U.S. Seeks Snapback of U.N. Sanctions on Iran Despite Departure from Nuclear Deal

August 25th, 2020 Cortney O’Toole Morgan and Camron Greer Leave a comment

The United States is formally demanding that the United Nations (U.N.) reimpose sanctions on Iran for its failure to meet commitments to limit its nuclear program set forth under the Joint Comprehensive Plan of Action (JCPOA). U.N. sanctions on Iran were lifted in 2015 as part of the terms of the JCPOA, which included the United States, European Union, France, Germany, the United Kingdom, Russia, and China as signatories. The U.S. formally withdrew from the JCPOA in 2018 and reinstated sanctions on Iran.

According to President Trump, the U.S. intends to restore “virtually all of the previously suspended U.N. sanctions on Iran. It’s a snapback.” Secretary of State Mike Pompeo is scheduled to go before the United Nations this week to officially notify the Security Council that the U.S. intends to restore U.N. sanctions on Iran. According to the Department of State’s press release, a range of U.N. sanctions will be restored within thirty (30) days, including the requirement to end all nuclear enrichment activities and the extension of the arms embargo on Iran, which is currently set to lapse in October.

The decision to request a snapback of U.N. sanctions on Iran follows the failure of an effort to extend a five-year U.N. arms embargo on Iran. The legality of the requested snapback by the U.S. has been questioned by other members of the JCPOA and the U.N. Security Council because the U.S. is no longer a party to the agreement. The Administration, however, maintains that as a permanent member of the Security Council, it has the authority under U.N. Security Council Resolution 2231 to push for a snapback of sanctions.

As a “participant state” in the JCPOA under the resolution, the U.S. claims it can assert “significant non-performance of commitments” by Iran to force a snapback within 30 days. It is not clear how the U.S. without support from Europe would enforce the U.N. sanctions. Without support from the rest of the Security Council, the U.S. will need to enforce sanctions unilaterally.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Archives, Global Trade Daily, News

US Imposes Additional Sanctions on Key Sectors of Iranian Economy

January 19th, 2020 Tamer Soliman, Ori Lev, Yoshi Ito, Brad Resnikoff, Liz Owerbach and Brad Cohen Leave a comment

On Friday, January 10, 2020, President Trump issued a new Executive Order, “Imposing Sanctions With Respect to Additional Sectors of Iran” (“E.O.”), which authorizes the imposition of sanctions against persons operating in or transacting with Iran’s construction, mining, manufacturing or textile sectors. The E.O. also imposes secondary sanctions against foreign financial institutions (“FFIs”) that engage in “significant financial transactions” within these sectors. Concurrently, the US Department of the Treasury, Office of Foreign Assets Control (“OFAC”), designated several Iranian and third-country metal producers and mining companies, a number of senior Iranian officials, and third-country entities that have transacted in the Iranian metal and mining sectors. This Legal Update provides a brief summary of these new sanctions and designations and discusses their impact on US and non-US businesses and financial institutions.

Designations. Concurrently with the E.O., OFAC designated several Iranian and third-country entities, including 17 Iranian metal producers and mining companies (described as the largest metals manufacturers in Iran); an Oman-based steel supplier; a network of three China- and Seychelles-based entities; and a vessel involved in the purchase, sale and transfer of Iranian metals products, as well as in the provision of critical metals production components to Iranian metal producers. OFAC also designated, pursuant to pre-existing authorities, several senior Iranian officials who have “advanced the regime’s destabilizing objectives.”[i]

New Targeted Sanctions. The E.O. imposes sanctions on the construction, mining, manufacturing and textile sectors of the Iranian economy, expanding on those already imposed on the country’s energy, shipping and financial sectors under Executive Order 13846 (“E.O. 13846”) and the iron, steel, aluminum and copper sectors under Executive Order 13871 (“E.O. 13871”). The aim of the new E.O. is to “deny the Iranian government revenues, including revenues derived from the export of products from key sectors of Iran’s economy, that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.” The new sanctions come amid rising tensions between the United States and Iran and only days after targeted, tit-for-tat military actions by both countries.

