U.S. “Maximum Pressure” Campaign Expands Isolation of Iran’s Financial Sector

On Thursday, October 8, 2020, U.S. Secretary of the Treasury Steven Mnuchin identified the Iranian financial sector as subject to the sectoral sanctions of Executive Order (“E.O.”) 13902, escalating the formidable Trump Administration sanctions campaign against Iran. In accordance with this announcement, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) strengthened its sanctions against 18 major Iranian banks that are now identified as subject to secondary sanctions on the agency’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). This latest tranche of sanctions – part of the Trump Administration’s “maximum pressure” campaign against Iran – follows OFAC’s clarification of key terms used in secondary sanctions (which we covered in a previous alert) and will now broadly target the Iranian financial sector in addition to its construction, mining, manufacturing, and textile sectors for sanctions. This new set of sanctions further isolates Iran’s struggling financial sector and threatens sanctions against non-U.S. companies that do business with Iranian financial institutions or the Iranian financial sector.

Key Takeaways

1. The new secondary sanctions primarily target non-U.S. companies that have continued to engage with Iranian financial institutions, but include previous exceptions for the humanitarian trade in certain agricultural commodities, food, medicine, and medical devices, including certain items necessary to address the COVID-19 pandemic.

2. OFAC granted a 45-day wind-down period, until November 22, 2020, to allow non-U.S. persons engaged in transactions with the Iranian financial sector to conclude those transactions without risk of exposure to sanctions.

3. For U.S. persons continuing to engage in the limited areas of humanitarian or other authorized trade with Iran, OFAC issued a new general license to clarify that such transactions and activities previously authorized for U.S. persons would be allowed to continue under the new sanctions.

4. Coming less than a month before the U.S. presidential and congressional elections, governments and companies around the world may use the wind-down period, in part, to wait for the results of the election, given that Vice President Biden has indicated he would re-enter the Iran nuclear deal if elected.

Background

U.S. sanctions are often categorized between “primary” sanctions (which apply to U.S. persons or transactions with a U.S. nexus and carry potential monetary penalties for violations) and “secondary” sanctions (which threaten sanctions against non-U.S. persons for transactions outside the United States that involve sanctionable conduct, including engaging in certain business with sanctioned parties or industries in Iran). U.S. sanctions against Iran include both types of sanctions but stand out in the scope and number of secondary (or “extraterritorial”) sanctions threatened against non-U.S. parties that do business with Iran. In the Iran sanctions program, there are currently secondary sanctions applicable to transactions involving a significant number of Iran-related persons on OFAC’s SDN List, including the Central Bank of Iran, as well as various Iranian industry sectors, such as the energy, shipping, automotive, construction, mining, manufacturing, textile, and (now) financial sectors.

President Trump issued E.O. 13902 earlier this year, which expanded U.S. secondary sanctions against particular industry sectors of Iran and authorized the Secretary of the Treasury to add more sectors as he sees fit, which we covered in our May 2019 client alert. The secondary sanctions in E.O. 13902 mean that OFAC may sanction non-U.S. individuals and entities if they operate in or knowingly engage in a “significant” transaction for the sale or supply to or from Iran of “significant” goods or services “used in connection with” a sector of the Iranian economy subject to secondary sanctions. E.O. 13902 also authorizes the Treasury Secretary via OFAC to sanction non-U.S. financial institutions that facilitate “significant” financial transactions involving those sectors.

The expansion of secondary sanctions under E.O. 13902 raised a number of questions about which types of companies and transactions OFAC included in sanctioned sectors and which goods and services counted as “significant” or were “used in connection” with those sectors. These questions gained a sense of urgency in March, after Iran became one of the epicenters of the COVID-19 outbreak. (We previously wrote about some of the reported difficulties in exporting medical supplies to Iran.) To blunt the effects of U.S. sanctions on humanitarian trade with Iran, the Treasury Department has previously clarified that authorized humanitarian trade involving Iran would remain authorized. It reiterated this commitment in last week’s announcement by stating that the “action under E.O. 13902 does not affect existing authorizations and exceptions for humanitarian trade, which remain in full force and effect,” meaning that OFAC general and specific licenses are not affected by this action

New Sanctions Against the Financial Sector of Iran

Now that the Iranian financial sector has been added to E.O. 13902, any person operating in or engaging in a significant transaction with the Iranian financial sector may be subject to U.S. sanctions. To drive this point home, OFAC designated 18 large Iranian banks as now subject to secondary sanctions. These banks are:

• Amin Investment Bank
• Bank Keshavarzi Iran
• Bank Maskan
• Bank Refah Kargaran
• Bank-e Shahr
• Eghtesad Novin Bank
• Gharzolhasaneh Resalat Bank
• Hekmat Iranian Bank
• Iran Zamin Bank
• Islamic Regional Cooperation Bank
• Karafarin Bank
• Khavarmianeh Bank (also known as Middle East Bank)
• Mehr Iran Credit Union Bank
• Pasargad Bank
• Saman Bank
• Sarmayeh Bank
• Tosee Taavon Bank (also known as Cooperative Development Bank)
• Tourism Bank

To reduce the collateral damage of these designations, OFAC concurrently issued new Iran General License L to authorize transactions and activities that were authorized, exempt, or otherwise not prohibited under OFAC’s Iran sanctions program involving the Iranian financial institutions above prior to last week’s action. OFAC took a similar approach earlier this year by issuing Terrorism General License No. 8 to authorize humanitarian activities involving the Central Bank of Iran (we discussed this in a previous client alert). In addition to General License L, OFAC issued FAQ 845, which grants non-U.S. persons a 45-day wind-down period ending on November 22, 2020 to conclude any activities involving the Iranian financial sector or the Iranian financial institutions now subject to secondary sanctions without risking exposure to such sanctions. OFAC mentioned that it anticipates issuing additional guidance regarding the scope of transactions and activity by non-U.S. persons that will become sanctionable after November 22, 2020.

The new sanctions against Iran’s financial sector show that the Trump Administration still has arrows in its quiver to escalate sanctions against Iran. While the effect of these new sanctions on U.S. persons will likely be minimal due to General License L, the effect on non-U.S. companies doing business outside the United States could be significant. Once the wind-down period ends on November 22, 2020, non-U.S. persons doing business in or with the Iranian financial sector or Iranian financial institutions will risk U.S. secondary sanctions. Such companies should consider whether they have any exposure to these new sanctions before the wind-down period ends. As always, our seasoned sanctions team at MoFo is happy to help.

 Raymond Rif, a legislative and policy specialist in the Morrison & Foerster LLP National Security practice, contributed to this alert.