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US Imposes First Sanctions Resulting from Human Rights Violations

The U.S. government announced yesterday that eight individuals were being added to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list.  These persons have been sanctioned due to their role in the perpetration of human rights violations in Iran following that country’s disputed 2009 Presidential election.

President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) into effect on July 1. This law requires the President to periodically submit the names of individuals believed to have significant roles in human rights violations in Iran.

The named individuals are:

  1. Mohammad Ali Jafari, Head of the Islamic Revolutionary Guards Corps (IRGC)
  2. Saeed Mortazavi, Former Prosecutor General of Tehran
  3. Sadegh Mahsouli, Iranian Minister of Welfare and Social Security (Former Minister of Interior)
  4. Gholam Hossein Mohsen-Ejei, Prosecutor General of Iran (Former Minister of Intelligence)
  5. Heydar Moslehi, Iranian Minister of Intelligence
  6. Mostafa Mohammad Najjar, Iranian Minister of Interior (Former Minister of Defense)
  7. Ahmad Reza Radan, Deputy Head of the Islamic Republic Police (NAJA)
  8. Hossein Taeb, Deputy Head of the IRGC’s Intelligence Unit (Former Head of the Basij militia)

The sanctions require that any assets held by these individuals in the United States (or any that become subject to the jurisdiction of the US, including branches of U.S. companies abroad) be frozen.  Additionally, such individuals may face visa sanctions should they want to enter the United States.

Although it is unlikely that any of these individuals would seek to make private visits to the United States or to hold property therein, the significance of this Executive Order is that it could very well create difficulty for such individuals should they want to engage in business in third countries, as many third country entities employ screening methods before doing business with foreign nationals.  Furthermore, many other countries may follow suit and similarly sanction these individuals.

Japan Imposes Sanctions on Iran

The Japanese government has imposed its own sanctions on Iran following UN Security Council Resolution 1929.  Japan’s actions include a bar on new energy business with Iran, as well as the sanctioning of 15 banks and an asset freeze on 88 entities.

Banks singled out include:

  • Banco Internacional De Desarrollo CA
  • Export Development Bank of Iran (EDBI)
  • Banque Sina
  • Post Bank of Iran

As mentioned above, 88 entities are now subject to an asset freeze.  Some of these are government entities directly tied to the Islamic Revolutionary Guards Corps (IRGC), such as the IRGC’s air force.  Other entities  include:

  • Etemad Amin Invest Company Mobin
  • First Persian Equity Fund
  • Hanseatic Trade Trust & Shipping (HTTS) GmbH
  • Iran Insurance Company
  • Irinvestship Limited
  • Isfahan Optics
  • Mehr Cayman Limited

Click here to read the full post on the Japanese Foreign Ministry’s website.

Qatar Financial Centre Issues Proposed Rules for Collective Investing

The Qatar Financial Centre (QFC) Regulatory Authority on Monday issued proposed rules governing collective investment / asset management schemes.  According to 1.3 of Consultation Paper 2010/05,  the proposed rules cover the  following:

  • allowing certain authorized firms to operate non-QFC schemes;
  • establishing a regime for QFC retail entities;
  • allowing certain non-QFC schemes to be marketed to the retail sector;
  • allowing the independent entity of a QFC scheme to also perform certain administrative functions for that scheme; and
  • proposals to develop specialist scheme arrangement.

OFAC Releases New Financial Sanctions Regulations Against Iran

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) on August 16 issued a final rule covering financial regulations on Iran.  These new regulations (the “Financial Regulations”) are based on laws outlined in the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), signed into law by President Obama on July 1 following the passage of United Nations Security Council Resolution 1929, which called on heightened limitations on trade with Iran.  The Financial Regulations are provided in the new Part 561 of Title 31 of the U.S. Code of Federal Regulations (CFR) and are separate from the Iran Transactions Regulations (the “ITR”) contained in 31 CFR Part 560.

I released a  to my clients and prospective clients regarding the new OFAC Financial Regulations on Iran.  Click here to download .

Quoted in the Los Angeles Times

Read this article from Tuesday’s Los Angeles Times about the Iran sanctions.

“By limiting Iran’s access to ancillary services necessary for international trade, such as international financing and banking as well as insurance and shipping, countries are making it extremely difficult for many businesses, even those trading in nonsanctioned goods and services, from doing business with Iran,” said Farhad Alavi, a Washington lawyer specializing in the Iran sanctions. “Business is getting very tough for Iran and Iranians, including normal Iranian businessmen who do business overseas.”

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.

