August 16, 2012

Iran Sanctions: U.S. Significantly Expands Sanctions Against Iran Considerably Limiting Trade in Petroleum Products to and from Iran

Holland & Knight Alert
Jonathan M. Epstein

In the last few weeks, the United States has significantly ratcheted-up sanctions against Iran with a new presidential Executive Order and new legislation. Together, these new sanctions substantially restrict the types of trade that the international shipping community can continue to undertake with Iran. In particular, the following are affected:

  • the carriage of crude oil, petroleum products, or petrochemical products to or from Iran could be deemed to violate U.S. sanctions, except in limited circumstances
  • a non-U.S. entity owned or controlled by a U.S. parent company is subject to the same embargo rules as the U.S. parent, and the parent may be liable for violations by the non-U.S. subsidiary

The New Sanctions

On July 30, 2012, President Obama issued Executive Order 13622 (the "Order") targeting Iran's petroleum sector. Within days Congress passed H.R. 1905, the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA or the "Act"), which the president signed into law on August 10, 2012. Prior versions of H.R. 1905 passed in both the House and Senate, and were in conference committee for much of the summer. (See our International Trade alert, "Further Round of U.S. Sanctions on Iran Likely if Diplomatic Talks Do Not Succeed," May 29, 2012). It is unclear whether the president's issuance of the Order prompted Congress to move forward with the Act, or whether the president sought to preempt the Act, which constrains the president's discretion in carrying out foreign policy. In either case, these represent different approaches to sanctions: the Order targets specific activities relating to Iran's petroleum section, whereas the 147-page Act contains a wide range of provisions.

The international shipping community has been struggling to comply with the rapidly changing and ever more complex extraterritorial reach of U.S. sanctions on Iran. In the last two years, we have already seen two significant legislative initiatives (the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) and the National Defense Authorization Act of Fiscal Year 2012 (NDAA)), and several presidential Executive Orders, all of which have extraterritorial application. Hence, the new sanctions can only be understood in the context of the pre-existing sanctions.

Restrictions on Import and Export of Crude Oil, Petroleum Products and Petrochemical Products into or out of Iran

The new sanctions codify and expand the Iran Sanctions Act (ISA) beyond the sanctions imposed under CISADA. Taken together with pre-existing sanctions, there are now only limited circumstances where non-U.S. vessel owners and operators can transport crude oil, petroleum and petrochemical products to or from Iran.

Importing Products into Iran. Together with pre-existing sanctions, the Order and Act would mean that the following are sanctionable:

  • Petroleum Resource Development. Providing goods or services to support Iran's development of petroleum resources (e.g., oil exploration and extraction), if valued at $1 million or more ($5 million over 12 months), or under the Act any joint development project with the Iranian government regardless of dollar value
  • Petrochemicals. Providing goods or services to support Iran's ability to produce petrochemicals valued at $250,000 or more (or $1 million or more over 12 months)
  • Refined Petroleum Products. Providing goods or services to supply refined petroleum products to Iran valued at $1million or more (or $5 million over 12 months)
  • Refined Petroleum Production. Providing goods or services to support Iran's ability to refine petroleum products valued at $1 million or more ($5 million over 12 months); the Act clarifies that goods or services relating to transportation infrastructure that supports petroleum refining (e.g., port, railway) are included in the prohibition

Exporting Products from Iran. The new sanctions now target the export of petroleum and petrochemicals from Iran, including the following:

  • All Exports of Petroleum-Related Products. Under the Order, any entity that engages in a significant transaction for the export of crude oil, petroleum production, or petrochemicals from Iran is potentially subject to sanctions, except for exports of crude oil to the 20 countries currently exempted by the president under the NDAA. These countries are currently Belgium, China, Czech Republic, France, Germany, Greece, India, Italy, Japan, Malaysia, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, Sri Lanka, Taiwan, Turkey and the United Kingdom. While the Order targets the principals in these transactions (e.g., the buyers of such product), a vessel owner or operator carrying this type of cargo from Iran could be deemed to enter into a "significant transaction" depending on the facts and circumstances.
  • Specific Sanctions on Crude Oil Exports. Subject to a 90-day grace period, the Act would sanction any entity that transports or insures the transport of crude oil from Iran, except to the NDAA-exempt countries identified above. Sanctions would also apply to the beneficial owner or operator of a vessel.

