The United States Congress is currently considering bills that would enlarge the scope of coverage of the existing Iran Sanctions Act (“ISA”)1 and thereby increase the ability of the President to impose sanctions on foreign persons conducting business with Iran. This legislation would authorize sanctions with respect to foreign persons who engage in transactions involving the export of “Refined Petroleum Products,” including gasoline, kerosene, aviation fuel, diesel fuel, residual fuel oil and distillates to Iran.2 Covered transactions would include those involving insurance or reinsurance for the sale, lease or provision of petroleum by-products; financing or brokering such a transaction; or providing ships or shipping services for such a transaction. In addition to the penalties currently included in the ISA, additional penalties would include a prohibition on foreign exchange activities, banking transactions or certain property transactions. The proposed legislation would also make certain changes to the President’s waiver authority, which has been previously used to avoid the imposition of sanctions against the French company Total. The proposed legislation also imposes liability on U.S. parent companies for the actions of their foreign subsidiaries, prohibits the U.S. government from entering into procurement contracts with companies that have exported “sensitive technology” to Iran, and grants to U.S. state and local authorities the right to divest from companies with significant investments in Iran’s energy sector.3
In addition to the proposed legislation, there has been significant media attention in the United States surrounding foreign companies that conduct business in Iran and also hold significant U.S. government contracts.
Status of the 2009 Proposed Bills to Amend the ISA
The proposed bills have been approved by the full membership of the U.S. Senate and House of Representatives, but the two bodies’ versions of the legislation differ. To become law, differences in the two versions must be reconciled in a committee negotiation process, the reconciled bill must be passed by a majority of each chamber and it must be signed by the President. The first step in this process occurred on March 11, 2010, when the Senate formally communicated to the House that it wishes the Senate version to serve as the basis for the final bill. The Senate has appointed members to the conference committee where the differences between the bills will be reconciled, but the House has not yet announced the names of its members who will serve on this committee. The conference process is a highly political matter and developments in the multilateral negotiations as well as domestic considerations, such as the current focus on health care reform, will ultimately determine the speed and likelihood of passage.
The following is a high-level summary of the changes that would be made by the proposed legislation.
Summary of ISA
The original ISA was adopted in August 1996. It requires the President to impose at least two out of a menu of seven sanctions on foreign companies that make an “investment” of more than $20 million in one year in Iran’s energy sector. If a company is not involved in making such investments, the ISA will not affect its business operations.
For violations of the investment prohibitions, the President could select two or more from the following menu of penalties:
(1) denial of Export-Import Bank guarantees, insurance, extension of credit, or participation in the extension of credit in connection with the export of any goods or services to any sanctioned person;
(2) denial of licenses for the U.S. export of military or dual-use technology to the entity;
(3) denial of U.S. bank loans exceeding $10 million in one year to the entity;
(4) if the entity is a financial institution, a prohibition on its service as a primary dealer in U.S. government bonds; and/or a prohibition on its serving as a repository for U.S. government funds (each counts as one sanction);
(5) prohibition on U.S. government procurement from the entity; and
(6) restriction on imports from the entity.
Under the terms of the original ISA, the President has discretion to waive the imposition of sanctions if the parent country of the violating firm agrees to impose economic sanctions on Iran or if the President certifies that doing so is “important to the U.S. national interest.”
Summary of Proposed Changes to ISA
Both the House and Senate proposed amendments to the ISA expand the scope of sanctionable activity to include (1) the export of goods, technology or services that would assist Iran in maintaining or expanding its domestic production of refined petroleum products, and (2) exporting significant amounts of refined petroleum products to Iran (more than US$500,000 in a 12-month period). These sanctionable activities include “providing ships, vehicles, or other means of transportation to deliver refined petroleum products to Iran, or providing services relating to the shipping or other transportation of refined petroleum products to Iran.” Thus, shipping companies engaged in the petroleum trade could be subject to sanctions under the proposed legislation. Providing insurance for or financing or brokering activities prohibited by the legislation also would trigger the revised sanctions.
