The U.S. Government, led by the Department of Treasury, is geared up for swift implementation and increased enforcement of global economic sanctions against the Iranian regime, as the second and final deadline for reimposition of economic sanctions on Iran occurs on November 5, 2018.
Reimposition of Additional Sanctions by OFAC
As Venable flagged at the time, in May 2018 the Trump administration announced a withdrawal of the United States from the Joint Comprehensive Plan of Action (JCPOA), the 2015 treaty between the United States and other "P5+1" countries and Iran, which was intended to ensure Iran's nuclear program would be pursued only for peaceful ends. As part of its withdrawal from the JCPOA, the United States is reinstating all primary sanctions and secondary sanctions against Iran that had been waived as part of the agreement.
On August 6, 2018, President Trump issued Executive Order 13846, which outlined the reimposition of sanctions on Iran that had been lifted under the JCPOA. The first round of reimposed sanctions became effective on August 7, 2018, namely, 90 days following the administration's announcement of a U.S. withdrawal.
The second and final set of reimposed sanctions becomes effective on November 5, 2018, 180 days after the withdrawal announcement. This second round of sanctions now restricts, among other things, sales of oil and petrochemical products from Iran, by imposing menu-based sanctions against any persons that have knowingly engaged in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum, petroleum products, or petrochemical products from Iran. Iran's oil exports, which were valued at $36 billion in 2016, are expected to drop, perhaps severely, this year with the reinstatement of the U.S. sanctions.
Beginning November 5, 2018, sanctions on Iran's port operators, and shipping and shipbuilding sectors, including on Islamic Republic of Iran Shipping Lines, South Shipping Line Iran, or their affiliates, are also reimplemented. In addition, as of Monday, November 5, sanctions are renewed for the provision of underwriting services, insurance, or reinsurance and with respect to Iran's energy sector.
In addition to the reimposition of previous sanctions, the current administration is also reportedly looking to impose further economic sanctions, which have not yet been announced. Ultimately the administration has latitude in how it chooses to interpret and enforce the various primary and secondary sanctions authorities. Information regarding secondary sanctions and the administration's interpretation of key statutory provisions and terms can be found on OFAC's Iran Sanctions FAQs. These FAQs are being updated on November 5th and may be further updated in the coming months to reflect any changes to the administration's interpretation and enforcement of secondary sanctions, which may result in a more expansive and stricter application of the sanctions than what was imposed by the previous administration (see, for instance, FAQ #601).
Increased Designations by OFAC
In mid-October 2018, the U.S. Treasury, acting through the Office of Foreign Assets Control (OFAC), issued sanctions for a vast financial network of financial institutions and intermediary companies in sectors as diverse as steel and tractors, known collectively as the Basji Cooperative Foundation (Bonyad Taavon Basji). In describing the basis for the new designations, OFAC pointed to methods in which Basji supported the Islamic Revolutionary Corp-Qods Force, which funds domestic and regional violence, including through the recruitment of child soldiers. Entities designated by OFAC included those from a range of different industries, including Mehr Eqtesad Bank, Bank Mellat, Technotar Engineering Company, Iran Tractor Manufacturing Company, Esfehan's Mobarakeh Steel Company, and many others.
As part of the re-imposition of U.S. sanctions on November 5th, over 700 persons are being designated and added to the SDN List, including but not limited to persons that had been removed from the SDN List in connection with the JCPOA. We expect to see additional designations of Iranian entities or Iranian-affiliated entities in the future, so general counsel, compliance officers, and other interested company employees are advised to maintain a watchful eye and conduct regular screening against the current lists issued by OFAC and other government entities.
New Iran Action Group at the State Department
In addition to increased activity by the Department of Treasury, the Department of State has also reported that Iran is a renewed policy and enforcement priority. Indeed, in August 2018, the State Department announced the formation of an Iran Action Group (IAG), led by a newly created position of Special Representative for Iran, who will direct, review, and coordinate the State Department's Iran-related activity. This increased focus and collaboration will likely translate into an increase in enforcement as well.
Renewed Warnings from FinCEN for U.S. Banks
On the financial side, there have also been cautionary pronouncements. On October 11, 2018, the U.S. Treasury, acting through the Financial Crimes Enforcement Network (FinCEN), cautioned U.S. banks to keep sharp watch for Iranian schemes to evade U.S. sanctions rules. FinCEN issued an Advisory (FIN-2018-A006) to U.S. banks and other money services businesses (MSBs) with guidance on detecting and thwarting illicit financial transactions related to Iran. In the advisory, FinCEN emphasized that the Iranian regime often uses front and shell companies to exploit financial institutions, such as third-country exchange houses. The agency also noted that Iran has used unlawful and subversive means to gain goods and services relating to currency counterfeiting, dual-use equipment, and commercial aviation. The advisory also contains a list of red flags for companies to use to identify potentially deceptive behaviors by the Iranian regime.
Given the Iranian regime's use of precious metals in the past to evade sanctions and access the global financial system, FinCEN also warned that Iran may seek to use virtual currencies in a similar manner in the future, noting that Iran's use of virtual currency since 2013 has included at least $3.8 million in annual bitcoin-denominated transactions—a small amount but one expected to grow as virtual currencies become more common. Whether or not a transaction is denominated in virtual currency, it bears keeping in mind that U.S. banks and other financial institutions have anti-money laundering and export controls compliance obligations.
Stricter Rules for Foreign Financial Institutions
These renewed rules do not apply just to U.S. banks, financial institutions, and MSBs. OFAC will prohibit or impose strict conditions on the maintenance in the United States of a correspondent account or a payable-through account by foreign financial institutions (FFIs) that violate the renewed Iran sanctions. In particular, on or after November 5, 2018, FFIs may be subject to such penalties for knowingly conducting or facilitating significant financial transactions relating to an Iranian SDN, the National Iranian Oil Company (NIOC), or the Naftiran Intertrade Company (NICO) (with some exceptions), or for the purchase, acquisition, sale, transport, or marketing of petroleum, petroleum products, or petrochemical products from Iran, as noted above.
In addition, FFIs and other persons that knowingly conduct significant transactions for or with certain Iranian persons risk being made subject to U.S. sanctions, pursuant to the Iranian Financial Sanctions Regulations and multiple statutory and executive authorities. Moreover, FFIs and other foreign persons that provide material support for, or goods or services in support of, the Central Bank of Iran (or NIOC or NICO), or the purchase or acquisition of U.S. bank notes or previous metals by the Government of Iran, are also subject to U.S. blocking sanctions.
The renewed sanctions will also now apply to the provision of specialized financial messaging services to the CBI and Iranian financial institutions.
Pushback from the EU
In contrast to these regulatory changes in the United States, the EU has pushed back against U.S. efforts to ratchet up financial pressure on the Iranian regime. As Venable alerted international firms in July 2018, the EU has imposed a blocking statute to block the extraterritorial effects of Iranian sanctions against EU companies. In addition, last month the United Kingdom, Germany, and France announced an agreement, supported by Russia and China, to set up a special-purpose vehicle to finance payments for Iranian imports and exports. The special-purpose vehicle will involve the creation of a legal entity to facilitate legitimate financial transactions with Iran. The EU countries have stated that they remain committed to the JCPOA as long as Iran keeps its side of the agreement – further complicating the enforcement picture and increasing the compliance work for companies on both sides of the Atlantic.
In short, global companies, take warning: The full weight of the U.S. Treasury Department and other U.S. government agencies may be brought to bear on any compliance missteps when those missteps involve Iran. If you would like further information about the newly reinstated Iranian sanctions and their potential impact on your business, please contact Venable's International Trade Group.