New sanctions against the Iranian Financial Sector

HM Treasury on Monday 21 November 2011 imposed new financial prohibitions on dealings with the Iranian banking sector, the Financial Restrictions (Iran) Order 2011 (2011/2775) (the "Direction"). From 3.00 pm Monday 21 November, all UK credit and financial institutions were required to cease business relationships and transactions with all Iranian banks, including their branches and subsidiaries, and the Central Bank of Iran. This prohibition applies to existing as well as future business relationships and transactions.
The prohibition was implemented using the powers in the Counter Terrorism Act 2008 (Schedule 7), and has been made as a result of increasing concern over the financing by Iranian banks of Iran's nuclear program. It also comes in the face of calls by the Financial Action Task Force for effective counter measures to deal with Iran's failure to address the risk of terrorist financing.

The existing financial sanctions and trade sanctions against Iran remain in force including in particular the Restrictive Measures against Iran Regulations (961/2010) (the "EU Regulations").

Application of these sanctions

The requirements of the Direction apply to all persons operating in the UK financial sector as financial or credit institutions (a term which includes some types of insurance including insurance companies (as defined by Section 1165(3) of the Companies Act 2006)); and all branches of such persons, wherever such branches are located. HM Treasury have made it clear that the direction does not apply to any subsidiaries of a UK financial or credit institution where those subsidiaries are incorporated outside the UK or to UK nationals working abroad for persons who are not subject to the Direction, the latter being in contrast to the extra territorial scope of the "main" sanctions regime. In addition, the Direction does not apply to subsidiaries of a UK financial or credit institution, wherever located, where those subsidiaries are not themselves financial or credit institutions.

The prohibition applies to all transactions or business relationships with (a) credit institutions incorporated in Iran; (b) the Central Bank of Iran, also known as Bank Markazi Jomhouri Islami Iran; (c) any branch, wherever located, of a credit institution incorporated in Iran; and (d) any subsidiary, wherever located, of a credit institution incorporated in Iran.

Whilst the financial sanctions do not apply to other UK entities (outside the credit and financial services sector) it is clear that the Direction may have a significant impact on their ability to do business in Iran (see below).

Breach of the Direction may be a criminal offence.

Types of transaction affected

The prohibition applies to all transactions or business relationships with Iranian credit and financial institutions. Therefore, the Direction will prohibit (this list is non-exhaustive):-

• transmission of funds or anything of value between a UK credit or financial institution and an Iranian credit institution;
• the accrual, creation or other provision of funds or value to an Iranian credit institution;
• the exchange of financial or credit documents with an Iranian credit institution;
• payments made by UK credit and financial institutions to Iranian credit institutions, either for the Iranian credit institution's own account or for that of a customer. Such payments are prohibited even if they are made through one or more intermediaries;
• any payment transmitted by (even if not originated by) a UK credit or financial institution where the intended recipient, from the originator's point of view, is an Iranian credit institution, either for the Iranian credit institution's own account or for that of a customer;
• the processing of any transfers of funds from an Iranian credit institution, to a UK credit or financial institution either for the UK credit or financial institution's own account or that of a customer. Again, indirect payments through intermediaries are also prohibited.

Although indirect payments through intermediaries are included in the prohibition, HM Treasury has explained in its guidance that if, having taken all reasonable steps and exercised all due diligence a credit or financial institution did not know or have reasonable cause to suspect that their participation in a transaction was prohibited by the Direction then they cannot be penalised for any breach.

Licensing

HM Treasury has the power to issues licences to exempt transactions or business relationships from the requirements of the Direction. However, whilst HM Treasury has stated that it will consider all licences on a case by case basis and taking account of the objectives of the Direction, it has stated that, as the Direction has been given because of the risks posed by activities in Iran, it is unlikely that the Treasury will issue licences for business with Iranian banks on an ongoing basis under new contracts.

HM Treasury, has, however, issued six general licences which cover transactions or business relationships with Iranian banks which are connected to the activities listed below. Those utilising the licenses will still need to consider whether they need to comply with the EU Regulations (and the related UK sanctions legislation), for example, the requirements to notify under Article 21 or seek prior authorisation if above the relevant threshold (licences 1-3, and 6). Some of the general licences referred to below (licences 1-3, and 6) do not permit transactions with persons subject to a specific asset freeze under the existing EU sanctions (e.g. pursuant to the EU Regulations).

