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CISADA – One Year Later

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  1. CISADA – One Year Later May 2011 © 2011 | Lyons & Flood LLP, 65 West 36th Street, 7th Floor, New York, NY 10018

  2. Overview of sanctions against Iran • Sources of U.S. sanctions • Scope of U.S. sanctions • Prohibited transactions under oil sanctions • Prohibited by Iranian Transactions Regulations • Prohibited by Iranian Financial Sanctions Regulations • Permitted transactions and activities • Potential penalties for violation • Waivers and other provisions • Responses to sanctions • Enforcement of U.S. sanctions • A look forward • Final thoughts Agenda May 2011

  3. Overview of sanctions against Iran 3 May 2011

  4. Sources of U.S. sanctions 4 May 2011

  5. Sources of U.S. sanctions (cont.) 5 May 2011

  6. Sources of U.S. sanctions (cont.) 6 May 2011

  7. And many more… Sources of U.S. sanctions (cont.) 7 May 2011

  8. Iran Sanctions Act of 1996 (as amended by CISADA): • Applies to “any person the President determines has carried out the [sanctionable] activities” • Not limited to just U.S. persons or companies – extraterritorial in reach • Extends to successors, parents, subsidiaries and affiliates – the key is common ownership and/or control All other sanctions including Executive Orders, Department of Treasury regulations, and other provisions of CISADA: • Apply to U.S. persons or companies wherever they are located or do business, including any foreign branches or subsidiaries • Apply to any persons or companies present in the U.S., including U.S.-based branches or subsidiaries of foreign companies • Apply to persons or companies whose property is present in the U.S. to the extent of such property, including electronic funds transfers and letters of credit Scope of U.S. sanctions 8 May 2011

  9. Under the Iran Sanctions Act of 1996 (as amended by CISADA), it is prohibited to “knowingly”: • Make an investment, in excess of $5 million per instance or $20 million annually, that “directly and significantly contributes to the enhancement of Iran's ability to develop petroleum resources” which includes exploration, extraction, refining, and transportation of petroleum, refined petroleum products, oil or LNG, natural gas resources, oil or LNG tankers, and products used to construct or maintain pipelines used to transport oil or LNG • Sell, lease, or provide to Iran “goods, services, technology, information or support,” with a fair market value in excess of $1 million per instance or $5 million annually, that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries" Prohibited transactions under oil sanctions 9 May 2011

  10. Under the Iran Sanctions Act of 1996 (as amended by CISADA), it is prohibited to “knowingly”: • Sell or provide to Iran refined petroleum products (defined as diesel, gasoline, jet fuel, and aviation gasoline) with a fair market value of $1 million per instance or $5 million annually • Sell, lease, or provide to Iran “goods, services, technology, information or support,” with a fair market value in excess of $1 million per instance or $5 million annually, that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products” including: • “underwriting or entering into a contract to provide insurance or reinsurance for the sale, lease, or provision of such goods, services, technology, information or support” • “financing or brokering such sale, lease, or provision” • “providing ships or shipping services to deliver refined petroleum products to Iran” Prohibited transactions under oil sanctions (cont.) 10 May 2011

  11. How are the threshold values calculated? • The regulations do not address this important question directly, but the State Department and OFAC have indicated (albeit informally) that: • For supply of refined petroleum products the $1 million per instance and $5 million annually will be measured against the value of the cargo as opposed to the freight or hire earned on the transport” • For provision of insurance the threshold values are measured by the premiums earned not the amount of insurance provided How is the “knowingly” standard applied to carriage of containerized cargo? • Due diligence in inspecting cargoes seems to be sufficient to prevent exposure to sanctions for carrying refined petroleum products and goods facilitating production of refined petroleum products • Institution of risk-based compliance systems and procedures • Checking consignees, shippers and notify parties against SDN list • Reliance on declarations provided by shippers is permitted Prohibited transactions under oil sanctions (cont.) 11 May 2011