The E.O. authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to block all property and interests in property that are in the United States, or within the possession or control of any US person, belonging to any person (meaning an individual or an entity) determined to:

1. be operating in the construction, mining, manufacturing, or textile sectors of the Iranian economy;

2. have knowingly engaged, on or after January 10, 2020, in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy;

3. have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any persons whose property and interests in property are blocked pursuant to the E.O.; or

4. be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the E.O.[i]

Importantly, the E.O. authorizes the Treasury Department to designate as a Specially Designated National (“SDN”), any “person,” including non-Iranian and non-US persons, who operates in or knowingly engages in a significant transaction in these sectors of the Iranian economy. The E.O. also permits the Treasury Secretary to designate other sectors of the Iranian economy to be subject to sanctions in the future.

Secondary Sanctions on Foreign Financial Institutions. In addition to the targeted sanctions discussed above, the E.O. permits the Secretary of the Treasury, in consultation with the Secretary of State, to impose correspondent account and payable-through-account (“CAPTA”) secondary sanctions on any FFI that, on or after January 10, 2020, knowingly conducts or facilitates any “significant financial transaction”:

i. for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy; or

ii. for or on behalf of any person whose property and interests in property are blocked pursuant to this order.

CAPTA sanctions “may prohibit the opening, and prohibit or impose strict restrictions on the maintaining” of such accounts in the US by FFIs determined to have engaged in the conduct described in the E.O.

Impact of the New Iranian Sanctions and Related Designations

The E.O. expands on the sanctions already put into place against Iran following the reimposition of secondary sanctions against the country announced in May 2018 and as expanded under E.O. 13846 (sanctions against Iranian energy, shipping and financial sectors) and E.O. 13871 (sanctions against Iranian iron, steel, aluminum and copper sectors).

Under the current sanctions regime, it remains prohibited for US persons—including US-owned or -controlled entities—to engage in virtually any transaction, directly or indirectly, with Iran without OFAC authorization. US persons are further prohibited from transacting without authorization with those persons and entities designated by OFAC and added to the SDN List, including via this recent round of designations.

The new sanctions introduced by the E.O. increase OFAC’s ability to sanction non-US persons, as the E.O. enables the United States to designate and block the property and interests in property of those non-US persons operating in or engaging in significant transactions with the construction, mining, manufacturing or textile sectors of Iran.[i] This has the effect of cutting off such non-US persons from the US financial system (and the US market more generally). Businesses with a presence in the European Union may continue to face challenges as they take into account this enhanced sanctions authority in light of the EU blocking statute, which prohibits EU companies from direct or indirect compliance with certain US sanctions laws, including Iranian sanctions.

It remains a secondary sanctions risk for FFIs (and non-US businesses) to knowingly engage in significant transactions involving certain Iranian persons on the SDN List.[i] Additionally, as discussed above, CAPTA sanctions may be imposed against FFIs who conduct or facilitate any “significant financial transaction” in one of the sectors of the Iranian economy specified in the E.O., regardless of whether such transactions have a US nexus. FFIs and non-US businesses may now include an evaluation of significant transactions in the Iranian construction, mining, manufacturing or textile sectors as part of their Iran sanctions risk assessments.

While the E.O. does not define either the term “significant transaction” or “significant financial transaction,” we suspect that the Treasury Department will apply a standard similar to previously issued guidance published in relation to E.O. 13871. Accordingly, such a determination will likely be based on a multifactor, totality-of-the-circumstances assessment of a broad range of factors, including the size, number and frequency of the transactions or services; their type, complexity and commercial purpose; and the level of awareness of the institution’s management.[i]

Since reinstating secondary sanctions in 2018, the United States has only designated non-US entities under secondary sanctions in a few limited circumstances.[i] However, this E.O. joins a series of preexisting Iran-related secondary sanctions authorities[ii] and further extends the extraterritorial reach of the Iran sanctions program to advance US policy objectives.

