Effective July 1, 2013: Executive Order 13645, Implementing The Iran Freedom And Counter-Proliferation Act Of 2012 And Authorizing New Iran Sanctions - Export Controls & Trade & Investment Sanctions

Effective July 1, 2013, the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) and Executive Order 13645 (EO) introduce extensive sanctions with respect to Iran. The IFCA, on which we have previously advised, imposes sanctions on the energy, shipping, and shipbuilding sectors of Iran. The EO, issued by President Obama on June 3, 2013, implements certain sanctions set forth in the IFCA and imposes additional sanctions with respect to Iran. On the same day that President Obama issued the EO, the US Treasury Department, Office of Foreign Assets Control (OFAC) issued guidance in the form of Frequently Asked Questions (FAQ Guidance) that sets forth interpretations of certain provisions of the IFCA and the EO. The US State Department has also issued a Fact Sheet.

Summary of IFCA Implementation and New Sanctions

The EO implements sanctions set forth in the IFCA relating to:

the provision of material support to:
- Iranian persons listed as Specially Designated Nationals (SDNs);
- members of the Iranian energy, shipping, and shipbuilding sectors; and
- Iranian port operators;
the facilitation of significant financial transactions with Iranian SDNs;
the supply to Iran of significant goods and services used in connection with the Iranian energy, shipping, and shipbuilding sectors;
the supply to Iran of precious metals, graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes;
the provision of insurance, reinsurance, and underwriting services for any activity for which sanctions have been imposed under US law; and
the diversion of goods intended for the people of Iran.

In addition, the EO expands existing Iran sanctions to target persons and/or foreign financial institutions (FFIs) that engage in certain transactions relating to:

the Iranian automotive sector;
the Iranian rial; and
the sale, transport, or marketing of Iranian petroleum, petroleum products, and petrochemicals.

In order to aid the public with its understanding of the new statutory restrictions and implementation of the EO, OFAC has addressed a number of compliance-related issues in its FAQ Guidance. This Guidance provides interpretation of several key terms and provisions set forth in the IFCA and the EO, including:

factors to consider in assessing whether a transaction is "significant";
whether payments or deliveries made after July 1, 2013 (the effective date of the IFCA) are exempt from IFCA sanctions;
the meaning of the terms "energy, shipping, and shipbuilding sectors of Iran";
how to identify persons determined to be part of the energy, shipping, and shipbuilding sectors of Iran;
which goods or services are considered to be "used in connection with" the energy, shipping, and shipbuilding sectors of Iran for IFCA purposes;
which materials are considered to be graphite, raw, or semi-finished metals;
which materials are considered precious metals;
how to identify which sectors of Iran are controlled by Iran's Islamic Revolutionary Guard Corps (IRGC);
how to determine whether Iran is using graphite, raw, or semi-finished metals in a manner such that their supply to Iran would be sanctionable; and
which goods or services are considered to be "used in connection with" the Iranian automotive sector for purposes of the EO.

OFAC is expected to issue regulations implementing the IFCA. The FAQ Guidance frequently refers to "regulations to be implemented" and OFAC officials also have informally confirmed that new regulations are forthcoming.

Executive Order 13645

Automotive Sector of Iran

The EO authorizes sanctions on persons that engage in certain "significant" transactions with the automotive sector of Iran, as well as FFIs that conduct or facilitate such transactions. This sector is targeted because of its economic importance to Iran, and it possible that sanctions on other key sectors may be forthcoming. The term "automotive sector of Iran" is defined broadly as:

the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles.

While not clear, there is a fair reading of the law, and OFAC has explicitly provided guidance (albeit informal), that the "automotive sector of Iran" does not include the delivery of fully finished vehicles to Iran. This may be an issue worthy of further clarification in specific contexts.

Sections 5 of the EO imposes sanctions (delineated in sections 6 and 7 of the EO) on persons that the Secretary of State determines have, on or after July 1, 2013, "knowingly engaged in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran." The EO defines "knowingly" to include circumstances where a person had "actual knowledge, or should have known" of a covered action, circumstance, or result. While the order does not define "significant," the FAQ Guidance sets forth several factors to consider (see the discussion of the FAQ below).

