John E. Smith, John P. Carlin, Nicholas J. Spiliotes, David A. Newman, Michael V. Dobson, Panagiotis C. Bayz, Saqib Alam, Felix Helmstädter, Kristofer G. Readling, and Jennifer S. Talbert
National Security, CFIUS, Sanctions + Export Controls
With tensions rising in the Persian Gulf, and Iran on the brink of pulling out of portions of the Iran nuclear deal, President Trump issued new Executive Order 13871 last Wednesday, May 8, 2019, imposing sanctions on Iran’s iron, steel, aluminum, and copper sectors. Following the “snap-back” of Iran sanctions last fall, the Trump Administration continued the sharp rhetoric of its “maximum pressure campaign” against Iran, but imposed few additional meaningful sanctions over the following half year. That pause has ended.
Over the past month, the United States has ended the waivers allowing Significant Reduction Exceptions for eight countries to purchase oil from Iran, designated the Islamic Revolutionary Guard Corps as a Foreign Terrorist Organization, dispatched air and naval forces to the Persian Gulf, and ordered the partial evacuation of its embassy in neighboring Iraq. This latest Executive Order, released on the one-year anniversary of the United States’ announcement of its withdrawal from the Joint Comprehensive Plan of Action (JCPOA), represents the culmination of its most recent round of maximum pressure against the Iranian regime.
The key takeaways are:
As we previously reported, as part of last year’s “snap-back” of Iran sanctions (see our alerts on Phase 1 and Phase 2, respectively), the United States re-imposed secondary sanctions related to several of Iran’s critical industry sectors and activities, including Iran’s energy, financial, insurance, automotive, and shipping and shipbuilding sectors as well as its port operators and its trade in gold, other precious metals, and graphite, raw, or semi-finished metals. As part of such secondary sanctions, OFAC was instructed to sanction any foreign entities found to be operating in, or engaging in significant transactions connected to, any such sectors or activities.
Effects of the Latest Significant Order
The new Executive Order expands upon existing sanctions under section 1245 of the Iran Freedom and Counter-Proliferation Act of 2012 (codified at 22 U.S.C. §§ 8801 et seq.) on the sale, supply, or transfer, directly or indirectly, to or from Iran of certain metals, including raw and semi-finished metals such as aluminum and steel. As a result of the new Executive Order, OFAC now may sanction a foreign person and add it to its List of Specially Designated Nationals and Blocked Persons (“SDN List”) if it determines that the person, on or after May 8, 2019:
With respect to foreign financial institutions, the Executive Order directs OFAC to impose correspondent or payable-through account sanctions on any such institution that engages in a “significant financial transaction” on or after May 8, 2019:
In a statement accompanying the Executive Order, President Trump asserted that Iran’s iron, steel, aluminum, and copper sectors were “the regime’s largest non-petroleum-related sources of export revenue,” accounting for 10% of its export economy. The threat of OFAC sanctions against companies involved in such critical economic sectors demonstrates that the United States intends to continue to ramp up its “maximum pressure” campaign against the Iranian regime — and that additional sectors of the economy could be targeted in the future.
While the Executive Order’s provisions are effective immediately, new FAQ 668 makes clear that foreign entities will have a 90-day wind-down period to cease transactions prohibited by the new Executive Order — so any steps to cease sanctionable activity should be taken by August 6, 2019. As with other OFAC wind-down periods, any safe harbor from U.S. sanctions afforded by the wind-down period applies only to transactions related to the winding-down of existing contracts or transactions. As OFAC noted, “Entering into new business that would be sanctionable under the [Executive Order] … will not be considered wind-down activity and could be sanctioned even during the wind-down period.”
The European Union and the foreign ministers of France, Germany, and the United Kingdom immediately expressed their concern about Iran’s announcement to reduce its commitments under the nuclear deal. In their joint statement made after Iran’s announcement and the issuance of the new Executive Order, they criticized again the re-imposition of sanctions by the United States. At the same time, the European parties to the JCPOA re-emphasized their willingness to fulfill the commitments made under the deal, which includes a long-standing plan to operationalize the payment channel between the EU and Iran through the special purpose vehicle INSTEX (please see our prior alert on INSTEX). On May 13, 2019, in an effort to avoid further escalation, the High Representative of the European Union called for an attitude of “maximum restraint,” as opposed to the “maximum pressure” campaign the U.S. government is continuing to pursue with the additional sanctions imposed by the Executive Order of May 8, 2019.
Global companies should expect the United States to follow through on its pledge to aggressively implement and enforce sanctions with respect to Iran: Among its several Iran-related designations in 2019, OFAC designated 25 individuals and entities, including those based in the United Arab Emirates and Turkey, for procuring both funds and vehicles for the Islamic Revolutionary Guard Corps and Iran’s Ministry of Defense and Armed Forces Logistics. Given a corresponding rise this year in the pace of OFAC sanctions and enforcement activity, companies around the world engaged in activities that could be linked to Iran, directly or indirectly, should undertake appropriate enhanced due diligence measures in light of the escalating and severe sanctions risk.
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