As of November 5, 2018, US secondary sanctions against Iran are back in force, and more than 700 Iranian individuals and entities have been re-added or newly added to the US Specially Designated Nationals and Blocked Persons List (the SDN List). The reinstated secondary sanctions prohibit foreign financial institutions and companies from dealing in Iranian crude oil and conducting business in the Iranian energy, shipping and financial sectors. European leaders have criticized the reimposition of the secondary sanctions and have promised to continue trade with Iran.
At the same time, temporary waivers have reportedly been granted to eight countries, allowing them to continue to purchase Iranian crude oil for a limited period and in limited amounts. Even with the temporary waivers, this sanctions action challenges world oil supply. This legal alert addresses the risks and issues that the global oil industry should be aware of and presents the most important implications of the Iran sanctions over the coming months.
I. Key Iran Sanctions Issues for Global Purchasers and Sellers of Crude Oil
A. Significant reduction exemptions temporarily allow eight countries to purchase Iranian oil within limits.
If a country demonstrates a “significant reduction” in its purchases of Iranian crude oil, sanctions law authorizes the President to grant an exemption to allow that country to continue purchasing oil from Iran in reduced amounts. Ordinarily, after November 5, non-US companies and financial institutions are subject to sanctions for dealing in Iranian oil. If a country receives an exemption, companies that are under the primary jurisdiction of the exempted country may continue to purchase and import Iranian petroleum. Banks and companies which are outside of the countries receiving waivers (i.e., not subject to the “primary jurisdiction” of a waiver country) are not protected by the waiver.
The eight countries receiving exemptions were announced on November 5. These countries received exemptions allowing them to purchase Iranian oil for the next six months. These eight countries are China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey. Iraq was not granted a waiver, and financial dealings in Iraqi crude carry sanctions risks to the extent that it may be mixed with Iranian crude. The waivers are limited in other respects, as well.
First, sanctions are only waived with respect to activities related to authorized oil purchases or sales for the exempted countries. If, for example, a person under the jurisdiction of an exempted country provides non-exempt financial or material support for individuals and entities on the SDN List including the National Iranian Oil Company (NIOC) and Naftiran Intertrade Company (NICO), or deals with companies affiliated with the Islamic Revolutionary Guard Corps (Quds Force) (IRGC-QF) or Hizballah, that person’s property may be blocked when it comes within the US or possession or control of a US person. Therefore, the waivers contemplate that payments for the purchase of Iranian oil on or after November 5 will be placed in escrow into a third-country account for use in humanitarian purchases.
Second, other sanctionable activity that is not exempted includes investment in exploration and production projects in Iran. Finally, although the administration has not made public the import limitations in each waiver, the waivers likely limit the countries to the purchase of a certain amount of barrels of oil from Iran over a specified period of time.
Finally, Administration officials have stated that “[o]ne hundred percent of the revenue that Iran receives from the sale of crude oil will be held in foreign accounts and can be used by Iran only for humanitarian trade or bilateral trade in nonsanctioned goods and services.” In furtherance of this objective, the Administration has advised the Belgium-based financial messaging system SWIFT to discontinue services to the Central Bank of Iran and designated Iranian financial institutions. Removing this point of access to the international financial system limits Iran’s options for trading other than via bartering and authorized financial channels.
B. The President’s enforcement powers allow him to block access to the US financial system for institutions or companies that contravene the secondary sanctions.
A foreign entity’s engagement in sanctionable activity puts it at risk of not being able to do business in the US or with US financial institutions worldwide. In other words, companies and banks which continue to engage in sanctionable activity risk losing access to the US financial system and the ability to deal in US currency.
The Trump Administration can block (or freeze) a non-US company’s property that comes within the US or comes within the possession of any US person, if the company engages in sanctionable activities (notwithstanding a license or other exemption). This activity includes providing services or material support to the NIOC, NICO, the Central Bank of Iran, or another Iranian individual or entity on the SDN List. The Administration may also block property if the non-US person does business with Iran’s energy or shipping industries. The Administration may also deny approval for an extension of credit, prohibit US banks from making loans, and deny visas if a person deals in Iranian petroleum.