The EO authorizes the Secretary of State (through the Secretary of the Treasury) to block the property of and restrict transactions and dealings with a sanctioned person. If a person is subject to a blocking order under the EO, the US Government presumably would freeze its assets located in the United States or in the possession or control of a US person, and the sanctioned person would be cut off from further dealings with US persons. In addition, the EO authorizes the US Secretary of State to prohibit any of the following vis-à-vis the sanctioned person:

US Export-Import Bank financing or support for exports to the sanctioned person;
issuance of licenses to US parties authorizing the export of goods or technology to sanctioned person;
loans totaling more than $10 million in any twelve-month period from a US financial institution to the sanctioned person;
federal procurement from the sanctioned person;
importation of goods from the sanctioned person by US persons;
transactions in foreign exchange that are subject to US jurisdiction and in which the sanctioned person has an interest;
payments through US financial institutions involving any interest of the sanctioned person;
US persons investing in or purchasing "significant" amounts of equity or debt instruments of the sanctioned person; and
entry into the United States by or issuance of visas to the sanctioned person's officers, principals, and controlling shareholders.

Furthermore, under sections 6 and 7 of the EO, the US Government can impose any of the above sanctions on the principal executive officers of the sanctioned person.

Section 3(a)(ii) of the EO imposes sanctions on FFIs that conduct or facilitate significant financial transactions for the sale, supply, or transfer to Iran of significant goods or services "used in connection with the automotive sector of Iran." The order authorizes the Secretary of the Treasury to prohibit the opening of, and prohibit or impose "strict conditions" on the maintaining of, US-based correspondent or payable-through accounts by a sanctioned FFI. We have previously advised on OFAC's interpretation of the terms "significant financial transaction" and "strict conditions" in the financial sanctions context.

Iranian Rials

Section 1 of the EO introduces a new approach to isolating the Iranian economy from global commerce, by authorizing sanctions on FFIs that the Secretary of the Treasury has determined to have:

knowingly conducted or facilitated significant financial transactions relating to the purchase or sale of Iranian rials, or of a derivative or similar contract whose value is based on the exchange rate of the Iranian rial; or
maintained significant funds or accounts outside of Iran denominated in the rial.

The Secretary of the Treasury may block the property of a sanctioned FFI, or may prohibit the opening of, and prohibit or impose "strict conditions" on the maintaining of, US-based correspondent or payable-through accounts by a sanctioned FFI. The imposition of sanctions on FFIs engaging in the above rial-related activities likely will affect non-US activities in a broad array of commercial sectors.

Iranian SDNs/Energy, Shipping, and Shipbuilding Sectors/Port Operators

Section 2 of the EO imposes sanctions on persons that the Secretary of the Treasury has determined:

to have "materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of" Iranian SDNs;
to be "part of" the Iranian energy, shipping, and shipbuilding sectors; or
to operate a port in Iran.

This provision implements section 1244 (c)(1)(A) of the IFCA. In respect of an Iranian SDN, the EO implements section 1244(c)(2)(C)(iii) of the IFCA, but adds the terms "materially assisted" and "sponsored" to the statutory language. It is not clear whether this language was intended as an expansion or clarification of the narrower statutory provision. Sanctioned persons are subject to blocking and denial of entry into the United States. These prohibitions do not apply to transactions relating to the Shah Deniz gas field project. See also the discussion below of the additional sanctions relating to the provision of goods and services in connection with the Iranian energy, shipping and shipbuilding sectors as implemented in section 7 of the EO.

Section 3 of the EO imposes additional sanctions on FFIs that the Secretary of the Treasury has determined to have knowingly conducted or facilitated significant financial transactions on behalf of Iranian SDNs. The Secretary of the Treasury may prohibit the opening of, and prohibit or impose "strict conditions" on the maintaining of, US-based correspondent or payable-through accounts by a sanctioned FFI. This provision implements section 1247 of the IFCA. Again, these prohibitions do not apply to transactions relating to the Shah Deniz gas field project.

