PUBLICATIONS
Publications
Publications

A Publication of Pepper Hamilton LLP

Client Alert

OFAC Issues Final Rule Implementing Provisions of Iranian Sanctions; President Makes Initial Oil Supply Determinations Needed to Begin Imposing Sanctions

Thursday, April 05, 2012

President Obama signed into law the National Defense Authorization Act for Fiscal Year 2012 (Defense Bill) on December 31, 2011. Section 1245(d) of the Defense Bill (Iranian Sanctions) directs the President to impose sanctions on foreign financial institutions that engage in significant financial transactions with the Central Bank of Iran (CBI) or an Iranian financial institution found on the Treasury Department’s List of Specially Designated Nationals and Blocked Persons (SDN List). President Obama delegated this authority to the Treasury Secretary via executive order.1 On February 27, 2012, the U.S. Office of Foreign Asset Control (OFAC) issued a final rule (OFAC Final Rule) to implement the Iranian Sanctions, and on March 30, 2012, President Obama made certain determinations on global oil supplies necessary to begin imposing Iranian Sanctions with respect to purchases of oil from Iran. This Client Alert highlights provisions of the OFAC Final Rule that may have the greatest impact on financial institutions and discusses the President’s oil supply determinations in the context of the Rule.

Activities that the Treasury Secretary May Sanction

Transactions not involving petroleum or petroleum-related products.

The Treasury Secretary currently may impose the Iranian Sanctions (discussed below) on pertinent “significant financial transactions” provided that no purchases of petroleum2 or petroleum products3 are involved. Special rules apply to petroleum transactions. The OFAC Final Rule sets forth a list of factors that the Treasury Secretary may consider in determining whether a financial transaction is significant, including:

  • the type, complexity, and commercial purpose of the transaction
  • whether the foreign financial institution’s management is involved in the transaction and whether the transaction is part of a business development strategy
  • whether the foreign financial institution engages directly with the CBI or Iranian financial institution found on the SDN List or whether the relationship is more remote, and
  • in the case of a series of transactions, the size, number and frequency of the transactions.

The OFAC Final Rule provides that the Iranian Sanctions will not be imposed on a foreign financial institution for conducting or facilitating a transaction for the sale of food, medicine, or medical devices.

Transactions in petroleum and petroleum-related products.

Privately-owned foreign financial institutions.

The Treasury Secretary may impose the Iranian Sanctions on a privately owned foreign financial institution that it determines has knowingly conducted or facilitated any significant financial transaction with the CBI or an Iranian financial institution found on the SDN List on or after June 28, 2012 for the purchase of petroleum or petroleum products from Iran. The Treasury Secretary may not impose the Iranian Sanctions, however, unless the President determines, initially by March 30, 2012 and then every 180 days, that the quantity of petroleum and petroleum-related products produced in other countries is sufficient to allow oil purchasers to reduce their level of purchases from Iran (the Petroleum Supply Determination). President Obama made the initial Petroleum Supply Determination on March 30, 2012, allowing the Iranian Sanctions to be imposed on private foreign financial institutions on or after June 28, 2012. The President must make another Petroleum Supply Determination by September 26, 2012 for such Iranian Sanctions to continue or to impose new Iranian Sanctions on private foreign financial institutions for the purchase of petroleum and petroleum-related products.

Government-owned or -controlled foreign financial institutions.

The Treasury Secretary may impose the Iranian Sanctions on a foreign financial institution owned or controlled by the government of a foreign country, including a central bank of a foreign country, only if the Secretary determines that:

  • with respect to sales of petroleum or petroleum products to Iran, the financial institution knowingly conducted or facilitated a significant financial transaction with the CBI or an Iranian financial institution found on the SDN List on or after June 28, 2012, or
  • with respect to purchases of petroleum or petroleum products from Iran, the financial institution knowingly conducted or facilitated a significant financial transaction with the CBI or an Iranian financial institution found on the SDN List on or after June 28, 2012. The President must make the same initial and continuing Petroleum Supply Determinations as must be made with respect to purchases of petroleum or petroleum products by privately owned foreign financial institutions. As noted above, President Obama made the initial Petroleum Supply Determination on March 30, 2012, allowing the Iranian Sanctions to be imposed on government-owned or -controlled foreign financial institutions on or after June 28, 2012.