Managing a Family Business

Family businesses are exceptionally common in the Middle East, particularly in the Gulf states. Many of these businesses are over one or two generations in age and have mushroomed into giant conglomerates with impressive portfolios, from distributorship rights for foreign companies to construction and manufacturing arms. Some are regionally-known brands. All this does not mean, however, that these businesses are always well run. Certainly, such enterprises need to periodically evaluate and monitor a number of aspects of their businesses. Some of these include:

(1) Corporate Governance Structure. Talking about corporate governance and papering documents can be a bit of a taboo in such family enterprises, but it is absolutely essential. Questions to ask:
– What is the decision-making protocol? Is it formalized?
– Are the corporate books in order?
– Who has power of the purse?

(2) Intellectual Property (IP) portfolio. What kind of rights does the business have over its own marks, copyrights, and patents? What kind of rights does it have over the IP that has been licensed to it by other companies?

(3) Succession Planning. What if a key person leaves the enterprises.

Again, running a family business is no easy feat. Companies need to be exceptionally concerned about management. It goes without saying that poor management can affect the bottom line tremendously, and make the enterprise even more difficult to handle.

The State of the MENA Private Equity Market

The MENA region private equity sector is the subject of much discussion these days.  The Financial Times today published this article which makes mention of an increase in recent fundraising in MENA.  However, the article also states that large deals like those that were much more common in yesteryear are now fewer and far between.

What’s happened?  As with other regions in the world, many preferred private equity / venture capital asset classes in the MENA region (particularly the GCC) have taken a hit.  This can be illustrated just by looking at business news coming out of Dubai.  However, declining real estate prices in Dubai may not necessarily be the best metric for PE activity.

For one, not all private equity investments are or have to be in real estate.  There are many other emerging market sectors in the region that are worthy of investment.  These include clean energy, water desalination, transport infrastructure, and even areas such as education.  Even sectors like hospitality which have arguably reached saturation points in some parts of the GCC may still have notable potential in other less developed parts of the region (I remember trying to book a hotel for a weekend trip to Muscat in 2008 – hotels that would barely go for $70 a night in the Washington, DC area were approximately $200 a night in the Omani capital).

Second, not all private equity investments have to be or are in the GCC region.  Indeed, certain sectors in other jurisdictions such as Lebanon and Egypt appear to be experiencing significant growth, and this is not to mention increasing interest by GCC investors in emerging markets such as east Asia, Africa, and even some as far as Latin America.

Are there barriers to entry? Yes, both for startups seeking MENA/GCC venture capital and for GCC investors seeking to invest overseas.  Issues typical to joint ventures, project financings, and other private equity deals such as deal structuring, overseas dispute resolution, recourse, and risk exposure are not uncommon. Seeking VC funding from the GCC is not the same as doing so in northern California or Washington, DC.  The preferences of investors differ, the investment landscape can be vastly different – so parties should never discount the importance of seeking out expert advice.

The fact is that the GCC remains a small area with huge potential and an arguably tremendous amount of capital that can arguably not only satisfy its internal investment needs also much of those of many other emerging and established markets.

Notes from the Islamic Finance Forum

The US-Qatar Business Council and the Arab Bankers Association of North America (ABANA) co-sponsored the Islamic Finance Forum at George Washington University Law School on Wednesday, July 28.  The talk featured a number of notable personalities in the industry, including Umar Moghul, partner at Murtha Colina, Sheikh Yusuf Talal de Lorenzo of Shariah Capital, and Aamir A. Rehman of Fajr Capital.  Topics covered Islamic investment structures as well as other timely Islamic finance issues, such as recent activities regarding Islamic finance in the US and the Gulf Cooperation Council (GCC) region.

Restructuring Nakheel’s Debt

Much has been said about Nakheel’s debt in the past year.  The large Dubai property developer known best for its creation of the man-made Palm Islands in Dubai has had its share of financial problems.  Much of this came in the aftermath of the Lehman Brothers’ collapse nearly two years ago, and the decline in property values in Dubai that soon followed.

This article in discusses a new proposal by Nakheel (owned by Dubai World) to reschedule some of its debt.  Companies reschedule debts all the time, so makes Nakheel’s debt interesting?  Nakheel’s debts touches on two major issues in international law – (1) Islamic Finance; and (2) sovereign guarantees and immunity in the commercial sphere.  Indeed, many do not even know that Nakheel has been a notable issuer of Sharia-compliant debt.

While Nakheel’s case may  have not been the best plug for Islamic finance, it is arguably an exercise in the feasibility of using Sharia-compliant finance in sophisticated transactions.  Nakheel in this case used an Ijara-based structure to create the basis of a Sukuk, often referred to as an “Islamic Bond” (notably, the Sharia does not permit bonds as most people know them; instead, Sukuk are generally supposed to be ownership certificates that are backed by tangible assets).  Good or bad, the publicity that has risen from this case could have a positive impact on the recognition of Islamic finance outside the Muslim world.

Click here for an interesting commentary in the UAE’s The National on Sukuk investments.