President Obama on Saturday signed the National Defense Authorization Act for Fiscal 2012 (HR 1540), which contains somewhat sweeping sanctions on Iran’s financial and petroleum sectors.  Although US sanctions on Iran have long prohibited the purchase by US persons of Iranian oil and other petroleum products, the new sanctions hit out against third country purchases of Iranian oil and dealings with the Central Bank of Iran (CBI).

The part of the bill addressing Iran is not very long, but is potentially far reaching.   It first calls for the freezing of all assets owned or controlled by all Iranian financial institutions if said interests come within US jurisdiction.  This is somewhat unclear as it is similar to language that allows the blocking by US financial institutions of all transfers in which designated banks (such as Bank Saderat, Bank Melli, etc.) have an interest.  Therefore, the question remains – if funds are transferred from a non-sanctioned Iranian bank to a third country bank for transfer to the United States (pursuant to an otherwise authorized transaction), can those funds be blocked?  One presumption is that there will likely be a carveout to protect licensed funds transfers (such as non-commercial family remittances to and from Iran).

Also, on a going forward basis, third country banks deemed to have engaged in a “significant financial transaction” with the CBI or a designated bank (again, such as Saderat, Melli, Sepah, etc.) may be subject to prohibitions on correspondent or “payable-through” accounts in the United States.

Third country central banks and government owned/controlled financial institutions can also be subject to sanctions if they are deemed to facilitate the purchase of Iranian and petroleum products after 180 days from the signing of the bill.  Of course, the President can impose waivers if it is deemed to be in the US national interest and if the President provides adequate reports to Congress.

Naturally, there are carveouts. For example, the President is explicitly barred from implementing certain sanctions with respect to entities conducting or facilitating transactions for agricultural, medical, and medical device sales to Iran.  Furthermore, there are provisions that among other things call for certain diplomatic initiatives regarding the use of sales to Iran by countries purchasing Iranian petroleum and petroleum products.

Two days after its signing, reports are abounding that the Iranian Rial has already lost 10% of its value (it has already lost significant value in the preceding 6 months).  It remains to be seen what the political effects are but it is arguable that despite the discretion afforded the President, the law could result in a significant decrease in third country purchases of Iranian oil and related products.