Continuing its “maximum pressure” campaign against Iran, the United States has (a) ratcheted up sanctions under Executive Orders that provide for the imposition of secondary sanctions on non-U.S. companies that engage in transactions with Iranian financial institutions, and (b) authorized the imposition of secondary sanctions on non-U.S. companies that engage in arms-related transactions with Iran pursuant to a new Executive Order, notwithstanding the expiration of the United Nations arms embargo under Security Council Resolution 2231 implementing the Joint Comprehensive Plan of Action (JCPOA).
Secondary Sanctions Exposure for Transactions With Iranian Financial Institutions
On October 8, 2020, the Department of Treasury’s Office of Foreign Assets Control (OFAC) imposed additional sanctions on 17 Iranian banks, causing transactions with those institutions to become subject to secondary sanctions. This action was made pursuant to Executive Order (E.O.) 13902, which authorizes the imposition of sanctions on key sectors of Iran’s economy in order to deny funding and support to Iran’s nuclear program, missile development and malign regional activities.
Iranian financial institutions have been individually designated as SDNs since the snap back of sanctions on November 5, 2018, and prior to the JCPOA either had been individually sanctioned (Islamic Regional Cooperation Bank), or blocked under the now-removed E.O. 13599 (the 16 remaining banks). However, transactions by non-U.S. persons with private Iranian banks do not carry risk of secondary sanctions without a further sanctions designation by the U.S. government and addition of a “Subject to Secondary Sanctions” note to the SDN listing. E.O. 13902 provides a path to expand secondary sanctions on the Iranian financial sector. An eighteenth bank was designated under E.O. 13902 on October 8, Hekmat Iranian Bank, which is affiliated with Iran’s military, but this bank already had been subject to secondary sanctions pursuant to E.O. 13382 and thus no substantive change occurred.
OFAC has provided for a 45-day wind-down period. OFAC Frequently Asked Question (FAQ) 845, published at the time of the designations, states that financial institutions and other persons engaging in transactions with banks subjected to secondary sanctions under E.O. 13902 have until November 22, 2020 before being subject to secondary sanctions.
Also, in conjunction with the designations, OFAC issued new General License L and several FAQs, which makes clear that humanitarian activities and business authorized by or ordinarily incident to OFAC general or specific licenses would not give rise to secondary sanctions. Pursuant to General License L and the existing General License 8, E.O. 13902 and E.O. 13382 will not prohibit humanitarian-related transactions or activities, including conducting or facilitating a transaction related to agriculture medicine, medical devices and food.
Continuation of Arms Embargo
Previously, on September 21, 2020, President Trump issued E.O. 13949 authorizing the imposition of secondary sanctions on persons that support Iran’s nuclear, missile and conventional arms-related activities. The issuance of E.O. 13949 followed the Trump Administration’s attempt to invoke the UN mechanism to “snap back” pre-JCPOA UN sanctions on Iran, including the arms embargo that is set to expire on October 18, 2020. Pursuant to the JCPOA and its implementing UN Resolution 2231, the UN arms embargo against Iran is set to expire on the earlier of (1) five years after the JCPOA “Adoption Day” (i.e., on October 18, 2020), or (2) upon the issuing by the International Atomic Energy Agency of a “Broader Conclusion” that all nuclear material in Iran remains in peaceful activities. However, the other JCPOA parties took the position that by withdrawing from the JCPOA in May 2018, the U.S. waived the right to “snap back” sanctions.
E.O. 13949 authorizes sanctions on persons that:
- Engage in any activity that materially contributes to the supply, sale or transfer, directly or indirectly, to or from Iran, or for the use in or benefit of Iran, of arms or related materiel, including spare parts;
- Provide to Iran any technical training, financial resources or services, advice, services or assistance related to the supply, sale, transfer, manufacture, maintenance or use of arms and related materiel described above;
- Have engaged or attempted to engage in any activity that materially contributes to, or poses a risk of materially contributing to, the proliferation of arms or related materiel or items intended for military end-uses or military end-users, including any efforts to manufacture, acquire, possess, develop, transport, transfer or use such items by the Government of Iran (including persons owned or controlled by or acting for or on behalf of the Government of Iran) or paramilitary organizations financially or militarily supported by the Government of Iran;
- Have materially assisted, sponsored or provided financial, material or technological support for or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order; or
- Have purported to act or acted for or on behalf of, or is owned or controlled, directly or indirectly, by any person whose property and interest in property are blocked pursuant to this order.
No New Impact on U.S. Companies But Potential Impact Globally
The designations under E.O. 13902 and the issuance of E.O.13949 have limited impact on U.S. companies because the 18 banks were previously designated as SDNs and the U.S. government already maintains an Iran-related arms embargo. By authorizing secondary sanctions for non-U.S. persons transacting with additional Iranian financial institutions, and that fund Iran’s conventional arms activity, the U.S. is seeking to unilaterally maintain the impact of the current UN arms embargo for Iran even after its pending expiration on October 18, 2020.
In a State Department press release, Secretary Pompeo emphasized that sanctions will be imposed on foreign entities, including Russian and Chinese entities, that sell arms to Iran in violation of the Iran arms embargo and E.O. 13949. A State Department fact sheet noted that OFAC’s September 22, 2020 designation of Nicolas Maduro of Venezuela under E.O. 13949 (in addition to his designation under the Venezuela sanctions program) should be viewed as a warning that the Administration will take action against parties that compromise the current sanctions on Iran’s arms, nuclear and missile program.