OFAC Enforcement Update

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1 OFAC Enforcement Update November 9, The Treasury Department's Office of Foreign Assets Control (OFAC) implements and enforces US economic sanctions. These sanctions proscribe certain transactions with various governments, businesses, groups, and individuals. OFAC issued its latest enforcement update on November 8, 2011; the two civil penalties identified in the update are quite modest, but the circumstances described underscore noteworthy trends in published OFAC enforcement cases. In the first case, Wilson Tool International agreed to pay $15,000 to settle an alleged violation of the Iranian Transactions Regulations. Without a license, Wilson allegedly sold approximately $10,304 worth of tooling equipment to an entity in Iran in In the second case ASF, Inc. agreed to pay $5,400 to settle an alleged violation of the Iranian Transactions Regulations. Without a license, ASF allegedly facilitated the exportation of goods from a third country to Iran in 2006 (OFAC did not disclose the type or value of the goods). Both Wilson and ASF voluntarily cooperated with OFAC's investigation of the transactions. Neither company, however, voluntarily reported the alleged violations to OFAC. In OFAC's enforcement guidelines, OFAC has emphasized the importance of voluntary disclosures by stating that the penalty amount generally will be only 50% of what it would be had the company not made a voluntary disclosure. OFAC has published 19 enforcement actions in In every published case, the allegations have involved: (1) violations of the Iranian Transactions Regulations and/or (2) lack of voluntary disclosure by the alleged violator. Sixteen of the 19 published cases have involved violations of the Iranian Transactions Regulations; only in five of the 19 published cases did the companies make full voluntary disclosures to OFAC. There are many OFAC enforcement cases that are not published, so one should be wary of relying too heavily on the published cases. But, at a minimum, the trends in the published cases indicate that OFAC takes a very grim view of any violation of the Iranian Transactions Regulations, regardless of how minor the transaction might appear, and that OFAC similarly takes a grim view of any other violation that is not voluntarily reported to OFAC. We will continue to monitor OFAC enforcement actions. If you have any questions regarding OFAC matters, please contact Ed Krauland at , Meredith Rathbone at , Stephen Heifetz at , Julia Court Ryan , Michael Gershberg at , Jack Hayes at , Michael Lieberman at , Teddy Nemeroff at , or Henry Smith at , in our Washington office, or David Lorello at in our London office.

2 U.S. Export Controls and Sanctions Laws Enforced Against Non-U.S. Companies Meredith Rathbone, Attorney, Steptoe & Johnson LLP, Washington DC, and Dr. Michael Sánchez Rydelski, Rechtsanwalt, Steptoe & Johnson LLP, Brüssel, contact: U.S. export controls and sanctions laws have broad extraterritorial reach. The U.S. Government agencies enforcing these laws have not hesitated to enforce them against non-u.s. companies. This article provides a short overview of some recent enforcement actions taken against non-u.s. companies for violations of U.S. export controls and sanctions laws. ITAR The Department of State, Directorate of Defense Trade Controls ( DDTC ) is responsible for administering and enforcing the International Traffic in Arms Regulations ( ITAR ). DDTC actively investigates ITAR violations committed by both U.S. and non-u.s. companies, and does impose civil penalties against non-u.s. companies for such violations. Criminal penalties for violations of the ITAR range from a fine of up to $1 million, statutory debarment for three years from engaging in ITAR-related activities, and imprisonment for up to ten years per violation. Civil penalties of up to $500,000 per violation and debarment for up to three years may be imposed. Because ITAR-related infractions often involve multiple violations, including multiple shipments or transfers, inaccurate paperwork, etc., DDTC often takes the position that what a company may view as one transaction actually constitutes multiple individual violations with the potential to result in penalties of many millions of dollars. In addition to the penalties described above, DDTC may require that companies implement other remedial measures, for example, undergoing audits conducted by third-party auditors, hiring a compliance officer, or implementing certain DDTC-mandated improvements to the company s compliance procedures. Though DDTC has imposed penalties on other non-u.s. entities for violations of export controls laws, we focus here on a relatively recent enforcement action against a German company and its U.S. affiliate. In January, 2010 a German company, Interturbine Aviation Logistics GmbH ( Interturbine Germany ), and its U.S. branch office in Texas ( Interturbine Texas ) (collectively, Interturbine ) agreed to a $1 million penalty for an unlicensed export of an ITAR-controlled product to Germany. Specifically, the case involved exports of a heat resistant protective coating capable of use on missiles. According to DDTC s draft charging letter, Interturbine had purchased the product from a U.S. manufacturer originally believing it was EAR controlled. The U.S. manufacturer later notified its customers, including Interturbine, that the product was ITAR-controlled, and Interturbine made the change in its computerized inventory system.