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Endnotes

[1] See Press Release, Treasury Targets Iran’s Billion Dollar Metals Industry and Senior Regime Officials (January 10, 2020), available at https://home.treasury.gov/news/press-releases/sm870

[1] The E.O., by its terms, does not apply with respect to any person for conducting or facilitating a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.

[1] The blocking provision of the E.O. requires that the property or interests in property comes within the United States or within the possession or control of a US person (e.g., through use of the US financial system in such transactions).

[1] See OFAC FAQ 636, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See OFAC FAQ 671, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See, e.g., OFAC, “Iran-related Designations; Issuance of Iran-related Frequently Asked Question,” (Sept. 25, 2019), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190925.aspx (adding Chinese tanker companies to the SDN list due to their alleged role in transporting Iranian oil).

[1] See, e.g., Mayer Brown Legal Update, “US to Reimpose Secondary Sanctions Against Iran Amid EU Opposition” (May 9, 2018), available at https://www.mayerbrown.com/en/perspectives-events/publications/2018/05/us-to-reimpose-secondary-sanctions-against-iran-am Executive Order 13846, “Reimposing Certain Sanctions With Respect to Iran,” (Aug. 6, 2018).

About the authors:

–Tamer Soliman is a partner in Mayer Brown’s Washington DC and Dubai offices, global head of the firm’s Export Control & Sanctions practice and a member of the International Trade practice.

–Ori Lev is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice and the Consumer Financial Services group.

–Yoshi Ito is a partner in Mayer Brown’s Washington DC office and a member of the International Trade and Public Policy, Regulatory & Political Law practices.

–Brad Resnikoff is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice.

–Liz Owerbach is an associate in Mayer Brown’s Washington DC office and a member of the firm’s Export Control & Sanctions and International Trade practices.

–Brad Cohen is an associate in Mayer Brown’s New York office and a member of the Litigation & Dispute Resolution practice.

Archives, Global Trade Daily, Special Reports

U.S. DOLLAR PROVIDES THE MUSCLE FOR ECONOMIC SANCTIONS

June 14th, 2019 Andrea Durkin Leave a comment

Money Talks

From drug kingpins to terrorists and from human traffickers to money launderers, the United States has nearly 8,000 economic sanctions in place, and the list is growing. Particularly in the post-9/11 era, the U.S. government has leveraged the global preeminence of the U.S. dollar to turn off spigots of funding for sinister activities and unwanted behaviors by state actors.

Among additional sanctions against Iran, Russia and Venezuela, The Trump administration earlier this month tightened travel restrictions to Cuba stating, “Cuba continues to play a destabilizing role in the Western Hemisphere…these actions will help to keep U.S. dollars out of the hands of Cuban military, intelligence, and security services.”

The muscle behind an array of U.S. financial sanctions derives from the reach and power of the U.S. dollar as the “lead currency” in the global economy. This status makes it possible to not only prevent U.S. individuals and companies from doing business directly with a sanctioned entity, it makes it risky to do business with third-country companies that do business with sanctioned entities. Acutely aware of their vulnerability, non-U.S. companies also frequently take steps to minimize their exposure to possible violations of U.S. sanctions lest they jeopardize their access to the U.S. financial system.

The U.S. Dollar Reigns

How strong is the dollar’s foothold in the global economy? The U.S. dollar was used in 88 percent of global foreign exchange transactions in 2016. For comparison, the euro was the medium of exchange in 31 percent of transactions in 2016, the Japanese yen in 22 percent, the British pound in 13 percent, and China’s renminbi in four percent (as two currencies may be involved in exchange, these numbers will add up to more than 100 percent).

Companies selling their goods and services outside the United States often accept dollars as payment because they can easily turn around and use dollars to pay for imported products and inputs. Or, they can hold onto their dollar revenues with confidence they are storing value.

