Update on CISADA's Iran Petroleum Sanctions, Diversion, & Penalty Provisions

(ITT’s previous summaries of CISADA covered the expanded petroleum sanction and penalty provisions (but in less detail) as well as: the removal of an exception from the import ban for certain Iran carpets and foodstuffs; contractor certification of Iran sanctions compliance for federal procurement; the ban against federal agencies purchasing goods from companies that export sensitive products to Iran; and new enforcement authority for BIS export officers. See ITT’s Online Archives or 06/30/10 and 09/20/10 news, 10063049 and 10092013, for previous BP summaries.)

Expanded Iran Petroleum Provisions

3 New Activities that Could Lead to Sanctions Against U.S./Non-U.S. Persons Added

Before the CISADA became law on July 1, 2010, the 1996 Iran Sanctions Act (ISA¹) prohibited virtually all import and export activities with Iran by U.S. persons (including trade in petroleum), and made certain petroleum investment activity by either U.S. or non-U.S. “persons” (individuals or companies) sanctionable.

The CISADA added three more sanctionable activities to the Iran petroleum provisions on the selling or providing of petroleum-related goods or services to Iran, that affects U.S. and non-U.S. “persons.”

(Trade and government sources state that these additions are directed at non-U.S. companies, also called third parties, as U.S persons were already barred from this type of trade in petroleum products and services under ISA.)

These new sanctionable Iran petroleum activities took effect on July 1, 2010, and affect “persons” who knowingly:

• sell, lease or provide to Iran goods, services, technology, information, or support (which includes providing shipping or brokering services)² that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products that have a fair market value of $1 million (M) or more or that during a 12-month period, have an aggregate fair market value of $5M or more (new);

• sell, lease or provide to Iran goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products which have a fair market value of $1 million or more or that during a 12 month period have an aggregate fair market value of $5 M or more (new); or

• sell or provide to Iran refined petroleum products that have a fair market value of $1M or more or that, during a 12-month period, have an aggregate fair market value of $5M or more (new).

(These three were added to the existing sanctionable activity for “persons” who knowingly make investments in Iran’s petroleum sector, though the dollar thresholds of the investments were lowered. Now persons who knowingly make investments of $20M (from $40M) or more or a combination of investments of at least $5M (from $10M) which in the aggregate equals or exceeds $20M (from $40M) in any 12-month period that directly and significantly contributed to Iran’s ability to develop petroleum resources are subject to sanctions.)

Added More Sanction Options for the 4 Activities, Required 3 of 9 to be Applied

To the existing list of six possible sanctions for “persons” who knowingly violate the Iran petroleum provisions, CISADA added three more, effective July 1, 2010: (i) a prohibition on access to certain foreign exchange in the U.S.; (ii) a prohibition on access to certain U.S. banking transactions; and (iii) a prohibition from acquiring, holding, transporting, importing, exporting, etc. any property that is subject to the jurisdiction of the U.S. and with respect to which the sanctioned person has any interest, etc.

(The original six sanctions include: (1) denial of any guarantee, insurance, or extension of credit from the U.S. Export-Import Bank; (2) denial of licenses for the U.S. export of military or militarily-useful technology to the entity; (3) denial of U.S. bank loans exceeding $10 million in one year to the entity; (4) if the entity is a financial institution, a prohibition on its service as a primary dealer in U.S. government bonds; and/or a prohibition on its serving as a repository for U.S. government funds (each counts as one sanction); (5) prohibition on U.S. government procurement from the entity; and (6) restriction on imports from the entity, in accordance with the International Emergency Economic Powers Act (IEEPA, 50 USC 1701).)

From this expanded list of nine possible sanctions, CISADA also requires the President to impose at least three of them (instead of just two) against persons violating the petroleum prohibitions.

(In September 2010, the State Department announced its first imposition of sanctions on a company involved in the Iranian petroleum sector since CISADA was enacted. See ITT’s Online Archives or 10/04/10 news, 10100438, for BP summary of the U.S. imposing sanctions against NaftIran Intertrade Company, a company based in Switzerland.)

President Must Investigate Possible Prohibited Iran Petroleum Activities

The CISADA also amended the existing provisions on Presidential investigations of “persons” who may be engaging in prohibited Iran petroleum activities by requiring the President to conduct such investigations (instead of encouraging them) and extending them to all prohibited Iran petroleum activities (not just those involving investment). As before, the President must make a determination of whether a “person” has engaged in such an activity 180 days after initiating an investigation, however for some of the prohibited Iran petroleum activities, such investigations do not have to be initiated until July 1, 2011, one year after enactment. The President must notify the appropriate Congressional committees of any determination and its basis.

Under “Special Rule” Investigation Can Stop if Person Ceases Activity, Etc.

However, the CISADA also established a “Special Rule” under which the President need not initiate such an investigation, or may terminate an investigation, if the President certifies in writing to the appropriate congressional committees that (i) the “person” whose activity was the basis for the investigation is no longer engaging in the activity or has taken significant verifiable steps toward stopping the activity; and (ii) the President has received reliable assurances that the “person” will not knowingly engage in the prohibited activity in the future.

Note that a bipartisan group of 10 Senators recently urged Secretary of State Clinton to provide updates by March 29, 2011 on the possible imposition of sanctions resulting from State’s pending investigations of international firms that have not yet committed to exit Iran's petroleum sector.² (See ITT’s Online Archives or 03/22/11 news, 11032218, for BP summary.)

