United States Sanctions Iran’s Financial Sector

October 14, 2020, Covington Alert

 On October 8, 2020, the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced the imposition of comprehensive sanctions against 18 major Iranian banks. As part of the same action, the Treasury Department identified the “financial sector” of the Iranian economy as subject to sanctions under Executive Order No. 13902 (the “Executive Order” or “E.O. 13902”). E.O. 13902 requires the Secretary of the Treasury, among other things, to block property — in the United States or the possession or control of a U.S. person — of any person determined to be operating in the construction, mining, manufacturing, or textiles sectors of the Iranian economy, or in any other sector of the Iranian economy as determined by the Secretary. See our January 15, 2020 Client Alert for details about the Executive Order.

The Treasury Department added 17 banks to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) pursuant to the Executive Order. The sanctions under the Executive Order will take effect on November 22, 2020, following the expiration of a 45-day wind-down period. OFAC also designated one additional bank (Hekmat Iranian Bank) pursuant to a different executive order, Executive Order 13382, which targets proliferators of weapons of mass destruction. Sanctions with respect to Hekmat Iranian Bank are effective immediately, as the 45-day wind-down period applies only to designations made pursuant to E.O. 13902.

At the same time, OFAC issued General License L authorizing transactions and activities involving the 17 financial institutions sanctioned under E.O. 13902 that are authorized, exempt, or not prohibited under the Iranian Transactions and Sanctions Regulations (“ITSR”); and it issued several Frequently Asked Questions (“FAQs”) concerning the new sanctions.

Importantly, these new sanctions measures do not prohibit the involvement of the 17 Iranian financial institutions designated under the Executive Order in sales of agricultural commodities, food, medicines, and medical devices to Iran. Non-U.S. persons similarly will not be exposed to U.S. sanctions if they involve such designated banks in their humanitarian trade with Iran.

OFAC’s imposition of property-blocking sanctions against the 17 Iranian banks was the first round of designations made pursuant to E.O. 13902 that President Trump issued on January 10, 2020, following Iran’s strike against two U.S. military bases in Iraq. The Iranian attacks followed a U.S. drone strike that killed Major General Qasem Soleimani, then-Commander of the Iranian Quds Force. The Executive Order states that the U.S. policy is to “deny the Iranian government revenue, 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.”  

In addition to requiring the imposition of property-blocking measures against persons determined to operate in key sectors of the Iranian economy, E.O. 13902 requires the Secretary of the Treasury to impose property-blocking measures against any person determined by the Secretary “to have knowingly engaged . . . in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with a sector of the Iranian economy specified . . . by the Secretary of the Treasury” or “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked” pursuant to the Executive Order. OFAC indicated that it plans to issue guidance with respect to expected regulatory definitions of “the Iranian financial sector,” and “goods and services used in connection with” the sector to clarify activities by non-U.S. persons that will become sanctionable after November 22, 2020.

E.O. 13902 also authorizes the imposition of sanctions against foreign financial institutions that have “knowingly” conducted or facilitated any “significant” financial transaction (i) for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with the sectors of Iran’s economy that are targeted by the Executive Order or (ii) for or on behalf of persons whose property is blocked pursuant to the Executive Order, even if those activities are undertaken without any nexus to U.S. persons or U.S.-regulated items. The authorized sanctions against foreign financial institutions include a prohibition on the opening of correspondent accounts or payable-through accounts in the United States, and the imposition of strict conditions on the maintenance of such accounts.

In FAQ No. 833, which OFAC issued in June 2020, OFAC explains that “knowingly” under E.O. 13902 means, with respect to conduct, a circumstance, or a result, that “a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.” The FAQ also explains that, in determining whether “goods or services” used in connection with the targeted sector are “significant” under the Executive Order, OFAC will consider “the totality of the facts and circumstances,” including “some or all of the following broad factors: (a) the value and number of goods or value and frequency of services; (b) the nature of the good or services, including their type, complexity, and commercial purpose; (c) the level of awareness of management and whether the provision of goods or services is part of a pattern of conduct; (d) the involvement of designated persons in transactions involving goods and services . . .; (e) the impact of the provision of goods or services on the objectives of E.O. 13902; (f) whether the provision of the goods or services involved deceptive practices; and (g) other relevant factors that the Secretary of the Treasury deems relevant.”

Designation of Iranian Financial Sector Under E.O. 13902

The designation of Iran’s financial sector as being subject to the Executive Order means that Iranian and non-Iranian persons whom the Treasury Department determines are operating in Iran’s financial sector could be designated on the SDN List and become subject to U.S. property-blocking sanctions, and non-U.S. persons could be subject to the sanctions outlined in E.O. 13902 for certain dealings with the sector or parties added to the SDN List under the Executive Order.

The imposition of sanctions on Iran’s financial sector under E.O. 13902 does not affect waivers issued by the U.S. State Department under the Iran Freedom and Counter-Proliferation Act of 2012 (such as the waiver covering ongoing international support to the Bushehr Nuclear Power Plant Unit 1 to ensure the safety of operations). Nor do those sanctions extend to transactions for the conduct of the official business of the United Nations (including its specialized agencies, programs, funds, and related organizations) by employees, grantees, or contractors thereof.

Property-Blocking Sanctions Against Iranian Banks

As noted, the October 8 action imposed sanctions on 17 Iranian banks pursuant to E.O. 13902 for operating in Iran’s financial sector, or for being owned or controlled by sanctioned Iranian banks, and on one additional Iranian bank pursuant to E.O. 13382, a counter-proliferation authority. All 18 Iranian banks were added to the SDN List.

