Below is an analysis of the impact of new U.N. Sanctions on Iran as prepared by our member law firm DLA Piper.

This piece is the first in an occasional series of updates on important legal issues affecting our various U.S. and U.A.E. member companies.  These updates will be provided by the Business Council’s member law firms under the auspices of our newly formed Legal Affairs Working Group.

ACTION ALERT:

U.N. SECURITY COUNCIL RESOLUTION 1929 IMPOSING NEW ECONOMIC AND FINANCIAL SANCTIONS ON IRAN:

A PRECURSOR TO ACTION BY THE CONGRESS LATER THIS MONTH IN ENACTING COMPREHENSIVE NEW UNILATERAL SANCTIONS ON IRAN

On June 9, 2010, the 15-nation United Nations Security Council approved a series of new economic sanctions against Iran to further pressure Tehran to halt its nuclear proliferation and ballistic missile programs.  Unlike the three previous UN Security Council Iran sanctions resolutions (see, for example, UNSCR 1803), which received unanimous approval, Brazil and Turkey voted against the sanctions and Lebanon abstained.  Under considerable U.S. diplomatic pressure behind the scenes, the new set of sanctions under UNSCR 1929 were adopted with 12 supporting votes.  These sanctions were adopted under Article 41 of Chapter VII of the UN Charter.  According to Under Secretary of State for Political Affairs, William Burns, these sanctions create legally binding obligations on member states.  Although Turkey and Brazil voted against the resolution (because of a recently announced nuclear fuel exchange agreement with Iran), these nations have nonetheless committed to implement the new round of sanctions.

The Administration, from President Obama to Secretary of State Clinton and UN Ambassador Rice, hailed the sanctions as sending an unmistakable message supporting the international community’s commitment to stopping the spread of nuclear weapons.  As President Obama stated, the UN Security Council vote sends an unmistakable message about the international community’s commitment to stopping the spread of nuclear weapons whether Iran is threatening the nuclear non-proliferation regime or the human rights of its own citizens or the stability of its own neighbors by supporting terrorism.  As a result of Tehran’s unacceptable behavior, according to Administration officials, the Iranian government continues to demonstrate that its own “unjust actions are a threat to justice everywhere.”

In urging the international community to implement and enforce the new UN sanctions, Secretary Clinton announced that the State Department’s Special Advisor for Non-Proliferation, Robert Einhorn, will lead the U.S. effort to coordinate the implementation of the UNSCR 1929.

Briefly summarized, the new sanctions freeze the assets of 40 listed entities not included in prior UN sanctions against Iran, including 15 new entities linked to Iran’s Revolutionary Guard Corps (IRGC).  Highlights of UNSCR 1929 include:

• A ban on Iranian nuclear and missile investments abroad.
• A conventional arms ban to prohibit states from selling to Iran a variety of heavy weapons.
• A ban on Iranian ballistic missile activities.
• A new cargo inspection framework.
• A ban on bunkering services.
• Measures to block the activities of the Islamic Republic of Iran Shipping Lines (IRISL) and Iran Air’s cargo division.
• New tools to block the financing of Iran’s proliferation activities through curtailing financial activities with Iranian financial institutions.
• Freezing assets and blocking travel of specified Iranian nationals engaged in proliferation activities.
• Appointment of a UN sanctions monitoring panel.

President Obama, in summarizing the sanctions, stated that they will inject a dramatic new effort to stop Iranian smuggling and crack down on Iran’s banks and financial transactions.  The President went on to say that the sanctions against individual Iranian entities and personalities and those associated with the IRGC have supported Iran’s nuclear program and have prospered from the illicit activities they have conducted at the expense of the Iranian people.  Notably, the President emphasized that the U.S. would expend every effort to see that the new UN sanctions were fully enforced, “just as we continue to enforce our own sanctions against Iran, working with our friends and allies.”

Typically, UN Security Council sanctions resolutions are framed in terms that have been carefully calibrated to allow member nations to implement sanctions generally if they are in accord with domestic and international law and, in some cases, consistent with the law of the sea.  Some of the sanctions are prefaced with non-mandatory terms such as the UN “notes” (as in the case of ship inspection on the high seas), “calls upon” (in the case of on-land cargo inspections) or “requests that” states carry out the sanctions.  Other sections of the resolution are more directive in nature (in the case of exercising “vigilance” when conducting business with the IRGC and the IRISL).  Overall, the sanctions leave considerable room for interpretation and implementation on a country-to-country basis, depending on local law, regulatory regimes and reaction to U.S. or other international pressures to carry out the sanctions.  Moreover, the sanctions are triggered only if a country has “reasonable grounds to believe” that proliferation actions are occurring.

