U.S. and EU SANCTIONS AGAINST IRAN: De Jure and De Facto Limitations on the Operation of Humanitarian Exemptions

Transcription

1 U.S. and EU SANCTIONS AGAINST IRAN: De Jure and De Facto Limitations on the Operation of Humanitarian Exemptions October 29, 2014

2 TABLE OF CONTENTS Page Preface. 1 I. Introduction and Executive Summary...1 II. The International Context for U.S. and EU Sanctions against Iran...2 III. U.S. Sanctions against Iran...5 A. Blocking Sanctions/Asset Freezes...7 B. OFAC Sanctions Based on Involvement of U.S. Persons or U.S. Origin of Goods, Services, or Technology...7 C. Sector-Specific Sanctions Applicable to Non-U.S. Persons...8 D. U.S. State Divestment Sanctions...10 E. Humanitarian Exceptions to U.S. Sanctions...10 i. Humanitarian Exceptions Applicable to Transactions Involving U.S. Persons or U.S.-Origin Goods or Services Food, Medicine, and Medical Devices Personal Remittances Humanitarian and Disaster Relief Programs Other Exceptions to U.S. Sanctions...12 ii. Humanitarian Exceptions Applicable to Non-U.S. Persons...13 iii. U.S. Policy Guidance on the Application of Humanitarian Exemptions...14 IV. EU Sanctions against Iran...15 A. EU Designated Entities...16 B. Financial Sector Restrictions...17 i. Restrictions on Transfers of Funds...17 ii. Additional Sanctions Against the Central Bank of Iran...17 iii. Restrictions on Financial Support for Trade with Iran...18 C. Humanitarian Exemptions...18 i. Exceptions to the Visa Ban...18 ii. Release of Frozen Funds and Economic Resources...18 iii. Export and Import Restrictions...19 iv. Restrictions on Financial Support for Trade...19 v. Financial Sector...19 vi. Transport Sector...20 V. Are the Humanitarian Exemptions Working?...20 A. Perceived Obstacles to Use of Humanitarian Exemptions...20 B. U.S. and EU Export Data...23 C. Evaluating the Evidence in Context...30 VI. Hypothetical Examples of Permitted Transactions under the Humanitarian Exemptions.31 VII. Findings and Recommendations...34

3 A. U.S./OFAC Sanctions...35 i. Findings...35 ii. Recommendations...35 B. EU Sanctions...36 i. Findings...36 ii. Recommendations...37 C. The JPOA Framework...37 i. Findings...37 ii. Recommendations...37 D. Other Considerations...37 i. Industry Awareness Building...37 ii. NGO Benchmarking and Best Practices...38

4 U.S. AND EU SANCTIONS AGAINST IRAN: DE JURE AND DE FACTO LIMITATIONS ON THE OPERATION OF HUMANITARIAN EXEMPTIONS Prepared for Human Rights in Iran Unit of the City University of New York Preface Akin Gump Strauss Hauer & Feld LLP ( Akin Gump ) has produced this report, entitled U.S. and EU Sanctions Against Iran: De Jure and De Facto Limitations on the Operation of Humanitarian Exemptions, at the request of the Human Rights in Iran Unit ( HRIU ) of the City University of New York ( CUNY ). The purpose of this report is to assist HRIU in its ongoing support for the work of the United Nations Special Rapporteur for Human Rights in Iran. In particular, HRIU requested Akin Gump to assess the scope and operation of the humanitarian exemptions embedded in the U.S. and EU sanctions regimes against Iran, and to evaluate whether these exemptions have been effectively narrowed or frustrated by law or through other constraints, whether or not grounded in law, as perceived by affected parties. While Akin Gump has collaborated with HRIU in the development of this report, the findings and conclusions set forth herein are those of Akin Gump alone. I. Introduction and Executive Summary In recent years, the global community has developed a comprehensive set of financial, trade, and investment sanctions against Iran with stated objectives that include deterring Iran from expanding its nuclear program, supporting international terrorism, and engaging in human rights abuses. These measures include severe restrictions on Iran s procurement of goods, services, and technology originating in the United States and the EU, restrictions on financial services transactions involving Iran, and punitive sanctions on persons engaging in investments in Iran s energy, shipping, transportation, mining, nuclear, financial, and automotive sectors. These measures negatively impact Iran s ability to explore for, extract, refine, or transport its petroleum resources and impair its shipping and financial services industries, with direct and indirect harmful impacts on almost every sector of the Iranian economy. While the U.S. and EU sanctions measures provide limited exemptions, exceptions, and licensing allowances (collectively, humanitarian exemptions) for the export to Iran of agricultural goods, medicine, and medical devices, as well as the supply to Iran of goods and services in the Internet and telecommunications sectors, some observers assert that the broader framework of U.S. and EU sanctions creates practical impediments that effectively undermine, deter, and prevent the full use of such provisions for humanitarian trade with Iran. Others, including some international human rights organizations, have suggested that, despite the humanitarian provisions included in the sanctions regimes, international sanctions against Iran are having a significant harmful impact on the people of Iran, which contravenes the stated policy of the international community to limit negative humanitarian effects of sanctions against the country and its people. Much recent criticism has focused on the suggestion that the formal policy objectives of legal exemptions and licensing provisions in the U.S. and EU sanctions regimes are not being achieved in fact, but rather are being blocked or neutralized by wide-ranging restrictions that Page 1 of 38

5 have been established through the successive imposition of increasingly severe sanctions measures against the country year after year, to the point where the cumulative effect is to significantly limit food supply and the availability of life-saving medical supplies and drugs in the country. For example, when licensing conditions generally imposed in U.S. licenses prohibit the involvement of blacklisted Iranian banks or other blocked Iranian parties in financing arrangements, the practical ability of such commercial sales to occur may be severely impaired or defeated. The purpose of this report is to consider and assess such assertions questioning the effectiveness of the humanitarian exemptions to the U.S. and EU sanctions regimes against Iran in light of their formal legal scope, relevant policy pronouncements, industry perceptions, business risk considerations, and official U.S. and EU export data for key humanitarian goods, i.e., food, medicine, and medical devices. Part II of this report describes the rapidly evolving international context for U.S. and EU sanctions against Iran. Parts III and IV provide a general overview of the relevant legal authorities comprising, respectively, the U.S. and EU sanctions regimes against Iran, with a focused review of provisions for humanitarian exemptions in these sanctions regimes. Part V of the report considers whether the humanitarian exemptions are achieving their desired effects, based on a review of publicly available information concerning affected commercial actors understanding of the humanitarian exemptions in the context of the broader sanctions regimes. Part V also reviews official U.S. and EU export data for key categories of humanitarian goods. In Part VI, the report provides three hypothetical examples of permissible transactions under the humanitarian exemptions, modeled after transactions known to the authors. Finally, Part VII presents a number of recommendations that could contribute to a clarified understanding of the formal scope of the humanitarian exemptions and effectuate broader utilization of the exemptions, consistent with the intentions of U.S. and EU policymakers. II. The International Context for U.S. and EU Sanctions against Iran The Iran sanctions regimes maintained by the United States and the EU that are the focus of this report have evolved in a multilateral political, strategic, and legal context that has exerted increasing pressure on Iran over the last decade in response to that country s nuclear program. While certain aspects of U.S. sanctions against Iran stem from the 1979 hostage crisis and predate UN Security Council Resolutions, the Resolutions, discussed in greater detail below, illustrate a mounting international consensus in recent years that sanctions to discourage Iran s nuclear-related activities are warranted. Since 2006, the UN Security Council has adopted four Resolutions aimed at curbing Iran s nuclear program and mitigating related proliferation risk principally through the authorization of targeted sanctions by member states. These Resolutions do not contain humanitarian exemptions per se, but provide a legal basis for, and inform the scope of, UN member states sanctions against Iran, including certain aspects of the U.S. and EU regimes described below. During the same period, the United States and the EU have collectively adopted dozens of legal measures imposing new sanctions on Iran. These measures on their face preserve longstanding carve-outs for certain kinds of humanitarian trade with Iran. The successive layering of new sanctions measures has, however, created progressive practical Page 2 of 38

6 constraints that, according to many sources, have adversely impacted the delivery of certain humanitarian goods to Iran. In the first round of measures adopted by the Security Council in 2006, the Security Council demanded the suspension of Iran s enrichment and reprocessing activities, and cooperation with the International Atomic Energy Agency ( IAEA ). 1 It also authorized member states to ban the supply to Iran of nuclear-related materials and technology and to freeze the assets of key individuals and companies involved in Iran s nuclear program. 2 In the second round of sanctions, passed in 2007, the UN Security Council imposed an arms embargo and authorized the expansion of the freeze on Iranian assets. 3 The third round, passed in 2008, further extended the freeze on Iranian assets, and called on member states to monitor the activities of Iranian banks, inspect Iranian ships and aircraft, and monitor the movement of individuals involved with Iran s nuclear programs through their territories. 4 In the fourth round, passed in 2010, the Security Council banned Iran from participating in activities related to ballistic missiles, tightened the arms embargo, and authorized the imposition of travel bans on individuals involved with Iran s nuclear program. 5 The fourth round also imposed sanctions against the Iranian Revolutionary Guard Corp ( IRGC ) and the Islamic Republic of Iran Shipping Lines ( IRISL ), as well as on Iranian financial institutions and member state financial institutions with links to Iran. 6 The United States proposed a fifth round of UN Security Council sanctions in 2012 in response to Iran s launch of medium-range Shahab missiles in 2012, but this measure failed due to opposition from China and Russia. Nevertheless, the four above-summarized UN Security Council Resolutions established the international legal basis for sanctions against Iran. The successive rounds of sanctions also illustrate an incremental intensification of the sanctions against Iran since 2006, culminating in current limitations on the activities of Iranian and non- Iranian financial institutions that, contrary to intentions, may have adversely impacted trade in humanitarian goods. In early 2014, hopes were raised for potential progress in the negotiations between Iran and the international community regarding the country s nuclear program. If realized, such progress could, in turn, prompt an easing of the separate U.S. and EU sanctions measures and similar sanctions maintained by other countries. Previously, in November 2013, a major breakthrough was achieved when the P5+1 group the five permanent members of the UN Security Council (the United States, Great Britain, France, Russia, and China) plus Germany reached agreement with Iran on a Joint Plan of Action ( JPOA ), which delineates steps towards a broader and more permanent resolution of concerns and differences with Iran in key areas. 7 Basic contours of the JPOA provide for Iran to accept certain limits on its uranium enrichment 1 UN Security Council Resolution 1737 (Dec. 23, 2006). 2 Id. 3 UN Security Council Resolution 1747 (March 24, 2007). 4 UN Security Council Resolution 1803 (March 3, 2008). 5 UN Security Council Resolution 1929 (June 9, 2010). 6 Id. 7 Joint Plan of Action, Nov. 24, 2013, available at Page 3 of 38

7 and reprocessing activities in exchange for relief from certain limited aspects of the international sanctions measures now in place. This interim accord, originally valid for six months and renewable by mutual consent, was expressly conceived as an initial step which, if successful, could provide a path towards a comprehensive solution by which all UN Security Council sanctions against Iran, as well as national and multilateral sanctions of UN member countries, could be progressively lifted as Iran institutes measures to limit its nuclear program and ensure the global community of the program s peaceful applications. Implementation of the JPOA began on January 20, 2014, and in July 2014, the P5+1 group and Iran agreed to extend the JPOA until November 24, Among other things, the JPOA calls for the revitalization of humanitarian trade through the establishment of a dedicated financial channel that will permit Iran to use oil sale revenue held abroad to purchase food, agricultural products, medicine, medical devices, and medical services. The financial channel will operate through specified non-iranian foreign banks and non-designated Iranian banks. 9 While, as discussed below, the current U.S. and EU regimes expressly permit trade with Iran in humanitarian products, the JPOA s provision of a dedicated financial channel for humanitarian trade may be seen as a reflection of widespread sentiment that the intensification of the sanctions in recent years has complicated or reduced such trade. Implementation of the JPOA is, however, incomplete and mired in controversy. Domestic political dynamics in both the United States and Iran are complicating implementation of the JPOA and casting doubt over prospects for a long-term deal. In the United States, the Obama administration is resisting calls from both Democratic and Republican Members of Congress to legislate additional sanctions against Iran, claiming that doing so will imperil the long-term success of the talks. 10 In Iran, legislators have introduced a bill that would require Iran to enrich uranium to higher levels (i.e., closer to the level that would be required for weaponization) if the United States imposes new sanctions against Iran could prove to be a watershed year in the evolution of international sanctions against Iran and could signal the beginning of their dissolution if the P5+1 process can gather momentum and move forward. Indeed, on July 22, 2014, the U.S. Department of State issued a statement indicating its assessment to date that Iran has carried out the very significant commitments it made, and has taken steps to address the international community s greatest 8 See Guidance Relating to the Provision of Certain Temporary Sanctions Relief in Order to Implement the Joint Plan of Action Reached on November 24, 2013, Between the P5 + 1 and the Islamic Republic of Iran, as Extended Through November 24, 2014, U.S. Department of States (July 21, 2014), available at 9 As part of its enforcement efforts, OFAC publishes a list of individuals and entities owned or controlled by, or acting for or on behalf of, targeted countries, including Iran. It also lists individuals, groups, and entities designated under programs that are not country-specific. For instance, several Iranian banks have been designated under OFAC s Nonproliferation of Weapons of Mass Destruction or Specially Designated Global Terrorist programs for their involvement in the financing of either weapons of mass destruction or ballistic missile proliferation or of terrorism, respectively. Collectively, such individuals and entities are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are generally prohibited from dealing with them. 10 See, e.g., White House Punishes More Firms Over Iran Sanctions, The New York Times (Dec. 12, 2013). 11 EU, Iran Delegates To Meet for Talks on Implementing Nuclear Deal, CNN (Jan. 7, 2014). Page 4 of 38

8 concerns. 12 There are some signs that, in the international business community, commercial actors involved in the production and trade of humanitarian goods are watching this process closely to be prepared for a revitalization of trade and investment involving Iran. 13 However, many obstacles to this process exist that could impede or derail the negotiations, including the volatility of related issues in domestic politics in both the United States and Iran, compounded by uncertainty over the terms of implementation of the JPOA. The United States has yet to provide specifics on how the financial channel will operate, except to note that the P5+1 and Iran are establishing mechanisms to further facilitate the purchase of, and payment for, the export of humanitarian goods and that the U.S. Department of the Treasury will directly contact any foreign financial institutions that Iran seeks to involve in hosting these new mechanisms to provide specific guidance. Despite U.S. government assertions that it is not the U.S. government s role to publicize to whom sales can be made and through which channels, 14 the U.S. Administration has reportedly contacted certain European medical firms and asked them to expedite sales of medical goods to Iran and cleared banks in Switzerland and Japan to process financing for those shipments. 15 Other statements by U.S. government officials suggest that U.S. authorities will work with the actors in a given transaction to issue reassurances that humanitarian transactions are exempt from sanctions. 16 Accordingly, the prospects for progress in easing constraints on humanitarian trade involving Iran in connection with this multilateral initiative remain uncertain and difficult to predict. This state of play appears likely to generate a degree of continuing adverse impact on the level of humanitarian trade with Iran for months yet to come. III. U.S. Sanctions against Iran The United States maintains a comprehensive sanctions regime against Iran consisting of three major components: 12 Summary of Understandings Related to the Implementation and Extension of the Joint Plan of Action, U.S. State Department, Office of the Spokesperson (July 22, 2014). 13 Iran Deal Opens Door for Business, The Wall Street Journal (Dec. 2, 2013). 14 In a February 6, 2014 open forum with high-level officials from the U.S. Department of State and the U.S. Department of the Treasury, a senior State Department official noted that the U.S. government views humanitarian trade as commercial trade transactions. As such, according to that official, the U.S. government does not plan to publicize the banks that will be designated to handle humanitarian trade transactions. A Discussion on U.S. and EU Sanctions: Implementation of the Iran Joint Plan of Action with Peter Harrell, Deputy Assistant Secretary for Counter Threat Finance and Sanctions, U.S. Department of State, Eytan Fisch, Assistant Director for Policy, Office of Foreign Assets Control U.S. Department of the Treasury, and Anahita Thomas, Principal Associate, Freshfields Bruckhaus Deringer U.S. LLP, February 6, Sponsored by The Technology and Export Controls Section of the Association of Women in International Trade, the ABA Section of International Law Export Controls and Economic Sanctions Committee, Washington Foreign Law Society, Virginia State Bar International Practice Section, National Foreign Trade Council/USA*Engage, National Council on International Trade Development, D.C. Bar International Law Section. 15 U.S. Pushes to Expedite Some Humanitarian Shipments to Iran, The Wall Street Journal (July 28, 2014). 16 See, e.g., Policy Memo: Why are U.S. sanctions blocking medicine for Iranians and how can we fix this? National Iranian American Council (Feb. 2014). Page 5 of 38

9 (1) blocking sanctions, which freeze property and assets of the government of Iran and certain individuals and entities designated by the U.S. Treasury Department s Office of Foreign Assets Control ( OFAC ) as Specially Designated Nationals ( SDNs ); (2) the Iranian Transactions and Sanctions Regulations ( ITSR ) 17 administered by OFAC, which prohibit U.S. persons from engaging in almost all activities with or for the benefit of Iran; and (3) sanctions administered by the Department of State through various interconnected legislation which may be applied outside of the United States, even when there is no U.S. person involvement, including the Iran Sanctions Act ( ISA ), 18 the Comprehensive Iran Sanctions, Accountability, and Divestment Act ( CISADA ), 19 the Iran Threat Reduction and Syria Human Rights Act ( ITRA ), 20 and the Iran Freedom and Counter-Proliferation Act of 2012 ( IFCA ), 21 a subtitle of the National Defense Authorization Act for Fiscal Year While OFAC plays a primary role in enforcing U.S. sanctions against Iran, the U.S. Department of State occupies an important role in providing policy guidance to inform OFAC licensing determinations and in enforcing sanctions legislation that restricts access to the U.S. market and services for non-u.s. companies that engage in certain commercial activities in Iran. Despite numerous complex sanctions requirements, many of which apply to both U.S. and non-u.s. persons, the U.S. Departments of State and Treasury recognize that sanctions should not prohibit the delivery of humanitarian assistance or exports of humanitarian goods to Iran. 22 Accordingly, the U.S. government broadly authorizes, with no specific licensing requirements, the sale and export of most food, medicine, and medical supplies to Iran. Other types of humanitarian exports may be authorized pursuant to specific licenses from OFAC. Moreover, Treasury Department guidance notes that, where U.S. persons are either specifically or generally authorized to engage in humanitarian exports to Iran, financial institutions here and C.F.R. 560 Iranian Transaction and Sanctions Regulations ; 31 C.F.R. 561 Iranian Financial Sanctions Regulations ; 31 C.F.R. 562 Iranian Human Rights Abuses Sanctions Regulations, collectively, the Iranian Transactions and Sanctions Regulations ( ITSR ). 18 Iran and Libya Sanctions Act of 1996, H.R. 3107, 111th Cong. (2006) (renamed the Iran Sanctions Act ( ISA ) in 2006). 19 Comprehensive Iran Sanctions, Accountability, and Divestment Act ( CISADA ), 22 U.S.C (2012). 20 Iran Threat Reduction and Syria Human Rights Act ( ITRA ), 22 U.S.C (2012). 21 Iran Freedom and Counter-Proliferation Act of 2012 ( IFCA ), a subtitle of the National Defense Authorization Act for Fiscal Year 2013, Pub. L. No , 126 Stat (2013). 22 The so-called humanitarian exception is one of two significant exceptions to U.S. sanctions law. The other is the NDAA exception which provides an exception to certain financial sector sanctions for countries that demonstrably reduce their purchases of crude oil from Iran. See NDAA 2012, Section 1245 (as amended). Page 6 of 38