3 Shortly thereafter, Interturbine business development personnel learned that another German company, Bayern-Chemie, was unable to continue to obtain the product from the United States. Although the business development personnel allegedly knew that the product was now ITAR-controlled, they nonetheless decided to pursue to sale and undertake the export to Bayern-Chemie without a DDTC license. Intertubine Texas placed an order for the product with the U.S. manufacturer and shipped it to Germany. The export paperwork incorrectly indicated that no license was required for the export of the product to Germany. Interturbine business development personnel allegedly falsified internal company paperwork to conceal the export. When Bayern-Chemie received the shipment it refused to pay Interturbine for the shipment absent proof of U.S. export authorization from Interturbine. Ultimately the product was returned to Interturbine Germany, which shipped the product back to the United States where it was seized by U.S. Customs officials. Charges against Interturbine included, among other things: (1) unauthorized exports of ITAR-controlled defense articles; (2) misrepresentation and omission of facts on export documentation; (3) willfully causing an unauthorized export; (4) for the Texas branch office, failing to register with DDTC as an exporter of defense articles; and (5) unauthorized retransfer of ITAR-controlled defense articles within Germany to a third party. The consent agreement entered into between DDTC and Interturbine states that of the $1 million in penalties assessed by DDTC, $900,000 were suspended provided that (1) the parties do not violate the terms of the consent agreement or the ITAR, and that they do not seek to engage in ITAR-related trade for two years; and (2) the parties implement significant remedial export compliance measures. Interturbine and its U.S. affiliate were not formally debarred from engaging in ITAR-related transactions, largely because of their cooperation with DDTC in the matter and their implementation of remedial compliance measures. In addition to the monetary penalties, Interturbine agreed to create an office to manage U.S. export compliance, to allow DDTC to audit its facilities, and to retain a DDTC-approved consultant to conduct audit s of the company s export compliance. EAR The Department of Commerce s Bureau of Industry and Security ( BIS ) administers and enforces the Export Administration Regulations ( EAR ). BIS routinely issues penalties against both U.S. and non-u.s. companies. Civil penalties for violations of the EAR can range up to the greater of $250,000 or twice the value of the transaction at issue. Criminal penalties can be up to $1 million and/or 20 years imprisonment. Violators may also be denied export privileges. As with DDTC, BIS often takes the position that a single unlawful export results in multiple violations of the EAR, counting not only the actual product shipment, but also related shortcomings involving export paperwork as separate violations of the EAR. Below are a few examples of recent penalties imposed by BIS on non-u.s. companies.

4 In September, 2009, five separate non-u.s. subsidiaries of a U.S. company, Thermon Manufacturing, entered into individual settlement agreements with BIS relating to their respective involvement in the unauthorized export of U.S.-origin products to Iran, Libya, and Syria, as well as to a company listed on BIS s Entity List. The settlement agreements with the non-u.s. subsidiaries, including those located in the Netherlands, the United Kingdom, India, and Japan, were concluded following a voluntary disclosure submitted by Thermon to BIS notifying it of the unauthorized exports. The products exported were heat tracking equipment classified as EAR99 and not listed on the Commerce Control List. It was alleged by BIS that the subsidiaries ordered the product from the U.S. parent company without informing the U.S. parent company of the destinations or end users. In most cases the U.S. parent company had informed its subsidiaries of restrictions on the export of U.S.-origin products to sanctioned countries and entities. The subsidiaries agreements with BIS resulted in penalties of approximately $175,000. Another recent enforcement action resulted in a December, 2010 settlement agreement between BIS and a Chinese company, PPG Paints Trading, for the unlawful export of U.S.-origin items to a Pakistani nuclear plant on the BIS Entity List. The Chinese company agreed to pay $1 million in penalties and to undergo two export compliance audits to be undertaken by a third-party auditor.. Sanctions The Department of the Treasury s Office of Foreign Assets Control ( OFAC ) frequently imposes fines on U.S. and non-u.s. companies for violations of the economic sanctions programs that it administers against Iran, Cuba and several other countries and specifically-listed entities. The penalty amounts for each sanctions program is determined based on the statute pursuant to which the specific sanctions regulations were promulgated. The maximum civil penalties for violations of OFAC sanctions programs can be up to the greater of $250,000 or twice the value of the transaction at issue, and the maximum criminal penalties can include fines of up to $1 million and/or 20 years imprisonment. In December, 2009, in one of the largest fines ever imposed for violations of U.S. sanctions laws, the Swiss bank, Credit Suisse, agreed to penalties of $536 million payable to the United States Government and the State of New York. At the same time, and as part of that settlement, Credit Suisse entered into a consent agreement with OFAC. The activities allegedly engaged in by Credit Suisse involved a systematic pattern of conduct from 1995 onward constituting violations of U.S. economic sanctions laws and regulations against Iran, Sudan, Libya, Myanmar (Burma) and Cuba. Specifically, in certain transactions with U.S. banks, Credit Suisse allegedly removed, omitted or falsified references to sanctioned countries, persons, and entities. For example, the bank manually deleted certain Iranian names from messages to the U.S. banks, replacing them with initials or other vague references to customer orders. Credit Suisse also instructed Iranian customers on how to provide information in a way that would avoid detection by OFAC screening mechanisms employed by U.S. banks. Similar activities were undertaken relating to certain Libyan and Sudanese-related transactions.

5 As part of its settlement agreement, Credit Suisse admitted to one count of violating laws and regulations prohibiting transactions with the United States that evade or avoid, or have the purpose of evading or avoiding, U.S. sanctions. Credit Suisse also admitted to certain violations of New York Law making it a crime to defraud another by making or causing a false entry in, or preventing the making of a true entry in, the business records of the other entity. Credit Suisse also agreed to implement several compliance measures designed to prevent additional violations of U.S. sanctions laws. Earlier in 2009, Lloyds TSB, a British bank, agreed to penalties of approximately the same amount for similar types of violations of U.S. sanctions laws. Conclusion The U.S. Government has long reserved the right to enforce its export controls and sanctions laws extraterritorially against non-u.s. companies. The cases described above demonstrate a renewed focus on enforcement of such laws against non-u.s. entities. Non-U.S. companies should be cognizant of the extent to which their business activities have a U.S. nexus that is sufficient in the eyes of the U.S. Government to subject them to U.S. jurisdiction, and likewise should ensure that their compliance programs account for and seek to minimize the risk of liability under U.S. export controls and sanctions laws. Meredith Rathbone ist Attorney bei Steptoe & Johnson LLP in Washington DC. Frau Rathbone ist Mitglied der International regulatory Compliance -Fachgruppe. Sie ist auf rechtliche Fragen im Zusammenhang mit der ITAR, EAR, US-Sanktionen und Gesetzen spezialisiert. Sie erreichen sie unter oder per an mrathbone@steptoe.com. Dr. Michael Sánchez Rydelski ist deutscher Rechtsanwalt und arbeitet für Steptoe & Johnson LLP in Brüssel. Herr Sánchez Rydelski ist seit vielen Jahren im Exportkontrollrecht spezialisiert. Sie erreichen ihn unter oder per an msanchez@steptoe.com.

6 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order August 14, The U.S. Congress and President Obama took action recently to further tighten sanctions against Iran. On August 1, 2012, Congress passed H.R that will: (1) impose sanctions on certain non-u.s. entities conducting business with Iran; (2) counter Iran s efforts to evade existing sanctions through additional measures; and (3) expand existing sanctions that are available under the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 ( CISADA ). This legislation focuses on Iran s oil and gas sector, prohibiting non-u.s. companies that engage in Iran s oil and gas sector from trading in the U.S. market and imposing new restrictions on Iran s nationalized oil companies. These new restrictions would broaden the sanctions that can be imposed for human rights abuses, particularly targeting the use of information technology that may potentially be used to facilitate such abuses. Notably, the legislation would extend IEEPA-based sanctions against Iran to foreign subsidiaries of U.S. companies, and establish new monitoring and reporting requirements that are likely to expose more non-u.s. companies to sanctions risks. President Obama signed this legislation on August 10, Also, on July 30, 2012, President Obama issued Executive Order ( E.O. ) 13622, which, among other measures, imposes new sanctions targeting the Iranian energy and petrochemical industries and expanding the existing sanctions available under the National Defense Authorization Act for Fiscal Year 2012, Public Law ( NDAA ). These new U.S. sanctions are intended to limit Iran s ability to establish new payment mechanisms for the purchase of Iranian oil, and curtail the purchase or acquisition of petrochemical products from Iran. Further, the E.O. authorizes sanctions against individuals and entities providing material support to the National Iranian Oil Company ( NIOC ), Naftiran Intertrade Company ( NICO ), or the Central Bank of Iran, as well as on those engaged in the Iranian Government s purchase or acquisition of U.S. bank notes or precious metals. Exempted from the additional sanctions in the E.O. are persons conducting or facilitating transactions involving certain natural gas and pipeline projects from Azerbaijan to Europe and Turkey. Below we provide a high-level summary of the recent legislation and the Executive Order. Congressional Legislation On August 1, 2012, the Senate and the House of Representatives passed the Iran Threat Reduction and Syria Human Rights Act of 2012 (H.R. 1905). The legislation introduces new sanctions that can be imposed on entities facilitating Iranian transactions, addresses Iran s efforts to bypass existing sanctions, and amends the Iran Sanctions Act of 1996 ( ISA ) and CISADA. Specifically, the legislation targets the following sectors and categories of activities: A. Iran s Oil and Gas Sector Section 212 authorizes sanctions against any persons providing underwriting, insurance, or reinsurance services to NIOC, the National Iranian Tanker Company ( NITC ), or successor entities to such companies. The proposed legislation exempts from sanctions those persons who provide underwriting, insurance or reinsurance services where it can be demonstrated that the person conducted appropriate due diligence to ensure that the services were not provided to NIOC or NITC. Further, the President is

