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 ArabianBusiness.com 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.

Interpreting the New US Sanctions on Iran

President Obama signed into effect the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 on July 1.  Just when you thought the United States had exhausted all its recourse against the Islamic Republic of Iran (due to very comprehensive, existing sanctions), a new legal framework has been implemented that makes full use of the U.S.’ economic prowess and influence over third countries.  I was quoted on this law in the Financial Times on July 14, 2010.  Click here for a link to the article.  The Los Angeles Times has also quoted me – click here.

How Does the Bill Affect Iran?

As mentioned above, the United States maintains comprehensive unilateral sanctions on Iran, preventing U.S. persons (as defined in the applicable regulations) from engaging in transactions for the provision of most goods and services to Iran.  As the United States has fewer levers to pull given the breadth of the current sanctions, Congress did the next best (and possibly better) thing – implementing sanctions on third country entities that assist or do business with Iran in key sectors, such as the country’s nuclear, finance, and energy sectors, not to mention the Islamic Revolutionary Guards Corps (IRGC) and related entities.

What’s Covered?

The new bill covers a range of entities and activities. Additionally, it requires that the administration periodically collect data on Iranian business done by G20 nations.  Notably, human rights play a key role as well – with the placement of sanctions on individuals responsible for human rights violations in Iran following that country’s June 2009 presidential elections.

A summary I wrote on the new law is available on the Iranian-American Bar Association (IABA) website.  Click here.

OFAC Targets More Iranian Entities

Following the trail of UN Security Council Resolution 1929 passed last week in response to Iran’s continued non-compliance with earlier UNSC resolutions, the United States today added numerous parties to its listed of sanctioned entities.

The U.S. government entity responsible for the country’s primary sanctions regime against Iran is the U.S. Treasury Department of Foreign Assets Control (OFAC).  In addition to promulgating regulations limiting trade with Iran and a number of other countries, OFAC also maintains the Specially Designated Nationals (SDN) list, a list of entities with whom any U.S. trade is prohibited.

Today’s listing, summarized in a Reuters article today, includes numerous entities related to Iran’s defense sector. This includes Defense Minister Ahmad Vahidi, Islamic Revolutionary Guards Corps (IRGC) Commander-in-Chief Ali Jafari, and head of the IRGC’s Basij paramilitary force, Brigadier General Mohammad Reza Naqdi.  Also included, among other entities, is the IRGC Air Force and IRGC Missile Command.

The sanctions also cover extensive shipping industry entities, including a number of ships and shipping companies.

Iran’s Post Bank has also been listed on the SDN.

Notably, as the previous post noted, the European Union is also contemplating similar types of sanctions against Iranian entities.  It should be stated that these sanctions do not appear to pose any particular pressure on Iranian civilians, rather they look to be crafted with an eye to pressure the IRGC and related entities, as well as entities deemed to be assisting Iran’s nuclear and missile programs.

New Sanctions Against Iran

A report in Tuesday’s Sydney Morning Herald states that the government of Australia has adopted sanctions against certain Iranian entities including Bank Mellat, Islamic Republic of Iran Shipping Line (IRISL) and General Rostam Qasemi head of the IRGC’s Khatam Al-Anbiya Construction Group.

The Australian decision follows a report in the New York Times detailing plans by the European Union to implement sanctions against Iran.  According to the report, these sanctions may eventually touch on Iran’s financial and energy sectors.  There appears to be a lack of consensus among EU states, and as such it will be interesting to see what the EU ultimately decides on.

Notably, the Financial Times has reported that there are certain legislative initiatives underway in the United States to sanction international banks engaging in business with Iran, in other words, third country institutions engaging in certain business with specific Iranian entities.

Given the very strong sanctions regime against Iran under current U.S. law, the U.S. government is arguably somewhat limited in using direct sanctions as leverage against Iran.  Conversely, the U.S.’ more recent strategy of dissuading third country financial institutions and other companies from doing business with Iran appears to be having a more direct impact on the Iranian economy.

A review of MENA Region Legal and Business Affairs.