United States Economic Sanctions Regime: Iran
Introduction
Iran has been subjected to sanctions from various countries and international organizations since the Iranian hostage crisis that took place in 1979. That being said, the restrictions significantly escalated after 2010, and the subject of economic sanctions imposed on Iran is one of the hottest topics in the international community of late.
A primary concern of the international community has commonly been that Iran’s nuclear technology should not be used for the proliferation of nuclear weapons. Following concerns that Iran was not fulfilling its international obligations, many countries responded with the imposition of comprehensive sanctions. The United States of America (US) has been the spearheading power in implementing these sanctions.
In the US, initially, economic sanctions, overall, were adopted pursuant to the 1917 Trading with the Enemy Act (TWEA). Modern sanctions, since the late 1970s, have largely fallen under the scope of the International Emergency Economic Powers Act[1] (the “IEEPA”). The IEEPA authorizes the President to implement economic sanctions, as follows:
“To deal with any usual and extraordinary threat, which has its source in the whole or substantial part outside the United States, to the national security, foreign policy, or economy of the Unites States, if the President declares a national emergency with respect to such threat.” (50 USC. Section 1701(a)
The US, through the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”), employs economic sanctions programs for a variety of purposes, including diplomatic, economic, and humanitarian purposes, as well as for national security matters. In this respect, the OFAC administers a complex sanctions regime against Iran. The Iran sanctions prohibit virtually all direct and indirect transactions involving Iran, the Government of Iran, persons who ordinarily reside in Iran, and entities that are located either in Iran, or formed under Iranian law, with a particular focus on the Iranian Revolutionary Guard Corps (IRGC).
The OFAC operates in collaboration with the internal and external intelligence agencies of the US to develop its sanction programs. Other than the OFAC, there are a number of other US institutions that may be involved in certain sanctions, such as the US Department of Justice (DOJ) and the US Department of Commerce’s Bureau of Industry and Security (BIS).
Within the scope of the sanctions regime, there are currently over 10 US statutes, over 20 executive orders issued by the President, as well as numerous regulations. Other than the IEEPA, there are also other important statutes that impose sanctions against Iran. These include:
- The Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA);
- The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA);
- The Iran Sanctions Act (ISA);
- The Iran Freedom and Counter-Proliferation Act of 2012 (IFCA);
- The Iran Threat Reduction and Syria Human Rights Act of 2012;
- The National Defense Authorization Act of 2012 (NDAA); and
- The Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA).
In light of the relevant statutes and other legislation, these sanctions, overall, may include trade restrictions, asset freezes, arms embargoes, capital restraints and travel bans.
The sanctions targeting Iran are also unique because the OFAC and the President are authorized to target foreign persons and foreign financial institutions that do business with Iran by imposing secondary sanctions against them. In this regard, economic sanctions imposed by the US generally fall under two separate categories: primary (or direct); and secondary sanctions.
Primary (Direct) Sanctions
Primary sanctions prohibit US persons or entities from engaging in specified activities with certain countries, entities, or individuals. A US person includes:
- US citizens (wherever located);
- Permanent US resident foreigners (also known as lawful permanent residents);
- Entities organized under US law (e.g., corporations);
- All entities and persons located in the US; and
- Entities owned or controlled by US citizens.
In addition, even if a party to a transaction is not directly a US person, if there is a “US nexus” in the transaction; primary sanctions may still be relevant. Whilst there is no simple description of what a US nexus could be, considerations may include whether a party has:
- US subsidiaries, branches or offices;
- US citizens or permanent resident employees;
- US counterparties or financiers;
- Dealings in US-origin goods or services;
- Activities conducted in or through the US; or
- Denominated the transaction in USD.
Currently, there are numerous economic sanctions programs that target countries, persons, entities, and organizations. The traditional types of economic sanctions are country-based sanctions, which prohibit virtually all activity and transactions involving a certain country.
The US government has begun to use other kinds of sanctions, known as list-based sanctions. List-based sanctions (also known as smart sanctions), target particular persons, entities, and organizations, rather than an entire nation or regime.
Country-based Sanctions
The US economic sanctions regime against Iran mainly concerns country-based sanctions.
Country-based sanctions function by prohibiting certain defined transactions and sometimes travel within the country’s territory, with persons who ordinarily reside within the country, and with the targeted governmental regime. Sanction programs generally prohibit trade in goods, services, technology, and financial transactions.
Country-based sanctions, though broad in scope, also have general licenses that allow certain types of activity, such as the provision of legal services, the exchange of information and informational materials, personal communications, humanitarian aid, and journalistic projects. Nonetheless, the use of country-based sanctions has decreased with the advent of more flexible list-based programs.