  12. Additionally, U.S. persons or companies cannot “knowingly”: • Import any goods from Iran • Export any goods, services, or technology of U.S. origin to Iran • Includes transshipments where undertaken with knowledge or reason to know that the re-exportation is intended for Iran • Purchase, sell, transport, swap, broker, approve, finance, facilitate, or guarantee such transactions – even between foreign parties • Invest in property owned or controlled by the Government of Iran • Contract to provide supervision and management responsibility for the development of petroleum resources located in Iran, or finance or guarantee such contracts Prohibited by Iranian Transactions Regulations 12 May 2011

  13. U.S. financial institutions (including insurance companies and branches or agencies of foreign banks) may not: • Open or maintain correspondent accounts or payable-through accounts on behalf of foreign financial institutions which “knowingly”: • Facilitate the efforts of the Government of Iran “to acquire or develop weapons of mass destruction or delivery systems for weapons of mass destruction,” “to provide support for organizations designated as foreign terrorist organizations ... or support for acts of international terrorism” • “[F]acilitate the activities of a person subject to financial sanctions” pursuant to United Nations Security Council resolutions • Engage in money laundering to carry out the above • Facilitate efforts by Iranian financial institutions to carry out the above • Facilitate significant transactions or provide significant financial services for Iran’s Revolutionary Guard Corps or any of its agents or affiliates whose property is blocked, or financial institutions whose property is blocked in connection with Iran's support for international terrorism or proliferation of weapons of mass destruction or delivery systems for weapons of mass destruction Prohibited by Iranian Financial Sanctions Regulations 13 May 2011

  14. There are limited exceptions to the ban on imports to the U.S. from Iran including: • Accompanied baggage for personal travel, and information and informational materials (defined as: publications, films, posters, phonographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and wire feeds) • Similarly, permitted exports to Iran from the U.S. include: • Agricultural products, medicine, medical devices, informational materials, humanitarian assistance, goods to support non-governmental organizations, hardware and software needed to access the internet, and parts and technologies necessary to assure the safety of civilian aviation • Foreign persons or companies may import goods from Iran to countries other than the U.S. • Foreign persons or companies may export goods, services, technology, information or support to Iran from other countries besides the U.S., so long as such exports do not involve refined petroleum products or enhance Iran's petroleum refining capacity or Iran's ability to import refined petroleum products in excess of the threshold amounts Permitted transactions and activities 14 May 2011

  15. Violation of the Iran Sanctions Act of 1996 (as amended by CISADA) requires imposition of at least three of the below: • Denial of assistance or credit by the Export-Import Bank of the United States • Revocation of export licenses • Prohibitions on loans or credits from U.S. financial institutions • Prohibition for financial institution's designation as primary dealer in U.S. debt instruments • Prohibition for financial institution's service as agent of U.S. or as repository for U.S. funds • Denial of U.S. government procurement opportunities • Prohibitions on making foreign exchange transactions in the U.S. • Prohibitions on bank transfers in the U.S. • Prohibitions on property transactions in the U.S. • Restrictions on imports The sanctions will also be published which could lead to reputational damage. Potential penalties for violation 15 May 2011

  16. Violation of Executive Orders: • Criminal fines of up to $1 million and a prison term of up to 20 years Violation of Iranian Transactions Regulations: • Civil fines of up to $11,000 per violation, criminal fines of up to $50,000, and a prison term of up to 10 years Violation of Iranian Financial Sanctions Regulations: • Civil fines of the greater of $250,000 or double the amount at issue (i.e., the amount of the offending transaction or the balance of the offending account), criminal fines of up to $1 million, and a prison term of up to 20 years Additional criminal fines and prison terms for making false statements or concealment of sanctions violations Potential penalties for violation (cont.) 16 May 2011

