November 30, 2009
In response to increased international concern regarding Iran’s nuclear fuel enrichment activities, both houses of Congress have introduced legislation that could substantially expand the impact of economic and trade sanctions against Iran. On October 28, 2009, the House Finance Committee approved H.R. 2194, the Iran Refined Petroleum Sanctions Act of 2009. The next day, the Senate Banking Committee approved the Dodd-Shelby Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009, which incorporates key provisions of S. 908 (the Iran Refined Petroleum Sanctions Act), the Senate counterpart to H.R. 2194.
The bills would modify the Iranian Sanctions Act (“ISA”), effectively codifying existing Executive Orders under the IEEPA and adding new restrictions primarily targeting Iran’s ability to produce or to import refined petroleum products and natural gas. The bills set out a host of measures that could affect businesses and financial institutions across the globe. The most significant measures include:
A far-reaching impact of the proposed legislation could be the possible extension of liability for U.S. firms for affiliates’ activities. Currently, an independent foreign subsidiary of a U.S. entity can operate in Iran and undertake dealings that would be illegal for its parent. The Senate bill would create new liability for a parent where the government determines that the parent controls the affiliate and that the affiliate exists to circumvent sanctions. In the Senate bill, “control” is defined as holding a majority equity interest, a majority of board seats, or “control of the actions, policies, or personnel decisions of the entity.” Existing regulations already bar facilitation of ISA violations, evasions, or changes to an affiliate’s policies to circumvent prohibitions. They also bar financing and guaranty transactions related to petroleum resource development by an entity “owned or controlled” by a U.S. person. Nonetheless, the new bills appear to increase focus on affiliate activities and may bring existing activities under greater scrutiny. The Senate bill offers a 90-day grace period for divestment from potentially problematic activities, suggesting that legislators intend to invite reconsideration of existing business ties in Iran.
New petroleum-related restrictions could sweep a host of additional commercial activities into the law’s scope. The Office of Foreign Assets Control’s (“OFAC”) Iranian Transaction Regulations implementing the ISA currently forbid contracts supporting petroleum-related projects, and bar financing or guaranteeing them. And the regulations also generally bar provision of goods and services to Iran. The new bills increase the law’s focus on petroleum industry activities, expanding existing restrictions expressly to all forms of work and all aspects of the industry, including transport vessels, shipping services, and pipeline work. The new definition also targets natural gas-related resources in the same terms.
The bills would potentially bring financing and insurance activities under new scrutiny. The bills expand the list of covered entities broadly to include a financial institution, insurer, underwriter, or guarantor, and their foreign affiliates. Notably, the definition also includes export credit agencies and “any other governmental entity operating as a business enterprise.” The bills would add to the ISA an express prohibition on “underwriting or otherwise providing insurance or reinsurance” supporting petroleum development, and on financing or brokering such activity. New potential sanctions proposed in the bills further this focus on financial transactions. The House bill gives the President the ability to respond to such activities by prohibiting foreign exchange transactions, credit transactions, and property-related transactions.
The President’s discretion in applying sanctions would be narrowed under the bills. The House bill would convert the suggestion that the President investigate potential ISA violations into an obligation, and require the President to act upon any “credible information” regarding a potential violation. The House bill raises the bar for the President’s national security waiver from an “important” to a “vital” national security interest, and requires an estimate of the impact of subject activities on Iran’s petroleum industry or imports. The Senate bill would remove the President’s discretion to freeze or not freeze assets of persons supporting Iran’s nuclear fuel-enrichment activities.
The bills would also require the President to issue a semi-annual report on potential foreign investment in Iran’s petroleum industry and on the determination as to each investment. Major U.S. trading partners have decried the potential “extraterritorial” effect of the ISA, and U.S. Administrations have thus far not applied the investment bar against non-U.S. entities. The Senate Banking Committee cited this hesitance to act against foreign firms in approving its bill, renewing a potential threat of action against non-U.S. companies.
Additional measures in the bills could have far-ranging impact on commerce, including expanded government procurement restrictions. Companies found illegally to have exported electronic jamming and monitoring equipment to Iran could be barred from government contracts. This equipment would be designated by the President and subject to waiver. Also the Senate bill would authorize a state or local government to divest its interest in a company that has made a prohibited investment or provision of credit related to Iran’s energy sector.
The Senate bill also provides for expanded anti-diversion and anti-transshipment programs. It would require the Commerce Secretary to report to Congress on potential diversion issues and would require the Administration to address such concerns with foreign governments. It would require the Administration to impose rigorous licensing requirements on uncooperative countries, unless it waves such restrictions as inconsistent with national interests. There has been heightened concern among U.S. legislators about such diversion and transshipment, including with regard to the United Arab Emirates.
Potential new sanctions measures against Iran could affect a broad range of U.S. and non-U.S. commercial and financial activity. Violations of the Iran Transaction Regulations can incur serious penalties. Criminal penalties could result in a fine up to $1,000,000 and up to 20 years imprisonment. Civil penalties ranging from $250,000 to twice the subject transaction value could be imposed administratively.
Gibson, Dunn & Crutcher’s International Trade Regulation and Compliance Practice Group is available to assist with any questions you may have regarding these issues. For further information please contact the Gibson Dunn attorney with whom you work or any of the following attorneys in the firm’s Washington, D.C. office:
International Trade Regulation and Compliance Practice Group
Daniel J. Plaine (202-955-8286, firstname.lastname@example.org)
Judith A. Lee (202-887-3591, email@example.com)
John J. Sullivan (202-955-8565, firstname.lastname@example.org)
Jim Slear (202-955-8578, email@example.com)
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Dave M. Wharwood (202-887-3579, email@example.com)
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