November 3, 2009

The U.S. Dual-Track Strategy of Economic Sanctions and Engagement With Iran: Recent Developments and Potential Impact on Foreign Businesses

Holland & Knight Alert
Jonathan M. Epstein | Antonia I. Tzinova

Since taking office, President Obama and his administration have adopted a dual-track strategy on Iran that differs markedly from the previous administration’s approach toward Iran. The current administration appears committed to opening a dialogue with Iran, while at the same time laying the groundwork for tougher sanctions.1 In addition, the administration is pursuing its objectives in concert with the international community, rather than taking unilateral action.

The United States has a history of imposing unilateral sanctions; and the language in legislation currently pending in the U.S. Congress would have extraterritorial implications for U.S. companies’ foreign subsidiaries and for other non-U.S. companies. In particular, the sanctions currently being proposed – both in U.S. legislation and for United Nations Security Council consideration – target the refined petroleum industry of Iran, and entities providing investment, financing or transportation in support of that industry.

Although some companies are taking a wait-and-see approach, other non-U.S. companies are either actively winding down business with the Iranian petroleum sector or developing wind-down plans to mitigate risk in anticipation of additional unilateral U.S. or multilateral UN sanctions against Iran.

No Change to the Letter of the Law, But…

Notwithstanding various legislation and talk of tougher sanctions, there has been no recent change to the letter of the law.2 The last substantive change occurred in November 2008, when the Office of Foreign Assets Control (OFAC), the agency that principally administers Iran sanctions, barred previously authorized “U-Turn”/dollar-clearing transactions through U.S. banks involving Iran.

However, while historically OFAC has focused on the activity of U.S. individuals and companies, more recently, OFAC and its sister agency, the Department of Commerce Bureau of Industry and Security (BIS), have both been increasingly more aggressive investigating and sanctioning wholly foreign entities that are believed to have violated U.S. embargo or export laws. For example, in September 2008, OFAC designated as Specially Designated Nationals (SDN) several Iranian banks, the Islamic Republic of Iran Shipping Lines (the largest Iranian shipping company), and a number of associated entities and vessels of various nations as proliferators of weapons of mass destruction. Similarly, BIS has temporary placed on the Denied Persons List (DPL) foreign entities believed to have re-exported U.S.-origin goods to Iran in violation of U.S. law.3

This concept of designating specific actors may reflect, in part, a shift in OFAC’s approach from broad and often difficult-to-enforce country sanctions, to sanctions targeting specific entities and persons. Such specific designations have also proved an effective means force foreign entities to comply with extraterritorial application of U.S. law.

Pending Legislation in the U.S. Congress

A number of bills are pending that would increase sanctions against Iran, although the administration has signaled that at this time it will not support legislation unless it can secure the approval of U.S. allies. For example, at the end of April 2009, two bills were introduced, one in the Senate (S. 908), and the other one in the House of Representatives (H.R. 2194). The two bills are substantially similar, and have broad support in Congress (at this writing, 75 cosponsors for the Senate bill and 326 cosponsors for the House bill). In general, they propose to authorize the President to impose additional sanctions relating to Iran’s refined petroleum industry.4

The proposed legislation targets the following activities of non-U.S. persons (note that U.S. persons are already prohibited from engaging in such activities under current OFAC regulations):

  • development of the petroleum resources of Iran, either through foreign investment exceeding $20 million over a 12-month period; or selling, leasing or providing Iran any goods, services, technology, information or support that would allow Iran to maintain or expand its domestic production of refined petroleum resources
  • exportation of refined petroleum resources to Iran, or contributing to the enhancement of Iran’s ability to import refined petroleum resources, including by providing shipping, insurance, financing or brokering services

The new legislation would effectively preclude foreign entities that provide goods or services that enhance Iran’s ability to maintain or expand its domestic production of refined petroleum from doing business or otherwise dealing with the United States, by potentially barring them from engaging in any banking transaction or foreign exchange with the United States, or from engaging in any other transaction with a U.S. person.

More recently, the House approved legislation (H.R. 1327) by a 414-6 vote allowing state and local governments to divest from companies doing significant business with Iran’s energy sector. The bill would allow state and local governments to divest from companies engaged in significant business with Iran’s energy sector, if such investment exceeds $20 million. H.R. 1327 has a corresponding bill in the Senate, S. 1065 (38 cosponsors), which has been read twice and referred to the respective Senate committees.

