FREQUENTLY ASKED QUESTIONS (“FAQs”) REGARDING ENFORCEMENT AGAINST FOREIGN PERSONS OF U.S. TRADE SANCTIONS AGAINST IRAN
The U.S. trade sanctions applicable to Iran are not encapsulated in any single statute or other easily identifiable source, but rather are incorporated into a rather complex web of statutes, regulations and Executive Orders. To the extent there is any universal theme, it is that the sanctions pertaining to Iran have become increasingly expansive in their scope, both in terms of the trade and transactions to which they apply, as well as their increasingly extraterritorial effect in their application to non-U.S. persons / entities.
In terms of a general overview as to the progression of U.S. sanctions over the last several years, the initial U.S. sanctions regimes were directed primarily at “U.S. persons,” consisting of U.S. companies, U.S. persons wherever located, and anyone actually in the United States. U.S. persons were subject to, inter alia, the Iran Sanctions Act of 1996 (“ISA”) and regulations enforced by the Office of Foreign Assets Control (“OFAC”), an agency within the U.S. Treasury Department which has historically had the primary responsibility for enforcing U.S. sanctions. Pursuant to these regulations and legislation, U.S. persons are and have been for years prohibited from engaging in virtually any transaction having a connection to Iran.
The U.S. Government’s position in terms of limiting sanctions primarily to U.S. persons began to change rather dramatically with the passage of the Comprehensive Iran Sanctions, Accountability and Divestment Act (“CISADA”). CISADA was signed into law in July 2010 and amended the ISA in a number of critical aspects. CISADA was significant because, inter alia, it provided for sanctions against foreign persons and was unique because the State Department was charged with the responsibility for enforcing a number of the sanctions provided therein, as opposed to OFAC.
Since the enactment of CISADA, the U.S. has continued its effort to place pressure on Iran by prescribing additional sanctions directed at foreign persons. These efforts have taken the form of further statutory enactments including, but not limited to, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRASHA”), the National Defense Authorization
These FAQs are specifically intended to deal with U.S. sanctions measures. EU sanctions measures exist also and EU Regulation 267/2012, as amended by EU Regulation 1263/2012, is in force across the European Union’s Member States. Members who are subject to EU law need to comply strictly with the EU and national EU/EEA Member State provisions. Sanctions legislation or regulations of other relevant jurisdictions may also be applicable, such as those of the country where the activity is to be performed including the law of the flag state; or the country of the Member’s domicile etc.
Act for 2012 (“NDAA 2012”), and the National Defense Authorization Act for 2013 (“NDAA 2013”). Additionally, the Iranian sanctions regime has been supplemented, and, in many instances, significantly expanded, by a series of Executive Orders authorizing sanctions against foreign persons. These Executive Orders include E.O. 13590 issued in November 2011, E.O. 13608 issued in May 2012 and E.O. 13622 issued in July 2012, amongst others.
The below FAQs summarize the more relevant statutory enactments and E.O.s as to foreign persons and provide useful comments on some of the more practical implications of the sanctions regime. The FAQs below should not, however, be considered a comprehensive analysis of the sanctions implicated by any potential transaction. It is recommended that anyone of whatever nationality considering carrying out any business with an Iranian connection seek legal advice to avoid inadvertent violations and/or unexpected delays and disruptions to their trade. With that background, the following FAQs may be of assistance.
WHAT ARE THE BASES FOR ENFORCEMENT OF TRADE SANCTIONS AGAINST IRAN UNDER U.S. LAW?
As explained above, the current body of U.S. trade sanctions against Iran does not derive from any single source, but rather from a rather wide array of statutes, regulations and Executive Orders.
WHAT IS AN EXECUTIVE ORDER?
An Executive Order is a decree by the President of the United States that has the force of law even though it has not been issued through the normal and customary legislative process.
WHO IS RESPONSIBLE FOR ENFORCEMENT OF U.S. TRADE SANCTIONS IN THE U.S.?
Depending on the source of the sanction, enforcement of U.S. trade sanctions can be delegated to the State Department, the Treasury Department, or both, as well as other departments or agencies. As a very general rule, however, where the sanction relates to foreign persons or the carriage of petroleum or petrochemical products, the State Department is generally charged with primary enforcement responsibility.