  17. A determination to impose sanctions is not reviewable in any court and cannot be appealed • However, waivers can be obtained from the President where such activities which are found to be “necessary to the national interest” • Alternatively, the Secretary of State is permitted to issue advisory opinions as to whether a proposed activity would result in sanctions • “special rule” exempts sanctions from firms which pledge to verifiably end their business with Iran and forgo any sanctionable business with Iran in the future Waivers and other provisions 17 May 2011

  18. Owners, charterers, and their insurers have largely complied: • The P&I Clubs have implemented systems to ensure compliance with the sanctions regimes in order to take advantage of the due diligence safe harbors provided by CISADA • This past February, Steamship Mutual, UK Club, West of England and North of England refused to renew P&I cover for the National Iranian Tanker Company, the world’s 4th largest tanker operator • Charterers have embraced the sanctions clauses put forth by INTERTANKO, Bimco, Lloyds and others Responses to sanctions 18 May 2011

  19. Affirmative obligation to investigate sanctionable activity: • Pre-CISADA the Executive Branch could ignore sanctionable activity for political or diplomatic reasons by simply declining to investigate • CISADA requires investigation when there is “credible information” about a potential violation and provides 180 day time limit to complete investigation • Responsibility for enforcement delegated to the State Department in September 2010 Enforcement of U.S. sanctions 19 May 2011

  20. Oil sanctions are more bark than bite: • First firms investigated under the oil sanctions were Total S.A. of France, Gazprom of Russia, and Petronas of Malaysia for a $2 billion contract they signed in 1997 to develop a gas field in Iran • To avoid a row with the EU (which had filed a WTO complaint), the Clinton Administration agreed to waive sanctions • No further enforcement of oil sanctions until September 2010, when State Department blocked assets of NaftiranIntertrade Company, a Swiss company with ties to the National Iranian Oil Company • The same day the State Department announced that it had reached a deal with oil majors Royal Dutch Shell PLC, Total S.A., Statoil ASA, Italy ENIS.p.A. and INPEX to voluntarily cease sanctionable activities involving Iran Enforcement of U.S. sanctions (cont.) 20 May 2011

  21. Members of Congress have been pressuring the State Department to investigate sanctions violations by directly providing “credible information” regarding violators and demanding an investigation • March 29, 2011 was supposed to be a big day for sanctions enforcement since it represented the end of the 180 day period for an investigation announced in September 2010 • However, no sanctions were announced against the violators identified by members of Congress and instead the only subject of sanctions was Belarusneft, a state-owned Belarusian energy company which entered into a $500 million contract with NaftIranIntertrade Company in 2007 for the development of the Jofeir oilfield in Iran Enforcement of U.S. sanctions (cont.) 21 May 2011

  22. Sending a mixed message to violators: • Enforcement of the oil sanctions has been underwhelming so far by most accounts • The impression is that foreign firms can evade or even openly violate oil sanctions with some measure of impunity • Last month the 16th International Oil, Gas, Refining and Petrochemical Exhibition (commonly known as the Iran Oil Show) was held in Tehran with no decline of foreign attendees and exhibitors including: • 166 firms from China, 64 from Germany, 37 from Britain, 36 from Italy, 33 from South Korea, 15 from France, and 14 from Spain Enforcement of U.S. sanctions (cont.) 22 May 2011

  23. Slight but steady enforcement of non-oil sanctions: • December 2010: Wells Fargo Bank, N.A. paid $67,500 to settle allegations of violations of the ITR stemming from the performance of financial services in the U.S. on behalf of an account holder in Iran. An individual was also assessed a penalty of $30,000 for attempting to send money to Iran to invest in an Iranian catering business. • November 2010: A company which failed to produce some documents responsive to subpoena relating to an OFAC investigation into the delivery of a jet engine destined for Iran, was fined $225,000, despite the fact that the company was relying on the advice of counsel.  • April 2011: Four companies alleged by OFAC to have violated the Iranian Transactions Regulations (“ITR”) through placement of insurance for an oil rig, provision of medical equipment and industrial imaging products, and underwriting aircraft hull policies. They collectively paid $217,936 to settle the allegations. Enforcement of U.S. sanctions (cont.) 23 May 2011

