Sanctions Round-Up: Second Quarter 2013

Author:Mr Philip Urofsky, Danforth Newcomb, Stephen Fishbein, Richard J.B. Price, Brian Burke and Brian Wheeler
Profession:Shearman & Sterling LLP

The end of the second quarter was marked by a flurry of Iran-related activity, with President Obama authorizing new sanctions targeting Iran and OFAC preparing for IFCA sanctions that came into effect on July 1. OFAC otherwise continued to target human rights abusers, foreign sanctions evaders, and North Korea's nuclear weapons and ballistic missile programs.Meanwhile, OFAC's issuance of a new licensing policy and a waiver authorizing certain transactions in support of Syrian opposition forces mirrored the Obama administration's evolving policy toward greater involvement in the Syrian conflict.Minor changes were also made to US sanctions targeting Burma and Sudan. Additionally, both OFAC and the NY Department of Financial Services announced settlements regarding sanctions violations at the end of the second quarter.

This quarter's sanctions update includes a discussion of:

The Iran Freedom and Counter-Proliferation Act of 2012  E.O. 13645, issued June 3, 2013 Enforcement Against Foreign Sanctions Evaders Enforcement Against Human Rights Abuses New US Sanctions Targeting North Korea Evolving US Sanctions Targeting Syria Extension but Easing of US Sanctions Targeting Burma New General License for US Sanctions Targeting Sudan High Profile Settlements Sanction Removals Online Licensing Tool Launched by OFAC IFCA Provisions Go Into Effect

As described in our Q4 2012 Sanctions Roundup, the Iran Freedom and Counter-Proliferation Act of 2012 ("IFCA") was signed into law on January 2, 2013 as part of the National Defense Authorization Act for FY 2013 ("NDAA 2013"). Most of IFCA's provisions, which target specific sectors of Iran's economy along with the provision of certain goods and services to Iran,1 apply to conduct occurring on or after July 1, 2013. This includes IFCA's broad prohibitions on activities related to Iran's energy, shipping, and shipbuilding sectors; the sale of precious or other materials to or from Iran; the provision of underwriting services, insurance, and reinsurance for sanctionable activities related to Iran; and financial transactions involving sanctioned Iranian persons. Under IFCA, foreign financial institutions ("FFIs") are subject to correspondent account sanctions imposed by OFAC pursuant to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA"), and non-US persons are subject to sanctions pursuant to the Iran Sanctions Act ("ISA"), as amended, imposed by the State Department.2 On June 3, OFAC published on its website answers to a number of frequently asked questions regarding IFCA, noting that OFAC regulations and guidance from the State Department are forthcoming. A few additional FAQs were subsequently published on July 1. The guidance provided by these answers is qualified by OFAC's repeated disclaimer that it is merely "anticipating" what will be included in the contents of the formal regulations. The new sanctions that came into effect on July 1 include those targeting:

Activities Related to Iran's Energy, Shipping, and Shipbuilding Sectors

IFCA authorizes sanctions on anyone participating in "significant" activities and transactions related to Iran's energy, shipping, and shipbuilding sectors, including the provision of support or significant goods or services used in connection with those sectors.3 Particularly relevant to the shipping and shipbuilding industries, OFAC has stated that this includes activities that may occur offshore in areas where Iran claims jurisdiction, including the continental shelf and Iran's exclusive economic zone.

OFAC anticipates that under the forthcoming regulations, the "Iranian shipping sector" will be defined to include all seagoing vessels, including tankers and cargo vessels, that fly the Iranian flag or are owned or controlled, directly or indirectly, by the Government of Iran. Examples of the types of activities that may be sanctionable include the sale or charter of a vessel; the provision of services such as registry, classification, repair, survey, issuance of certificates or maintenance; and supply, bunkering, or docking of a vessel.

The "Iranian shipbuilding sector" is expected to be defined to include activities related to the construction of seagoing vessels, including oil tankers and cargo vessels, in Iran. Sanctions will target parties involved in the building and refit of vessels; the provision or refit of items such as turbines, marine propulsion engines, propellers and blades, and compasses and other navigational instruments; the provision of other goods used in connection with building and propulsion of vessels; and the provision of technical assistance and training relating to, and financing of, the building, maintenance or re-fitting of vessels.

OFAC anticipates that the "Iranian energy sector" will be defined to include activities involving the exploration, extraction, production, refinement, or liquefaction of petroleum, natural gas, or petroleum products in Iran. Sanctions will target parties involved in the supply or provision of goods or services that contribute to Iran's ability to develop, maintain, or expand its domestic petroleum resources or to import or export petroleum or petroleum products.

Going forward, individuals and entities determined to be part of each of these sectors will be identified as such on OFAC's SDN List. On July 3, OFAC published a list of SDNs whose entries had been updated with this information, marked by the addition of the phrase, "IFCA Determination."

Provision of Precious Metals, Graphite and Other Raw and Semi-Finished Materials, and Industrial Software

IFCA authorizes sanctions on anyone involved in the sale, supply, or transfer of a precious metal, directly or indirectly, to or from Iran. OFAC expects that precious metals will be defined to include silver and gold along with base metals or waste and scrap containing precious metal or precious-metal compounds. This provision, which prohibits anyone to sell or transfer any amount of gold to Iran, is largely intended to prevent Iran from trading its oil and gas for gold in contravention of sanctions that target conventional banking methods.

IFCA also authorizes sanctions on any person involved in the sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal, or industrial software, where such materials are intended for use in certain ways. This includes use in the energy, shipping, or shipbuilding sectors; in any sector of the Iranian economy controlled by Iran's Islamic Revolutionary Guard Corps ("IRGC") or by an SDN; or for Iran's nuclear or weapons of mass destruction programs. OFAC's June 3 answers to FAQs include a detailed list of the materials that are likely to be included in the definitions of "precious metals" and "graphite, raw, or semi-finished metals." OFAC has also stated that it will publish a report indicating which sectors of the Iranian economy are controlled directly or indirectly by Iran's IRGC.

This provision of IFCA includes a due diligence exception, meaning that persons who are deemed by the Treasury or State Departments to have established and enforced proper policies and controls to ensure that they are not involved in the sale, supply, or transfer of such materials and metals used in prohibited ways will not be targeted for sanctions.

Insurance and Reinsurance Activities

A number of insurance activities are subject to sanctions under IFCA, including the provision of insurance, reinsurance, or underwriting services (a) related to any activity with respect to Iran for which sanctions have been imposed under US law or (b) to or for any Iranian person included on the SDN List.4 Thus, the scope of sanctionable activities relating to insurance and underwriting services is extremely broad. However, the due diligence exception also applies to this provision of IFCA, meaning that sanctions will not be imposed on insurers or reinsurers that establish and enforce official policies and controls to ensure that they do not underwrite or enter into contracts to provide insurance or reinsurance for sanctionable activities.

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Given the breadth of the new sanctions that came into effect on July 1, non-US companies that continue to trade with Iran after that date face not only the potential sanctions outlined above, but also commercial risks such as the denial of coverage by insurers and reinsurers unwilling to risk sanctions; the refusal by banks to process transactions...

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