ON WHOM MAY SANCTIONS BE IMPOSED?
As a general proposition, sanctions may be imposed on the foreign person (which includes a natural person, a business organization and its successor, a governmental entity operating as a business enterprise or a successor to any such entity) engaging in the sanctionable conduct. According to guidance from the State Department, all types of business organizations and enterprises fall within this broad definition of person including without limitation a corporation, business association, partnership, society, trust, financial institution, insurer, underwriter, and/or guarantor.
Furthermore, certain sanctions (including those imposed under the ISA, as amended by CISADA and ITRASHA) include the possibility of excluding the foreign person’s corporate officers, principals and controlling shareholders from entering the U.S. and imposing sanctions on its principal executive officers. With respect to the latter, the sanctions against the principal officers can consist of the same type of financial sanctions that can be imposed against the sanctioned person (see FAQ #5) such as blocking any property of the officer that comes within the U.S. and denying the officer access to the U.S. banking system.
5. WHAT TYPES OF SANCTIONS CAN BE IMPOSED ON FOREIGN PERSONS?
Due to the fact that the potential sanctions derive from various sources, the type of sanctions that might be imposed will often depend on which statute or E.O. was violated. Some of the more significant sanctions that might be imposed include the following:
(i) denying the foreign person access to the U.S. banking system, which would include the inability to effect any transaction anywhere in the world in U.S. dollars regardless of whether that transaction has anything to do with sanctionable conduct;
(ii) blocking property of the foreign person that comes within the jurisdiction of the U.S., including U.S. dollar wire transfers;
(iii) preventing the corporate officers, principals or controlling shareholders of the foreign person from entering the U.S.;
(iv) imposing sanctions on the principal executive officers of the foreign person; and
(v) in some instances prohibiting a vessel from entering the U.S. for a period of two years (see FAQ # 11 below).
6. DO FOREIGN PERSONS ALSO FACE CIVIL OR CRIMINAL PENALTIES?
The list of potential sanctions identified in the recent E.O.s and ISA, as amended by CISADA and ITRASHA, do not include the imposition of civil or criminal penalties against foreign persons. However, with the enactment of NDAA 2013, which takes effect on July 1, 2013, foreign persons may face the same civil and criminal penalties authorized under the International Emergency Economic Powers Act (“IEEPA”).
Under IEEPA, “persons” are subject to the imposition of civil and criminal penalties for violating, attempting to violate, conspiring to violate or causing a violation of any sanction regulation enforced by OFAC. The OFAC regulations generally consist of the sanctions directed at U.S. persons, and insofar as Iran is concerned, prohibit U.S. persons from engaging in virtually any transaction having a connection to Iran or a person/entity/vessel on the Specially Designated Nationals list (“SDN” – see FAQ #8), including exporting any services to or for the benefit of Iran or a SDN. (OFAC administers sanctions regulations pertaining to transactions with other countries, and thus the penalties that can be imposed under the IEEPA are not limited to Iranian transactions, but for purposes of this FAQ, the focus is on Iran.)
Historically the IEEPA was considered as applying only to U.S. persons. However, because the IEEPA on its face does not limit its application to only “U.S. persons,” the U.S. authorities very recently have taken the position that any person who can be considered subject to the general jurisdiction of the U.S. (e.g. a company that does substantial U.S.-related business even if not located in the U.S.) may be subject to the IEEPA for “causing” a U.S. person to violate the sanction regulations. Such a person may be subject to a civil fine to the greater of $250,000 or twice the amount of the transaction at issue and criminal penalties up to $1 million per violation with a potential imprisonment up to twenty (20) years per violation.
By way of example, certain foreign banks were alleged by OFAC to have violated the IEEPA by altering U.S. dollar wire transfer details to remove any reference to the nexus between the transaction and a sanctioned country. OFAC alleged that this conduct caused the U.S. banks processing the transfers to violate the OFAC regulations because the U.S. banks (unknowingly) exported financial services from the U.S. for the benefit of Iran or other sanctioned countries, and as such, the foreign banks caused a violation within the scope of the IEEPA. Settlements were eventually reached between OFAC and the foreign banks, but the allegations demonstrate the broad interpretation recently advanced by the U.S. insofar as the IEEPA is concerned and its application to foreign persons.