  24. August 2010: Barclays Bank PLC paid $176 million to settle allegations of violations of multiple sanctions programs, including the ITR by assisting sanctions violators to route thousands of EFTs. Barclays separately paid $298 million to the Department of Justice and the New York County District Attorney's Office for additional violations. • July 2010: Maersk Line, Limited paid over $3 million to settle allegations of violation of sanctions including the ITR, relating to thousands of unlicensed shipments of cargo which were partly transshipped aboard U.S. flagged vessels owned, operated and/or chartered by MLL. It did not matter that the vessels in question were time-chartered or sub-time-chartered by MLL’s parent A.P. Moller-Maersk or that the ultimate deliveries to Iran were not performed by MLL controlled vessels. Another company accused of violating the ITR as well as Export Administration Regulations, by selling and shipping dental implants and equipment to purchasers in a third country for delivery to Iran, paid $125,000 in settlement. Enforcement of U.S. sanctions (cont.) 24 May 2011

  25. Mounting political pressure to enforce oil sanctions: • Republicans have majority control in Congress • As Iran edges closer to becoming nuclear power (now expected by 2014) criticism of Obama Administration’s enforcement of sanctions is mounting • Stuart Levey, who headed the Treasury Department's sanctions programs and is widely seen as the “father” of the U.S.’s expanded sanctions policies recently announced his resignation • This July the President is required to report to Congress regarding countries which are so-called “Destinations of Diversion” meaning that they are countries which sanctions violators are known to operate in • Last month a bill (HR 1655) proposing even tougher sanctions was introduced in the House of Representatives A look forward (cont.) 25 May 2011

  26. Stop Iran’s Nuclear Weapons Program Act: • Sanction entering into long-term contracts to purchase Iranian oil and gas (or simply paying in advance for future deliveries) • Sanction entities that subscribe to Iranian bond issues or other Iranian debt financing • Sanction firms which enter into joint ventures with Iranian firms and oil companies outside of Iran • Sanction foreign subsidiaries of U.S. firms conducting business in Iran – this would close a large loophole in existing sanctions • Further tighten the sanctions prohibiting doing business with the Iran Revolutionary Guard Corps and its front companies • Sanction the supply of equipment to Iran for uranium mining and milling A look forward (cont.) 26 May 2011

  27. Stop Iran’s Nuclear Weapons Program Act: • Close the loophole in existing sanctions permitting access to civilian aircraft parts and repairs • Add new penalties for sanctions violations, including revocation of certain tax benefits, authorizing states to revoke licenses (such as permission to sell insurance), the blocking of access to taxpayer funds or government assistance through various programs, and barring senior executives of sanctions violators from entering the U.S. • Reduce U.S. contributions to the World Bank in proportion to the aid it provides to Iran in loans • Encourage taxpayers to divest from firms connected to Iran by eliminating capital gains taxes for any gains recognized when transferring such holdings to other investments A look forward (cont.) 27 May 2011

  28. The oil sanctions portion of CISADA has largely been a paper tiger so far • This is in part because the sanctions (by design) never prohibited foreign firms from purchasing Iranian oil and gas – most Iranian oil is traded on the Rotterdam spot market • Similarly, with respect to development of petroleum resources, the sanctions only prohibit investments – this permits foreign firms to sell equipment to Iran for oil or gas exploration or extraction (but not refining) so long as the sales are not structured to provide ongoing profits or royalties • Agencies providing credit guarantees also fall outside the scope of the sanctions – permitting Iran to benefit from financial markets • CISADA is set to expire on December 31, 2016 – but Iran is predicted to become a nuclear power long before then • The U.S. will be forced to either accept Iran as a nuclear power or confront its allies by passing and enforcing tougher sanctions against Iran soon Final thoughts 28 May 2011