Transactions or business relationships with Iranian banks which are connected to the following activities are permitted -

• GL1 - humanitarian activities where the related transfers are under €40,000;
• GL2 - personal remittances between individuals where both are acting in a private capacity, the transfers are under €40,000 and the transactions are not in the course of a business relationship or transaction. The term "transfer" includes several operations which appear to be linked, which suggests where a series of transactions take place that a bank would prudently request a further licence if the €40,000 limit were to be exceeded in aggregate. Notification (or authorisation if applicable) of transactions under Article 21 is still required;
• GL3 - provision of insurance which is exempt under the EU Regulations. Under Article 26(2) and (3), it is not prohibited to provide compulsory or third party insurance to Iranian persons, entities or bodies based in the EU or to provide insurance to those acting in a private capacity (except for designated individuals under the EU Regulations). This therefore permits premium payments or claims in connection with such insurance;
• GL4 - continuing to hold an account which was frozen under the EU Regulations where the business is now prohibited under the Direction. The licence also permits credits onto the account by the UK credit or financial institution ie where the credit or financial institution receives funds transferred to the account, and also allows interest or other earnings to be credited to the account (such credits themselves have to be frozen). In addition GL4 permits activities to continue where a licence has previously been granted by HMT under the EU Regulations and under the equivalent UK sanctions regime;
• GL5 - where a UK credit or financial institution holds an account for an Iranian bank (ie a person subject to the Direction) the UK credit or financial institution can continue the business relationship only so far as is necessary to hold that account. UK credit or financial institutions are required to report any such accounts to HM Treasury as soon as reasonably practicable but in any event within 14 days. HM Treasury have stated that specific licences may subsequently be issued to permit the balance on the account to be transferred, and the account closed. In the interim, payments could only be made for/to the account to the extent permitted by other licences;
• GL6 - a UK credit or financial institution may, before midnight on 28th November 2011, take any steps required to complete a payment to or from a designated person (ie an Iranian bank subject to the Direction) where instructions in respect of that payment were given before the coming into force of the Direction. Firms should note that there is still the obligation to comply with notification or prior authorisation requirements, depending on the value of the transaction (set out in Article 21 of the EU Regulations and Articles 10 and 11 of the equivalent UK sanctions legislation).

How does this impact on transactions already notified under the EU Regulations or partly underway?

The situation is more complex where a transaction is partly underway or where a notification (or authorisation) has already been made (and given) by HM Treasury, given the interplay of the two regimes:-

• New applications made to HM Treasury post 3pm on Monday will be treated as an application for both a licence under the Direction and as a notification or authorisation request (under Article 21 of the EU Regulations), where the Iranian entity is affected by both regimes. If the underlying payer or payee is also designated under the EU Regulations, HMT should confirm whether a separate licence will be required covering the payer or payee;
• Where a notification has already been made to (or if any required authorisation has already been granted by) HM Treasury under Article 21 of the EU Regulations, and if one of the general licences above does not apply, then an application for a licence will need to be made under the Direction to HM Treasury;
• Where a notification has been made to (or if any required authorisation has already been granted by) HM Treasury under Article 21 of the EU Regulations and the transaction was underway (ie instructions had been given) before the Direction came into force then General Licence 6 will apply.
• If the payment is part of a series of transfers (which have already been authorised by HM Treasury under Article 21) but it is not covered by one of the general licences, then a licence will be needed under the Direction before payment can be made. An example of this would be a series of monthly payments being made by a customer of a UK bank to an Iranian entity under one contract. The series of payments may have been authorised by HM Treasury under Article 21 (as being above €40,000), but if instructions have not already been given, in respect of the latest payment, a separate licence will be required. One issue which could arise in this regard and which is not clarified by the HM Treasury guidance is what is meant by "instructed". As, however, this licence is only of short duration to 28 November this issue will fall away quickly.

Effect on UK business

Whilst the Direction has been given to UK credit and financial institutions, it will in practice have a widespread effect on all those doing business in the UK with Iran. Exporters and importers will not be able to use UK banks to enter into letters of credit, for example, to facilitate payments being made or received from Iran, where an Iranian credit institution is involved. This Direction applies to existing contracts in the same way as it applies to new business dealings; there is no carve out, as in some of the sanctions regimes, for payments due under existing contracts. The only such licence is for payments which had already been authorised before the Direction came into force and this licence only applies until midnight on 28 November 2011.

To lessen this burden slightly, HM Treasury has stated that "The Treasury will consider applications for licences which would enable payments due under such existing contracts to be made, subject to being satisfied that the contract in question was entered into prior to the Direction. Where exporters have an existing contract with an Iranian importer or exporter that requires a payment to be made or received by an Iranian bank, they should apply to the Treasury for a licence. Exporters should discuss their intention to apply for a licence with their bank, in order to ensure duplicate applications are not made." HM Treasury has, however, stated that it is unlikely that it will issue new licences for business with Iranian banks on an ongoing basis under new contracts.

In reality, this may have less impact than might have been expected as our experience has been that a large number of banks have been reluctant for some time to enter into any dealings with Iranian financial institutions.

Other developments

In a co-ordinated move, the US and Canada have also announced a strengthening of their sanctions regimes against Iran. The US announced last night (Monday) that it is tightening the restrictions on individuals and companies doing business in the Iranian oil and gas industries, updating the list of blacklisted Iranian firms and designating Iran as a jurisdiction of primary money laundering concern. Canada also announced that it would ban exports to the Iranian petrochemical, oil and gas industries.