Consequently, under the IEEPA, a foreign person may be subject to civil and criminal penalties if it otherwise conducts substantial business in the U.S. and “causes” a U.S. person to violate the regulations administered by OFAC. The instances of such conduct may be limited but would include as an example a shipowner or Club which engages in substantial and regular business within the U.S. receiving or making payments in U.S. dollars for any transaction that has a connection to Iran or to an SDN, even though no U.S. persons are involved in the underlying transaction, and manipulating the payment instructions to conceal the fact that the underlying transaction has a connection to Iran or a SDN.
The NDAA 2013 will expand the scope of IEEPA by providing that the IEEPA civil and criminal penalties shall apply to a person who “violates, attempts to violate, conspires to violate, or causes a violation” of the NDAA 2013 or any regulations enacted thereunder. In this way, NDAA 2013 confirms that a foreign person may face civil or criminal penalties in addition to the types of penalties described in FAQ #5.
7. WHAT IS THE MEANING OF KEY TERMS USED IN THE VARIOUS SANCTIONS IMPOSED BY THE U.S.?
Each sanction source may have its own definitions section, but some of the key terms seen in one or more of the sanctions include the following:
“Due diligence” is not defined in any of the legislation but it generally includes an analysis of whether the foreign person had in place sufficient procedures and safeguards to reasonably protect against the possibility of engaging in sanctionable conduct. What is required to exercise due diligence will depend on the circumstances. (See also FAQ#10 for a further discussion on due diligence).
“Financial institution” includes, inter alia, an insurance company, including an agency or underwriter, but when the term “foreign financial institution” is used, it typically does not include an insurance company, but rather refers to traditional banking institutions.
“Knowingly” means that a person or entity has actual knowledge, or should have known, of the conduct, the circumstance, or the result. (See also FAQ #9 below discussing further the meaning of “knowingly”).
“Petrochemical product” includes any aromatic, olefin, or synthesis gas, and any derivative of such a gas, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea. (For guidance as to specific “petrochemical products” that may be subject to sanctions, please see the State Department’s “Sanction Information and Guidance” available at www.state.gov/e/eb/tfs/spi/iran/fs/200316.htm).
“Petroleum resources” includes petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas.
“Refined petroleum products” means diesel, gasoline, jet fuel (including naphtha-type and kerosene-type jet fuel) and aviation gasoline. (For guidance as to specific “petroleum products” that may be subject to sanctions, please see the State Department’s “Sanction Information and Guidance” available at www.state.gov/e/eb/tfs/spi/iran/fs/200316.htm).
“Significantly” is not defined but the Treasury Department has indicated in its guidance publications that a number of factors are considered in determining “significance,” including size, number, and frequency; type, complexity, and commercial purpose; and the ultimate economic benefit conferred on the sanctions target. However, as explained, the State Department (not Treasury) generally has primary responsibility for enforcing the sanctions directed at foreign persons. While one cannot be certain, it is believed likely that the State Department will apply the same factors in assessing whether a transaction is significant.
8. WHAT IS THE U.S. SPECIALLY DESIGNATED NATIONALS (“SDN”) LIST?
The SDN list is published by and updated regularly by OFAC which describes the list as follows:
As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are generally prohibited from dealing with them.
(A searchable version of the list is available at sdnsearch.ofac.treas.gov/.) A U.S. person, which again includes a U.S. person wherever located, is prohibited from virtually any transaction having a connection to anyone on the SDN list absent a specific license from OFAC.
The SDN list, in and of itself, does not apply to foreign persons and, therefore, foreign persons are not prohibited from transacting with parties on the SDN list. However, both OFAC and the Department of State have suggested that foreign persons could sustain “reputational damage” if they deal with parties on the SDN list. Further, a foreign person which “causes” a U.S. person to violate the SDN prohibitions may be subject to civil and criminal penalties under the IEEPA (see FAQ #5). Additionally, as of July 1, 2013, the NDAA 2013 incorporates the SDN list into certain of its sanctions provisions, and does prohibit foreign persons from dealing with parties on the SDN list with respect to certain goods and services. (See FAQ# 17). As such, to avoid the imposition of sanctions related to the SDN list, foreign persons should ensure that any transaction with or involving an entity on the SDN list does not come within U.S. jurisdiction (e.g., U.S. dollars routed through a U.S. bank) and also that it is not the type of activity that could lead to the imposition of U.S. sanctions.