To date, congressional leaders have not attempted to push through legislation unilaterally without support from the administration. However, as House Foreign Affairs Committee Chairman Howard Berman (D-CA) said, “[S]hould engagement with Iran not yield the desired results in a reasonable period of time, Congress will have no choice but to press forward with additional sanctions that could truly cripple the Iranian economy.”5

New Developments in the U.S.-Iranian Relations

Developments in October 2009 have been a mix of positive signals and defiance by Iran.

Earlier in October, the P5+1 countries (i.e., the five permanent members of the UN Security Council and Germany) met in Geneva with representatives of Iran. The goal of the meeting was to have Iran engage actively in meeting its obligations to the International Atomic Energy Agency (IAEA). As President Obama put it, “If Iran does not take steps in the near future to live up to its obligations, then the United States will not continue to negotiate indefinitely, and we are prepared to move towards increased pressure.”6 A day later, the U.S. Department of State published its position that it “believes that the Iranians in the Geneva meeting have agreed in principle to open up facilities and to accept the proposal to send low-enriched uranium out of the country.”7 As of October 23, 2009, it was unclear whether Iran would comply with a compromise to ship uranium to Russia for processing, and notwithstanding Iran’s agreement to allow IAEA inspectors to visit certain sites, this has not yet occurred.

While pursuing a diplomatic solution, the United States has also secured a clear and unified message of the P5+1 in Geneva regarding potential sanctions should Iran not comply, as well as forging regional partnerships to gain cooperation from certain key countries. As a result, although it appears the United States will continue its dual-track strategy, the government is paving the way for additional sanctions on a multilateral basis, should the latest rounds of talks prove unsuccessful or Iran not honor its commitments.8

How to Prepare for Changes

While hoping for the best from a risk-management perspective, companies must plan for the worst. If U.S. policy toward Iran continues to harden, foreign companies may want to consider taking the following two steps:

  • reviewing current compliance procedures to ensure that they comply with U.S. embargo and export laws
  • developing (and potentially implementing) plans for winding up currently lawful activities related to Iran, especially if their operations, or their parent company operations, have a U.S. nexus, or if they support the petroleum industry in Iran

These steps would reduce the risks and reputational harm that could be caused if there were a U.S. investigation of the company’s business, even if its activities were lawful. In addition, there are advantages to winding-up business activities in an area voluntarily over a period of time versus an abrupt cessation mandated by new sanctions. The latter can disrupt supply chains, and potentially cause a company to default on obligations to distributors or other customers.

1 See U.S. Secretary of State Hillary Clinton Presentation to the U.S. House Foreign Affairs Committee, April 22, 2009.

2 31 C.F.R. Part 560, Iranian Transactions Regulations administered by the U.S. Department of the Treasury Office of Foreign Assets Control (OFAC). Note that OFAC administers a few different sets of economic sanctions programs, including a program relating to the Iranian Assets Control, 31 C.F.R. Part 535, which blocks Iranian assets that currently are or may come into possession of the United States.

3 The United States asserts jurisdiction over U.S.-origin goods, and foreign-made goods containing more than 10 percent of U.S. content by value. Although there are some exceptions for uncontrolled goods sold by foreign persons from inventory to Iran, generally most reexports of U.S.-origin goods to Iran are prohibited.

4 Sec. 2(b), H.R. 2194.

5 Rep. Berman, as quoted in “House Set to Move on New Sanctions Against Iran as Clinton Steps Up Pressure,” The BNA Reporter, September 21, 2009.

6 Remarks by President Obama on the Meeting of the P5+1 Regarding Iran, October 1, 2009, available at

7 U.S. Department of State Daily Press Briefing, October 2, 2009, available at See also U.S. Department of State Background Briefing on P5+1 Talks in Geneva, October 1, 2009, available at 

8 See “Minimizing Potential Threats from Iran: Administration Perspectives on Economic Sanctions and Other U.S. Policy Options,” Deputy Secretary of State James B. Steinberg Opening Statement before the Senate Banking, Housing and Urban Affairs Committee, October 6, 2009.

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