December 2, 2011 Iranian Sanctions United States Designates Iran as a Primary Money Laundering Concern under Section 311 of the USA PATRIOT Act; New Sanctions Target Persons Who Provide Goods, Services, Technology or Support that Contributes to Iran’s Development of Petroleum Resources or Production of Petrochemical Products SUMMARY In response to recent revelations regarding Iran’s nuclear weapons program, and in advance of significant legislation currently under consideration by the U.S. Congress, the United States has imposed several new sanctions measures targeting Iran. First, although short of calls by some to sanction the Central Bank of Iran (also known as Bank Markazi), the U.S. Treasury Department issued a finding pursuant to Section 311 of the USA PATRIOT Act that Iran is a jurisdiction of primary money laundering concern, and issued proposed rules that would impose special measures against banking institutions in Iran, including the Central Bank of Iran. The special measures would prohibit U.S. financial institutions and financial agencies from opening or maintaining a correspondent account for or on behalf of an Iranian banking institution and will also require covered financial institutions to apply special due diligence measures to their correspondent accounts for non-U.S. financial institutions to guard against their improper indirect use by Iranian banking institutions. In addition, on November 21, 2011, President Obama issued Executive Order 13590. E.O. 13590 parallels and enhances the Iran Sanctions Act, targeting for sanctions any person who provides goods, services, technology or support that contributes to Iran’s development of petroleum resources or production of petrochemical products. These sanctions are designed to work with the Iran Sanctions Act to further impede Iran’s efforts to maintain and modernize its oil and gas sector. E.O. 13590 also newly designates 11 Iranian parties that support Iran’s nuclear procurement network and carry out research and development in the field of nuclear technology, pursuant to a previous Executive New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com Order that blocks the property of proliferators of weapons of mass destruction and their supporters. Those 11 have been listed as Specially Designated Nationals on the List of Specially Designated Persons and Blocked Nationals maintained by the Treasury Department’s Office of Foreign Assets Control. SPECIAL MEASURES PURSUANT TO SECTION 311 OF THE USA PATRIOT ACT The United States currently targets Iran with various sanctions programs. Among other things, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers the Iranian Transaction Regulations (“ITR”), 31 C.F.R. part 560, which ban substantially all trade between the United States and Iran. In addition, a number of Iranian parties, including many of the principal Iranian banks, are designated under programs that target weapons proliferation activities and terrorists and their supporters, so that their assets must be blocked by U.S. persons; these programs are consistent with and help to implement various United Nations Security Council Resolutions, and many other nations accordingly have similar sanctions on these banks and other parties. Iranian parties that are blocked under these programs include the Bank of Industry and Mine (of Iran), Bank Mellat, Bank Melli, Bank Saderat, Bank Sepah, Export Development Bank of Iran, Mehr Bank and Post Bank of Iran. Under the ITR, U.S. financial institutions may not deal directly with any of the Iranian banks located in Iran, including the Central Bank of Iran; the Central Bank of Iran, however, is not designated under the special blocking regimes for weapons proliferation activities and terrorism. The identification of Iran as a “jurisdiction of primary money laundering concern” under Section 311 of the USA PATRIOT Act by the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) in effect enhances the scope of U.S. sanctions applicable to the Central Bank of Iran while stopping short of specific blocking sanctions that have been applied to the other Iranian banks listed above. Along with the identification of Iran as a “jurisdiction of primary money laundering concern,” FinCEN proposed a rule that would impose special measures pursuant to Section 311 against the Islamic Republic of Iran and any “Iranian banking institution,” which includes the Central Bank of Iran, any bank chartered by Iran (including any branches, offices or subsidiaries, wherever located), any branch or office of a foreign bank within Iran and licensed by Iran, and any foreign bank more than 50% owned by two or more banks chartered in Iran. The special measures would prohibit the opening or maintenance of any correspondent account for or on behalf of an Iranian banking institution, but because of the U.S. sanctions already in place, such as the ITR, this aspect of the proposed rule should not be of great practical significance. Such accounts likely would violate sanctions already in existence and thus presumably do not exist. The special measures, however, also would require special due diligence by covered financial institutions of their correspondent accounts to help prevent improper indirect access by Iranian banking institutions to U.S. correspondent accounts. The proposing release indicates that appropriate screening mechanisms, including existing OFAC screening mechanisms are one example of additional diligence measures that might be employed. -2- Iranian Sanctions December 2, 2011 This due diligence requirement would enhance those that are in place today. In particular, as discussed in our memorandum entitled “U.S. Bank Reporting Obligations Regarding their Non-U.S. Correspondent Accounts,”1 FinCEN recently adopted rules to implement Section 104(e) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). These Section 104(e) rules established a mechanism whereby FinCEN may, upon written request, require that a U.S. bank (including a U.S. branch of a non-U.S. bank) make certain inquiries of specified non-U.S. banks for which the U.S. institution maintains a correspondent account, and report information obtained from the non-U.S. banks to FinCEN, along with other information about the non-U.S. banks’ correspondent accounts. In particular, FinCEN may require U.S. institutions to inquire of a specified non-U.S. bank client whether that non-U.S. bank: (1) maintains a correspondent account for an “Iranian-linked financial institution” designated under the International Emergency Economic Powers Act, as identified on the List of Specially Designated Nationals and Blocked Persons (“SDN List”) maintained by OFAC;2 (2) has processed one or more funds transfers, within the preceding 90 calendar days, for or on behalf of, directly or indirectly, such designated Iranian-linked financial institution; or (3) has processed one or more funds transfers within the preceding 90 calendar days for or on behalf of, directly or indirectly, Iran’s Islamic Revolutionary Guard Corps (“IRGC”) or its agents or affiliates, as identified on OFAC’s SDN List. The special measures contemplated by FinCEN’s proposed rule under Section 311, however, would require a “Covered Financial Institution”3 to: notify those correspondent account holders, that the Covered Financial Institution knows or has reason to know provide services to Iranian banking institutions, that such correspondent account holders generally may not provide Iranian banking institutions with access to the correspondent account maintained at the Covered Financial Institution; document its compliance with this notice requirement; take reasonable steps to identify any indirect use of its correspondent accounts by Iranian banking institutions (to the extent that indirect use can be determined from transactional records maintained in the Covered Financial Institution’s normal course of business), such as the use of existing OFAC screening mechanisms; and employ a risk-based approach in deciding what, if any, other due diligence measures it should adopt to guard against the improper indirect use of its correspondent accounts by Iranian banking institutions. The proposed special measures pursuant to Section 311 would require compliance without the special request of FinCEN, and accordingly expand the compliance burden on domestic institutions from their current obligations under FinCEN’s CISADA Section 104(e) rules. Comments on the proposed rules are due by January 27, 2012. EXECUTIVE ORDER 13590 E.O. 13590 essentially establishes a parallel track for sanctions that mirrors those currently available under the Iran Sanctions Act of 1996 (“ISA”), as amended by CISADA, in order to more broadly target -3- Iranian Sanctions December 2, 2011 activities in Iran’s energy sector. This broadening was said to be necessary because the targeted sectors – Iran’s development of petroleum resources and Iran’s production of petrochemicals – continue to fund Iran’s illicit nuclear activities and could serve as conduits for Iran to obtain proliferation sensitive technology. In addition, President Obama indicated that the new sanctions were needed because, while the CISADA amendments to the ISA have impeded Iran’s ability to develop its domestic refining capacity, Iran has attempted to compensate by using its petrochemical facilities to refine petroleum.4 Specifically, E.O. 13590 establishes