Waivers

Standard for President to Issue Waivers Raised from “Important” to “Necessary”

In addition, CISADA amended the provision which allows the President to waive the imposition of sanctions against “persons” determined to have carried out sanctionable Iran activities in order to: (1) revise the standard for issuing a waiver from "important" to U.S. national interest to "necessary" to U.S. national interest; and (2) require in a waiver request certain information regarding an activity's effect on petroleum resource development or nuclear, chemical, or biological weapons development.

Added Waiver for Persons in Countries Closely Cooperating with U.S. Iran Efforts

The CISADA also added the option for an additional twelve-month waiver (which can be renewed) for persons in countries that the President certifies are closely cooperating with the U.S. in multilateral efforts to prevent Iran from acquiring or developing nuclear and other weapons, and if such waivers are vital to the national security interests of the U.S.

Country-Wide License Prohibitions

Prohibits Nuclear Export Licenses if National Engaged in Certain Iran Activities

The CISADA prohibits issuance of export licenses or approval for transfers or retransfers to a country for any nuclear material, facilities, components or other goods services or technology that are or would be subject to an agreement for cooperation between the U.S. and that country if a person (e.g. individual or company) from that country has engaged in prohibited Iran activities relating to its acquisition or development of nuclear weapons, related technology, or certain missiles or advanced conventional weapons.

However, the CISADA provides for waivers of such prohibitions if the President determines that a government does not know or have reason to know about the activity or is taking reasonable steps to prevent a recurrence of the activity. In addition, CISADA allows for case-by-case individual waivers if it is in the security interests of the U.S., etc.

Requires License (Presumed Denied) for Certain Goods/Services Diverted to Iran

The CISADA also requires that the Director of National Intelligence (DNI) report to the President, Secretaries of Defense, Commerce, State, Treasury, and to Congress in a classified report) on which countries the Director believes allow the diversion through the country of goods, services, or technologies to Iranian end-users or Iranian intermediaries that are either:

(1) prohibited for export to Iran under a resolution of the United Nations Security Council or:

(2)

• originated in the U.S.;
• would make a material contribution to Iran’s (i) development of nuclear, chemical, or biological weapons; (ii) ballistic missile or advanced conventional weapons capabilities; or (iii) support for international terrorism; and
• are (i) items on the Commerce Control List (CCL) or services related to those items; or (ii) defense articles or defense services on the United States Munitions List (USML).

The President must then determine whether these countries should be designated a Destination of Possible Diversion Concern. If a country is so designated, 45 days later, a license under the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR) (whichever is applicable) would be required to export to that country a good, service, or technology that the President has determined are being diverted to Iran, with the presumption that any application for such a license will be denied.

The President can delay the imposition this licensing requirement for a 12-month period (with options for renewal) if determined that the government of the country is taking steps to: (i) institute an export control system or strengthen the export control system of the country; (ii) to interdict the diversion of goods, services, or technologies through the country to Iranian end-users or Iranian intermediaries; etc.

President Must Report on Feasibility of Expanding Diversion Concern System to Other Countries

In addition, one year after enactment, the President must submit a report to Congress that identifies any country that the President determines is allowing the diversion, in violation U.S. law, of items on the CCL or services related to those items, or defense articles or defense services on the USML, that originated in the U.S. to another country (other than Iran) that is seeking to obtain nuclear, biological, or chemical weapons, or ballistic missiles or that provides support for acts of international terrorism. This report must assess the feasibility and advisability of expanding the system for designating countries as Destinations of Diversion Concern to include such countries.

Increased “Harmonized” Penalties

In a section entitled “Harmonization of Criminal Penalties for Violations of Sanctions,” CISADA amended the:

• United Nations Participation Act of 1945 to increase criminal penalties to up to $1 million (from $10,000) and 20 years in prison (from 10) for violations of Security Council resolutions imposing sanctions.

• Arms Export Control Act under 22 USC 2278(c) and 22 USC 2780(j) to increase criminal penalties to up to 20 years in prison (from 10) for violations of certain provisions regarding: (1) the control of arms imports and exports controls of defense articles and services; and (2) transactions with countries that support acts of international terrorism.

• Trading with the Enemy Act under 50 USC App. 16(a) to increase criminal penalties to up to 20 years in prison (from 10).

(See link to CISADA below for other details of the law, including sanctions with respect to financial institutions that engage in certain transactions, various new reports that the President must submit, the freezing of assets of certain individuals, etc.)

¹ISA, which was amended several times, was originally called the Iran and Libya Sanctions Act of 1996.

²These are goods, services, technology, information, or support that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products, including; (i) financing or brokering such sale, lease, or provision; or (ii) providing ships or shipping services to deliver refined petroleum products to Iran; or (iii) underwriting or entering into a contract to provide insurance or reinsurance for the sale, lease, or provision of such goods, services, technology, information, or support.

³Also note that the State Department applied the “Special Rule” in November 2010 when it announced that it would not investigate the Japanese energy company INPEX as it had withdrawn from its project in Iran. (See ITT’s Online Archives or 11/18/10 news, 10111843, for BP summary)

OFAC fact sheet on Sanctions against Iran, updated 02/17/11, available here.

Congressional Research Service summary, dated 07/01/10, available here.