7 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order not authorized to impose sanctions relating to underwriting, insurance or reinsurance services where those services are provided solely for the provision of agricultural commodities, food, medicine, medical devices, or humanitarian assistance for the people of Iran. The legislation further targets Iran s national petroleum industry. Section 201codifies Executive Order of November 21, 2011, which sanctions any transaction that could directly and significantly contribute to Iran s ability to develop domestic petroleum resources (if a single transaction is $1 million or more, or a series of transactions from the same entity have an aggregate fair market value of $5 million or more in a 12-month period), or could facilitate or expand Iran s domestic production of petrochemical products (if a single transaction is $250,000 or more, or a series of transactions from the same entity have an aggregate fair market value of $1 million or more in a 12-month period). The legislation utilizes E.O s definition of petrochemical product to include any aromatic, olefin, or synthetic gas, and any derivate of such a gas, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea. The bill directs the President to impose five or more ISA sanctions on any party violating the ISA as amended including: Any person that purchases, subscribes to, or facilitates the issuance of Iranian sovereign debt (Section 201), and debt of any entity owned or controlled by the GOI issued on or after the law is enacted (Section 213). Any person engaged in investments that include infrastructure to support the delivery of refined petroleum products (including roads, railways, and ports); any person that barters or contracts by goods or services (including insurance and reinsurance) for the exportation of refined petroleum products (Section 201). Any person that knowingly participates in a joint venture relating to the development of petroleum resources outside Iran where the joint-venture was established on or after January 1, 2002 and where the GOI is a substantial partner or investor, or through which Iran could receive technological knowledge or equipment (Section 201). The joint venture prohibition would extend to energy-related or uranium mining, production, or transportation joint ventures in which the GOI is a substantial partner or investor, where uranium is transferred to Iran, or where the GOI could receive know-how not previously available to it (Section 203). The term substantial is not defined in the legislation. Persons have 180 days to terminate such joint ventures or otherwise risk being subject to sanctions. Any person determined to be the controlling beneficial owner, operator, controller, or insurer of a vessel that transports crude oil from Iran, on or 90 days after the enactment of the Iran Threat Reduction and Syria Human Rights Act of 2012, where any beneficial owner had actual knowledge, or the owner or operator knew or should have known, how the vessel was used. The sanction applies only where the President has determined there is a sufficient supply of petroleum products under NDAA Section 1245(d) and the country to which the oil is destined to has not received an exception under Section 1245(d)(4)(D); and any person, including the owner, controller, or insurer, concealing the Iranian origins of petroleum products transported on the vessel (Section 202). The President may prohibit a vessel owner, operator, or controller from landing at a United States port for up to 2 years after the date on which the President imposed those sanctions. The legislation also specifically refers to the persons identified by the Department of Treasury, Office of Foreign Assets Control ( OFAC ) as evading or concealing their Iranian origin (see our previous advisory here).

