December 2, 2011 Iranian Sanctions

United States Designates as a Primary 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 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 . 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

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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 Melli, Bank Saderat, , Export Development Bank of Iran, Mehr Bank and .

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.

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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 two new conduct triggers that may lead to sanctions on any person who knowingly sells, leases, or provides to Iran goods, services, technology, or support:

 that has a fair market value of $1,000,000 or more or that, during a 12-month period, has an aggregate fair market value of $5,000,000 or more, and that could directly and significantly contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources located in Iran; and  that has a fair market value of $250,000 or more or that, during a 12-month period, has an aggregate fair market value of $1,000,000 or more, and that could directly and significantly contribute to the maintenance or expansion of Iran’s domestic production of petrochemical products.

New Petroleum Resources Sanctions The “petroleum resources” aspect of E.O. 13590 enhances a provision of the ISA that authorizes sanctions against any person who knowingly makes an “investment” of $20,000,000 or more (or a combination of investments in a 12-month period of at least $5,000,000 and that equal or exceed $20,000,000 in the aggregate) that directly and significantly contribute to the enhancement of Iran’s ability to develop petroleum resources. The term “investment,” however, is defined under the ISA in a relatively limited fashion to mean one of only three activities undertaken pursuant to an agreement, or pursuant to the exercise of rights under such an agreement, entered into with the Government of Iran or an Iranian entity:

 a contract that includes responsibility for the development of petroleum resources located in Iran, or the entry into a contract providing for the general supervision and guarantee of another person’s performance of such a contract;  the purchase of a share of ownership, including an equity , in that development; or  the entry into a contract providing for the participation in royalties, earnings, or profits in that development, without regard to the form of the participation.

The new Executive Order thus broadens the reach of the activity triggers that can give rise to sanctions to capture the provision of goods, services, technology and support, as opposed to only investment as under the ISA, and at lower thresholds. The new Executive Order provision on petroleum reserves mirrors a provision of the ISA, added by CISADA, that authorizes sanctions against anyone who knowingly sells, leases, or provides to Iran goods, services, technology, information, or support that has a fair market value of $1,000,000 or more, or that, during a 12-month period, has an aggregate fair market value of $5,000,000 or more, and that could directly and significantly facilitate the maintenance or

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expansion of Iran’s domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries.

New Petrochemical Sanctions The ISA currently does not specifically authorize sanctions against anyone who knowingly sells, leases, or provides to Iran goods, services, technology, information, or support that could directly and significantly contribute to the maintenance or expansion of Iran’s domestic production of petrochemical products. The new Executive Order thus targets activities not previously targeted under the ISA. The Executive Order defines “petrochemical products” to include any aromatic, olefin, and synthesis gas, and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea.

Sanctions Available The sanctions available under E.O. 13590 also mirror those available under the ISA. The ISA requires the President to impose three or more sanctions from a menu of nine available sanctions on a person who is determined to have knowingly engaged in sanctionable conduct under the ISA. The new Executive Order sets forth the same menu of nine available sanctions, but does not specifically require that three or more sanctions be imposed upon a person who is determined to have knowingly engaged in sanctionable conduct.

NEW SANCTIONS BEING CONSIDERED BY THE U.S. CONGRESS As mentioned above in the summary, various measures are being considered by the U.S. Congress that, if adopted, would further expand and enhance U.S. sanctions targeting Iran. A few of the more significant measures being considered include:

 The Iran Threat Reduction Act (H.R. 1905). This bill has been approved by the House of Representatives Foreign Affairs Committee and reported out of Committee by unanimous consent. Chairwoman Ileana Ros-Lehtinen (R-FL) stated her intent to seek a floor vote as soon as possible. The bill has 356 co-sponsors. If adopted, the bill would repeal, replace and strengthen the ISA, with expanded sanctions targeting Iran’s energy sector. The bill also includes a number of additional measures, including disclosures about certain activities, transactions or dealings with Iran, without regard to materiality, in quarterly and annual reports filed with the Securities and Exchange Commission. The bill also contains a provision that requires the President, within 30 days of enactment, to determine whether the Central Bank of Iran provides financial services in respect of, or otherwise facilitates, Iran’s development of weapons of mass destruction, or facilitates the transactions of, or provides financial services to, the IRGC. Upon an affirmative finding, the President would be required to impose sanctions on the Central Bank of Iran.  The Iran, North Korea and Syria Nonproliferation Reform and Modernization Act of 2011 (H.R. 2105). This bill also has been approved by the House of Representatives Foreign Affairs Committee, reported out of Committee by unanimous consent and awaiting a possible floor vote. This bill would repeal, replace and strengthen the existing Iran, North Korea, and Syria Nonproliferation Act.  National Defense Authorization Act for Fiscal Year 2012 (S. 1867). On December 1, 2011, the Senate passed S. 1867, which authorizes appropriations for fiscal year 2012 for military activities of the Department of Defense and certain other defense-related measures. During consideration of this -5- Iranian Sanctions December 2, 2011

bill by the Senate, an amendment containing additional Iran-related sanctions was adopted. As amended, the bill will prohibit any U.S. financial institution from opening or maintaining a correspondent account for any foreign financial institution that knowingly conducts or facilitates certain transactions with the Central Bank of Iran or other designated Iranian banking institutions, subject to certain grace periods, conditions, and the prospect of a waiver from the President. The prohibition on opening or maintaining a correspondent account could also apply to the central bank of another country in certain circumstances. The amendment passed despite a letter from Treasury Secretary Geithner to Senator Levin, the Chairman of the Senate Committee on Armed Services, expressing the Obama Administration's “strong opposition” to the amendment because it threatened “to undermine the effective, carefully phased and sustainable approach [the Administration has] undertaken to build strong international pressure against Iran.”

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ENDNOTES

1 See our Memorandum, dated October 17, 2011, available at: http://www.sullcrom.com/files/Publication/b076a311-8664-4c03-afb6- 7f1c7b25d0b3/Presentation/PublicationAttachment/36645adc-a833-4420-aeeb- 80dd2fddc687/SC_Publication_US_Bank_Reporting_Obligations.pdf. 2 The list of designated entities includes the following 22 entities (“also known as” and “formerly known as” identifications not repeated here), not all based in Iran: Ansar Bank; Arian Bank; Banco Internacional de Desarrollo, C.A.; Bank of Industry and Mine (of Iran); Bank Kargoshaee; Bank Mellat; Bank Melli; Bank Refah Kargaran; ; Bank Sepah; Bank Sepah International PLC; Europaeisch-Iranische Handelsbank AG; Export Development Bank of Iran; First East Export Bank, P.L.C.; B.S.C.; Mehr Bank; Mellat Bank SB CJSC; Melli Bank PLC; Mir Business Bank ZAO; Moallem Insurance Company; Persia International Bank PLC; and Post Bank of Iran. The list is subject to change and updated from U.S. Bank Reporting Obligations Regarding Their Non-U.S. Correspondent Accounts time-to-time by OFAC. OFAC maintains a special list of individuals and entities designated under either tag, at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/irgc_ifsr.pdf. 3 Covered Financial Institutions (as defined in FinCEN’s regulations, 31 C.F.R. § 1010.65(e)(1)-(2) (2011)) includes an insured bank; a commercial bank; an agency or branch of a foreign bank in the United States; a union; a savings association; a corporation acting under 25A of the Act (i.e., an Edge corporation); a trust bank or trust company; a broker or dealer in securities registered, or required to be registered, with the Securities and Exchange Commission under the Securities Exchange Act of 1934, except persons who register pursuant to Section 15(b)(ii) of the Securities Exchange Act of 1934; a futures commission merchant or an international broker registered, or required to be registered, with the Commodity Futures Trading Commission under the Commodity Exchange Act except persons who register pursuant to section 4(f)(a)(2) of the Commodity Exchange Act; a private banker; and a . 4 Press Release, The White House, Office of the Press Secretary, Message to Congress: Iran Sanctions (Nov. 21, 2011).

Copyright © Sullivan & Cromwell LLP 2011

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