10 abroad are generally permitted under U.S. law to process all financial transactions necessary to facilitate the trade. 23 A. Blocking Sanctions/Asset Freezes One form of commonly applied U.S. economic sanction is the imposition of an asset freeze on individuals in government, government bodies and associated companies, or terrorist groups and individuals associated with those groups. With respect to Iran, the United States maintains blocking actions designed to freeze the assets of designated Iranian and non-iranian persons or entities, as well as sanctions applicable to persons who conduct transactions with those designated persons or entities. 24 These blocked persons are also known as SDNs, and are identified on the SDN List maintained by OFAC. U.S. persons are prohibited from engaging in transactions involving SDNs or property in which an SDN has a direct or indirect interest. 25 Furthermore, once such property enters the United States, it is frozen and cannot be accessed by any person without authorization from OFAC. B. OFAC Sanctions Based on Involvement of U.S. Persons or U.S. Origin of Goods, Services, or Technology OFAC enforces the ITSR which, as indicated above, is a comprehensive sanctions program prohibiting U.S. persons from engaging in nearly all commercial transactions and other activities involving Iran or Iranian nationals. Under the ITSR, U.S. persons are defined to include entities organized under the laws of the United States, U.S. citizens, U.S. permanent residents, and entities and individuals located in the United States. 26 As of October 9, 2012, the ITSR also applies to non-u.s. entities that are owned or controlled by U.S. persons (e.g., foreign subsidiaries of U.S. entities). The expansive definition of a U.S. person in this context provides for the extraterritorial application of OFAC sanctions based on U.S. person involvement or ownership. In addition, the sanctions also have extraterritorial application based on the U.S. origin of the items at issue. That is, the sanctions apply to activities devoid of U.S. person involvement if the activities deal with items subject to U.S. export controls (i.e., U.S. origin items or items that contain more than a threshold level of U.S. content under the U.S. Department of Commerce regulations). 27 The ITSR prohibit activities including, but not limited to: Exporting commodities, technology, software, and services from the United States to Iran (regardless of the product s origin); 28 Importing into the United States goods or services originating in Iran; OFAC, Clarifying Guidance: Humanitarian Assistance and Related Exports to the Iranian People, Feb. 6, 2013, available at C.F.R Id C.F.R (defining U.S. person), 31 C.F.R (defining person and entity). 27 See 31 C.F.R C.F.R Page 7 of 38

11 Facilitating, directing, supporting, approving, or guaranteeing activities by related or unrelated third parties (including non-u.s. persons) that are prohibited for U.S. persons; 30 Referring business opportunities that are prohibited for U.S. persons to offshore entities; Attempting to evade or avoid sanctions prohibitions; 31 Engaging in financial dealings with Iran, including committing funds, assets, loans or other extensions of credit in Iran, or to the Government of Iran, outside of Iran; 32 C. Sector-Specific Sanctions Applicable to Non-U.S. Persons In addition to the prohibitions that are triggered by U.S. person involvement or the U.S. origin of the goods or services involved, the Department of State also sanctions certain activities of non-u.s. persons if they engage in activities with Iran in identified sectors, such as the energy sector, petrochemical sector, financial services, shipping and shipbuilding services, underwriting, insurance, and reinsurance services, precious metals, metals, and other industrial materials, and automotive products. These sector-specific sanctions are intended to cripple the Iranian economy and force political change. Such sanctions include: a ban on loans or financing from U.S. entities or persons; a ban on investments and forced divestment by U.S. persons and entities; restrictions against U.S. correspondent banking accounts; denial of Export-Import Bank loans, credits, or guarantees; denial of licensing and restrictions on U.S. export and import trade; disqualification from U.S. government contracts; prohibition of transactions in U.S.-based assets; and imposition of such measures on individual officers and principals of a sanctioned entity. 33 The most relevant of these sector-specific sanctions in the context of humanitarian trade are the financial sector sanctions because such sanctions may discourage financial institutions and other entities from engaging in otherwise lawful transactions involving Iran. U.S. sanctions laws are designed to constrain Iran s access to financial services by making it difficult for non-u.s. financial institutions to conduct transactions with both Iran and the United States. In particular, foreign financial institutions 34 may be barred from opening or maintaining payable through or correspondent accounts in the United States, if they are determined to be: C.F.R C.F.R C.F.R C.F.R See generally, ISA (as amended), at Section 6; CISADA (as amended), at Section 104, codified at 22 U.S.C. 8513, et al. 34 Foreign Financial Institutions are broadly defined in the Iranian Financial Sanctions Regulations (31 C.F.R ) to include depository institutions, banks (including foreign central banks), money services businesses, trust companies, investment companies, and others. Page 8 of 38

12 Conducting or facilitating significant financial transactions on behalf of persons or entities designated by U.S. sanctions law or UN Security Council Resolutions; 35 Conducting or facilitating any significant financial transactions: o With the Central Bank of Iran or designated Iranian financial institutions; 36 o For the purchase, acquisition, sale, transport, or marketing of petroleum or petrochemical products from Iran; 37 o For the sale, supply, or transfer to or from Iran of certain materials (i.e., precious metals, graphite, raw and semi-finished metals, or software for integrating industrial processes), if those materials are for designated purposes; 38 o For the sale, supply, or transfer to Iran of significant goods or services used in connection with the energy, shipping, or shipbuilding sectors of Iran; 39 o For the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran; 40 or o Related to the purchase or sale of Iranian rials or certain financial transactions denominated in Iranian rials; 41 Maintaining significant funds or accounts outside the territory of Iran denominated in Iranian rials; 42 Facilitating the Government of Iran s efforts to acquire or develop weapons of mass destruction ( WMDs ), WMD delivery systems, or foreign terrorist organizations, or engaging in money laundering or other efforts by the Central Bank of Iran to carry out these activities; 43 Facilitating significant transactions or providing significant financial services for the IRGC or any of its agents or affiliates; 44 or 35 CISADA (as amended), at Section 104, codified at 22 U.S.C NDAA 2012, Section 1245 (as amended). 37 Executive Order (Jul. 30, 2012), at section 1, (as amended by Executive Order (Oct. 9, 2012) and Executive Order (Jul. 1, 2013). 38 IFCA, Section 1245(c). 39 Id. 40 Executive Order (Jul. 1, 2013), at section Id. at Section Id. 43 CISADA (as amended), at Section 104, codified at 22 U.S.C Id. Page 9 of 38

13 Facilitating significant transactions or providing significant financial services for persons whose property or interest in property have been blocked in connection with Iran s proliferation of WMD, WMD delivery systems, or support of terrorism. 45 Because U.S. law prohibits direct payment from an Iranian financial institution to a U.S. financial institution, third-country banks must be involved in transactions between the United States and Iran. Such institutions may be leery of involvement in such transactions, even if permitted under U.S. law, because if viewed as engaging in any of the above activities, the entity could lose its access to the U.S. market. D. U.S. State Divestment Sanctions In addition to the OFAC and Iran Sanctions Act sanctions, individual U.S. states and municipalities have adopted laws to mandate divestment of public funds, including public pension and retirement funds from companies with business interests in Iran, Cuba, Syria, and Sudan. While these measures vary, many apply whether or not the activities of a particular company are in violation of U.S. sanctions at the federal level. E. Humanitarian Exceptions to U.S. Sanctions As noted above, even with the escalation of U.S. sanctions in recent years, U.S. policy is to permit transactions for humanitarian reasons. In particular, the United States supports the sale or transfer of certain food, agricultural commodities, medicine, and medical devices to Iran. In addition, OFAC permits personal remittances, the transfer of certain communications equipment, and disaster relief. i. Humanitarian Exceptions Applicable to Transactions Involving U.S. Persons or U.S.-Origin Goods or Services 1. Food, Medicine, and Medical Devices As of October of 2012, OFAC authorizes the export or re-export of certain food items, 46 medicines, and basic medical supplies 47 by U.S. persons under General Licenses codified in the ITSR. 48 Pursuant to these General Licenses, U.S. persons are authorized to export or reexport food (including bulk agricultural commodities), 49 medicine, and basic medical supplies to the Government of Iran, to any individual or entity in Iran, or to persons in third countries 45 Id. 46 Food, under OFAC s General License, includes items that are intended to be consumed by and provide nutrition to humans or animals in Iran, including vitamins and minerals, food additives and supplements, and bottled drinking water, and seeds that germinate into items that are intended to be consumed by and provide nutrition to humans or animals in Iran. For purposes of this general license, the term food does not include alcoholic beverages, cigarettes, gum, or fertilizer. See 31 C.F.R (a)(2)(ii). 47 Basic medical supplies, under OFAC s General License, includes medical devices, as defined by OFAC s List of Basic Medical Supplies, provided on OFAC s website: See 31 C.F.R (a)(3)(ii). 48 See 31 C.F.R (a)(2) and (a)(3) C.F.R (a)(2). Page 10 of 38

14 purchasing specifically for resale to any of the foregoing, provided that the items are not used by military or law enforcement purchasers or importers. 50 With respect to basic medical supplies, the eligible items are listed on OFAC s website. In July 2013, OFAC revised the list of basic medical supplies, significantly expanding the list of medical devices that are eligible for export without specific authorization. 51 The General Licenses specifically authorize conduct of related transactions, including, but not limited to, the making of shipping and cargo inspection arrangements, the obtaining of insurance, the arrangement of financing and payment, shipping of the goods, receipt of payment, and the entry into contracts (including executory contracts), so long as the terms are consistent with other provisions of the ITSR. 52 Prior to October 2012, specific one-year licenses (under the Trade Sanctions Reform Act ( TSRA )) were required for the sale of these items. TSRA licensing was cumbersome and had unpredictable license processing times. The General Licenses remove the uncertainty related to the licensing process and should result in an increase humanitarian trade of food, medicine, and medical supplies that are eligible for trade under the General Licenses. TSRA licensing is still required for items outside the definition of food, 53 medicine, 54 and basic medical supplies 55 and other specifically excluded food 56 and medicine. 57 Likewise, TSRA licensing is still required if the items are for use by military or law enforcement purchasers or importers. 58 Donations to the Iranian people (but not the Government of Iran) of food and medicine intended to relieve suffering are exempt from sanctions Personal Remittances U.S. sanctions regulations permit persons in the United States to send through U.S. financial institutions noncommercial, personal remittances to Iran. 60 Personal remittances may include the transfer of funds from the United States to Iran to assist a family member or friend. These transfers are permitted provided that the payment is processed through a third-country C.F.R (a)(3). 51 OFAC s List of Basic Medical Supplies, available at C.F.R (a)(2) and (a)(3) C.F.R (a)(2)(ii) C.F.R (e)(2) C.F.R (a)(3)(ii) C.F.R (a)(2)(iii) C.F.R (a)(3)(iii) C.F.R (a)(2)(iv), 31 C.F.R (a)(3)(iv). 59 OFAC, Clarifying Guidance: Humanitarian Assistance and Related Exports to the Iranian People, Feb. 6, 2013, available at at C.F.R Page 11 of 38

15 financial institution before reaching Iran (i.e., not a direct transfer from a U.S. bank to an Iranian bank, which is a prohibited transaction under current U.S. law) Humanitarian and Disaster Relief Programs Historically, OFAC has adhered to a general policy that allows specific licensing for the provision of disaster relief on a case-by-case basis. However, on September 10, 2013, OFAC removed the requirement for a specific authorization by issuing General License E, which authorizes certain services in support of non-governmental organizations activities in Iran. 62 In particular, this License provides limited authority for U.S. non-governmental organizations to export services and transfer funds to support certain not-for-profit humanitarian activities including: Activities designed to meet the basic needs of the people of Iran (i.e., health-related services, operation of orphanages, relief services, donation of food, clothing, and medicine); Activities related to non-commercial reconstruction projects in response to natural disasters (two-year window after disaster); Activities related to environmental and wildlife conservation projects that involve endangered species; and Human rights and democracy building projects. 63 General License E limits the transfer of funds in support of such activities to not more than $500,000 in a 12-month period. It also requires parties utilizing the General License to report such activity to OFAC Other Exceptions to U.S. Sanctions In addition to exceptions intended to authorize trade in humanitarian goods, the United States has authorized other limited exceptions in support of U.S. policy goals. The United States issued an exception to the exportation of certain services and software incident to Internet-based communications. 65 Moreover, on May 30, 2013, OFAC issued a new General License D authorizing the export of fee-based services used to exchange personal communications over the Internet, such as instant messaging, , social networking, or blogging, as well as certain software and hardware used for personal communications. Additionally, on September 10, 2013, 61 OFAC, Clarifying Guidance: Humanitarian Assistance and Related Exports to the Iranian People, Feb. 6, 2013, available at C.F.R. 560, General License E Authorizing Certain Services in Support of Nongovernmental Organizations Activities in Iran (Sept. 10, 2013), available at 63 Id. 64 Id C.F.R Page 12 of 38

16 OFAC issued General License F authorizing certain services in support of professional and amateur sports activities and exchanges in the United States and Iran. 66 Most recently, on March 19, 2014, OFAC issued General License G authorizing certain academic exchanges and exportation or importation of certain educational services, including provision of scholarships to students enrolled in Iranian universities to allow such students to attend U.S. academic institutions. 67 ii. Humanitarian Exceptions Applicable to Non-U.S. Persons Typically, non-u.s. entities not otherwise owned by U.S. persons are not subject to the ITSR-based sanctions regime, and they are not required to seek general or specific licensing authority to engage in humanitarian transactions with Iran. Rather, these transactions, when engaged in by non-u.s. persons, are simply not sanctionable under U.S. law. To clarify this point, OFAC released Guidance on the Sale of Food, Agricultural Commodities, Medicine, and Medical Devices by Non-U.S. Persons to Iran, on July 25, In this guidance, OFAC noted that to further assist non-u.s. persons, including banks and medical suppliers, in fully understanding these allowances, this Guidance underscores that [food, agricultural commodity, medicine, and medical device] sales to Iran do not trigger sanctions under U.S. law. The financing or facilitation of such sales by non-u.s. persons likewise does not trigger sanctions, so long as the transaction does not involve certain U.S.-designated persons (such as the IRGC or a designated Iranian bank) or proscribed conduct. Proscribed conduct is further described to include routing a payment directly from Iran to the United States, or vice versa, or otherwise taking action to evade U.S. sanctions authorities. 69 Further, the guidance provides that [t]he conduct or facilitation of payments for such sales by foreign banks are not subject to U.S. sanctions when the payments originate from accounts of the Central Bank of Iran (CBI) or from accounts of Iranian commercial banks that have not been designated by the [United States]. Further underscoring this point, the Iran Financial Sanctions Regulations provide that funds owed to Iran may be used for the purchase and export to Iran of agricultural commodities, food, medicine, or medical devices regardless of the country from which such goods are purchased and regardless of where such goods originate, and payment from the funds for such goods may be made to exporters in countries other than the country with primary jurisdiction over the foreign financial institution holding the funds C.F.R. 560, General License F Authorizing Certain Services in Support of Professional and Amateur Sports Activities and Exchanges Involving the United States and Iran (Sept. 10, 2013), available at C.F.R. 560, General License G Certain Academic Exchanges and the Exportation or Importation of Certain Educational Services Authorized (March 19, 2014), available at 68 OFAC, Guidance on the Sale of Food, Agricultural Commodities, Medicine, Medical Devices by Non-U.S. Persons to Iran, July 25, 2013, available at 69 Id C.F.R , Note 2. Page 13 of 38

17 U.S. sanctions law thus provides that non-u.s. persons do not need express authorization to sell food, agricultural commodities, medicine, or medical devices to Iran, and rather that these activities are simply not reached by the extraterritorial sanctions administered by the U.S. Departments of State and Treasury. Moreover, Treasury s OFAC has confirmed that the auxiliary actions needed to make these sales, such as processing payment through financial institutions, are also not subject to U.S. sanctions. iii. U.S. Policy Guidance on the Application of Humanitarian Exemptions There is a strong consensus in the U.S. government that it remains vital for U.S. policy to support humanitarian trade with Iran, including exports of medical and food products. Recent changes to the ITSR, including the October 2012 issuance of new General Licenses for food, medicine, and basic medical supplies, and remarks by Wendy R. Sherman, Under Secretary for Political Affairs and the top U.S. official in the ongoing multilateral negotiations with Iran, reflect this commitment. In remarks before the U.S. Senate Committee on Banking, Housing, and Urban Affairs in June 2013, Ms. Sherman announced that, even as the United States significantly increases pressure on the Iranian regime, it remains committed to ensuring that legitimate humanitarian trade can continue for the benefit of the Iranian people. Ms. Sherman remarked that the United States takes no pleasure in the hardship U.S. sanctions may cause the Iranian people in their everyday lives, and that it is U.S. policy to not target Iranian imports of humanitarian items. Moreover, some members of the Obama Administration reject the viewpoint that U.S. sanctions on Iran are disproportionately harming average Iranians and denying them access to medicines and medical equipment. These officials stress that there are already substantial U.S. waivers to allow for medical supplies to enter the country. They also stress that Iran s government maintains enough foreign exchange reserve in overseas bank accounts to pay for medical supplies. Still, other high ranking U.S. officials acknowledge that practical obstacles exist to furthering humanitarian trade with Iran. In a June 2013 interview with BBC Persian, Under Secretary Sherman noted that the Obama Administration sent a team around the world, talking to countries who said they are having difficulty getting their medicines to Iran, because we want to make sure that they don t think they may get sanctioned by the U.S. if they send medicine to Iran. Additionally, as noted above, on July 25, 2013, the United States took certain steps to further ease U.S. restrictions on humanitarian trade by expanding the list of basic medical supplies that are exempt from sanctions and issuing new guidance in response to inquiries it had received from non-u.s. medical suppliers and financial institutions concerning the humanitarian exceptions to sanctions on Iran. However, as noted above in Section II, the United States is yet to provide specifics on how the JPOA humanitarian trade financial channel will operate, except to note that the P5+1 and Iran are establishing mechanisms to further facilitate financial transactions related to humanitarian trade and that foreign financial institutions whose involvement in hosting these new mechanisms sought by Iran will be contacted directly by the U.S. Department of the Treasury and provided specific guidance. 71 In that regard, it is not clear if the United States has 71 See Guidance Relating to the Provision of Certain Temporary Sanctions Relief in Order to Implement the Joint Plan of Action Reached on November 24, 2013, between the P5+1 and the Islamic Republic of Iran, U.S. Page 14 of 38

18 contacted any foreign financial institutions. Moreover, State department officials have been clear that the United States currently has no intention of publicizing the identity of such institutions. 72 IV. EU Sanctions against Iran The EU fully implements the UN sanctions and has also adopted a number of complementary measures. Since July 27, 2010, the EU has increased the number of sanctions it has imposed against Iran which, in effect, has more closely aligned the EU sanctions with those of the United States. In late 2012, in response to Iran s alleged failure to engage seriously in negotiations to address international concerns about its nuclear program, the EU again expanded its sanctions against Iran. Despite its tougher stance, however, EU and U.S. sanctions continue to differ substantially. Among the most notable differences is the fact that the EU sanctions do not apply to subsidiaries of EU companies that are incorporated outside the EU, whereas the United States most recent sanctions took steps to constrain the Iran-related activities of foreign subsidiaries of U.S. companies. EU sanctions do not impose a general ban on investment in, or trade with, Iran. Rather, they consist largely of an arms embargo, sector-specific sanctions targeting particularly the nuclear, oil and gas, petrochemical, transport, and financial sectors, a visa ban on persons designated by the UN or associated with or providing support for Iran s proliferation-sensitive nuclear activities or for the development of nuclear weapon delivery systems, asset freezes of entities associated with Iran s proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems, and trade restrictions on certain dual-use (commercial) items. 73 On October 15, 2012, the Council of the European Union ( EU Council ) tightened EU restrictions against Iran. 74 The adopted measures designate 35 new parties as subject to the asset freeze 75 and establish broad restrictions against transactions between EU and Iranian financial institutions. 76 As of October 15, 2012, the new financial sector and import/export restrictions Department of the Treasury and U.S. Department of State (Jan. 20, 2014), available at: 72 A Discussion on U.S. and EU Sanctions: Implementation of the Iran Joint Plan of Action with Peter Harrell, Deputy Assistant Secretary for Counter Threat Finance and Sanctions, U.S. Department of State, Eytan Fisch, Assistant Director for Policy, Office of Foreign Assets Control U.S. Department of the Treasury, and Anahita Thomas, Principal Associate, Freshfields Bruckhaus Deringer U.S. LLP, February 6, Sponsored by The Technology and Export Controls Section of the Association of Women in International Trade, the ABA Section of International Law Export Controls and Economic Sanctions Committee, Washington Foreign Law Society, Virginia State Bar International Practice Section, National Foreign Trade Council/USA*Engage, National Council on International Trade Development, D.C. Bar International Law Section. 73 European Union External Action, Factsheet: The European Union and Iran (Nov ), available at at Council Decision 2012/635/CFSP of 15 October 2012, amending Decision 2010/413/CFSP concerning restrictive measures against Iran; Council Implementing Regulation (EU) 945/2012 of 15 October Council Decision 2012/635/CFSP of 15 October 2012, amending Decision 2010/413/CFSP concerning restrictive measures against Iran. 76 The new measures also adopt a range of new sector-specific import and export restrictions specifically targeting the oil and gas, petrochemical, and transport sectors. See Council Decision 2012/635/CFSP of 15 October 2012, amending Decision 2010/413/CFSP concerning restrictive measures against Iran. These new sanctions would likely have limited impact on humanitarian trade. For further discussion of these sector-specific sanctions, see European Page 15 of 38

19 applied only to Member States governments. After they were implemented through a Council Regulation in December 2012, the restrictions were made applicable to nationals of EU Member States (including those located outside the EU) and companies incorporated or doing business in whole or in part in a Member State. 77 Given the structure of the EU sanctions regime in particular, its focus on certain specified sectors there is less of an obvious need than in the U.S. regime for express carve-outs or exemptions to protect and facilitate humanitarian trade. An exception, however, is found in the EU financial sector-related sanctions. For example, Regulation 1263/2012 exempts from the restrictions on EU banks participation in transactions with Iranian financial institutions transfers regarding foodstuffs, healthcare, medical equipment, or for agricultural or humanitarian purposes, provided that they have undergone authorization procedures, as required (depending on the amount involved in the transfer). 78 EU authorities charged with administering sanctions, unlike their U.S. counterparts, have not felt compelled to repeatedly issue policy guidance to help potential exporters navigate the humanitarian exemptions. A. EU Designated Entities On October 15, 2013, the EU designated a number of additional entities as subject to the EU asset freeze. The designated entities include the Ministry of Energy, Ministry of Petroleum, National Iranian Oil Company ( NIOC ), and certain subsidiaries and affiliates thereof, National Iranian Gas Company, National Iranian Oil Refining and Distribution Company, National Iranian Tanker Company, Trade Capital Bank, Bank of Industry and Mine, and Cooperative Development Bank. The designated entities are subject to the freeze of funds and economic resources. In addition, individuals and entities under Member States jurisdiction are prohibited from making available funds and economic resources to the designated entities. Importantly, Member States interpret these restrictions as extending to entities owned and controlled by designated entities. These new designations constitute a significant enhancement of the EU sanctions against Iran. Historically, the NIOC and other state oil and gas companies have been a source of a substantial body of trade with European companies, and the EU reportedly had faced pressure for not taking the step of designating these parties for asset freezing restrictions. 79 Prior to the current designations, EU companies resisted engaging in new business with the NIOC and other Union External Action, Factsheet: The European Union and Iran (Nov ) available at at Council Regulation (EU) No 1263/2012 of 21 December 2012 amending Regulation (EU) No 267/2012 concerning restrictive measures against Iran, [2012] OJ L 356/ Id. 79 See, e.g., U.S. and EU Fail to Isolate Iran, LOS ANGELES TIMES, August 8, 2010, available at WRAPUP 3-European Oil Firms Resist U.S. Pressure to Quit Iran, REUTERS, October 1, 2010, available at Page 16 of 38

20 Iranian oil and gas enterprises, at least in part to comply with U.S. restrictions which have covered Iranian oil-and-gas entities for many years. 80 B. Financial Sector Restrictions i. Restrictions on Transfers of Funds The EU sanctions regime now prohibits transfers between EU financial institutions and (i) credit and financial institutions and bureaux de change domiciled in Iran, including the Central Bank of Iran; (ii) branches and subsidiaries of such institutions domiciled in Iran, whether within or outside the jurisdiction of EU Member States; and (iii) financial entities that are not domiciled in Iran, but that are controlled by persons or entities domiciled in Iran. Similar sanctions have already been in force in the United Kingdom since November 21, The EU sanctions regime sets out certain exceptions to these prohibitions and specifies certain transfers that can be authorized by EU Member States. For example, payments to satisfy claims by or against an Iranian entity may be authorized, provided such payment does not contribute to any prohibited activity. ii. Additional Sanctions Against the Central Bank of Iran The newly implemented measures allow EU Member State authorities to authorize only limited transfers made by or through the Central Bank of Iran. Specifically, EU Member States may only authorize the release of frozen funds or economic resources held by the Central Bank of Iran if they determine that those funds or economic resources are necessary for: providing credit, or providing financial institutions with liquidity, for the financing of trade, or the servicing of trade loans; or reimbursement of a claim due under a contract or agreement concluded by an Iranian person, entity, or body before October 16, 2012, where such a contract or agreement provides for the reimbursement of outstanding amounts to persons, entities, or bodies under the jurisdiction of Member States. These revisions have the effect of tightening trade restrictions against the Iranian Central Bank, which was previously designated for financial sanctions under earlier EU measures. Whereas the earlier restrictions allowed Member States a broad flexibility to issue licenses for payments from or to the Iranian Central Bank if those payments were in support of third party trade contracts, the current provision may not cover payments from EU parties to Iranian counterparties that are made through the Iranian Central Bank. 80 See, e.g., id. 81 Implemented by the Financial Restrictions (Iran) Order 2011 made under Schedule 7 to the UK Counter- Terrorism Act Page 17 of 38

