Financial and trade sanctions against Iran strengthened

Three measures against Iran adopted on 23 January 2012 by the EU’s Foreign Affairs Council add yet another layer to the extensive Iranian sanctions regime, which will need to be carefully considered by any EU business involved in any enterprise in Iran, or with Iranian persons and entities.

At the same meeting the EU Foreign Affairs Ministers also agreed amendments to various aspects of the sanctions currently in place in respect of Syria, Myanmar/Burma, Al Qaida and Belarus; some with immediate effect. Further adjustments to these regimes are expected to be considered at the next Foreign Affairs Council meeting in April 2012.

This post summarises the key developments in relation to the Iranian sanctions regime.

Introduction

Described in HM Treasury’s Financial Sanctions Notice of 24 January 2012 as “an unprecedented package of sanctions”, the recently adopted measuresi build on, and considerably expand, the EU sanctions relating to Iranian nuclear proliferation that have been steadily accumulating since 2007.

The powerful new sanctions are a response to the latest, damning, report produced by the UN’s International Atomic Energy Agency (IAEA), and Iran’s perceived failure to comply with its international obligations. A statement from the US Secretary of State and US Treasury Secretary welcomed the development as consistent with new US sanctions adopted on 31 December 2011. The recent efforts by the US and the EU are designed to encourage Iran to resume negotiations on its nuclear programme.

Council Decision 2012/35 addresses both the financial and trade aspects of the existing regime, last consolidated in Regulation 961/2010. The two new Regulations (54/2012 and 56/2012) give immediate effect to a specific set of provisions in the Decision relating to asset freezing. Further Regulations, necessary to make the remaining (trade related) amendments directly applicable to individuals and entities throughout the EU, are expected to be adopted by the Council shortly, although individual Member States are free to pre-emptively adopt national legislation for this purpose in the meantime.

The new provisions are a continuation of the EU’s targeted attack on the principal sources of the Iranian Government’s revenue. This intention is most evident in the embargo on the import, purchase or transport of Iranian crude oil and petroleum and petrochemical products. Council Decision 2012/35 also calls for the prohibition of supply of key products and services to enterprises involved in the Iranian petrochemical industry, and any investment in such enterprises. Direct or indirect trade with the Iranian Government or the Central Bank of Iran in gold, precious metals and diamonds is to be prohibited; as is making new Iranian notes and coins available to the Iranian Central Bank. Finally, travel bans and asset freezes have been expanded to ensure that the sanctions regime is not circumvented.

Financial sanctions with immediate effect

Council Decision 2012/35 expands the categories of persons and entities which EU Member States must subject to asset freezes and travel bans. In accordance with this expanded scope, Council Implementing Regulation (EU) No 54/2012 adds three more individuals and nine entities to the list of designated persons for the purposes of Regulation 9610/2010 with immediate effect. The Consolidated List maintained by HM Treasury has been revised accordingly.

The most important of the new designations are the Central Bank of Iran and the state-owned Bank of Tejarat. Both are alleged, by the Council, to have participated in the circumvention of sanctions; and the Bank of Tejerat is further alleged to have directly and indirectly facilitated Iran’s nuclear efforts. Significant carve-outs have been made to allow for legitimate banking transactions, albeit subject to oversight by the EU Member States through their competent authorities. In particular, pursuant to Council Regulation (EU) No 56/2012, subject to obtaining prior authorisation on a case by case basis from the competent authority for this purpose (which in the UK will continue to be HM Treasury), the freeze will not apply to:

• transfers by, or through, the Central Bank of funds or economic resources received and frozen after the date of its designation (23 January 2012); or
• transfers to, or through, the Central Bank which relate to payments due (to non-designated persons) in connection with “a specific trade contract”.

Transfers by, or through, Bank Tejarat are similarly exempted, on the same conditions; but only for a two month period.

A separate specific derogation permits, subject to prior competent authority authorisation, transfers by or through the Central Bank for the purpose of providing EU financial institutions with liquidity for the financing of trade. The decision also envisages that the Central Bank will be expressly permitted to receive payments in connection with the execution of contracts conforming with the new oil embargo although, as the oil embargo is not yet in force, these provisions do not appear in the new Regulations.

Council Decision 2012/35 also introduces a new, more general, exemption, absent from the previous financial sanctions regime, permitting the competent authorities of Members States to authorise official payments to, or receipts from, accounts belonging to diplomatic or consular missions, or international organisations enjoying immunity under international law. It applies to persons placed on the designated persons list by the EU, who are not also on the UN sanctions list. This exemption is not, however, included in Council Regulation (EU) No 56/2012, and will need to be separately implemented.

The impact of the new financial sanctions on the UK financial services industry is expected to be limited, given that they have, in large part, been foreshadowed by HM Treasury’s direction to UK financial and credit institutions (including their branches and subsidiaries) to cease all current or future dealings with any Iranian banks in the Financial Restrictions (Iran) Order 2011 (“the 2011 Order”) (see: 22 November 2011). The amendments will, therefore, primarily be of significance to non-UK banks in the EU, to the extent that they have maintained some form of relationship with Iranian institutions.