Why is the Dollar Preferred?

The dollar is the world’s lead currency because it meets three key conditions.

First, the dollar is fully tradable and exchanged at relatively low costs. The U.S. government does not restrict the purchase or sale of the dollar.

Second, the dollar holds its value against other currencies. The United States is still considered a stable and open market economy, current tariff vagaries notwithstanding. At the end of last year, just under 62 percent of all central bank reserves were held in U.S. dollars.

Third, the United States is still the largest economy in the world, equivalent to 24 percent of global GDP. Below is a snapshot from the International Monetary Fund comparing the world’s largest economies. We have a large money supply, providing liquidity for the global economy.

Into the Arms of Another

Some have argued bad actors like North Korea will find always find ways to evade U.S. sanctions. Buyers of Iranian oil will seek alternative currencies for their transactions, both diluting the effect of sanctions and hastening reduced dependence on the dollar.

Several European countries developed a clearinghouse to enable companies to avoid the U.S. financial system in transactions involving Iran as part of their effort to salvage the nuclear pact the Trump administration pulled out of last year before restoring a slew of sanctions against Iran.

Despite initial discussions about a wider scope, Europe’s Instrument in Support of Trade Exchanges (INSTEX) will, at least for now, only facilitate trade in humanitarian goods such as pharmaceuticals, medical devices and agri-food products, all of which are already permissible under U.S. sanctions. Despite European government grumbling about being beholden to the U.S. dollar, there appeared to be little appetite on the part of European companies and commercial banks to risk U.S. penalties by using such a clearinghouse for other types of transactions.

Will the Euro or Renminbi Overtake the Dollar?

Not anytime soon.

The euro covers a large economic zone featuring sophisticated financial market institutions, but the politics surrounding continued support by members of the euro zone and unresolved debt discussions with southern states (we were talking about Grexit long before Brexit) are holding the euro back in overtaking the U.S. dollar.

Although the renminbi’s share in global transactions is still low, it should be noted that usage and overseas holdings of China’s currency by individuals, businesses and central banks has expanded in the last decade, enabling China to break through in 2016 to join the top five most-used currencies. The Chinese government is making a big push to internationalize its currency through global infrastructure investment funds associated with its Belt and Road initiative and through renminbi-denominated commodities futures contracts, among other initiatives.

China’s currency, however, is not freely convertible, its performance has been volatile, and the degree of state and private debt in China’s financial system remains murky.

The Dollar’s Achilles Heel

For the time being, most experts believe there’s no real threat to the U.S. dollar’s dominance. Europe would need to address skepticism regarding the monetary union’s future, China would need to implement significant reforms to its financial sector, and much-hyped cryptocurrencies still have long way to go to challenge the conventional system of global payments.

These are all big “ifs”. Instead, the dollar’s Achilles’ heel is of our own making. One of the biggest risks to the dollar’s long-term value is continued fiscal imbalances in the United States and the sustainability of our debt burden.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Trade Daily, International Trade

In Hot Extraterritorial Water

December 17th, 2018 Eric Sohn Leave a comment

People often think that sanctions regulations are really for the financial sector. After all, they are referred to as “financial sanctions” as often, if not more so, than “economic sanctions.” And, in many countries, the primary sanctions regulator is the same as the one which oversees banks and other financial firms.

The greater public has, unfortunately, been lulled into a false sense of security by how enforcement of sanctions compliance failures is conducted across the globe – except in the United States and United Kingdom. Outside of those two countries, firms are only penalized if their system of controls to identify sanctions violations is found wanting during periodic reviews of their compliance programs.

In October 2018, the head of the U.K.’s sanctions regulator stated that they expect to mete out fines in the coming year based on the 122 reports of regulatory violations they have received. However, to date, there is currently no track record of enforcement based on investigation of actual breaches of the regulatory burdens.

