obtaining weapons of mass destruction and conventional weapons. Second, the Act permits the President to waive sanctions if he notifies Congress that it is “necessary to the national interest” to do so.
Conclusion
This Act constitutes a significant enhancement of current U.S. sanctions against Iran and will have a major impact on foreign entities that do business with the U.S. and Iran. Because the sanctions that may be imposed on prohibited conduct are severe, foreign entities may be forced to decide between doing business with the U.S. and doing business with Iran.
For additional information concerning U.S. sanctions programs, please contact Vinson & Elkins lawyers Kathleen Little, David Johnson, Suzanne Reifman, or Amanda Dietrick. Visit our website to learn more about V&E's Export Controls and Economic Sanctions practice, or e-mail one of the practice contacts.
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