Targeting Specific Iran Entities for Sanctions

The U.S. has increasingly targeted specific Iranian entities and non-Iranian entities owned or controlled by Iran for additional sanctions, and in some cases designating such entities as Specially Designated Nationals (SDNs). Most recently the U.S. sanctioned Kunlun Bank in China and Elaf Bank in Iraq for providing banking services to Iranian banks designated under certain programs, as well as Sytrol, Syria's oil-marketing company. These new sanctions continue the use of these designations, including the following:

  • Sanctions Against the National Iranian Oil Company and Related Entities. The new sanctions prohibit any entity from providing goods or services or material support to the National Iranian Oil Company (NIOC) and the Naftiran Intertrade Company (NICO). Furthermore, there are sanctions on foreign financial institutions that engage in transactions with NIOC and NICO. The Order would also sanction any entity that provides insurance or reinsurance to NIOC or the National Iranian Tanker Company (NITC).
  • Sanctions Against the Iran Revolutionary Guard Corp (IRGC). The U.S. already has limited sanctions against the IRGC, and has designated numerous entities as SDNs for being owned or controlled by the IRGC. The Act tightens restrictions by sanctioning any entity that provides goods, services, or material support to the IRGC or its affiliates.

Assisting Iran in Evading U.S. Sanctions

The U.S. has increasingly focused on sanctioning entities that assist Iranian entities in evading sanctions. For example, ING Bank N.V. recently paid $619 million for removing information concerning embargoed countries from wire transfers clearing through U.S. banks. More recently, Executive Order 13608 gave U.S. enforcement agencies additional authority to sanction entities that assist Iran in evading sanctions by concealing payments or other means.

  • Concealing the Origin of Iranian Petroleum. The Act imposes potentially draconian sanctions on any entity that conceals the Iranian origin of crude oil or refined petroleum products. This provision clearly targets vessel owners and operators — examples of concealment include suspension of a vessel's satellite tracking device, or obscuring the operation or control of a vessel by the government of Iran, the NITC, or the Islamic Republic of Iran Shipping Company (IRISL). Any vessel beneficially owned or operated by an entity sanctioned under this provision may be barred from entering the U.S. for two years.

General Prohibitions Applying to U.S. Persons

In general, U.S. persons (e.g., U.S. citizens, resident aliens, U.S. companies and persons physically in the U.S.) cannot generally engage in transactions with Iran, Iranian entities, or involving Iranian-origin goods, nor can U.S. persons facilitate transactions by foreign persons with Iran. The new sanctions change this, as follows:

  • Close U.S. Foreign Subsidiary Exception. The Act, with a 60-day grace period, closes the longstanding exception that allowed foreign companies owned or controlled by U.S. companies to operate in or trade with Iran, provided the U.S. parent did not facilitate such activities of the foreign subsidiary. Further, the Act would sanction the U.S. parent company for such activities of its foreign subsidiaries, unless the U.S. parent divests or terminates its business with the foreign subsidiary within 180 days.
  • Mandatory Disclosures for Issuers. For companies that are publicly traded on U.S. stock exchanges (e.g., issuers), the Act would remove ambiguity about when activities relating to Iran must be disclosed in public filings with the Securities and Exchange Commission (SEC). In particular, if the issuer or its affiliates knowingly engage in certain activity sanctionable under U.S. law (including petroleum-related transactions involving Iran), or knowingly engage in transactions with certain blocked entities (including the government of Iran and its instrumentalities) such activity must be disclosed. Furthermore, such information would be "credible evidence" of a violation requiring a mandatory investigation.

Financial Industry and Banking Sanctions

Pursuant to the prior legislation and Executive Orders, the U.S. already has the authority to sanction foreign financial institutions that conduct or facilitate significant financial transactions, including those related to petroleum or petroleum products, with the Central Bank of Iran or any other Iranian banks. Currently, all Iranian banks and some non-Iranian banks have been designated as SDNs. The new sanctions expand this as follows:

  • Sanction Against Foreign Financial Institutions. Under the Order, the U.S. may sanction foreign financial institutions for conducting or facilitating significant transactions with the NIOC, NICO, or transactions for the purchase or acquisition of crude oil, petroleum products, or petrochemical products from Iran.
  • Sanctions Against Financing Messaging Services. Notwithstanding that the SWIFT has cut-off message processing with Iranian financial institutions subject to EU sanctions, the Act seeks to force SWIFT to cease providing messaging services to all Iranian financial institutions. Under the Act, the U.S. could sanction SWIFT and other financial messaging service providers that Iranian banks may be using.

Implications of New U.S. Sanctions for Non-U.S. Vessel Owners and Operators

This alert is intended only to highlight the major provisions of the new sanctions affecting the shipping industry, rather than provide an in-depth analysis. In light of the new U.S. sanctions, vessel owners and operators need to reevaluate whether and what kinds of services they can continue to provide in transporting products to or from Iran. Given the complexity of sanctions, this may need to be examined on a voyage-by-voyage basis.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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