8 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order Section 204 also expands the ISA to allow the President to: (1) prohibit any U.S. person from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person (without defining significant ); (2) exclude any corporate officer, principal of, or shareholder with a controlling interests in a sanctioned person from entry into the United States; and (3) impose any sanction available under the subsection, including prohibition from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person and exclusion from entry into the United States, on the principal executive officers of any sanctioned person. The legislation also adds detailed requirements to the reporting obligations set forth in the CISADA regarding the importation to and exportation from Iran of crude oil and refined petroleum products. Such details include reporting on the volume of, the persons selling and transporting, and the financing of the importation and exportation of crude oil into and out of Iran. It also amends CISADA to require the Administration to investigate whether NIOC and NITC are agents and affiliates of the Iran Revolutionary Guard Corps, and to block transactions under U.S. jurisdiction that relate to the purchase, or financial services relating to the purchase, of petroleum or petrochemical products from these entities. Section 603 exempts from the sanctions certain natural gas projects that involve the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Europe and Turkey in furtherance of a production sharing agreement or license awarded by a sovereign government other than the Iranian Government. While not explicit, this exemption would appear to be directed at the Shah Deniz gas development project in the Caspian Sea region. This exemption does not apply where the President certifies that an Iranian entity: (1) has increased its equity interest in the project relative to the interest it held on January 1, 2002, or (2) has assumed an operational role in the project. An Iranian entity, as defined in the legislation, includes any entity that is: owned or controlled by the GOI; organized under the laws of Iran or with the participation or approval of the GOI; owned or controlled by another entity that is owned or controlled by the GOI or controlled by Iranian law; or a successor entity to any such entity. It is not clear whether any increase in the equity interest by an Iranian entity or the Government of Iran writ large (e.g., a different Iranian entity that is owned by the Government of Iran) vitiate the exemption. Moreover, the legislation does not expound on the notion of an operational role. B. Transportation of Goods Related to Proliferation or Terrorism-Related Activities Section 211 requires the President to block and prohibit any transaction in property, which is in the United States or within the possession or control of a U.S. person, of any person who knowingly provides a vessel, insurance or reinsurance for transportation services, or any other shipping services to transport goods to or from Iran that could materially contribute to the GOI s proliferation of weapons of mass destruction-related activities. These restrictions extend to persons that own, have a controlling interest in, or are successor entities to persons providing such transportation services. C. Financial Institutions Section 216 broadens CISADA s scope by applying its restrictions to any foreign financial institution that facilitates, participates or assists in, attempts or conspires to facilitate or assist in, or is owned or controlled by a foreign financial institution that engages in a number of prohibited activities described in section 104(c)(2) of CISADA. These activities include, but are not limited to, supporting Iran s efforts to

9 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order acquire or develop weapons of mass destruction or efforts to support terrorist organizations. Section 217 also continues the blocking of property and restrictions on financial transactions relating to property of the GOI, the Central Bank of Iran, and sanctions evaders, as identified pursuant to Executive Order Section 220 authorizes, but does not require, the President to impose sanctions on global financial communications services providers, such as the Society for Worldwide Interbank Financial Telecommunications ( SWIFT ), that directly provide their services, or facilitate direct or indirect access to such services, to the CBI and other blocked Iranian financial institutions. The provision requires, within 60 days of enactment, a report to Congress of all known entities that provide or facilitate access to such services for the CBI or Iranian financial institutions designated under CISADA. Providers who have not terminated such services, or who serve as intermediary financial institutions for such messaging services, as well as their directors and significant shareholders, can be subjected to sanctions either under the International Emergency Economic Powers Act or CISADA within 90 days of enactment of the legislation. It appears the President has discretion to impose such sanctions. The legislation provides two exceptions to such sanctions, which appear to be aimed at exempting European institutions: (1) the provider is already subject to a sanctions regime under its governing foreign law that requires it to terminate the knowing provision or facilitation of specialized messaging services; and (2) the provider has terminated the knowing provision or facilitation of specialized messaging services for the CBI or other Iranian financial institutions, as identified by the governing foreign law. Section 503 of the bill expands the NDAA to explicitly exclude the sale of agricultural commodities from NDAA sanctions. Section 504 amends Section 1245(d)(3) to target only foreign central banks, and not foreign financial institutions owned or controlled by the government of a foreign country. In addition, it amends Section 1245(d)(4) to exclude only financial transactions that involve trade in goods or services between the country with primary jurisdiction over the foreign financial institution and Iran. Under this amendment, any funds owed to Iran as a result of such trade are credited to an account located in the country with primary jurisdiction over the foreign financial institution. Section 504 further allows a country to receive an exemption under 1245(d) (see our previous advisories here) where the country is significantly reducing its imports of Iranian crude oil. Where a country reduces its crude oil imports to zero, that country s financial institutions will continue to qualify for the exemption. This section of the legislation expands the measurement of significant reduction to include both the volume and price of purchases from Iran of petroleum and petroleum, whereas before significant reduction was based purely on imported volume. D. Parent Companies of Foreign Subsidiaries Engaging in Transactions with the Government of Iran The legislation prohibits any non-u.s. entity owned or controlled by a U.S. person from engaging in any transaction with the GOI or with any person subject to GOI s jurisdiction (a term that is not defined in the legislation and potentially could be interpreted broadly), if current U.S. laws prohibit a U.S. person, or a person in the United States, from engaging in such transactions. The legislation requires the President to prohibit such transactions no later than 60 days after enactment of H.R. 1905, unless the entity divests or terminates its business with the relevant subsidiary no later than 180 days after enactment. Failure of a non-u.s. entity to terminate such transactions would potentially subject the U.S. parent company to civil penalties.