The potential application of sanctions under this specific EO differs for Iranian financial institutions as compared to other Iranian SDNs. In general, dealings with any Iranian SDN can subject a person to sanctions under this EO. For Iranian financial institutions, however, the new sanctions apply only to Iranian financial institutions that have been specifically designated for weapons proliferation, terrorism, or human rights abuse reasons. The sanctions would not be triggered under this EO for dealings with an Iranian financial institution designated as an SDN only under Executive Order 13599, i.e., as owned or controlled by the Government of Iran.

Furthermore, section 3 provides for the following limitations and exceptions relating to the imposition of sanctions on FFIs:

Transactions related to the provision of certain humanitarian assistance, food, agricultural products, medicine and medical devices are not subject to sanctions.
With respect to transactions relating to petroleum or petroleum products, FFIs are subject to sanctions only if they have not qualified for the significant reduction waiver on which we have previously advised.
With respect to transactions relating to natural gas, FFIs will not be subject to sanctions where the financial transaction is (1) for trade between Iran and the country with primary jurisdiction over the FFI, and (2) any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the FFI.

With respect to the limitations on sanctions for natural gas transactions, the sanctions do not specify whether the funds credited to an account with primary jurisdiction over the FFI needs to be controlled in a manner similar to a blocked account. However, given the sanction on rials discussed above, presumably the account should not be held or denominated in rials.

Supply to Iran of Certain Goods and Services/Insurance, Reinsurance, and Underwriting Services

Section 7 of the EO implements sections 1244(d), 1245(a), and 1246(a) of the IFCA. It authorizes either the Secretary of State or the Secretary of the Treasury to determine that a person has knowingly engaged in one of the following sanctionable acts:

supplying significant goods or services used in connection with the Iranian energy, shipping, and shipbuilding sectors;
supplying to Iran precious metals, graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes (under certain circumstances, on which we have previously advised); and
providing insurance, reinsurance, and underwriting services for
- any activity related to Iran for which sanctions have been imposed under US law, including under the IFCA that now is being implemented;
- to or for any person:
  - with respect to, or for the benefit of, any activity in the energy, shipping, or shipbuilding sectors of Iran for which sanctions have been imposed under the IFCA;
  - for the sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals (such as aluminum and steel), coal, and software for integrating industrial processes, if such materials are subject to sanctions under the IFCA; or
  - that has been designated for sanctions under the International Emergency Economic Powers Act (IEEPA) in connection with Iran's proliferation activities or support for terrorism; or
- to or for any Iranian SDN (except for Iranian financial institutions designated as an SDN only under Executive Order 13599, i.e., as owned or controlled by the Government of Iran).

The sanctions on insurance, reinsurance, and underwriting services are among the broadest of the newly implemented sanctions, given that they purport to cover any activity that is sanctionable under all prior sanctions programs, including a wide array of Executive Orders, regulations, and statutes. The IFCA provides that sanctions can be imposed when a person "knowing" provides underwriting services or insurance or reinsurance for "any activity" "for which sanctions have been imposed" under the IFCA, the International Emergency Economic Powers Act, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, the Iran Threat Reduction and Syria Human Rights Act of 2012 or "any other provision of law relating the imposition of sanctions with respect to Iran." Depending on how the US Government interprets "for which sanctions have been imposed" – i.e., whether it means there is a law, Order or regulations identifying conduct as sanctionable or, alternatively, whether it means that the US government has exercised its sanctions authority – the new sanctions on the insurance industry could have a significant effect on non-US insurers.