Some examples of currently in-force prohibitions include:
- Entering into/facilitating transactions that Iran would benefit from;
- Proceeding with transactions with the knowledge that a good/service/technology is for end-use in Iran, or by an Iranian entity;
- Conducting business with Iranian parties registered in other countries;
- Conducting business with entities that are partially owned or financed by the Government of Iran;
- Use of third parties to circumvent prohibitions; and
- Servicing/installing equipment in facilities using Iranian-sourced petroleum products.
List-based Sanctions
The use of list-based sanctions, or smart sanctions, has allowed the US government to more precisely target persons and groups who pose a threat to national security, foreign policy, and the economy. Indeed, list-based sanctions have been particularly helpful from a law enforcement perspective of the OFAC sanctions.
The OFAC prohibits transactions between US persons and individuals, entities (e.g., corporations), and organizations on the Specially Designated Nationals and Blocked Persons List, or “SDN list.” The SDN list, which is amended on an “as-needed” basis, targets persons involved in terrorism, narcotics trafficking, weapons proliferation, human rights abuses, genocide, and transnational organized crime.
The US government has demonstrated a preference for list-based sanctions for two reasons: Firstly, smart sanctions are able to target particular parties without resulting in substantial collateral that may arise from country-based sanctions imposed on a targeted nation’s population. Secondly, list-based sanctions can be effectively enforced through automated screening, which enables US persons to check clients and businesses against the SDN list. Because of their flexibility and precision, smart sanctions are now the standard for OFAC sanctions programs.
Penalties for Violating Primary Sanctions
The OFAC’s Economic Sanctions Enforcement Guidelines set out the policy and process for determining an appropriate enforcement response to apparent violations of the US economic sanctions programs. The enforcements may include:
- Referring cases to the Department of Justice for criminal investigation;
- Issuing civil penalties; and
- Issuing cautionary letters or taking no action where there is insufficient evidence.
Penalties for violations of US sanctions programs, depending on their underlying authorizing legislation include, for example:
- Criminal penalties, such as fines ranging up to $1 million per violation and the possibility of imprisonment for up to 20 years; and
- Civil penalties. Generally, IEEPA supported US sanctions programs can impose civil penalties up to the greater of $302,584 or twice the amount of the underlying transaction for each violation.
OFAC civil penalties’ varies based on, amongst other things, the egregiousness of the violation, and whether the party voluntarily self-disclosed.
Secondary Sanctions
Secondary sanctions apply to non-US persons for non-US conduct that occurs outside of the US jurisdiction. Secondary sanctions are a relatively new kind of sanctions that have been implemented frequently over the past five years, particularly relating to Iran. These kinds of sanctions supplement other sanctions programs by targeting non-US persons (primarily foreign financial institutions and foreign sanctions evaders) who do business with individuals, regimes, and organizations in Iran.
In the case of Iran, secondary sanctions only apply to transactions involving SDNs, oil, energy, automotive, shipbuilding/shipping, precious metals, and insurance. For example, if the volume of transactions between a foreign financial institution and Iran are significant enough, that foreign financial institution risks being designated pursuant to one of the legal authorities authorizing the use of secondary sanctions.
As of this time, secondary sanctions have applied only to Iran, though that can and may change.
Outcomes of Violating Secondary Sanctions
The aim of secondary sanctions is to put pressure on non-US persons to comply with US sanctions by threatening to cut them off from access to the US financial system. Therefore, once designated, secondary sanctions can prohibit US persons from doing business with that foreign third party, or require US banks to limit, or restrict, that foreign third party’s correspondent accounts in the US.
Under secondary sanctions, the US can place the offending non-US person on either the SDN list or the Foreign Sanctions Evaders (FSE) list. In either case, once listed, US persons are prohibited from doing business with the sanctioned non-US person.
The possible consequences of a person or organization entering the OFAC’s SDN list are summarized as follows:
- The assets of real and legal persons listed in the US jurisdiction are blocked;
- US persons may not conduct transactions with persons on the SDN list, as well as with legal entities that they control or hold more than 50% shares, either directly or indirectly; and
- Internationally operating companies and international or local financial institutions in third countries outside the United States must also refrain from engaging in business relationships with those on the SDN list.
Conclusion
In late 2018, the US announced that their participation in the Joint Comprehensive Plan of Action (JCPOA) would end and, following a wind-down period, they would begin the re-imposition of sanctions that had been lifted. Currently, US economic sanctions are once again in force, and are even stricter than ever before.
Furthermore, the ever-increasing risk of facing secondary sanctions concern even the most remote non-US persons and corporations, as their business practices may invoke imposition of such sanctions upon them. Since companies and individuals in breach of the sanctions may be subject to major penalties, compliance with the US economic sanctions regime is currently an important aspect of legal compliance for companies.
[1] The IEEPA gave the US President the authority to regulate export and international transactions in a state of national emergency. It is a crime to violate any provision of the IEEPA.
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