President Signs Iran Freedom Support Act

October 30, 2006

On September 30, 2006, the President signed into law the Iran Freedom Support Act ("IFSA"). The law authorizes the President to impose penalties against non-U.S. persons and companies that the President determines to have knowingly "exported, transferred, or otherwise provided" to Iran "goods, services, technology, or other items" that would "contribute materially" to helping Iran "acquire or develop chemical, biological or nuclear weapons or related technologies," or "destabilizing numbers and types of advanced conventional weapons." According to the U.S. State Department, advanced conventional weapons include portable anti-aircraft weapons; major weapons systems and heavy military equipment (e.g., tanks, aircraft, missiles); sensors and lasers; and precision-guided munitions. The law also extends sanctions against non-U.S. persons that invest in Iran’s petroleum, petroleum by-product, and natural gas industries. The sanctions effectively bar investments of $20,000,000 or more in any 12-month period, that "directly and significantly" contribute to the development of Iran’s oil and gas resources.

The IFSA codifies certain Iran Transactions Regulations, and, amending the Iran Libya Sanctions Act ("ILSA"), removes sanctions against Libya under that law. The ILSA, enacted in 1996, was designed to limit Iran’s access to foreign funds and the development of its energy industry by penalizing foreign companies that invested in Iran’s energy sector. The ILSA drew the ire of European nations, who had threatened to challenge the law in the World Trade Organization. The U.S. subsequently issued a waiver under the ILSA to an EU company related to a $2 billion contract in Iran, and indicated that future waivers for other investments subject to the law might be available. Due to international resistance and related diplomatic considerations, no sanctions determinations were made against a foreign company under ILSA. 

The U.S. executive appears to retain the flexibility to avoid imposing penalties under the new law as well. The IFSA formally narrows the ILSA’s waiver provisions related to energy industry investment, requiring a certification that a waiver is in the "national security interest" and also requiring that the waiver be renewed every six months. However, this change does not substantively limit the President’s discretion to overlook certain investment activities subject to the law. With regard to the "mandatory sanctions" the IFSA requires for activities supporting Iran’s military, nuclear or WMD capabilities, the IFSA also does not appear to clearly bind the President. The President is not required to determine that a non-U.S. company has made an illegal transfer to Iran, and no deadline for making such a determination is set. The President may also effectively terminate the sanctions barring investment in Iran’s energy sector, but only if he can meet the high bar of attesting that Iran no longer supports terrorism and no longer poses a security threat to the United States or its allies. 

Additionally, the law expresses Congress’ intent that the United States as a matter of policy should not enter into international agreements with governments that are considered to be aiding development of uranium enrichment or weapons programs in Iran. This provision apparently targets Russia, which is involved in some nuclear energy related projects in Iran. The IFSA also aims to spur the development of democracy in Iran. It approves financial assistance to certain types of human rights and political organizations supporting this aim. 

These new sanctions could affect a broad range of non-U.S. commercial and financial activities related to Iran, and penalties for their violation can be severe. Corporate criminal penalties for violations of the Iran sanctions regulations can range up to $500,000, with individual penalties of up to $250,000 and 20 years in jail. Civil penalties of up to $50,000 may also 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 Judith A. Lee (202-887-3591, [email protected]), Jim Slear (202-955-8578, [email protected]), Andrea Farr (202-955-8680, [email protected]) or Dave Wharwood (202-887-3579, [email protected]) in the firm’s Washington, D.C. office.

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.