By: Scott Maberry and Reid Whitten
On November 21, 2011, President Barack Obama signed Executive Order 13590 expanding sanctions against non-U.S. companies doing business in Iran. Under the new rules, whole sectors of business between Iran and third countries are now subject to U.S. sanctions. Overnight, non-U.S. companies working in Iran—in sectors not previously subject to sanctions—found their contracts subject to punishment under U.S. law. Many of these companies had invested significant resources in making sure their transactions in Iran did not fall afoul of U.S. sanctions, some having met directly with U.S. Government agencies, including the U.S. State Department, to understand the rules. These companies must now again adjust the aim of their compliance efforts to hit moving targets.
Fortunately for these companies, it appears likely that in the near-term, contracts already in place and compliant with the rules at the time of the November 21 order will not be the target of enforcement actions.
On July 1, 2010, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) was signed into law. In August 2010, the U.S. Treasury Department Office of Foreign Assets Control (OFAC) implemented CISADA through regulations under which the U.S. government could impose a range of penalties against companies doing more than $20 million of business in a year (or any one-time transaction of more than $5 million) with the Iranian petroleum industry.
U.S. persons, including U.S. companies, were already generally prohibited by OFAC sanctions from doing business in Iran, so the effect of the CISADA sanctions fell mainly on non-U.S. companies that conducted business in or with Iran.
Changes Under the New Executive Order
The November 21, 2011 Executive Order substantially expands the types of transactions subject to sanction. Specifically, the new rules create two major changes to the measures enacted under CISADA:
1. With respect to a transaction that "could directly and significantly contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources in Iran," the threshold level for sanctionable transactions is reduced from $20 million in a one-year period (the level set in the CISADA) to $5 million in a one-year period. In addition, any single such transaction that has a fair market value of $1 million or more will now expose the transaction party to sanction.
2. With respect to a transaction that "could directly and significantly contribute to the maintenance or expansion of Iran’s domestic production of petrochemical products" (a sector not previously subject to CISADA sanctions), sanctions may be imposed for transactions that amount to $1 million or more in fair market value during a one-year period. Furthermore, any single such transaction that has a fair market value of $250,000 or more will expose the transaction party to sanction.
The ratcheting up of sanctions reflects an increasing push by the U.S. Government (and, increasingly, many U.S. trading partners) to increase leverage against Iran’s nuclear development programs.
Compliance With Changing Requirements
The spasmodic expansions of Iran sanctions may give the impression of traps laid to snare businesses by suddenly prohibiting various types of transactions. But the U.S. State Department has said it does not intend to play “gotcha” games with companies that do business in or with the United States, and that the real target of the sanctions is the government of Iran.
Based on recent experience under CISADA, we do not believe that the State Department will prioritize sanctions against companies with contracts that were compliant when executed but became prohibited by the new Executive Order, at least in the near term. Conversely, we believe that sanctions will be imposed against companies that initiate new contracts or expand existing contracts to provide goods or services to the Iranian petroleum and petrochemical industries. We also believe that the State Department will publish guidance on compliance with these new rules shortly. We anticipate that this new guidance will outline State’s policy toward deliveries against existing contracts.
Looking Ahead – Upcoming Changes to Iran Sanctions
Businesses engaged in compliant activities in or related to Iran should be aware that, while they may now be standing safely on the shore, the tide may still be moving in: such companies face the risk that their currently-allowable transactions may, in the near future, become subject to new sanctions. At the time of this article’s publication, two bills are under consideration in the U.S. House of Representatives that propose to further increase measures by the U.S. Government against Iran. H.R. 3439 proposes extending CISADA measures to businesses transacting with the Central Bank of Iran in certain cases, while H.R. 1905 proposes prohibiting communication by any U.S. Government personnel with anyone “affiliated” with the government of Iran. In addition, on December 1, 2011, the U.S. Senate passed an amendment to a defense bill that would specifically disallow organizations that do business with financial institutions in Iran, including Iran’s central bank, from holding financial accounts in the United States. It is unclear what chances these pieces of legislation have of becoming law, but they illustrate the same lesson: the boundaries of what is allowed with respect to Iran will likely continue to change.
A company aiming to remain compliant with U.S. laws and regulations is at the greatest advantage when it carefully tracks the shifts in regulations and directs its compliance efforts ahead of the moving target. We will continue to keep a weather eye on Iran sanctions, and report significant developments as they occur.
 Titled: To require the President to impose sanctions on foreign financial institutions that conduct transactions with the Central Bank of Iran if the President determines that the Central Bank of Iran has engaged in certain transactions relating to the proliferation of chemical, biological or nuclear weapons or support for acts of international terrorism
 Titled: The Iran Threat Reduction Act of 2011