10 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order E. Reporting and Disclosure Requirements Section 219 of the legislation requires all U.S. stock exchange-listed companies to disclose whether they or their affiliates have engaged in activities sanctionable under current U.S. law, including activities: (1) relating to Iran s oil, gas, and petrochemical industries; (2) supporting the proliferation of weapons of mass destruction; or (3) violating the Iranian Transactions Regulations ( ITR ). The legislation does not define the term affiliate, nor specify whether the requirement extends only to affiliates owned or controlled by the listed entity, or whether it also extends to other types of affiliates, such as parent or sister companies. Further, the legislation requires the Securities Exchange Commission to notify the President of such disclosure. Upon notification, the President is required to initiate an investigation into the possible imposition of sanctions on such companies, and determine whether to impose sanctions within 180 days after initiating the investigation. F. Human Rights Abuses The legislation includes sanctions against persons that commit, or assist in the commission of, human rights abuses in Iran. Sections 401and 402 expands CISADA sanctions to persons that have transferred, facilitated the transfer of, or provided any services relating to goods (including ammunition, chemical sprays, and water cannons) and technologies (including surveillance technology and other sensitive technologies ) used by Iran and any of its agencies or instrumentalities to commit serious human rights abuses. Section 412 further directs the Secretary of State to provide periodic guidelines on what constitutes sensitive technology. The President must submit to Congress a list of persons engaging in such activities 90 days after enactment. The list will include persons who help transfer or provide services to any entity organized under the laws of Iran or otherwise subject to the jurisdiction of the GOI, or any national of Iran, for use in or with respect to Iran, as well as transferring such goods or providing such services to the IRGC.. Executive Order of July 30, 2012 Authorizing Additional Sanctions With Respect to Iran A. Sanctions Targeting Foreign Financial Institutions Section 1 of the E.O. authorizes the Secretary of the Treasury to impose sanctions on a foreign financial institution when Treasury determines that the foreign financial institution has knowingly conducted or facilitated any significant financial transaction with NIOC or NICO for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran. Not included in the sanctions are sales or provision of products described in section 5(a)(3)(A)(i) of the Iran Sanctions Act of 1996 (Public Law ) (i.e., refined petroleum products), as long as the fair market value of the products is lower than the applicable dollar threshold in that section. The Treasury Department can prohibit the opening or maintenance of, or otherwise impose strict conditions on, a correspondent account or a payable-through account by the foreign financial institution in the United States. These restrictions seek to deprive foreign financial institutions found to be engaging in such transactions from access to the U.S. financial system. The above sanctions apply with respect to the acquisition or purchase or petroleum or petroleum products only if: (1) the President determines pursuant to the NDAA that there is sufficient supply of such products from countries other than Iran; and (2) an exception pursuant to NDAA does not apply for the country with primary jurisdiction over the foreign financial institution.

11 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order B. Various Sanctions on Individuals or Entities Regarding Purchases of Petroleum, Petroleum Products, or Petrochemicals The E.O. also authorizes the Secretary of State to impose sanctions on a person (defined as an individual or entity) when State determines that the person knowingly engaged in a significant transaction for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran. The sanctions can apply to: (1) successor entities of such persons; (2) entities which own or control such persons and had knowledge that the persons engaged in such activities; or (3) entities which are owned and controlled by (or under common ownership or control with) such persons and knowingly participated in such activities. The sanctions that may be imposed by the State Department, in conjunction with the Treasury Department, Commerce Department, the United States Trade Representative, the Export-Import Bank, and the Federal Reserve System, include: (1) Export-Import Bank denial of any guarantee, insurance, extension of credit, or participation in any extension of credit in connection with the export of any goods or services to the sanctioned person; (2) U.S. Government agencies refusing approval, where required, of the export or reexport of goods or technology to the sanctioned person; (3) precluding a sanctioned financial institution from acting as a primary dealer in U.S. Government debt instruments or from serving as an agent of the U.S. Government or repository for U.S. Government funds; and (4) prohibiting U.S. Government agencies from procuring or entering into procurement contracts for goods or services from the sanctioned person. In addition, the State Department may, in conjunction with the Treasury Department (which is responsible for implementing the following sanctions when selected by the State Department), prohibit a U.S. financial institution from making loans or providing credits to the sanctioned person of more than $10 million in any 12-month period (unless for projects to relieve human suffering); may prohibit any foreign exchange transactions subject to the jurisdiction of the United States in which the sanctioned person has any interest; and may prohibit transfer of credit or payments between financial institutions (or by, through, or to any financial institution) where such transfers or payments (subject to U.S. jurisdiction) involve an interest of the sanctioned person. When such sanction is selected by the State Department, the Treasury Department is also authorized to block all of the sanctioned person s property and interests in property in the United States, that come within the United States, or that are or come within the possession or control of any U.S. person (including a foreign branch of a U.S. person), and providing that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in, and may restrict or prohibit the direct or indirect importation of the sanctioned person s goods, technology, or services into the United States. The above sanctions apply with respect to the acquisition or purchase of petroleum or petroleum products only if: (1) the President determines pursuant to the NDAA that there is sufficient supply of such products from countries other than Iran; and (2) an exception pursuant to NDAA does not apply for the country with primary jurisdiction over the foreign financial institution. C. Sanctions on Individuals or Entities Providing Support to NIOC, NICO, or the Central Bank of Iran The E.O. also authorizes Treasury to impose additional sanctions on a person that the Treasury Secretary determines has materially assisted, sponsored, or provided financial, material, or