21 iii. Restrictions on Financial Support for Trade with Iran The newly implemented measures prohibit Member States from entering into new commitments to provide financial support for trade with Iran, including the granting of export credits, guarantees, or insurance to Iranian nationals or entities involved in trade with Iran. EU Member States are also prohibited from guaranteeing or reinsuring such commitments. C. Humanitarian Exemptions As explained above, due to its sector-specific focus, the EU sanctions regime against Iran does not rely on express exemptions for humanitarian trade. Nevertheless, the EU has implemented several exemptions to its sanctions against Iran, as summarized below, designed to protect and build confidence for humanitarian export activity. In addition, each EU Member State is individually responsible for, inter alia, granting exemptions. i. Exceptions to the Visa Ban Member States may grant exemptions from the measures imposed to prevent the entry into, or transit through, their territories of the persons responsible for serious human rights violations in Iran, and persons associated with them, where travel is justified on the grounds of urgent humanitarian need, or on grounds of attending intergovernmental meetings, including those promoted by the Union, or hosted by a Member State holding the Chairmanship in office of the OSCE, where a political dialogue is conducted that directly promotes democracy, human rights and the rule of law in Iran. 82 However, such an exemption is subject to a notification requirement by any Member State wishing to grant such exemption and an objection in writing by one or more Council Members. 83 Similarly, Member States may grant exemptions from the measures imposed to prevent the entry into, or transit through, their territories of persons engaged in Iran s proliferationsensitive nuclear activities where they determine that travel is justified on the grounds of urgent humanitarian need, including religious obligations. 84 ii. Release of Frozen Funds and Economic Resources The competent authority of a Member state may authorize the release of certain frozen funds or economic resources, or the making available of certain funds or economic resources upon a determination that the fund or economic resources concerned are, inter alia, necessary to satisfy basic needs, including payments for foodstuffs, rent or mortgage, medicines and medical treatment, taxes, insurance premiums, and public utility charges Council Decision 2011/2356/CFSP, Art. 1(6) (Apr. 12, 2011). 83 Id. at Art. 1(7). 84 See Council Decision, Art. 19(7)(i) (Jul. 26, 2010). 85 See Council Regulation (EU) No. 1263/2012, Art. 1(13) (Dec. 21, 2012); Council Decision 2011/2356/CFSP, Art. 2(3)(a) (Apr. 12, 2011); Council Regulation (EU) 267/2012, Art. 26(1)(a)(i) (Mar. 23, 2012); Council Regulation (EU) No. 359/2011, Art. 4(1)(a) (Apr. 12, 2011); Council Decision, Art. 20(3)(a) (Jul. 26, 2010). Page 18 of 38

22 iii. Export and Import Restrictions Certain export and import restrictions related to nuclear items, military equipment, other dual-use goods and technologies, and the provision of assistance related to those items, do not apply, where the Committee determines in advance and on a case-by-case basis that such items or assistance are for food, agricultural, medical, or other humanitarian purposes. 86 In order for this provision to apply, two requirements must be met: (1) the contracts for delivery of such items or assistance include appropriate end-user guarantees; and (2) Iran has committed not to use such items in proliferation-sensitive nuclear activities or for development of nuclear weapon delivery systems. 87 iv. Restrictions on Financial Support for Trade The EU restrictions related to entering into new short- medium-, and long-term commitments for publicly and privately provided financial support for trade with Iran do not concern trade for food, agricultural, medical or other humanitarian purposes. 88 Moreover, Member States may grant, under such terms and conditions as they deem appropriate, an authorization to make an investment for food, agricultural, medical, or other humanitarian purposes, as long as the transaction would clearly not contribute to the development of technologies in support of Iran s proliferation-sensitive nuclear activities, or to the development of nuclear weapon development delivery systems. 89 Like similar exemptions, the EU requires the Member State concerned to inform the other Member States and the Commission of any authorizations it grants under this provision. 90 v. Financial Sector The EU sanctions regime prohibits Member States from entering into new commitments for grants, financial assistance, or concessional loans to the Government of Iran, including through their participation in international financial institutions, except for humanitarian and developmental purposes. 91 The relevant Member State may authorize transactions regarding foodstuffs, healthcare, medical equipment, or for agricultural or humanitarian purposes. 92 For transfers due on such 86 See Council Regulation (EU) 267/2012, Art. 7(1)(a) (Mar. 23, 2012); Council Decision, Art. 3 (Jul. 26, 2010). 87 See Council Decision, Art. 3 (Jul. 26, 2010). 88 See Council Decision 2012/635/CFSP, Para. 10 (Oct. 15, 2012); Council Decision, Art. 8(3) (Jul. 26, 2010). 89 See Council Regulation (EU) 267/2012, Art. 19(1) (Mar. 23, 2012). 90 See id. at Art. 19(2). 91 See Council Decision, Art. 9 (Jul. 26, 2010). 92 See Council Regulation (EU) No. 1263/2012, Art. 1(15) (Dec. 21, 2012); Council Decision 2012/635/CFSP, Art. 1(6) (Oct. 15, 2012); Council Regulation (EU) 267/2012, Art. 30(1)(a) (Mar. 23, 2012) ( Transfers of funds to and from an Iranian person, entity or body shall be processed as follows: (a) transfers due on transactions regarding foodstuffs, healthcare, medical equipment, or for humanitarian purposes shall be carried out without any prior authorization. The transfer shall be notified in advance in writing to the competent authorities if above EUR 10,000 or equivalent.). Page 19 of 38

23 transactions below EUR 100,000, no prior authorization is required, but notification to the competent authority of the Member State concerned is required if the transfer is equal to or above EUR 10, However, transfers due on such transactions equal to or above EUR 100,000 require the transferring party to obtain prior authorization from the Member State concerned and require the Member State concerned to inform the other Member States of any authorization granted. 94 vi. Transport Sector In addition, the EU exempts transactions from the following transport-related prohibitions if the supply, sale, transfer, or export is necessary for humanitarian purposes : The provision of bunkering or ship supply services, or other servicing of vessels, to Iranian-owned or -contracted vessels carrying prohibited items; and The provision of engineering and maintenance services to Iranian cargo aircraft carrying prohibited items. 95 V. Are the Humanitarian Exemptions Working? Notwithstanding assertions by U.S. officials that the humanitarian exemptions provided or available in the Iran sanctions regime have not been limited by the expansion of sanctions against Iran in recent years, anecdotal evidence suggests that a wide variety of commercial actors involved in or potentially involved in humanitarian trade with Iran are being deterred and are limiting such activity based on the perception that such transactions entail high and unacceptable levels of business risk. In particular, many observers have linked the imposition of financial sanctions in recent years to shortages in Iran of certain previously available humanitarian goods. The discussion below provides a brief review of related evidence and available U.S. and EU export data to inform assessment of whether the expansion of U.S. and EU sanctions against Iran in recent years has, in fact, chilled trade with Iran in humanitarian goods. A. Perceived Obstacles to Use of Humanitarian Exemptions In spite of the U.S. and EU humanitarian exemptions as well as recent U.S. efforts to encourage such trade by clarifying the scope of the exemptions to non-u.s. banks and expanding the list of medical supplies that may be sold to Iran without a license, companies interested in selling such products to Iran still may face difficulty getting paid because U.S. and EU banks are hesitant to be involved in financial transactions with Iran, regardless of the products involved. The U.S. and EU sanctions regimes authorize the imposition of sanctions on financial institutions that engage in transactions with sanctioned Iranian banks. Moreover, with limited exceptions, 93 See Council Regulation (EU) No. 1263/2012, Art. 1(15) (Dec. 21, 2012); Council Decision 2012/635/CFSP, Art. 1(6) (Oct. 15, 2012); Council Regulation (EU) 267/2012, Arts. 37(1) and 37(2) (Mar. 23, 2012) (exempting services necessary for humanitarian and safety purposes ); Council Decision, Art. 10(3)(a) (Jul. 26, 2010). 94 See Council Regulation (EU) No. 1263/2012, Art. 1(15) (Dec. 21, 2012); Council Decision 2012/635/CFSP, Art. 1(6) (Oct. 15, 2012). 95 See Council Decision, Arts. 15(6) and 18 (Jul. 26, 2010). Page 20 of 38

24 U.S. banks are prohibited from engaging in any transactions with any Iranian bank. In addition, the Secretary of the Treasury has the authority to require U.S. banks to terminate correspondent banking relationships with foreign banks that knowingly engage in significant transactions with designated Iranian banks. The U.S. government has also handed out steep fines to Western banks in connection with their participation in financial transactions associated with Iran and other countries subject to comprehensive U.S. sanctions programs. For example, on June 12, 2012, ING Bank N.V. agreed to forfeit $619 million to settle criminal charges brought by the United States and the State of New York and civil claims brought by OFAC. ING Bank was charged with conspiring to violate U.S. economic sanctions and with violating New York State laws by illegally moving billions of dollars through the U.S. financial system on behalf of Cuban and Iranian entities. 96 In December 2012, the U.S. Department of Justice announced that HSBC Holdings, PLC and HSBC Bank USA NA had agreed to forfeit $1.256 billion to the United States in connection with violations of sanctions targeting Iran, among other countries. 97 Additionally, in December 2012, a UK bank, Standard Chartered Plc., agreed to pay $327 million to settle OFAC charges that it violated international sanctions in connection with transactions with Iran and a number of other sanctioned countries. 98 To be sure, the penalties enforced against these banks for breaching sanctions on Iran did not involve transactions related to trade in food or medicine. But European companies say their banks are increasingly refusing to handle letters of credit because they fear they could run into trouble in the United States because financial sanctions there have become so complex. Given the potential for steep fines, many foreign banks are understandably unwilling to process transactions for Iranian businesses and citizens even when these transactions would not trigger sanctions. Banks are either afraid, or can t be bothered to try to do business with Iran. 99 Many public studies and reports find that the U.S. and international sanctions regimes have chilled lawfully permitted activity under the humanitarian exemptions. 100 This is consistent with anecdotal evidence based on interaction with significant companies in the food and medical products sectors in both the United States and in Western Europe. Financial institutions are limited in their ability to enter into financial transactions with Iran without risking international sanctions, and they are hesitant to do so, even when the transactions would not trigger sanctions. 96 U.S. Treasury Department Announces $619 Million Settlement with ING Bank, N.V. (June 12, 2012), available at 97 HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement (December 11, 2012), available at 98 Treasury Settlement Part of Combined $327 Million Settlement for Bank s Apparent Violations of Sanctions Programs (December 10, 2012), available at 99 Thomas Erdbrink, Iran Sanctions take unexpected Toll on Medical Imports, The New York Times (Nov. 2, 2012). 100 See, e.g., Namazi, Siamak, Sanctions and Medical Supply Shortages in Iran, Wilson Center Report, February 2013, available at and U.S. and International Sanctions Have Adversely Affected the Iranian Economy, GAO , (February 2013), available at Page 21 of 38