Although the House and Senate bills do differ, the following major provisions are similar in both versions. Specific penalties have been added for exporting refined petroleum products to Iran. All of the following penalties apply to such prohibitions:
(1) Prohibition of any transactions in foreign exchange by the sanctioned person;
(2) Prohibiting transfers of credit or payments between, by, through or to any financial institution, to the extent that such transfers or payments involve any interest of the sanctioned person; and
(3) Prohibition on entering into transactions involving any property in which the sanctioned person has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.
The proposed revisions to the ISA also require the President to find that a potential waiver is “vital to the national security interests of the United States,” rather than “important to the national interest of the United States.” The revisions require the administration “immediately” to initiate investigations into possible sanctionable activity after receiving credible information of such activities, and to report to Congress on activities that would trigger sanctions.
The House bill would make the revised sanctions retroactive to cover conduct engaged in on or after October 28, 2009. The Senate bill, however, does not include a retroactive effective date. Neither bill includes a grace period before the legislation would become effective.
Potential Application to Non-U.S. Companies
As currently drafted, the new provision of the proposed legislation that would most affect foreign companies’ business is the prohibition on exporting significant amounts of refined petroleum products to Iran (more than US$500,000 in a 12-month period). A second prohibition on assisting Iran in maintaining or expanding its domestic production of refined petroleum products may also be relevant to some companies’ business activities.
The proposed legislation covers the activities of foreign persons. The legislation’s applicability is designed to be extraterritorial, and is likely, if passed, to trigger major objections from U.S. trading partners, including the European Union, which protested the enactment of the original ISA. Although the persons who may be sanctioned include members of a corporate group, the language of the ISA requires that such persons have knowledge of and engage in the violation in order to be sanctioned.
Possible penalties for engaging in sanctionable activities include prohibitions on:
- transactions in foreign exchange by the sanctioned person;
- transfers of credit or payments between, by, through or to any U.S. financial institution. For example, this could include payments in U.S. dollars routed through New York bank accounts that are destined for accounts outside the United States;
- prohibition of any transactions in U.S. currency by the sanctioned person; and
- entering into transactions involving property subject to the jurisdiction of the United States.
It is not clear to what extent these additional prohibitions would have the effect of preventing U.S. financial institutions from extending credit to, or other U.S. persons from making investments in, foreign persons who are engaging in prohibited conduct. The existing sanctions in the ISA including, but not limited to the denial of, U.S. bank loans, appear to apply only to the investment prohibitions contained therein.
Additional Public Pressure on Foreign Companies Doing Business in Iran
As you might have read in the press, the New York Times published an article4 on March 6, 2010 in which the Times sought to identify companies with significant U.S. Government contracts which are also doing business in Iran. Seventy-four companies were identified in the article, including many well known multinational companies.
It is difficult to say whether or not the Times article will have more than a transitory impact. Of course, immediately after it was published, there were calls for sanctions against the companies involved; and in a Wall Street Journal story published last week, a number of significant companies were reported to have announced that they would be, or have already, suspended all business with Iran.
Similarly, last summer, there was considerable controversy following an article in the Wall Street Journal in which the Journal alleged that Nokia Siemens had provided telecom network equipment to Iran that provided the Iranian Government with the capability of monitoring e-mail and telephone traffic in Iran. As a result of the political furor from the Nokia Siemens story, two influential U.S. Senators (Charles Schumer, a Democrat, and Lindsay Graham, a Republican) introduced legislation, the objective of which was to deny companies supplying such telecom equipment to Iran the privilege of being awarded U.S. Government contracts. The Schumer/Graham proposal has not been passed, although many of the concepts in that legislation were incorporated in more comprehensive ISA amendments discussed above. It is conceivable that this type of controversy could arise in other sectors where an international company conducts business with Iran as well as with the U.S. Government.
As noted above, the pending legislation as well as the press coverage of foreign companies’ business activities in Iran and their ties to the United States is highly political, and attention to this subject as well as the speed of passage of final legislation will be affected by the progress (or lack of progress) in international negotiations concerning Iran as well as domestic political developments.
For more information, please contact the following lawyers:
Carl A. Valenstein, Partner
Jerome P. Akman, Partner
Rebecca S. Hartley, Of Counsel