12 President and Congress Take Further Steps to Expand Iran Sanctions with New Legislation and Executive Order technological support for, or goods or services in support of, NIOC, NICO, or the Central Bank or Iran, or the purchase or acquisition by the Government of Iran of U.S. bank notes or precious metals. The sanctions authorized by the E.O. for violation of this provision are the blocking of any transaction involving the sanctioned person s property and interests in property which are in the United States, come within the United States, or are or come within the possession or control of any U.S. person, including any foreign branch of a U.S. person. D. Exemption Like the proposed legislation, the sanctions imposed by the E.O. do not apply to any persons engaged in conducting or facilitating a transaction involving a natural gas development and pipeline project initiated prior to July 31, 2012 to bring gas from Azerbaijan to Europe and Turkey in furtherance of a production sharing agreement or license awarded by a sovereign government other than the Iranian Government before July 31, Conclusion The new legislation has a number of significant provisions, apart from the incremental expansion of sanctions against Iran. For example, for the first time, non-u.s. companies that are owned or controlled by U.S. persons are now subject to the restrictions of the ITR. Non-U.S. persons who engage in certain energy related activities involving Iran but located outside of Iran can now be subject to sanctions. The legislation attempts to further limit the financing (including financing through barter type arrangements) and transportation logistics associated with Iranian petroleum and petroleum products. And there are significant new reporting and monitoring obligations that are intended to identify non-u.s. company involvement in the Iranian economy, which could lead to additional enforcement investigations and sanctions against such companies. Meanwhile, the E.O. expands U.S. sanctions against Iran by further targeting transactions and payments related to the petroleum and petrochemical industry of Iran. It expands upon sanctions in the NDAA in order to prevent circumvention of existing sanctions against Iran s oil industry, particularly with regard to payment mechanisms for the purchase of Iranian oil. We will continue to keep you apprised of developments regarding sanctions against Iran. If you have questions about this advisory or related sanctions questions, please contact Meredith Rathbone at , Ed Krauland at , Richard Verma at , Julia Court Ryan at , Alexandra Baj at , Jack Hayes at , Jeanne Cook in our Washington, DC office or Andy Irwin at in our Washington Office or in our Century City/LA office.

13 New Executive Order Targeting Foreign Evaders of US Economic Sanctions Against Iran and Syria May 3, Introduction On May 1, 2012, President Obama issued Executive Order Prohibiting Certain Transactions and Suspending Entry into the United States of Foreign Sanctions Evaders with Respect to Iran and Syria (Foreign Sanctions Evaders E.O. or Order). This Order authorizes the Secretary of the Treasury to prohibit a broad array of transactions involving foreign persons (foreign sanctions evaders) who have contravened existing US sanctions against Iran and Syria, or have facilitated deceptive transactions with respect to such sanctions. The Foreign Sanctions Evaders E.O. cites a series of prior executive orders to make clear that the new measures in the Order are meant to address foreign parties that attempt to evade US economic sanctions against Iran and Syria. As further explained in the related fact sheet, the US Government views such activities of foreign parties as undermining important national security and foreign policy efforts to address the Iranian and Syrian governments weapons proliferation, human rights abuses, and support for terrorism. Under the Foreign Sanctions Evaders E.O., the Treasury Department has authority to identify such evaders and prohibit US persons from conducting business with them, effectively excluding them from the US economic system. No such persons were designated along with issuance of the Order. Issued less than ten days after Executive Order 13606, Blocking the Property and Suspending Entry into the United States of Certain Persons with Respect to Grave Human Rights Abuses by the Governments of Iran and Syria via Information Technology (the GHRAVITY E.O.), the Foreign Sanctions Evaders E.O. marks the latest step in the United States Government s efforts to impose extraterritorial prohibitions on entities that have economic relations with Iran and Syria. Parties That Can Be Designated as Foreign Sanctions Evaders The Order permits the Secretary of the Treasury, in consultation with the Secretary of State, to prohibit transactions or dealings with foreign individuals or entities that: (1) have violated, attempted to violate, conspired to violate, or caused a violation of any existing Iran or Syria sanctions, and, where the conduct relates to property and interests in property of any person subject to United States sanctions concerning Iran or Syria, any non-proliferation or anti-terrorism sanctions; (2) have facilitated deceptive transactions for or on behalf of any person subject to Iran or Syria sanctions; or (3) are owned or controlled by, or acting or purporting to act on behalf of such a person or entity. The Order defines deceptive transaction as any transaction where the identity of any person subject to United States sanctions concerning Iran or Syria is withheld or obscured from other participants in the transaction or any relevant regulatory authorities. In turn, the term person subject to United States sanctions concerning Iran or Syria includes (1) any person with whom transactions are restricted pursuant to the various Executive Orders relating to Iran and Syria (expressly including the Governments of Iran and Syria), and (2) persons whose property and interests in property are blocked pursuant to the International Emergency Economic Power Act (IEEPA) in connection with Iran s or