9. WHAT DEGREE OF CULPABILITY IS REQUIRED FOR TRADE SANCTIONS TO APPLY UNDER U.S. LAW?
Generally speaking, U.S. sanctions target conduct done “knowingly.” Depending on the requirements of the specific sanction, “knowingly” may require a showing of actual knowledge, whereas in other instances it may be sufficient that the person “should have known” of the conduct, circumstance, or result. There is no test or defined set of factors that will be examined to determine if a person “should have known” of a specific conduct, circumstance or result. It is believed that in assessing the existence of “should have known,” the U.S. authorities will examine, similar to what is examined in a due diligence analysis (see FAQ #10 below), whether the foreign person had in place sufficient procedures and safeguards to reasonably protect against the possibility of engaging in sanctionable conduct.
10. WHAT DOES IT MEAN WHEN A SANCTION PROVIDES AN EXCEPTION FOR THE EXERCISE OF “DUE DILIGENCE” BY THOSE PROVIDING INSURANCE SERVICES?
As explained herein, several sanctions provide that those providing insurance services are not subject to sanctions provided they exercised “due diligence” to reasonably ensure that they do not provide insurance for sanctionable conduct. Due diligence is not specifically defined but for the most part the sanctions having a due diligence exception provide that a person providing underwriting services, insurance or reinsurance is not subject to sanctions if it has established and enforced policies, procedures, and controls to ensure that the person does not provide its services in relation to sanctionable conduct.
While there is no set definition, the State Department has provided guidance on the meaning of the term. That guidance provides several non-exhaustive examples of what steps might be taken to exercise due diligence including, but not limited to, confirming that an entity owned or controlled by Iran is not involved in the transaction, reviewing on a regular basis OFAC’s SDN list, searching commercial databases and verifying ownership structure of unknown companies, and in the case of transportation of crude oil, petroleum or petrochemical products, verifying that Iran is not the origin of the cargo.
The State Department has also advised that due diligence measures could include inserting coverage exclusions for losses associated with sanctionable conduct. The State Department has also suggested that due diligence could include establishing strict underwriting policies and procedures that scrutinize the business activity of prospective insured persons and decline risks that present a “probability” of insuring sanctionable conduct. The State Department guidance is not definitive on precisely the policies or procedures that might demonstrate due diligence, but state that such procedures “may” include “affirmative, rigorously applied” company rules against engaging in sanctionable conduct, instruction of employees regarding prohibited and sanctionable activity with Iran, and active monitoring, inspection and diligence on customers’ activities.
In our view, the lack of definitive requirements from the State Department, coupled with the discretionary language used in the guidance provided when identifying the non-exhaustive list of policies/procedures, indicates that the State Department would consider what measures are practical and appropriate under the circumstances in assessing whether due diligence exists. For instance, a measure such as active monitoring of customers identities might be more feasible in the case of vessel owners, but less so in the insurance context, where an insurer may be expected to be fully aware of who it insures but may encounter practical difficulties in monitoring the day to day activities of their Members. We believe that State Department would have to take practicality into account in assessing whether due diligence was exercised in a particular situation.
11. WHAT CONDUCT IS CURRENTLY SANCTIONABLE WITH RESPECT TO FOREIGN PERSONS ENGAGED IN THE TRANSPORTATION OF CRUDE OIL AND PETROLEUM PRODUCTS FROM IRAN?
Transportation of crude oil from Iran: if a vessel is used to transport crude oil from Iran to another country, a controlling beneficial owner is subject to sanctions if it had “actual knowledge” that the vessel was so used and anyone who otherwise owns, operates, controls or insures such a vessel is subject to sanctions if they “knew or should have known” that the vessel was so used. [ITRASHA]
o NOTE: Guidance from the State Department suggests that the term “from” Iran is not limited to actual loading in Iran but is also intended to capture situations where Iran is the country of origin regardless of the place of loading.
o NOTE: While “storage” is not specifically mentioned, the State Department has suggested that it considers storage of crude oil from Iran to fall within the scope of the sanctions, and thus, it is believed that providing insurance with respect to such storage would also be considered sanctionable to the same extent as insuring the actual transportation.