After determining a person has engaged in one of the above sanctionable acts, either the Secretary of State or the Secretary of the Treasury is authorized to impose sanctions from a menu of options, which are implemented by the Secretary of the Treasury. Most importantly, the Secretaries are authorized to block the property of and restrict transactions and dealings with a sanctioned person. In addition, the EO authorizes the Secretary of State or the Secretary of the Treasury to impose any of the following sanctions prohibiting:

loans totaling more than $10 million in any twelve-month period from a US financial institution to the sanctioned person;
transactions in foreign exchange that are subject to US jurisdiction and in which the sanctioned person has an interest;
payments through US financial institutions involving any interest of the sanctioned person;
US persons investing in or purchasing "significant" amounts of equity or debt instruments of the sanctioned person;
importation of goods from the sanctioned person by US persons; and
any of the above can be applied to principal executive officers of the sanctioned person.

The IFCA required imposition of five or more of the sanctions found in the Iran Sanctions Act, section 6(a). This EO, however, does not appear to specify or require that number of sanctions to be imposed. In contrast, the State Department Fact Sheet continues to reference that the IFCA "requires" imposition of five or more sanctions from the menu.

Diversion of Goods Intended for the People of Iran

Section 8 of the EO provides for the blocking of persons who engage in corruption or other activities relating to the diversion of goods intended for the people of Iran, or the misappropriation of proceeds relating to the sale of such goods. The EO also imposes sanctions on persons who materially assist such activity. This section implements section 1249 of the IFCA.

Sale, Transport, or Marketing of Iranian Petroleum, Petroleum Products, and Petrochemicals

Section 16 of the EO expands Executive Order 13622, on which we have previously advised, to impose sanctions on persons who knowingly engage in significant transactions for the sale, transport, or marketing of Iranian petroleum, petroleum products, and petrochemicals. This adds to the existing restrictions set out in Executive Order 13622, which cover significant transactions for the purchase or acquisition of such products.

Furthermore, section 16 amends Executive Order 13622 to include dealers in precious metals, stones, or jewels within the definition of FFIs. Therefore, to the extent such a dealer conducts or facilitates a significant financial transaction with the National Iranian Oil Company or the Naftiran Intertrade Company for the purchase or acquisition of petroleum, petroleum products, or petrochemicals, it will be subject to sanctions.

FAQ Guidance

The FAQ Guidance provides interpretations of several key terms set forth in the IFCA and the EO, such as "significant," the "energy, shipping, and shipbuilding sectors of Iran," "graphite, raw, or semi-finished metals," and which goods and services are "used in connection with" certain sectors in Iran.

It should be noted, however, that the FAQ Guidance is not comprehensive. For example, the FAQ Guidance is silent as to whether Iran is using graphite and certain raw or semi-finished metals for certain sanctionable purposes, a key inquiry under section 1245 of the IFCA. It is likely that OFAC will provide further guidance in forthcoming regulations.

"Significant"

Several provisions of the IFCA and the EO impose sanctions on persons that engage in certain "significant" transactions.

The FAQ Guidance provides that, in interpreting the term "significant" for purposes of the IFCA and the EO, OFAC will look to the interpretation set out in the Iranian Financial Sanctions Regulations (IFSR), 31 C.F.R. § 561.404. The IFSR set forth several factors to consider in assessing whether a transaction is "significant," including:

the size, number, and frequency of the transactions, financial services, or financial transactions;
the type, complexity, and commercial purpose of the transactions, financial services, or financial transactions;
the level of awareness of management and whether the transactions are part of a pattern of conduct;
the nexus of the transactions, financial services, and financial transactions and blocked persons;
the impact of the transactions, financial services, and financial transactions on statutory objectives;
whether the transactions, financial services, and financial transactions involve deceptive practices;
whether the transactions solely involve the passive holdings of Central Bank of Iran (CBI) reserves or repayment by the CBI of official development assistance or the transfer of funds required as a condition of Iran's membership in an international financial institution; and
other relevant factors that the Secretary of the Treasury deems relevant.

Contracts Executed Before July 1, 2013

The FAQ Guidance provides that there is no exception for sanctionable payments or deliveries after July 1, 2013 that arise out of contracts entered into before that date.

"Energy, Shipping, and Shipbuilding Sectors of Iran"

Section 1244 of the IFCA imposes sanctions on persons that engage in certain transactions with the "energy, shipping, and shipbuilding sectors of Iran." Section 1244(c) addresses dealing with persons who are "part of" these sectors, while section 1244(d) addresses the provision of "goods and services" "in connection with" those sectors.

