United States Imposes New Sanctions on Iran’s Construction, Mining, Manufacturing, and Textile Sectors
On January 10, 2020, President Trump issued a new executive order (the “E.O.”) adding to the already long list of Iranian industries and sectors targeted by U.S. sanctions. This action is significant because it authorizes sanctions against non-Iranian individuals and entities who are engaged in activities not previously viewed as independently giving rise to sanctions risk.
The Executive Order
The E.O. authorizes blocking sanctions (i.e., designation on the Specially Designated Nationals and Blocked Persons List) on any individual or entity determined to “operate in the construction, mining, manufacturing, or textile sectors of the Iranian economy, or any other sector of the Iranian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State.” (emphasis added).
The E.O. also authorizes, most notably: (1) blocking sanctions against anyone who, after January 10, 2020, knowingly engages in the significant supply of goods or services used in connection with any of these sectors; and (2) prohibitions on opening or maintaining U.S. correspondent or payable pass-through accounts for foreign financial institutions that facilitate significant financial transactions for the sale, supply, or transfer of significant goods or services used in any of these sectors.
These new sanctions are all designation-based, meaning that the Secretary of the Treasury, through the Office of Foreign Assets Control (“OFAC”), must identify specific individuals or entities who have engaged in transactions or activities that are a ground for designation, before restrictions are imposed on those individuals or entities. All entities operating in the Iranian construction sector, for example, are not automatically subject to block sanctions as a result of the E.O.
What does the E.O. mean by “construction, mining, manufacturing, or textile sectors”?
OFAC, which is responsible for enforcing most U.S. sanctions, may issue guidance in the future defining these sectors, but has not done so yet. OFAC’s definitions occasionally are more restrictive (and sometimes more expansive) than one might expect from the plain language of an executive order. For example, U.S. sanctions define the “energy sector of Iran” (which is also subject to sanctions) to “include activities involving the exploration, extraction, production, refinement, or liquification of petroleum, natural gas, or petroleum products in Iran.” This is a far narrower definition than could have been chosen; for example, it does not include activities relating to the generation of electricity, solar power, or other non-petroleum based energy activities. Thus, it remains to be seen what exact activities OFAC will catch under the E.O.
What about the “any other sector of the Iranian economy” language?
This is a provision that allows the Secretary of the Treasury, in consultation with the Secretary of State, to add additional sectors of the Iranian economy that will be targeted by sanctions. This is typically done without warning.
This language is identical to that contained in Section 1 of Executive Order 13850, imposing sanctions on Venezuela, which authorizes the Secretary of the Treasury to impose sanctions on anyone determined:
to operate in the gold sector of the Venezuelan economy or in any other sector of the Venezuelan economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State.
A few months later, OFAC used that authorization to sanction Venezuelan state-owned Petróleos de Venezuela, S.A.(“PdVSA”) “for operating in the oil sector of the Venezuelan economy.” OFAC did not give public notice that the oil sector would be subject to sanctions before sanctioning PdVSA for operating in it. Indeed, OFAC announced its determination that operating in Venezuela’s oil sector would be sanctionable and its decision to sanction PdVSA for that reason in the very same press release.
When do these sanctions become effective?
The E.O. does not include a wind-down period. Thus, on its face, these new sanctions are in effect now. OFAC may address this issue in guidance in the future.
Are there any exceptions?
Yes. As generally appears in sanctions-related executive orders, Section 11 of the E.O. provides that it does not apply “with respect to any person for the conducting or facilitating of a transaction for the provision (including the sale) of agricultural commodities, food, medicine, or medical devices to Iran.”
On its face, it is unclear whether this exception (or any definition of manufacturing OFAC may publish) will cover manufacturing of food, medicine, or medical devices in Iran rather than simply sales of those items from third countries.
The Trump Administration has consistently communicated its intent to place maximum economic pressure on Iran, and recent hostilities between the two countries have led to the administration seeking to expand an already expansive sanctions regime. It remains to be seen how these new sanctions will operate in practice.
We will be closely tracking the implementation of the E.O. and are available to speak if you have any questions or would like to discuss how your business may be exposed to risk under these or other U.S. sanctions.