Similarly, the Administration can prohibit a foreign financial institution from maintaining or opening a correspondent account in the US if the financial institution has engaged in sanctionable activity, including conducting or facilitating a “significant financial transaction“ involving Iranian petroleum. In addition, the Administration can block a foreign financial institution’s property that comes within the US or possession or control by a US person, if a foreign financial institution facilitates a significant transaction or maintains significant funds in Iranian currency. As a result, international financial institutions have a strong disincentive to finance or insure trade in Iranian crude.
C. The reimposition of US sanctions creates serious compliance risks for global oil traders.
Iranian officials stated that Iran will continue to export crude oil and seek to defy the reimposed sanctions. At the same time, non-US companies and foreign financial institutions are subject to US sanctions for engaging in sanctionable activities with Iran after November 5. The US anticipates attempts to “bust” the sanctions and disguise trade in Iranian-origin oil. The Financial Crimes Enforcement Network (FinCEN), has issued an advisory in order to assist financial institutions to comply with US sanctions. FinCEN warns that the Treasury Department has observed that the Central Bank of Iran and IRGC-QF use regional banks to hide “illicit transactions.” For example, IRGC-QF has front companies that reclaim funds “in various currencies from foreign bank accounts held by CBI and then transfer the funds back to Iran.” Some “red flags” that financial institutions can look for include using personal accounts, unusual wire transfers, and using forged documents. Financial institutions are also advised of the following:
(1) exercise due diligence when exchange houses exposed to Iran and Iranian persons are involved (red flags include the use of multiple exchange houses and depositors);
(2) be aware of Iran’s global use of procurement networks through shell companies, and practices that include counterfeiting and the use of Iranian airlines. Foreign financial institutions should also note that they could be sanctioned and placed on the SDN List for “providing material support” to Iranian airlines on the SDN List;
(3) be aware of Iran’s deceptive shipping practices such as reflagging vessels and falsifying documents;
(4) be alert for deceptive practices that use precious metals to enable Iranian oil sales (red flags to watch for include the use of gold and funnel accounts); and
(5) be aware of the emerging use of virtual currency in Iran, such as blockchain.
Since US sanctions have been reimposed, and Iran has openly stated defiance of these measures, foreign financial institutions in particular– and also the oil trading industry- should be aware that some of these practices are likely to become more prevalent.
D. The EU blocking statute prohibits European companies from refusing Iranian deals in order to comply with the US secondary sanctions.
Another compliance challenge for non-US entities is presented under the EU’s “blocking statute.” The EU’s Blocking Regulation prohibits ‘compliance’ with specified US secondary sanctions laws. It is the EU’s attempted response to the US’s Iran-related secondary sanctions, which it considers to be contrary to international law. The Blocking Regulation is directly applicable in all EU Member States but responsibility for enforcement rests with the individual Member States.
The amended annex to the Blocking Regulation came into effect on August 7, 2018, and extends its application to US secondary sanctions laws. Specifically, following the update to the Blocking Regulation, it is prohibited for all EU persons, including all (i) EU-incorporated companies (including EU subsidiaries of US companies); (ii) EU residents/nationals; and (iii) non-EU nationals acting in the EU in a “professional capacity,” to refuse to have dealings with Iranian entities for the purposes of “complying” with US secondary sanctions.
The Blocking Regulation has historically been considered ineffective as a means of counteracting US sanctions. It is for individual EU Member States to decide what penalties are to be imposed for violations of the relevant provisions. For the most part, Member States have declined to engage in any enforcement activity. In the meantime, European companies that want to maintain access to the US financial system are obligated to comply with the US secondary sanctions.
II. Further Implications of US sanctions
Some analysts have remarked that, although oil prices have declined over the past month, it is uncertain whether OPEC countries and Russia can increase production much more than current levels and whether prices will increase. Concerns over price pressures and a reduced global oil supply could have driven the decision to temporarily issue waivers. Major purchasers of Iranian crude oil, including China and India, were granted significant reduction exemptions. But it is not clear if these waivers will be renewed after the six-month period. The decision could again be influenced by price pressures and market impacts, as well as political pressures from a bipartisan group of Congressional members who have already spoken out against the issuing of significant reduction exceptions.
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