November 30, 2011

U.S. Tightens Sanctions on Iran: Targets Petroleum/Petrochemical Trade and Financial Sector With Further Extraterritorial Sanctions

Holland & Knight Alert
Jonathan M. Epstein

President Obama signed Executive Order 13590 on November 20, 2011, ratcheting up sanctions on Iran. The sanctions target non-U.S. entities and transactions that take place wholly outside the United States. Hence, they are directly and immediately relevant to non-U.S. entities in the maritime and energy sectors that trade with Iran.

These new sanctions:

  • lower the thresholds for sanctionable activity relating to investments in petroleum resources from $20 million to $1 million
  • target transactions involving Iran’s production of petrochemical products of $250,000 or more
  • exert additional pressure on foreign financial institutions to cease doing business with Iranian banks

The latest round of sanctions are, at least in part, a reaction to the troubling November 9, 2011, International Atomic Energy Agency (IAEA) report, which indicated that Iran has carried out tests related to the development of nuclear explosive devices. As discussed below, the United States is not the only country increasing sanctions on Iran as a result of this report.


In July 2010, Congress passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). CISADA targeted foreign entities that provided or assisted in providing “refined petroleum products” to Iran or provided goods or services that could significantly contribute to Iran’s ability to produce refined petroleum products. To be sanctionable the value of the goods or services had to exceed a $1 million threshold (or $5 million over the course of a year). However, with respect to the “petroleum resources” (e.g., the development of crude oil and natural gas resources), CISADA left in place the 1996 legislation thresholds that sanctioned only “investments” in Iran’s petroleum resources sector of at least $20 million (or investments of $5 million or more that total $20 million or more in a 12-month period).

The U.S. Department of State has used CISADA to impose sanctions on a limited number of non-U.S. entities under CISADA for petroleum related transaction with no U.S.-nexus. In some cases, the sanctions imposed resulted in the foreign entities being “blacklisted” entirely from trade with the U.S. by designation on the U.S. Treasury Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list.

New Sanctions on Petroleum Resources

The executive order gives the State Department the authority to sanction any entity that sells, leases or provides goods, services, technology, or support worth $1 million or more (or that during a 12-month period has an aggregate value of $5 million or more) for the development of Iran’s petroleum resources.

Not only is the dollar limit dramatically lower than the $20 million threshold under CISADA, but the type of activities that are sanctionable are no longer limited solely to “investments.” For example, the sale of oil drilling equipment to Iran worth more than $1 million could result in sanctions being imposed on:

  • the seller selling the goods
  • the buyer in Iran buying the goods
  • the bank financing the transaction or providing the letter of credit
  • the shipowner, ship operator, or time charterer

These new sanctions continue to target goods and services being provided to Iran (e.g., inbound transactions). The export of crude oil from Iran is not specifically targeted.

New Sanctions on Petrochemical Products

The executive order gives the State Department authority to sanction any entity that sells, leases or provides goods, services, technology, or support worth $250,000 or more (or that during a 12-month period has an aggregate value of $1 million or more) for the maintenance or expansion of Iran’s petrochemical products. Petrochemical products include any aromatic, olefin and synthesis gas, as well as any of their derivatives. While it is unclear if this is intended to reduce Iran’s ability to develop synthetic fuels, or simply to place additional economic pressure on Iran, this sanction will significantly curtail trade in petrochemicals with Iran. In particular:

  • Provision of any intermediate chemical that could be used in producing these petrochemicals could trigger sanctions.
  • Given the low dollar thresholds, it is likely that a vessel owner, operator or time charterer would violate sanctions because the fair market value of a vessel charter will likely exceed the $250,000 threshold.

Designation of Iran as Country of Primary Anti-Money Laundering Concern

On November 21, 2011, the U.S. Department of the Treasury designated Iran as being a jurisdiction of primary anti-money laundering concern. The designation is broad and covers the entire Iranian financial sector, including Iran’s central bank and all Iranian private banks, including their subsidiaries and branches outside of Iran. This designation allows Treasury to require U.S. financial institutions to take “special measures” to reduce the risk of money laundering. While U.S. financial institutions are already prohibited from engaging in or facilitating transactions with Iran, this designation will indirectly put additional pressure on foreign financial institutions to cease banking transactions with Iranian banks.

In conjunction with the designation, Treasury proposed rules that would require financial institutions to take certain steps to make sure that their correspondence accounts with foreign financial institutions are not being used by foreign financial institutions for transactions by Iranian banks. While certain targeted requirements were already implemented in this area under rules promulgated under CISADA, these proposed rules are more comprehensive.

Additional SDN Designations in Maritime Sector

The United States continues to identify and blacklist entities and vessels linked to the Islamic Republic of Iran Shipping Lines (IRISL), an entity identified as a proliferator of weapons of mass destruction (WMDs). In particular, OFAC, on November 23, 2011, designated as SDNs a number of Maltese, Cypriot and Barbados flag vessels, as well as certain Iranian shipping companies.

International Sanctions

The IAEA report is also prompting international reaction. The United Kingdom issued an order essentially prohibiting financial transactions and relationships between UK financial institutions and banks incorporated in Iran, and their foreign subsidiaries and branches. Canada has imposed additional sanctions on Iran, and the European Union is expected to impose additional sanctions on certain persons and entities in Iran shortly.

This latest round of sanctions against Iran may have a direct and immediate impact on current and planned shipments to Iran. Therefore, companies need to review and make decisions regarding ongoing and pending shipments to Iran. As a broader issue, the continued ratcheting up of sanctions, particularly in the financial sector, and the increased multinational implementation of sanctions against Iran, will only continue to increase the risks involved in doing business with Iran.

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