25 Accordingly, exporters of humanitarian goods increasingly face difficulty in getting paid for their shipments. Exporters also have to consider their ability to access capital in an international financial system that is increasingly leery of getting involved with companies that conduct business with Iran, even when such trade is lawful. Some investors are reluctant to invest or continue to invest in companies with business dealings in Iran, especially given the potential that such transactions may be publicly disclosed in an SEC filing or otherwise. 101 These business risks, among other considerations discussed below, have had a chilling effect on exports of some humanitarian goods to Iran. According to a 2012 UN report, the sanctions targeting Iran have had significant impacts on the general population, including causing a shortage of necessary items such as medicines. 102 The GAO reported in 2013 that foreign financial and business officials in Dubai have indicated that financial sanctions have significantly limited their ability to export food to Iran because foreign banks were unwilling to process transactions for Iranian business. 103 According to a 2013 Wilson Center report, Washington s and Brussels stated intention that sanctions pressure the Iranian government without contributing to the suffering of the ordinary [Iranians], is not being reflected by the reality on the ground. 104 Drug shortages used in the treatment of illnesses such as cancer, heart disease, hemophilia, and multiple sclerosis have also been reported and give rise to concerns that the humanitarian exemptions are potentially not meeting their intended purpose. 105 Many non-u.s. companies in the food and medicine sector have been vocal about the impact of tightening financial sanctions on their level of humanitarian trade with Iran. For example, the Swiss food company Nestle SA has reportedly scaled down its Iran business after banks refused to transfer revenue back from Iran. 106 As noted above, some companies are refraining from entering into legally permissible transactions involving Iran because of the business risks associated with uncertainty of receiving payment for goods delivered. Additional deterrents to lawful trade with or involving Iran include increasing scrutiny by U.S. and EU enforcement officials and the often sizable cost of compliance, with companies employing entire teams to manage ongoing risks. These considerations appear to have led to an increasingly cautious and risk-averse approach by increasing numbers of U.S. and European companies, to the point where many have simply 101 Under the U.S. Iran Threat Reduction and Syria Human Rights Act, U.S. domestic and foreign companies that file reports to the U.S. Securities and Exchange Commission ( SEC ) must include a disclosure of contracts, transactions and dealings with Iranian and other entities in their Annual Reports on Form 10-K, Annual Reports on Form 20-F and Quarterly Reports on Form 10-Q. While there is no such requirement under EU law, we have not confirmed the non-existence of reporting requirements under the law of EU Member States. 102 Saeed Kamali Dehghan, Iran Sanctions Putting Millions of Lives at Risk, The Guardian, (October 17, 2012), available at U.S. and International Sanctions Have Adversely Affected the Iranian Economy, GAO , (February 2013), available at Namazi, Siamak, Sanctions and Medical Supply Shortages in Iran, Wilson Center Report, February 2013, available at National Iranian American Council: Policy Memo: Why are Sanctions Blocking Medicine for Iranians and How can We Fix This? (February 24, 2014), available at Iran Deal Opens Door for Business, THE WALL STREET JOURNAL, December 1, 2013, available at Page 22 of 38

26 ceased and refused to continue any Iran-related business either because they do not want the scrutiny or cannot afford the compliance infrastructure required to monitor risks and prevent violations of applicable U.S. and European sanctions laws. Banks, in particular, have adopted increasingly restrictive policies on any form of transaction involving Iran, including transactions for sales of food and medical products to the country. Reputational risk is another consideration that companies have to contend with when deciding whether to get involved with Iran-related business, even though it may be permissible and licensed in the case of humanitarian trade. U.S. companies, in particular, are mindful of the potential political and public backlash and skepticism that may result from public disclosure of their Iran-related activities. The U.S. state divestment measures also present a concern for parties that consider engaging in Iran-related business. As noted in Section III, certain U.S. states have laws that mandate divestment of public funds, including public pension and retirement funds from U.S. and non-u.s. companies with business interests in Iran, Cuba, Syria and Sudan, whether or not the underlying activities are in violation of U.S. sanctions at the federal level. Historically, OFAC has approved licenses for exports to a number of Iranian companies. Two U.S. companies disclosed in their 2013 SEC filings that they received OFAC licenses that permit the transfer of medicine and medical equipment to Medical Equipment and Pharmaceutical Holding Co. of Iran and the Iranian Blood Research & Fractionation Company. 107 Also, our review of various OFAC licenses indicates that a considerable number of Iranian entities, including government-owned entities, have received implicit OFAC authorization to receive humanitarian goods from the United States. However, OFAC does not publish a list of approved Iranian entities. The absence of such a list may also contribute to risk perceptions among commercial actors involved or potentially involved in humanitarian exports to Iran. B. U.S. and EU Export Data 108 The U.S. and EU publish official trade data that permit an assessment of trends and changes in the export of humanitarian goods from these jurisdictions to Iran. Changes in trends observed in the export data may also be indicative of changes in the exporting jurisdictions sanctions regimes, including the intensification of financial sanctions in recent years. At the outset, we note several significant limitations in the export data for purposes of this report. First, the data are not entirely current. As of October 2014, EU export data are only available through year-end 2013, and U.S. export data are only available through August Thus, the full impact of the most recent sanctions may not be evident in the available export data. 107 See Novartis AG, Annual Report (Form 20-F), at 266 (Jan. 23, 2012) (describing a sale of influenza vaccines and rabies vaccines to Medical Equipment and Pharmaceutical Holding Co. of Iran); Novo Nordisk A/S, Annual Report (Form 20-F), at 10 (describing a contract with the Iranian Blood Research & Fractionation Company for the engineering, procurement, and construction of a human plasma fractionation plant for the production of human plasma derivates). 108 All U.S. trade data reproduced here are derived from the United States International Trade Commission: Interactive Tariff and Trade DataWeb, available at All EU Trade data are derived from the European Commission: Trade; Market Access Database, available at Page 23 of 38

27 Second, the data do not permit the identification of precise correlations with changes in U.S. and EU sanctions; factors other than sanctions may be the cause of observed shifts in export trends. Third, the export data by their very nature do not reveal anything about transactions that might have occurred, but did not, for reasons related to actual or perceived sanctions risk. Nevertheless, the export data present a reasonably reliable picture of overall trade activity with Iran, and may serve to corroborate or counter certain aspects of the above-discussed anecdotal evidence concerning use of the humanitarian exemptions. The assessment below begins with U.S. export data, then turns to EU export data, and finally considers the data in aggregate form. As discussed above, the United States has long maintained comprehensive sanctions against Iran. In 2010, the United States significantly strengthened it sanctions against Iran by imposing additional restrictions with extraterritorial application, including those related to the financial sector. These additional restrictions may have discouraged U.S. and non-u.s. entities from engaging in humanitarian trade. Conversely, with its issuance of the new General Licenses for food, medicine, and basic medical supplies in October 2012 and the expanded list of eligible medical supplies issued in July 2013, one may expect to see an uptick in exports of these items after these dates. We turn first to U.S. exports of food, combining all U.S. exports to Iran captured by Harmonized Tariff Schedule ( HTS ) Chapters 3, 4, 7, 8, and As can be seen in the chart below, the value of U.S. food exports to Iran spiked in 2008, apparently due to a disproportionately large amount of wheat products exported that year. After 2008, the value of U.S. food exports dropped, reaching its lowest level in 2010, the year in which the United States intensified financial sector sanctions. The value of exports then increased from 2010 through November The sharpest increase was from 2011 to Because OFAC implemented the General License for exports of food in October 2012, it seems possible that this increase in the value of exports could be attributable to the General License. It also seems reasonable to conclude that any negative impact of the 2010 financial sanctions on U.S. food exports to Iran diminished in the following years. However, more recent data shows a drop in exports between 2013 and Chapters 3, 4, 7, 8, and 10 of the HTS cover the following products respectively: (3) fish and crustaceans, mollusks and other aquatic invertebrates; (4) dairy produce; birds eggs; natural honey; edible products of animal origin, not elsewhere specified or included; (7) edible vegetables and certain roots and tubers; (8) edible fruit and nuts; peel of citrus fruit or melons; and (10) cereals. Page 24 of 38

