Both the petroleum industry and financial services industry need to closely examine their international operations in light of new Iranian sanctions that will be signed into law today by President Barack Obama. The Comprehensive Iran Sanctions, Accountability, and Divestment Act amends and extends sanctions already in place under the Iran Sanctions Act. The new sanctions are explicitly aimed not only at the Iranian government, but also at companies worldwide who operate in these industries and could help advance Iranian interests, even unintentionally. Importantly, the law also exposes companies to significant publicity risks, because of an increased emphasis on government investigations of potential sanctions violations.

Petroleum Industry Activities Subject to Sanction

The petroleum industry has been aware of the risks of operating in Iran for many years, but the new law greatly expands the activities that make companies subject to sanction. Three different activities are sanctionable:

First, companies may not make an investment of $20 million or more (or individual investments of at least $5 million that add up to $20 million over twelve months) that directly and significantly contributes to Iran’s ability to develop petroleum resources. This provision is similar to the previous sanctions regime, but greatly expands the definition of “petroleum resources” to cover petroleum, refined petroleum products, oil or liquefied natural gas (LNG), natural gas resources, oil or LNG tankers, or products used for oil or LNG pipelines.

Second, companies cannot supply goods, services, technology, information, or support that could directly and significantly facilitate Iran’s maintenance or development of its domestic refined petroleum production capacity. This provision is triggered by any single activity worth $1 million or more, or a number of activities that aggregate to at least $5 million over a twelve-month period. Importantly, the standard for imposition of sanctions in this area is relatively low: the requirement that the activity “could” directly and significantly contribute gives the government greater leeway to impose sanctions on these activities as compared to the investment-related sanctions above. Furthermore, even the mere maintenance of existing facilities could trigger sanctions. Refined petroleum products include diesel, gasoline, jet fuel, and aviation gasoline.

Last, companies may not export refined petroleum products themselves to Iran, or any goods, services, technology, information, or support that could enhance Iran’s ability to import refined petroleum products. This provision applies to any activity worth $1 million or more, or multiple activities worth at least $5 million together over a twelve-month period. Narrow exceptions are available for certain underwriting, insurance, or reinsurance activities, but only if the President determines that the person has exercised due diligence to ensure that no such activities provide support for Iran’s ability to import refined petroleum products.

The law requires the President to impose at least three sanctions from an expanded list of nine sanctions if he finds that a company has engaged in sanctionable activity. The new sanctions are in many respects much more significant and potentially crippling than the previous sanctions regime. While the older sanctions restricted the availability of Export-Import Bank financing, restricted some exports by sanctioned entities, and so on, the three new sanctions aim directly at restricting a sanctioned company’s ability to do business internationally. Under these sanctions, the government can prohibit:

• All foreign exchange transactions by the sanctioned entity subject to US jurisdiction;
• All transfers of credits or payments between institutions subject to US jurisdiction; and
• Any transaction involving property subject to US jurisdiction

It is Congress’s intent that the President choose these more draconian sanctions in the event any sanctionable activity takes place.

Publicity Risks for Companies Operating in the Petroleum Industry

While the new sanctions themselves are sufficient reason for any petroleum company to conduct ongoing reviews of its operations, the law’s provisions regarding government investigations and reports on current and past activities provide additional incentive to ensure that all activity is non-sanctionable. For that reason, many companies worldwide have already retreated from Iranian operations.

The President retains the ability to waive the application of sanctions under certain conditions (more restrictive than previous law), but it appears that the cost of retaining that right was a greatly expanded requirement for the President to report on credible information that a company might be undertaking activities subject to sanction. While the previous law only said that the President “should” investigate violations, under the new law the President “shall” investigate potential violations. The requirement to investigate is eased only somewhat in certain situations, such as when the President reports to Congress on his efforts to dissuade foreign persons from engaging in sanctionable activity. These provisions are extremely complex, with various waiver and certification requirements, but the clear goal of the law is to both put pressure on the President to report to Congress and put pressure on companies to comply or face governmental investigation and attendant publicity.

The law also requires the President to report within the next 90 days regarding all significant energy-related investments in Iran since January of 2006. The report would include the total value of any joint venture, investment, or partnership, and the percentage of the joint venture, investment, or partnership owned by any Iranian entity. This report must be updated every 180 days with any new activities or older activities recently discovered. Therefore, companies that have operated in Iran, even if those operations were legal under previous law, should anticipate that those operations may be made public in relatively short order.

New Requirements for Foreign and Domestic Financial Institutions

Following up on multilateral efforts through the Financial Action Task Force to fight terrorist financial networks and money laundering efforts, the new law imposes significant requirements on both domestic and foreign financial institutions. These include prohibitions on certain types of accounts that could facilitate Iranian efforts to acquire weapons of mass destruction and requirements that domestic financial institutions audit and certify that their foreign correspondent banks are not providing services to Iranian entities. Any connections to the Iranian Revolutionary Guard Corps are specifically identified as violations in these provisions.

Additionally, “financial institutions” is defined broadly, including entities typically considered to be financial institutions, such as banks or credit unions as well as currency exchanges and insurance companies. The specific definitions of “domestic financial institution” and “foreign financial institution” are to be determined by the Treasury Department through regulation.

There are three basic elements to the financial services-related restrictions in the bill, subject to further specification in future Treasury regulations.

• Foreign financial institutions that facilitate Iranian proliferation efforts, terrorist support activities, money laundering, or evasion of sanctions laws will be restricted in their ability to maintain correspondent accounts in the United States.
• Any transactions with the Revolutionary Guard (or any agents subject to blocking orders) by foreign owned or controlled affiliates of domestic financial institutions will subject the domestic institutions to penalties of $250,000 or twice the value of the transaction, whichever is greater. This exposes domestic institutions to direct sanction based on activities of their foreign affiliates. These penalties apply if the domestic institution knew or should have known about the transactions.
• Domestic financial institutions maintaining accounts for foreign financial institutions must undertake significant investigation of those foreign institutions. They must audit any activities that may help Iranian terrorist, proliferation, or money laundering efforts; report to the Treasury Department regarding any questionable transaction; certify that, to the best of the domestic entity’s knowledge, the foreign institution is not knowingly engaging in forbidden activity; and establish due diligence procedures to ensure ongoing compliance by the foreign institution.

Taken together, these provisions effectively require domestic institutions to investigate their foreign partners in great detail before continuing to provide services to those banks. Domestic institutions have affirmative obligations to find out what their foreign counterparts are doing that might violate these provisions. In this way, the government can actively use US banks to help shut down Iranian access to the international banking system in a way that had not been fully possible under existing regimes.

The provisions of the new Iran sanctions are quite complex, and many details will remain somewhat unclear until the Treasury Department promulgates implementing regulations. If you have further questions about the issues raised in this alert, please contact the Arent Fox attorney you work with or a member of Arent Fox’s International Trade practice group.

Michael L. Burton
burton.michael@arentfox.com
202.857.6083 DIRECT

Jeff Lord
lord.jeff@arentfox.com
202.857.6038 DIRECT