One of the criticisms leveled against UNSCR 1929 is that the sanctions were based on political compromises that allowed Russia and China to pursue various nuclear-related transactional activities with Iran.  Notably, UNSCR 1929 does not focus on the Iranian oil and gas sector for the application of sanctions and fails to place the Iranian Central Bank in the Annex of proliferation enablers.  Rather, UNSCR 1929 settled for the inclusion of the First East Export Bank as a controlled entity of Bank Mellat, which had been previously listed by the UN as an entity involved in nuclear activities.

Against this background, reactions from U.S. lawmakers has varied.  House Foreign Relations Committee Chairman Howard Berman stated:

“Today’s passage of a new Iran sanctions resolution at the UN Security Council is a significant diplomatic triumph for the Obama Administration, and particularly Dr. Susan Rice, the U.S. Ambassador to the United Nations. The resolution is a powerful statement of opposition by the international community to Iran’s ongoing nuclear weapons program and a critical step in strengthening the multilateral sanctions regime intended to persuade Iran to suspend that program.

“We now look to the European Union and other key nations that share our deep concern about Iran’s nuclear intentions to build on the Security Council resolution by imposing tougher national measures that will deepen Iran’s isolation and, hopefully, bring the Iranian leadership to its senses. The U.S. Congress will do its part by passing sanctions legislation later this month.

“I urge the Iranian leadership to immediately bring itself into compliance with the long-standing demands of the international community regarding its nuclear program.”

House Majority Leader Steny Hoyer stated, “Building on their efforts in New York, I remain committed to sending to the President our own, even stronger package of sanctions during the week of June 21, when we pass the Iran Refined Petroleum Sanctions Act conference report.”

Senator John Kerry, Chairman of the Senate Foreign Relations Committee, applauded the UN measure when he stated that the Obama Administration and the international community now have important new economic and political tools to moderate Iran’s nuclear ambitions.

However, a number of Republicans and Democrats who had expressed impatience with Congress’s slow pace in passing new U.S. sanctions and challenged the UN resolution, calling it “full of loopholes.”  Senate Minority Whip Jon Kyl said that the language of the resolution would do little to stop or slow down Iran’s illegal nuclear weapons program and its support for terrorism around the world.  House Foreign Affairs Committee Member Ed Royce observed that the resolution is far from dramatic and “we need dramatic action to change the game of Iran’s nuclear program.”

Now that the United Nations Security Council has acted, it is likely that the Iranian sanctions legislation will move to the U.S. Congress later this month.

It should be noted that, unlike UNSCR 1929, the various sanctions bills pending in Congress specifically target transactions that promote the development of Iran’s oil and gas sector and adopt wide-ranging sanctions that could impact U.S. corporations and their foreign subsidiaries if they engage in Iran energy sector-related transactions.  The pending bills also target foreign corporations or persons engaged in Iran’s energy sector.  The pending measures also authorize U.S. pension funds to divest of stocks in companies that engage in Iranian-related energy activities.

The pending legislation reduces the monetary threshold established in the Iran Sanctions Act of 1996 for the imposition of sanctions related to investments in the Iranian energy sector from $40 million to $20 million.  In addition, the pending legislation goes beyond targeting investment and now specifically targets smaller trade-related transactions that support the Iranian energy sector.

The threshold for sanctioning these trade-realted transactions is extremely low: $200,000 per transaction, up to an annual cap of $1 million (in the House version of the bill).  These low thresholds are deliberately designed to block all economic and financial activities on the part of U.S. companies (and their foreign subsidiaries), as well as non-U.S. companies.

As currently drafted, these sanctions also target a wide variety of “enablers.”  These include insurers or reinsurers, shippers or providers of shipping services, banking and financial services, and exports.

Other issues that are currently being debated with regard to the new U.S. Iranian sanctions legislation relate to whether Presidential waivers should be allowed to weaken the impact of the sanctions, amidst criticism that the previous waiver authorities contained in the U.S. under the 1996 Iran Sanctions Act were abused and consequently those sanctions  were never enforced, despite information available to the State Department that various companies and their foreign subsidiaries were engaged in actions that fell within the scope of the sanctions.

As soon as Congress enacts a final version of the Iran sanctions legislation, we will update members of the U.S.-UAE Business Council of its key provisions, particularly those that impact the operations of U.S. companies and their foreign-based subsidiaries across the broad spectrum of activities that relate to the development of Iran’s energy sector.