The FAQ Guidance provides that new regulations are anticipated to define those sectors as follows:

The "energy sector of Iran" will be defined to include "activities involving the exploration, extraction, production, refinement, or liquefaction of petroleum, natural gas, or petroleum products in Iran."
The "shipping sector of Iran" will be defined to include activities involving the transportation of goods by seagoing vessels, including oil tankers and cargo vessels, flying the flag of the Islamic Republic of Iran, or owned, controlled, chartered, or operated directly or indirectly by the Government of Iran." Because two entities previously identified or designated OFAC sanctions are explicitly identified in the IFCA and the FAQ as "part of" the "shipping sector of Iran" – i.e., the National Iranian Tanker Company and the Islamic Republic of Iran Shipping Lines – providing goods and services in connection with activities involving these entities likely will constitute a sanctionable act.
The "shipbuilding sector of Iran" will be defined to include "activities involving the construction of seagoing vessels, including oil tankers and cargo vessels, in Iran."

The FAQ Guidance further provides that persons determined to be "part of" the above sectors will be identified on the SDN list.

The FAQ Guidance also provides detailed lists of the types of goods and services that OFAC will consider to be "used in connection with" those sectors:

With respect to the energy sector, the goods and services identified parallel prior sanctions by identifying activities relating to Iran's domestic petroleum industry. Specifically, the FAQ Guidance provides that goods or services that contribute to Iran's ability to develop its domestic petroleum resources; the maintenance or expansion of Iran's domestic production of petroleum products; and Iran's ability to import or export petroleum or petroleum products will be targeted.
For the shipping and shipbuilding sectors, OFAC has provided detailed lists of goods and services associated with the operating and building of ships.
- Goods and services associated with the shipping sector include providing crude and product tankers to Iran; registry, flagging, or classification services; repair of ships and their parts; inspection, testing, and certification of marine equipment materials and components; surveys, inspections, audits and visits, and the issuance, renewal or endorsement of the relevant certificates and documents of compliance, as they relate to ships and shipping; and other goods or services that are associated with maintaining, supplying, bunkering, and docking of Iranian-flagged vessels or vessels owned, controlled, chartered, or operated (whether directly or indirectly) by, or for or on behalf of the Government of Iran or any Iranian person.
- Goods and services associated with the shipbuilding sector include building and refitting of vessels; supplying or refitting parts and components specific to maritime vessels, and other goods, technical assistance, and financing that relates to the building, maintenance or re-fitting of vessels.

Payments to Iranian Port Operators

Section 1244(c) of the IFCA provides for the blocking of the property of persons that knowingly provide significant support—including financial, material, or technical support, or goods or services—for the benefit of persons that the President determines to operate a port in Iran.

The FAQ Guidance provides that "routine" payments to Iranian port operators—provided they are not designated as SDNs under other sanctions regimes, such as for WMD proliferation—generally will not be sanctionable. Such payments should be "limited strictly to routine fees including port dues, docking fees, or cargo handling fees, paid for the loading and unloading of non-sanctioned goods at Iranian ports." OFAC cautions against dealing with Iranian port operators that have been designated as SDNs under other sanctions regimes, such as the Tidewater Middle East Co. and South Shipping Line Iran. Furthermore, the FAQ Guidance provides that "non-routine and/or large payments or fees that materially exceed standard industry rates" could be sanctionable. Finally, the FAQ Guidance states that the provision of significant support to an Iranian port operator could be sanctionable.

Graphite, Raw, or Semi-Finished Metals

Section 1245 of the IFCA provides that the supply to Iran of graphite, raw, or semi-finished metals will be sanctionable if the President determines that Iran uses such materials as a medium for barter or lists them on its national balance sheet. The FAQ Guidance provides a detailed list of the materials that OFAC considers to be "graphite, raw, or semi-finished metals." Entities in the graphite and metals industries should consult these very broad lists.