HM Treasury’s guidance on the new measures emphasises that the prior restrictions imposed on UK financial and credit institutions have not been displaced and apply more broadly to prohibit all transactions and business relationships with all Iranian banks. HM Treasury has further confirmed that any licence applications made in accordance with the 2011 Order will, provided that they match one of the permitted derogations in Regulation (EU) No 961/2010 (as amended), be treated also as an application for an exemption from the EU sanctions regime.

Pending trade sanctions

The restrictive measures envisaged in Council Decision 2012/25 can be divided in three categories:

• restrictions on trading activities involving the Iranian petrochemical industry;
• restrictions on trade with the Iranian Government and the Iranian Central Bank in gold, precious metals and diamonds; and
• the prohibition on the supply to the Iranian central Bank of new Iranian banknotes and coinage.

The first of these categories can itself be broken down into four broad sub-categories:

1. An oil embargo prohibiting the “import, purchase or transport” of Iranian crude oil, petroleum and petrochemical products. Although the scope of the ban on oil imports is likely to be extensive, the relevant definitions for this purpose (“Iranian”, “crude oil”, “petroleum product”, “petrochemical product”) have yet to be confirmed; and will be critical to understanding the potential impact of the ban.
2. The oil embargo is accompanied by a separate prohibition on providing any form of financial support, including derivatives, insurance and reinsurance, in connection with prohibited import, purchase, or transport activities. This prohibition will impact on the involvement of EU nationals and entities in a far-reaching set of activities connected with oil imports, purchases or transports conducted anywhere in the world.
3. Council Decision 2012/35 also provides that a range of prohibitions, previously targeted to certain key sectors of the Iranian oil and natural gas industry (the refining of crude oil, the liquefaction of natural gas, and the exploration and production of crude oil and natural gas), are now to apply more broadly to the petrochemical industry as a whole. These prohibitions apply to any export or import of key (i.e. dual use) equipment and technology, and related services or financing, which involve enterprises operating in Iran, or Iranian-registered or owned enterprises operating outside Iran (“Iranian enterprises”). Again, Council Decision 2012/35 does not itself define what items are to be considered “key equipment and technology” for the petrochemical industry. These are expected to be set out in an Annex to a forthcoming Regulation, in the same way that key equipment for the currently restricted oil and gas sectors is listed in Annex VI to Regulation 961/2010.
4. Council Decision 2012/35 extends the existing prohibitions on investing in Iranian enterprises involved in the four key sectors of the Iranian oil and gas industry, identified above, also to Iranian enterprises engaged in the Iranian petrochemical industry.

All four sub-categories of trade sanctions are subject to specific “grandfathering” provisions, which temporarily suspend or exclude entirely the application of the sanctions for certain categories of contracts.

The entry into force of the oil embargo is phased, which should mitigate its disruptive potential. Accordingly, in broad terms, contracts relating to the import, purchase or transport of Iranian crude oil and petroleum products, and necessary ancillary contracts, may be executed until 1 July 2012; and contracts and necessary ancillary contracts which relate to Iranian petrochemical products may be executed until 1 May 2012.

For both types of contract, an exemption applies to permit the execution of any express obligations in contracts which predate 23 January 2012 and which provide for the outstanding debts of EU persons to be reimbursed with oil/petrochemical products or their proceeds.

In respect of contracts for the sale, supply or transfer of “key equipment and technology”, the date on which the prohibition in question was adopted will be the cut-off date for exempting certain pre-existing contractual obligations. Very broadly speaking, obligations to deliver goods for use in one of the (previously controlled) four key Iranian oil and gas sectors, may be executed if the contract in question was concluded before 26 July 2010. Equivalent provisions apply to obligations to deliver goods for use in the Iranian petrochemical industry, but with a cut off date of 23 January 2012. Existing contracts providing for investment in Iranian enterprises engaged in restricted sectors are “grandfathered” in a similar way. Notification obligations may apply in order to take advantage of the exemptions.

Impact

The extension of the EU sanctions is of potential relevance to any EU business operating in Iran, as well as to investors in such businesses. Even where trading activities are not directly impacted by the sanctions, the financial sector restrictions (including the new bank designations) may increase the difficulty of financing or being paid for any such activity.

The sanctions apply not only in the territories of the EU Member States, but also to any activities undertaken by EU nationals and entities outside of the EU. Businesses which are exposed to the jurisdiction of more than one EU Member State may need to be wary of potential discrepancies between the national enforcement regimes. Companies will also need to continue to have regard to the US regime. The US sanctions have extensive extraterritorial scope and new, strengthened, legislation is under active consideration.

An assessment of the implementation of the EU oil embargo is to be conducted by 1 May 2012. The review is intended to establish the availability, and financial viability, of EU Member States sourcing their oil from elsewhere; which is clearly of great concern to those EU Members States who have been heavily reliant on Iranian oil imports. The Council and Commission have separately agreed to give urgent consideration to the impact of the strengthened sanctions at the next Foreign Affairs Council meeting in April 2012.

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Council Decision 2012/35/CFSP of 23 January 2012 amending Decision 2010/413/CFSP concerning restrictive measures against Iran

Council Implementing Regulation (EU) No. 54/2012 of 23 January 2012 implementing Regulation (EU) No 961/2010 on restrictive measures against Iran

Council Regulation (EU) No. 56/2012 of 23 January 2012 amending Regulation (EU) No 961/2010 on restrictive measures against Iran