14 New Executive Order Targeting Foreign Evaders of US Economic Sanctions Against Iran and Syria Syria s proliferation of weapons of mass destruction or support for international terrorism. Prohibitions Imposed on Transactions Involving Foreign Sanctions Evaders Once foreign sanctions evaders are designated, the Order prohibits any transactions or dealings involving designated evaders that are related to goods, services, or technology located in or intended for the United States, or provided by or to any US person wherever located. Transactions or dealings includes exporting, reexporting, importing, selling, purchasing, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing goods, services, or technology. In essence, most commercial dealings with the designated foreign parties will be prohibited if there is a US nexus (involving US territory or a US person). The prohibitions do not involve the blocking of assets of foreign sanctions evaders. The Order expressly prohibits donations of humanitarian articles such as food, medicine, and clothing to or for the benefit of any foreign sanctions evader. Evaders also are barred from entering the United States. In addition, the Order prohibits US persons from engaging in transactions that involve evading, avoiding or causing a violation of, attempting to violate, or forming conspiracies to violate any prohibition set forth in the Order. The Order does not, however, prohibit transactions that occur within the course of official US Government business, nor does it prohibit transactions permitted by statute, regulations, or license, or undertaken pursuant to a contract, license, or permit, executed prior to the Order. The Order is silent as to whether individuals or entities can be designated as foreign sanctions evaders for conduct that occurred before May 1, Implications The Foreign Sanctions Evaders E.O. provides the US government with additional leverage to prevent non-us parties from engaging in commercial activity with Iran and Syria where that activity is inconsistent with US economic sanctions, foreign policy, and national security objectives. The Order appears to be the first time the United States has implemented economic sanctions based on the concept of facilitation of deceptive transactions. The Order s focus on designation for causing a violation or facilitating a deceptive transaction the latter of which includes withholding the identities from counterparties to a transaction of parties that are subject to Iranian or Syrian sanctions suggests potentially broad applicability. The Order may be designed to discourage, for example, the practice of a non-us company ordering US goods for later distribution to Iran or Syria without informing the US supplier. Similarly, the Order could be read to permit designation of non-us entities that do not inform US parties where Iranian or Syrian entities that are subject to US sanctions may benefit from financial transactions or services. Non-US distributors with incidental or occasional business with Iranian or Syrian customers (and who may not know at the time inventory is purchased the identity of the ultimate customer) may face compliance challenges to ensure that their activities do not fall within the definition of deceptive transactions (such as by withholding or obscuring parties to a transaction who may not yet be known). It is not clear if the concept of a deceptive transaction requires an intention to withhold information for a wrongful purpose, as opposed to a normal commercial practice of not supplying information regarding end-users or suppliers (as often is the case in distribution or reseller transactions).

15 New Executive Order Targeting Foreign Evaders of US Economic Sanctions Against Iran and Syria While programs previously implemented under IEEPA already prohibit activities that cause a violation, the provisions of this Order are more explicit as to the treatment of deceptive practices by foreign parties. Moreover, the US government may have more flexibility under the Order to designate a foreign party as a foreign sanctions evader than it would in pursuing civil or criminal sanctions violations through ordinary enforcement procedures and channels. US companies already are faced with a multitude of restricted parties to screen and exclude from transaction, so from a US company compliance perspective, the additional compliance burden is relatively limited. In contrast, the Order creates significant new challenges to non-us companies compliance efforts. While significant restrictions already apply to the provision of US goods, technology and service to Iran and Syria, under the Order, non-us companies now may have increased impetus to evaluate the existence of US goods, services and technology in their supply chains (or any other US nexus) if they conduct any business with Iran or Syria. Further, non-us companies may face additional compliance efforts to determine when they must identify to other transaction participants or relevant government authorities any parties to a transaction that are subject to US sanctions against Iran or Syria. If you have any questions about the Foreign Sanctions Evaders E.O., please contact Ed Krauland ( ), Meredith Rathbone ( ), Julia Court Ryan ( ), Jack Hayes ( ), Anthony Rapa ( ), or Charles Morris ( ) in our Washington office.