28 700, , , , , , , US Food Exports to Iran (in 1000s U.S. Dollars) YTD Food Exports (Ch. 3, 4, 7, 8, 10) With respect to medicine, defined here as all exports under HTS Chapter 30 (pharmaceutical products), the value of U.S. exports to Iran spiked in After 2009 exports underwent a sharp decrease in 2010, the year in which the United States enhanced financial sector sanctions. The value of medicine exported from the United States to Iran continued to decrease in 2011, 2012, and through September The continued decrease in the value of medicine exported to Iran may suggest that the financial sector sanctions have had a negative impact on these exports. 70, , , , , , , US Medicine Exports to Iran (in 1000s U.S. Dollars) US Ch. 30 Exports YTD With respect to exports of medical devices, defined here as exports captured under relevant subheadings of HTS Chapter 90 (optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof), the data reveal a general trend of increasing value of exports through There is no noticeable decrease or flattening in the value of exports in 2010, the year in which the United States enhanced financial sector sanctions. Also, notably, the value of exports decreased substantially through 2014 to date. This decline seems inconsistent with OFAC s October 2012 Page 25 of 38

29 Thousands of Dollars issuance of the General License for certain medical supplies and the expansion of the list of eligible items in July 2013, but may corroborate an effect attributable to financial sanctions. 30, , , , , , US Medical Device Exports (in 1000s U.S. Dollars) YTD , 9025 US Exports We also reviewed quarterly reports issued by OFAC from the first quarter of 2010 through the third quarter of 2013 in connection with license applications and licenses granted (and related license amendments) for exports of agricultural commodities, medicine, and medical devices to Iran. 110 The overall number of license applications as well as licenses and license amendments issued is erratic over time. It is difficult to discern a clear trend with respect to license applications; however, there appears to be a slight downward trend in the third quarter of 2012 and an overall downward trend in Additionally, the number of licenses and license amendments issued seems to have experienced a significant downward trend since The licensing numbers do not reveal anything about the value or significance of the licensed exports. However, the post-2012 decline could reasonably be interpreted as supporting anecdotal evidence that exporters and would-be exporters of humanitarian goods to Iran may be holding back to some degree. 110 OFAC submits quarterly reports to Congress pursuant to Section 906(b) of the Trade Sanctions Reform and Export Enhancement Act of 2000 ( TSRA ) covering its processing of license applications requesting authorization to export agricultural commodities, medicine, and medical devices to Iran under the licensing regime set forth in Section 906 of the TSRA. The quarterly reports OFAC submits to Congress pursuant to TSRA may be found at the following website: Page 26 of 38

30 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Iranian License Applications Agricultural Commodities Medicine Medical Devices Total Iranian Licenses and Amendments Issued Agricultural Commodities Medicine Medical Devices Total Turning to the EU, as discussed above, the EU implemented sanctions consistent with UN Security Council resolutions over the course of 2006 through In 2010, and again in 2012, the EU strengthened its sanctions regime. As reflected in the tables below, EU trade data through 2012 do not necessarily reflect fluctuations in export levels coinciding with the Page 27 of 38

31 implementation of these new sanctions. However, because the data are available only through year end 2013, the full effect of the most recent enhancements to the EU sanctions regime may not be apparent here. With respect to food, the value of EU exports spiked in 2008 and peaked in 2012, before declining sharply in In 2008 and 2012, the upward spike appears to be a result of a disproportionately large amount of wheat exported that year. After 2008, the lowest level of food exports occurred in The EU put in place heightened sanctions in 2010, so it is possible that the decrease could be related to these new measures. This decrease, however, is difficult to reconcile with the dramatic increase of food exports in 2012, which occurred under an even more restrictive sanctions regime. 1,000, , , , , EU Food Exports to Iran (in 1000s Euro) Total EU Food Exports With respect to EU exports of medicine, there is a general trend of increasing value of exports through 2013, with a slight decline in There is no noticeable decrease or flattening of value of exports in 2010 or 2011, suggesting that the enhanced sanctions implemented in 2010 did not hinder the export of medicine from the EU. 800, , , , , , , , EU Medicine Exports to Iran (in 1000s Euro) EU Ch. 30 Total Page 28 of 38

32 With respect to EU exports of medical devices, there is a peak in 2006, before the institution of any UN or EU sanctions, and a sharp drop in From 2007 through 2011, the data show a general trend of increasing value of exports. There is no noticeable decrease or flattening of value of exports in 2010 or 2011, suggesting that the enhanced sanctions implemented in 2010 did not hinder the export of medicinal devices from the EU. The value of exports, however, has decreased in 2012 and 2013, which could be related in part to the most recent tightening of sanction that occurred in late EU Medical Device Exports to Iran (in 1000s Euro) 500, , , , , EU Ch. 90 Total Taken together, no clear trend of diminished humanitarian trade emerges that could be attributed to U.S. and/or EU sanctions. One noteworthy item, however, is the disparity in the volume of exports between the U.S. and the EU, with the EU surpassing exports to Iran by the United States by several orders of magnitude. This could suggest that, even if U.S. sanctions have chilled humanitarian exports from the United States, they have not had a similar effect on exports from the EU, despite their potential extraterritorial application. Moreover, it would also appear that any diminished use of U.S. humanitarian exemptions may have been more than offset by EU exports to Iran of humanitarian goods in the same basket categories. Page 29 of 38

33 Thousands of euros 900, US and EU Humanitarian Exports (by category) 800, , , , , , , , Year US Food Exports US Medical Devices Exports EU Ch. 30 Total US Medicine Exports Total EU Food Exports EU Medical Devices Exports C. Evaluating the Evidence in Context Anecdotal evidence and trade data do not provide clear support for the hypothesis that recent sanctions have chilled humanitarian trade; nor do they provide clear support for a finding that humanitarian trade with Iran is not impinged by the myriad sanctions regimes that apply to dealings with Iran. As discussed above, with respect to the U.S. sanctions regimes, anecdotal evidence suggests that contemplated humanitarian trade transactions have not occurred or have not been pursued because of the risk associated with such transactions and/or actual or perceived difficulties in navigating the sanctions programs once a transaction is underway. Some human rights advocates and journalists point to the U.S. and EU sanctions regimes as the reason behind current shortages of critical medicines and convey the message that, while humanitarian trade is authorized under certain provisions, it is effectively prohibited because of sanctions related to the financial sector. It is undeniable that the sanctions regimes, particularly the U.S. sanctions regime, is difficult to comprehend and, even when understood, can be bewildering in its nuances. The patchwork of Executive Orders, statutes, Department of Treasury and Department of State regulations and the intricacies of how these regimes interact is difficult for commercial buyers and sellers to understand and navigate. Recent moves by the U.S. government (issuing general licenses for food, medicine, medical supplies, expanding the list of eligible medical supplies, issuing guidance regarding permissible activities by non-u.s. persons, stating that it will identify a dedicated financial channel for humanitarian trade with Iran) suggest a recognition of this complexity and an attempt to confirm and clarify the permitted activities related to humanitarian trade. Page 30 of 38

34 Even so, there has been no substantial apparent increase in U.S. humanitarian trade with Iran, and perhaps that is informed by the nature of the transactions and other non-sanctions related considerations. First, in large part, the transactions considered in this report are commercial transactions with commercial actors. As such the sellers, buyers, financial institutions, and other parties involved must analyze the risks and benefits of the transactions. While the sellers and buyers risk potential financial loss associated with a failed transaction, non- U.S./non-Iranian foreign financial institutions involved may be barred from opening or maintaining payable through or correspondent accounts in the United States, a potentially crippling consequence. Until financial institutions develop a level of comfort with the permissible activities related to humanitarian trade, often the risk/benefit analysis will lead such institutions to decline to support transactions involving Iran even though they are permissible under the sanctions regimes. The proposed dedicated financial channel that may emerge as a result of the P5+1 negotiations could remove some of the perceived risk for financial institutions involvement in humanitarian trade, and if understood and utilized, may lead to increased humanitarian trade. Until such a time, however, transactions related to humanitarian trade may remain commercially unappealing and potential buyers and sellers may not be able to find financial institutions and other third parties to support these transactions. VI. Hypothetical Examples of Permitted Transactions under the Humanitarian Exemptions Examples of permissible transactions under the U.S. and EU humanitarian exemptions include: Page 31 of 38

35 A UK company may export influenza and rabies vaccines as well as pharmaceutical products and devices for diabetes care, all manufactured in Germany, to entities owned or controlled by the Government of Iran. Under the EU sanctions regime, there is no obligation to ensure that the goods are not being transferred to persons or entities that are designated by the European Union or the United States. However, if the UK company is owned or controlled by a U.S. parent company, the UK company must ensure that the products are not being transferred to SDNs, and OFAC-specific authorization may be required. products Products made in Germany sold to Exported to UK Company Goverment of Iran If UK company is owned by U.S. Parent, U.S. Sanctions apply If UK company is owned by a U.S. Parent company: It must ensure that: the products are not being transferred to an SDN, and it may be required to seek specific OFAC licensing if the transaction does not qualify for a general license under ITSR. Page 32 of 38

36 A German company may honor letters of credit and guarantees from non-designated Iranian banks in connection with customer transactions related to the sale of biopharmaceutical products to Iran. Transfers below EUR 100,000 or equivalent may occur without prior authorization of the German government. However, transfers equal to or above EUR 10,000 or equivalent must be reported to the relevant German authority in advance in writing. Nondesignated Iranian Bank Letters of credit and guarantees German company Related to transactions of biopharmaceutical products Transfers equal to or below EUR 100,000 No prior authorization necessary Transfers equal to or above EUR 10,000 Must be reported to the relevant German authority in advance Page 33 of 38