Curiously, the FAQ Guidance states that in order to determine whether Iran uses such materials in a way that would make their supply sanctionable, an FFI should undertake due diligence in order to ensure that such materials are not being supplied "for sanctionable uses." The IFCA, however, requires the President to make such a determination by July 1, 2013. Therefore, it is unclear why the FAQ Guidance calls upon FFIs to engage in such due diligence.

Sectors Controlled by the IRGC

Section 1245 of the IFCA imposes sanctions on persons that supply to Iran graphite, raw, or semi-finished metals to be used in connection with any sector controlled by the IRGC. The FAQ Guidance states that by July 1, 2013, a report will be published in the Federal Register identifying such sectors.

Goods or Services "Used in Connection with" the Automotive Sector of Iran

Section 5 of the EO imposes sanctions on persons that provide significant goods or services to Iran "used in connection with" automotive sector of Iran. The FAQ Guidance states that such goods or services include those that contribute to:

Iran's ability to research, develop, manufacture, and assemble light and heavy vehicles; and
the manufacturing or assembling of original equipment and after-market parts used in Iran's automotive industry.

The FAQ Guidance further provides that:

The supply to Iran of fully assembled and finished vehicles generally will not be sanctionable under the EO.
The supply to Iran of "auto kits" or "knock-down kits," by comparison, likely would be considered to be goods or services used in connection with the automotive sector of Iran, and thus sanctionable under the EO if the transaction is significant.
The supply to Iran of goods and services for the maintenance of finished vehicles exported to Iran generally would not be sanctionable under the EO. The FAQ Guidance notes, however, that the supply to Iran of goods or services that would contribute to Iran's ability to manufacture or assemble vehicles, or manufacture original equipment and after-market parts in Iran, could be sanctionable. OFAC thus advises exporters and FFIs to exercise caution to ensure that such goods or services are not diverted for the manufacturing of vehicles, original equipment, or after-market parts in Iran.

Conclusion

Executive Order 13645 implements key aspects of the IFCA and marks a further expansion of US sanctions on Iran in several key areas. Parties in the automotive industry in particular should be aware of the heightened risk of doing business with Iran. The targeting of the Iranian automotive industry, reported to be the second-largest sector of Iran's economy, is especially notable, as it may signal the start of a trend in which the US adopts more sanctions programs directed at frustrating business with Iran's largest industries. Furthermore, parties should exercise due diligence to ensure they do not engage in significant transactions with Iranian SDNs, and FFIs will need to consider the risks associated with transactions relating to the Iranian rial. These broad restrictions on SDNs and the rial cut across numerous industrial sectors. Persons that engage in the sale, transport, and marketing of Iranian petroleum, petroleum products, and petrochemicals should be aware of the new "marketing and transporting" restrictions set out in the EO. Notably, the EO allows the US government to block the property of and restrict US person dealings with parties engaging in much of the sanctionable conduct above, and parties that are blocked could essentially become akin to SDNs themselves.

The sanctions directed at the insurance, reinsurance, and underwriting industries are broadly worded, and present considerable compliance risks to individuals and entities in these sectors. As previously advised, there is a safe harbor provision for companies that undertake certain good faith due diligence and compliance steps (although the State and Treasury Departments have not provided detail or guidance on what will suffice). Exclusion clauses, appropriate terms and conditions, internal compliance programs with an established compliance officer, and training may be elements of what OFAC and the State Department would consider to be adequate steps. It should be noted that the safe harbor noted above does not cover transactions with Iranian SDNs that have been designated for WMD proliferation activity or support for international terrorism.

The FAQ Guidance provides interpretation regarding several key terms set out in the IFCA and the EO, including factors to consider in assessing whether a transaction is "significant," which is a crucial inquiry in this context. The FAQ Guidance, however, is not comprehensive. Based on the FAQ Guidance's references to "regulations to be promulgated," it seems likely that the US Government will provide further guidance in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: Effective July 1, 2013: Executive Order 13645, Implementing The Iran Freedom And Counter-Proliferation Act Of 2012 And Authorizing New Iran Sanctions