March 31, 2017
On March 21, the US government imposed new sanctions against a group of 11 entities and individuals for transferring technology and sensitive items to Iran’s ballistic missile program under the Iran, North Korea and Syria Nonproliferation Act (INKSNA). This piece of legislation authorizes the U.S. to impose sanctions against foreign individuals, private entities, and governments that engage in the proliferation of equipment and technology from Iran, North Korea, or Syria,controlled under multilateral control lists (such as the Missile Technology Control Regime, Australia Group, Chemical Weapons Convention, Nuclear Suppliers Group, Wassenaar Arrangement). INKSNA also provides for sanctions for the transfer of equipment or technology having the potential to make a material contribution to the development of weapons of mass destruction or ballistic missile systems.
This bold move by the Trump Administration comes a month after President Trump put Iran “on notice” following testing of its ballistic missiles, stating that Iran was “not behaving”. The new sanctions will be effective for two years.
Souring of U.S.-Iranian Relations
On January 16, 2016, Iran and the five permanent members of the United Nations Security Council — the U.S., France, U.K., Russia and China – as well as Germany began implementing their long-negotiated nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA). The aim of the agreement is to eliminate Iran’s nuclear infrastructure in exchange for the gradual lifting of economic sanctions against Iran by the U.S., E.U., and U.N.
On February 3, 2017, a few weeks after being sworn in as the US President, Trump undermined the multilateral deal by introducing a new round of sanctions against Iran following the country’s successful test-launch of a ballistic missile. Though vehemently denied by Tehran, Washington considered the testing to be a breach of U.N. Resolution and the JCPOA. As such, the U.S. Treasury Department imposed sanctions against 25 individuals and companies connected to Iran’s ballistic missile program and those providing support to Iran’s Islamic Revolutionary Guard Corps’ Qods Force. The Trump Administration described these sanctions as “initial steps” and said Washington would no longer turn a “blind eye” to Iran’s hostile actions.
Under the JCPOA, the U.S. has agreed not to implement new “nuclear-related” sanctions. Therefore, the most recent sanctions imposed are only with regard to Iran’s non-nuclear activities, such as its ballistic missile program, support for terrorism, and human rights abuses.
Potential for Far-Flung New Sanctions with Compliance Challenges
Moves to curb dealings with Iran are not limited to the White House. On 23 March, a bipartisan group of Senators introduced a bill, the so-called Countering Iran’s Destabilizing Activities Act of 2017, which would impose tighter sanctions against Iran over its ballistic missile tests and other non-nuclear activities.
The Senate bill would require the President to impose sanctions against US and foreign entities and individuals involved in Iran’s ballistic missile program.
If passed, the legislation would trigger new compliance challenges for US and non-US businesses, by creating the potential to:
- authorize new secondary sanctions, applicable to companies and individuals who may have little or no nexus to the US; and/or
- impose new sanctions on entities that would be subject to “blocking,” meaning that U.S. persons must freeze their assets, including bank accounts.
In the event an entity is sanctioned, restrictions would apply not only to the entity, but also to its parent company, subsidiaries, and affiliates.
IRGC as a “Foreign Terrorist Organization”?
The March 23 Senate bill does not propose to designate the Islamic Revolutionary Guard Corps as an “Foreign Terrorist Organization” (FTO), but according to recent a February CNN report the Trump administration may do this in the future.
The IRGC, which is a branch of Iran’s Armed Forces and protects its borders, also reportedly controls several major industry sectors in Iran. If such a move is made, it could have a serious impact on the sanctions relief promised under the JCPOA.
If the U.S. State Department designates the IRGC as an FTO, it would make it a criminal offense for all persons worldwide, not just U.S. persons, to provide “material support” to the Iranian military group.
U.S. financial institutions must block “any funds in which [a] foreign terrorist organization or its agent has an interest.” (31 C.F.R. §597.201). The applicable OFAC regulations define “agent” to include an individual or entity (1) owned by an FTO; (2) controlled by an FTO; or (3) acting or purporting to act directly or indirectly on behalf of an FTO. (31 C.F.R. §597.301).
If the IRGC is designated as an FTO, U.S. financial institutions could spend considerable resources determining whether transactions should be blocked as a result of an interest indirectly held by a party to the transaction that may be determined to be an “agent” of the IRGC.
Currently, the IRGC is designated as a Specially Designated National (SDN) on OFAC’s SDN List of sanctioned entities.
Newly Sanctioned Entities
According to the US Department of State, the 11 entities sanctioned on March 21, 2017 under the INKSNA for transfers to Iran’s missile program are:
- Beijing ZhongKe Electric Co. Ltd. (ZKEC) (China)
- Dalian ZenghuaMaoyiYouxianGongsi (China)
- Jack Qin (Chinese individual)
- Jack Wang (Chinese individual)
- Karl Lee [aka Li Fangwei] (Chinese individual)
- Ningbo New Century Import and Export Company Limited (China)
- Shenzhen Yataida High-Tech Company Ltd (China)
- Sinotech (Dalian) Carbon and Graphite Corporation (SCGC) (China)
- Sky Rise Technology [aka Reekay Technology Limited] (China)
- SaengPil Trading Corporation (SPTC) (North Korea)
- Mabrooka Trading (United Arab Emirates).
The following restrictions apply to the above sanctioned individuals and entities:
- No department or agency of the U.S. Government may procure or contract for any goods, services, or technology from the designated entities, except to the extent the Secretary of State otherwise may determine;
- The designated entities are ineligible for any assistance program of the U.S. Government, except to the extent the Secretary of State otherwise may determine;
- Government sales of any item on the U.S. Munitions List to these entities are prohibited, and sales of any defense articles, defense services, or design and construction services controlled under the Arms Export Control Act are terminated; and
New licenses will be denied, and any existing licenses suspended, for transfers of export- controlled items.
Retaliation by Iran
Iran has responded to Washington by imposing sanctions on 15 U.S. companies on Sunday for alleged human rights violations and cooperating with Israel. The sanctioned companies include ITT Corporation, United Technologies and specialty vehicles maker Oshkosh Corp.
Gert Demmink, Partner at Dutch compliance firm Philip Sydney, says that these new sanctions will “predominantly affect Iranian banks and their compliance staff as well as any businesses in Iran that do or would want to do business with the sanctioned U.S. entities, like Oshkosh. As these are mainly defense contractors, the likelihood of business between them and Iranian business is pretty slim.”
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