On Saturday, March 24, 2007, the UN Security Council adopted Resolution 1747 against Iran in response to Iran’s failure to suspend its program to enrich uranium. The resolution imposes a ban on exports of arms from Iran, an asset freeze on additional Iranian persons and entities, and a prohibition on new loans to Iran.

In adopting the resolution, the Security Council cited Iran’s failure to comply with previous resolutions calling for Iran to cooperate with the International Atomic Energy Agency’s (IAEA) efforts to determine the extent of its nuclear program. According to press reports, the embargo on Iranian weapons exports – such as small arms and explosives – is also an attempt to stop Iran from smuggling to militant groups like Hezbollah in Lebanon and to prevent Iranian arms from reaching Iraq. Member states (States) must report to the Council within 60 days on their progress in implementing the sanctions.

Resolution 1747 is the Security Council’s third resolution on Iran in less than one year. On July 31, 2006, it adopted Resolution 1696, which demanded that Iran suspend all enrichment-related and reprocessing activities, including research and development, to be verified by the IAEA.

In addition, on December 23, 2006, the Security Council adopted Resolution 1737, aimed at eliminating exports to Iran of items that could contribute to Iran’s enrichment-related activities, nuclear fuel reprocessing or heavy water-related activities as well as to the development of nuclear weapon delivery systems. Among the items included in Resolution 1737 were certain “dual use” items – items with both a military and civil application, such as certain types of machine tools; certain alloys and materials; dimensional inspection machines; computers, electronic assemblies and components; certain types of radars and sensors; navigation and direction finding equipment; and modular pulse generating equipment.

In light of current events, such as Iran’s detention of 15 British marines, it is highly likely that the UN and/or the United States will impose additional sanctions on Iran in the near future.

Resolution 1747

The Security Council resolution requires member states to take the following actions:

• Restrain the supply, sale or transfer directly or indirectly from their territories or by their nationals or using their flag vessels or aircraft of military items to Iran. These items include battle tanks, armored combat vehicles, large-caliber artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems. States must also restrain the provision to Iran of any technical assistance or training, financial assistance, investment, brokering or other services, and the transfer of financial resources or services related to the supply, sale, transfer, manufacture or use of such items in order to prevent a destabilizing accumulation of arms.
  
• Restrain from entering into, or allowing financial institutions to enter into, new commitments for grants, financial assistance and concessional loans to the government of Iran, except for humanitarian and development purposes.
  
• Notify the UN Security Council of the entry into or transit through their territories of certain individuals designated by the Security Council as being engaged in, directly associated with, or providing support for Iran’s proliferation of sensitive nuclear activities or for the development of nuclear weapon delivery systems. Those on the list are entities or persons involved in nuclear or ballistic missile activities or entities or persons associated with the Iranian Revolutionary Guard Corps entities.
  
• Freeze assets of the same designated persons. Specifically, the resolutions require that funds, other financial assets and economic resources that are owned or controlled by persons or entities designated by the Security Council or by the Committee as being engaged in, directly associated with or providing support for Iran’s proliferation sensitive nuclear activities or the development of nuclear weapon delivery systems, or by persons or entities acting on their behalf or at their direction, or by entities owned or controlled by them, including through illicit means. (The asset freeze does not apply to funds that States have determined to be necessary for basic expenses, including payment for foodstuffs, rent or mortgage, medicines and medical treatment.)

US Government Putting Informal Pressure on Companies to Stop Doing Business with Iran

In addition to formal sanctions, the US government is exerting pressure on US and international businesses in an effort to persuade them to refrain from doing business in Iran. The impetus for this initiative stems in part from the new Democratic Congress, which appears to be moving to impose mandatory sanctions on Iran. In particular, Democrats in Congress are frustrated that the Bush administration has waived the Iran and Libya Sanctions Act of 1996 and its successor statute, the Iran Freedom Support Act, as it applies to foreign companies doing business in Iran. Democrats prefer that the administration enforce sanctions rather than resort to military action.

According to a report in The New York Times on March 20, 2007, the Bush administration has been warning energy companies – including Shell, Repsol and SKS (a Malaysian energy company) – as well as the governments of China, India, Pakistan and Malaysia that they could be subject to penalties if they pursue energy deals with Iran. This has jeopardized a number of significant deals, including a $10 billion dollar project by Royal Dutch Shell as well as a deal by Repsol, a Spanish energy company. American companies doing business with Iran through offshore subsidiaries (such as General Electric Co. and Xerox) are also facing increased financial and political pressure to stop doing business in Iran, according to a Wall Street Journal report on March 27, 2007.

In addition, on March 26, The Washington Post reported that more than 40 major international banks and financial institutions, many of them in Europe and Asia, have either cut off or cut back business with the Iranian government or private sector because of a campaign launched by the Treasury and State departments last September. US government officials have also educated banks and financial institutions about Iran’s use of dummy companies and deceptive practices to conduct illicit business activities, such as keeping the name of “Iran” or the originating bank in Iran off of transactions.

The US government hopes these steps will hinder Iran’s petroleum industry in particular and convey the message to the Iranian government that it will suffer financial hardship if it continues with its nuclear program. The Washington Post reports that the Bush administration has warned companies about the dangers of investing in Iran’s oil and gas sector specifically.

Please do not hesitate to contact Arent Fox’s International Practice if you would like additional information on this issue.