New U.S. Sanctions on Iran Following U.N. Security Council Resolution 1929

President Obama on July 1 signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, which amends the Iran Sanctions Act of 1996. Following United Nations Security Council Resolution 1929 passed in June, the new U.S. law is primarily a response to Iran’s nuclear and defense programs, but is wide-ranging in scope, covering topics as diverse as the energy industry, financial transactions, export-control regulations, U.S. government contracting, Iran’s Islamic Revolutionary Guard Corps (IRGC), and human rights. As a result, the law will arguably lead to a very drastic change in the form and nature of the U.S. sanctions regime in effect against Iran.

A clear message we can take from this new legislation is that U.S. sanctions are a real concern not just for U.S. persons (as defined in the law), but also businesses and individuals outside the United States.

What Does the New Law Cover?

The United States has long maintained strict sanctions prohibiting most business between U.S. persons and Iran.  The new law preserves certain exceptions to these restrictions, such as the export of certain agricultural, medicinal and food products to Iran pursuant to a license issued by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and trade in informational materials like publications, film, and music.  However, it closes the door to the import of presently permitted goods such as Iranian pistachios, carpets, and caviar.  The restrictions do not end there, however.  Beyond U.S. persons, the new law also affects other industries and a wide range of non-U.S. persons.

A noteworthy aspect of the new law is its many extra-territorial applications.  The law leverages the U.S.’ role as the world’s largest economy as a tool to dissuade third country nationals in certain key industries from doing business with Iran.  It does this by subjecting persons in third countries with U.S. sanctions if they engage in certain activities.  In other words, the looming threat of being sanctioned by the United States can render trade with Iran an extremely expensive and risky exercise for third country parties.

The new law imposes deep-reaching restrictions on activities related to Iran’s energy industry.  It sets a very low threshold on third country entities doing business with Iran’s energy sector, including activities such as providing investment, assistance, certain services, and goods such as refined petroleum products to Iran.  Irrespective of nationality, companies engaging in such activities can be subject to a wide range of U.S. sanctions, such as certain prohibitions on banking transactions, foreign currency activities, and an effective freeze on certain assets (such as real estate) under U.S. jurisdiction.

The new law imposes many financial sanctions impacting Iran, generally consistent with other U.S. efforts in recent years.  This includes a call on the U.S. President to consider imposing sanctions on certain Iranian financial institutions, including Iran’s Central Bank.  Further, the law requires the U.S. Treasury Secretary to prescribe sanctions restricting third country financial institutions from opening or maintaining corresponding accounts in the United States if the third country institution provides certain types of services to the Iranian government.

The law also covers other commercial activities.  For example, the U.S. President is now required to provide certain congressional committees with periodic reports of Iran’s trade with other G-20 nations. Additionally, the law calls on the United States to identify and impose sanctions on third country entities who provide material support to or engage in commercial or financial transactions with the IRGC as well as its officials, agents, instrumentalities, affiliates, and fronts, among others.

Export controls on sensitive “dual use” goods having civilian and military application are of particular concern to the U.S. government and the new law addresses this issue.  It calls on the U.S. government to undertake greater efforts to prevent the reexport of certain dual-use goods and defense articles to Iran through third countries.  Such countries can now be subject to a designation by the United States as a “Destination of Diversion Concern,” which will greatly restrict the export of such items to that third country.  Consequently, many countries will feel compelled to impose tighter export control restrictions and customs inspections in order to avoid the potentially disastrous effects of such a designation by the U.S. government.

What does it all mean?

In addition to direct limitations on doing business with the United States, sanctioned companies and individuals in third countries can often face problems when doing business with other non-U.S. companies.  For example, a third country company placed on one of the U.S.’ many sanctions lists following an alleged violation of U.S. export laws may face difficulty with business parties in Europe, even if a given transaction has no connection to the United States or Iran. Why? Companies around the world are increasingly screening the names of prospective business partners, counterparties and purchasers using periodically updated software programs that list entities sanctioned by the U.S. and other jurisdictions.  Therefore, even if a certain list only governs transactions with U.S. persons, businesses in other countries may voluntarily choose to not work with that listed company. Financial institutions, energy companies, and others will continue finding it increasingly costly to do business with Iran and many will likely decide to pull out of Iran altogether.   

As with most types of trade restrictions, the new U.S. law will increase compliance burdens for businesses in the United States and elsewhere as the law poses real concerns for businesses globally. Additionally, UN Security Council Resolutions are binding on all UN members and jurisdictions such as the European Union and the UAE are taking affirmative steps to block certain Iranian business activity in their territories.

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