That leaves the United States – the country with the longest, and most punitive, history of regulatory enforcement actions, the most aggressive and varied application of sanctions regulations, as well as the most expansive definition of legal jurisdiction. Fortunately, the Office of Foreign Assets Control (OFAC), the U.S. sanctions regulator, is also the most transparent about its requirements, expectations and the investigation and prosecution of sanctions violations.

The Long Arm of the U.S.

The U.S. claims legal jurisdiction broadly. In addition to “U.S. persons,” which are U.S. citizens and U.S.-incorporated firms, and foreign persons and operations of foreign firms located in the United States, the U.S. stakes a claim to take some manner of enforcement action when:

– Based on a 2017 enforcement action against 2 Singaporean firms, the U.S. currency is used to facilitate a prohibited transaction.

– Based on explicit wording in the regulatory framework for the U.S.’ Iranian sanctions, U.S.-origin goods are shipped to Iran.

– For elements of the Hizballah, Iran and Ukraine/Russia-related sanctions, a foreign person or organization is involved in (including advice, insurance and other facilitation) of transactions prohibited to U.S. persons.

In addition, U.S. sanctions programs generally provide the power to sanction those parties who, through their conduct of business with those already sanctioned, help lessen or delay the impact of sanctions restrictions and prohibitions. This was evidenced in late 2018 by the sanctioning of a Singaporean citizen and his companies who had facilitated trade involving North Korea, in contravention of OFAC and United Nations sanctions.

While the U.S. is not the only country to apply sanctions on foreign persons and organizations beyond what is agreed to on a multilateral basis by the United Nations or the European Union, its extraterritorial application of sanctions is, by far, the most far-ranging.

U.S. Regulatory Framework

Unlike the overwhelming majority of countries, to properly comply with the United States sanctions regime, one must master an array of legislation, regulation and guidance. While downloading a list of names of sanctioned parties and withholding any assets in which they have an ownership interest checks the box for most countries’ requirements, much of the U.S. regime’s nuances must be derived from descriptions of affected parties and types of commercial or financial transactions. For example:

– In addition to any specifically-named parties, some securities issued or held by elements of the Venezuelan government are subject to restrictions or prohibitions.

– One is expected, due to the import and export restrictions placed on certain governments and countries, to identify references to geographic locations (including port facilities) in the affected countries in order to identify transactions that are potentially subject to compliance oversight.

Perhaps the most impactful of these regulatory expectations that are not explicitly provided by OFAC is the OFAC 50 Percent Rule. This regulatory guidance, which has been quoted in 3 enforcement actions since 2016, states that any organization which is at least 50 percent owned by 1 or more sanctioned parties is, itself, considered sanctioned. The European Union has also published a similar “ownership and control” guidance. Based on extensive, non-exhaustive research of publicly-available ownership and management control records, the number of additionally-sanctioned parties is between 3 and 4 times the size of the combined applicable U.S. and E.U. sanctions lists.

Same Sanctions, Different Day

The scope of foreign sanctions requirements, especially those of the United States, may appear daunting. However, one must contend with a pair of painful realities. While the cost of complying with another country’s regulatory requirements may feel like an unnecessary expense, it likely pales with the commercial impact of an enforcement action resulting from willful neglect of OFAC’s extraterritorial reach. Similarly, while one’s home regulator may currently seem inattentive with regards to oversight and enforcement, that can shift significantly in a blink of an eye, exposing one immediately to significant reputational and regulatory risk. Consider the regulatory responses in Hong Kong and Singapore in the wake of the 1MDB scandal as a prominent example.

When one reviews the outsized fines against European banks for their compliance failures, and the short-lived ban on exports to the Chinese telecommunications firm ZTE, perhaps, to paraphrase an old saw, an ounce of compliance prevention is worth a pound of enforcement action cure, even if the odds of catching the contagion seem remote.

Eric A. Sohn, CAMS, global market strategist and product director, Dow Jones Risk & Compliance, New York, NY, USA, eric.sohn@dowjones.com