All foreign financial institutions.

Finally, the Treasury Secretary may not impose the Iranian Sanctions on any foreign financial institution, whether privately owned or government-owned or –controlled, for a period of up to 180 days, if the Secretary of State determines and reports to Congress that the country with primary jurisdiction over the foreign financial institution has significantly reduced its volume of crude oil purchases from Iran.

Types of Iranian Sanctions

Upon determining that a foreign financial institution has knowingly conducted or facilitated any significant financial transaction with the CBI or an Iranian financial institution found on the SDN List, the OFAC Final Rule provides that the Treasury Secretary will:

  • prohibit U.S. financial institutions from opening a correspondent account or a payable-through account in the United States for the foreign financial institution, and either
  • prohibit U.S. financial institutions from maintaining a correspondent account or a payable-through account in the United States for the foreign financial institution, or
  • impose strict conditions on maintaining any correspondent account or payable-through account that had been opened in the United States for the foreign financial institution prior to the Treasury Secretary’s determination.

Pepper Points: OFAC’s adoption of the OFAC Final Rule is another example of the importance that the U.S. government is placing on isolating Iran from the global financial community. The OFAC Final Rule follows several other recent actions, including: (i) an executive order issued by the President on February 5, 2012 blocking property subject to U.S. jurisdiction that is owned or controlled by Iran, the CBI or Iranian financial institutions; (ii) OFAC’s adding Bank Tejerat, Iran’s third-largest bank, to the SDN List on January 23, 2012; and (iii) an executive order issued by the President on November 21, 2011 that expands economic sanctions on Iran’s oil, gas and petrochemical industries. Financial institutions that engage in transactions linked to Iran therefore urgently must begin to develop strategies to curtail their business relationships with Iranian financial institutions. Doing so will help financial institutions avoid the Iranian Sanctions under the OFAC Final Rule and also may ease any compliance burdens imposed by future U.S. government actions aimed at the Iranian financial sector.

Endnotes

1 Executive Order No. 13599, February 5, 2011, available at http://www.whitehouse.gov/the-press-office/2012/02/06/executive-order-blocking-property-government-iran-and-iranian-financial-. The Treasury Secretary must consult with the Secretary of State before imposing sanctions.

2 The OFAC Final Rule defines “petroleum” as a “mixture of hydrocarbons that exists in liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities. Also known as crude oil.”

3 The OFAC Final Rule defines “petroleum-related products” as including “unfinished oils, liquefied petroleum gases, pentanes plus, aviation gasoline, motor gasoline, naphtha-type jet fuel, kerosene-type jet fuel, kerosene, distillate fuel oil, residual fuel oil, petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt, road oil, still gas, and miscellaneous products obtained from the processing of crude oil (including lease condensate), natural gas, and other hydrocarbon compounds. The term does not include natural gas, liquefied natural gas, biofuels, methanol, and other non-petroleum fuels.”

Timothy R. McTaggart and David W. Freese

Written by

Timothy R. McTaggart
Phone: 202.220.1210
Fax: 202.220.1665
mctaggartt@pepperlaw.com



David W. Freese

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

View the PDF version


Copyright © 2014 Pepper Hamilton LLP | Use of This Site Subject to These Terms & Conditions | PRIVACY POLICY | Contact Us: phinfo@pepperlaw.com or 866.737.7372 | Find Pepper Hamilton LLP on Facebook | Pepper Hamilton LLP on LinkedIn | Follow Pepper Hamilton LLP on Twitter | Pepper Hamilton LLP YouTube Channel