New Iranian Sanctions May Lead to Uncertainty for Foreign Financial Institutions Engaging in Business in Iran

Jan 11, 2012   

On December 31, 2011, President Barack Obama signed into law the National Defense Authorization Act. Among the various provisions included within the $662 billion defense spending bill are new sanctions that focus on foreign financial institutions which engage in financial transactions with the Central Bank of Iran and those which engage in financial transactions for the purposes of purchasing oil and petroleum products. However, because the new sanction provisions provide for several exceptions and waivers it is uncertain what effect, if any, they will have on foreign financial institutions engaging in business in the United States.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC. General information regarding economic sanctions against Iran can be found at OFACs website here.

The new sanctions go further than those previously in place by prohibiting the opening of any correspondent account or payable-through account in the US by foreign financial institutions which “knowingly conducted or facilitated any significant financial transactions with the Central Bank of Iran.” Additionally, the new sanctions “shall apply with respect to a foreign financial institution owned or controlled by government of a foreign country, including a central bank of a foreign country, only insofar as it engages in a financial transaction for the sale or purchase of petroleum or petroleum products to or from Iran.” The practical effect of these sanctions would be to prohibit many countries, including allies of the US, from purchasing petroleum from Iran.

The broad language of the Act originally raised fears that the sanctions would drive oil prices up and alienate US allies that currently depend upon Iran for its oil supplies. However, Congress and the White House hoped to quash those fears by giving the President flexibility in his implementation of the sanctions program.

First, the statute provides that the sanctions scheme will not take effect until the President determines “that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.” The President must make an initial determination within 90 days of the enactment of the Act and every 180 days thereafter. As a result, the President has the flexibility of delaying the ultimate implementation of the Act.

Second, once the sanctions take effect, the Act gives the President the authority to grant exemptions to foreign financial institutions that are located in countries which “significantly reduced its volume of crude oil purchases from Iran” in the prior 180 days. Finally, the Act provides that the President may waive the imposition of sanctions on a foreign financial institution “if the President determines that such a waiver is in the national security interest of the United States.”

Given the broad discretionary powers of the President in implementing the new Iranian sanction scheme, it is possible that foreign financial institutions may see little to no changes in their business dealings with Iran in the near future. Fuerst Ittleman, PL will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com