As a result, all property and interests in property of the designated banks, and of entities owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more of the banks or their majority-owned affiliates (or other blocked parties), that are or come into the United States or the possession or control of a U.S. person must be blocked. U.S. persons also are prohibited from engaging in virtually any dealings with such sanctioned persons without prior authorization from OFAC.

Scope of General License L

General License L, issued concurrently with the imposition of sanctions, authorizes all transactions and activities involving the 17 Iranian financial institutions blocked pursuant to E.O. 13902 that are authorized, exempt, or otherwise not prohibited under the ITSR. This includes, but is not limited to, (i) transactions and activities authorized by general and specific licenses issued pursuant to the ITSR, and (ii) with limited exceptions under the ITSR, transactions ordinarily incident and necessary to give effect to a licensed transaction.

As a result, a U.S. person (or a U.S.-owned or -controlled foreign entity) that is relying on a general or specific license issued pursuant to the ITSR to engage in transactions and activities, including general or specific licenses authorizing the export or reexport to Iran of agricultural commodities, medicines, and medical devices, can continue to engage in those licensed transactions and activities even if they involve one of the 17 Iranian financial institutions designated under E.O. 13902, without the need to obtain additional authorization from OFAC.   

Importantly, General License L does not authorize any transactions or activities that are otherwise prohibited by the ITSR, E.O. 13902, or other sanctions authorities. For example, General License L does not authorize dealings with Hekmat Iranian Bank, the Iranian financial institution newly designated on the SDN List in connection with Iran’s weapons proliferation activities.  

Exposure to U.S. Sanctions for Non-U.S. Persons Who Engage in Certain Dealings with Persons Whose Property Is Blocked Under the Executive Order

With certain exceptions discussed below, persons who are determined by the Secretary of the Treasury “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” any entity whose property is blocked pursuant to the Executive Order will be exposed to property-blocking sanctions measures. Furthermore, non-U.S. financial institutions conducting or facilitating any significant financial transaction for or on behalf of any of the designated banks could be prohibited from opening, or prohibited or restricted from maintaining, correspondent or payable-through accounts in the United States, either pursuant to E.O. 13902 (for conduct involving the 17 banks designated under the Executive Order) or prior Iran-sanctions legislation targeting dealings by non-U.S. financial institutions with Iranian banks designated for proliferation reasons.

Non-U.S. persons engaging in transactions or activities with the Iranian financial sector or the 17 Iranian banks designated pursuant to E.O. 13902 that were not previously sanctionable will have 45 days, until November 22, to wind down those activities without exposure to U.S. sanctions.

As explained in FAQ No. 847, even after the expiration of the wind-down period, OFAC would not generally view transactions or activities by non-U.S. persons to be sanctionable if they are consistent with activities permissible as to U.S. persons. Thus, non-U.S. persons—including non-U.S. financial institutions—do not risk exposure to U.S. secondary sanctions for engaging in transactions and activities involving the Iranian financial sector or financial institutions sanctioned pursuant to E.O. 13902 that would be authorized under the ITSR and General License L if engaged in by a U.S. person. However, such transactions and activities should not involve any person designated on the SDN List in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction, except as expressly authorized by OFAC as to U.S. persons.

Exception for Humanitarian and Other Specified Activities by Non-U.S. Persons

In announcing the sanctions against Iran’s financial sector, Treasury Secretary Steven Mnuchin emphasized that the new sanctions “will continue to allow for humanitarian transactions to support the Iranian people.” To that end, Section 11 of E.O. 13902, states expressly that the prohibitions of the Executive Order do not apply with respect to any person conducting or facilitating humanitarian-related activities involving the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.

Importantly, OFAC FAQ No. 844 confirms that non-U.S. persons do not risk exposure to U.S. secondary sanctions, even after the expiration of the wind-down period on November 22, 2020, for engaging in the sale of agricultural commodities, food, medicine, or medical devices to Iran. Again, however, non-U.S. persons should not involve in such transactions SDNs that are designated as a result of their involvement in Iran’s weapons proliferation or terrorism activities, except to the extent such involvement is licensed for transactions involving U.S. persons (e.g., the authorization in General License 8 for the involvement of the Central Bank of Iran in certain humanitarian transactions).

In addition, OFAC’s FAQ No. 847 provides that foreign financial institutions and other non-U.S. persons would not generally risk exposure to U.S. sanctions if they engage in transactions involving the Iranian financial sector or the 17 Iranian financial institutions designated under the Executive Order “for the purpose of supporting the sale, supply, or transfer of certain goods and services to Iran or for manufacturing of such goods in Iran, solely for use in Iran and not for export from Iran, to ensure the protection of life, health, and safety, such as: products used for sanitation, hygiene, medical care, medical safety, manufacturing safety, including soap, hand sanitizer, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, manufacturing safety systems, safety devices, alarm systems, and ventilation systems.”

OFAC also indicated that it is continuing to analyze whether certain other transactions and activities involving the Iranian financial sector or the 17 newly sanctioned Iranian financial institutions may be “non-significant” and, thus, not sanctionable if engaged in by non-U.S. persons even after the end of the wind-down period. OFAC anticipates issuing additional guidance regarding the scope of transactions and activities by non-U.S. persons involving the Iranian financial sector and Iranian financial institutions designated pursuant to E.O. 13902 that will become sanctionable after November 22, 2020.

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Covington has deep experience advising clients on the legal, policy, and practical dimensions of U.S. sanctions. We will continue to monitor developments with respect to Iran and more generally in this area, and we are well positioned to assist clients in understanding how these developments may affect their business operations.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our trade controls practice group: