US Secondary Sanctions Against Iran: Why Arbitration And Financial Institutions Should Be Cautious


This post, which follows a recent submission Regarding the impact of the asset freeze on arbitral and financial institutions, discusses some of the issues that these institutions may face as a result of the restrictions that are part of the United States’ secondary sanctions against Iran. A third and final post will discuss the effects of secondary US sanctions against Russia.

US secondary sanctions currently in place against Iran

The US sanctions regime against Iran has a long and complex history: the US has imposed a multitude of restrictions on activities with Iran under various legal authorities since the 1979 seizure of the US embassy and the capture hostages of American diplomats in Tehran. Today, a fragmented and complex web of primary and secondary US sanctions against Iran remains in place.

While primary sanctions generally prohibit individuals and entities who are under (or who trade in goods or technology that fall under) the jurisdiction of the sanctioning state from engaging in commercial and / or financial transactions with a target, secondary sanctions threaten to impose sanctions on aliens individuals and entities that are outside the jurisdiction of the sanctioning state and are involved in transactions unrelated to that state, if such foreign individuals and entities maintain commercial and / or financial relations with a target. The US secondary sanctions, in particular, are “intended to force foreign companies to choose between doing business with the United States and […] sanctioned countries.1)

The Foreign Assets Control Office (“OFAC”) Of the United States Department of the Treasury, which has primary responsibility for the implementation of United States financial sanctions, maintains the“ List of Specially Designated Nationals and Stranded Persons ”(the“SDN List“) as a key part of its efforts.2) The SDN list contains individuals, companies and other entities whose assets are blocked, either because these individuals and entities are acting for or on behalf of, or are owned or controlled by a target state. , or under a non-country specific program, such as those targeting terrorists and drug traffickers.

A U.S. person – generally defined as any U.S. citizen or permanent resident alien, any entity organized under U.S. laws (including foreign branches), and any person in the U.S. – is generally prohibited from engaging in transactions involving a person or entity designated as SDN. In addition, non-U.S. Persons and entities (including foreign financial institutions) may, under certain sanctions programs, incur secondary sanctions for carrying out or facilitating material transactions involving a person or entity listed on the SDN list. This is particularly the case with a series of decrees (“OE”) Issued following the Trump administration’s withdrawal from the Joint Comprehensive Plan of Action (“JCPOA”) In 2018, including EO 13846 of August 6, 2018, EO 13871 of May 8, 2019 and EO 13902 of January 10, 2020. These OEs impose significant restrictions on non-U.S. Persons and entities, among others with respect to transfers of funds originating in Iran and / or effected by or on behalf of Iranian persons or entities.

Do the activities of Arbitration institutions and their banks Fall under US secondary sanctions against Iran?

EO 13846 mainly targets the Iranian energy, shipping and banking sectors. EO 13871, in turn, imposes sanctions on Iran’s iron, steel, aluminum and copper sectors. Finally, EO 13902, issued by President Trump following Iran’s strikes on two US military bases in Iraq, focuses on the construction, mining, manufacturing, textiles and finance of the Iranian economy.

These three OEs authorize the imposition of blocking sanctions on persons and entities providing material assistance to identified targets. As a result, it can be argued that an arbitration institution which manages a dispute involving (and requests payment of advances on the costs of) such a target could face freezing sanctions against any asset. that the arbitration institution could hold in the United States.

For example, it could be argued, on the basis of a literal interpretation of Article 1 (a) of OE 13846, that an arbitration institution risks incurring blocking sanctions if it manages a dispute involving among others the Iranian National Oil Company (NIOC), the Naftiran Intertrade Company (NICO), the Central Bank of Iran, any Iranian person or entity included in the SDN list or any other person or entity included in the SDN list whose ownership and interests in the property are blocked under OE 13846. Likewise, based on a strict interpretation of Section 1 (a) (iv) of OE 13871 and Section 1 (a) (iii) of OE 13902, it may be possible to argue that the administration of a dispute involving any person whose ownership and interest in the property is frozen pursuant to either of these OEs ( which can include anyone who operates in Iran’s iron, steel, aluminum or copper sector, and anyone who operates in the construction, mining, manufacturing, textile or financial sector Iranian economy, respectively) falls within the scope of sanctionable activities.

The three OEs also threaten non-U.S. Financial institutions with a blocking and correspondent account and a pass-through account (“CAPTA”) sanctions, which prohibit or impose strict conditions on the opening or maintenance by a foreign financial institution of a correspondent account or a transit account in a US bank.

For example, among other measures, EO 13846 provides, in section 2 (a) (ii), that CAPTA sanctions may be imposed on any financial institution determined to have knowingly carried out or facilitated any material financial transaction, among others on behalf of any Iranian person on the SDN list or any other person on the SDN list whose ownership and interest in the property is blocked in accordance with OE 13846. Similarly, section 2 (a) ( iii) of OE 13871 and section 2 (a)) (ii) of OE 13902 authorize the imposition of CAPTA sanctions on foreign financial institutions that knowingly carry out or facilitate material financial transactions for or on behalf of any person whose assets and interests in the property are blocked in accordance with EO 13871 or EO 13902, respectively. A “financial transaction” includes any transfer of value involving a financial institution, including in particular the receipt or issuance of wire transfers on behalf of or involving designated parties.3)

Arguably, these prohibited activities include the acceptance by a non-US bank of registration fees and advances on fees paid in arbitration proceedings.

Does the general authorization for legal services apply to arbitral institutions and their banks?

Notwithstanding the restrictions under EO 13846, 13871, and 13902, services provided by arbitral and financial institutions in connection with international arbitration proceedings may be deemed authorized under United States law, if such services are considered to be within the purview of scope of authorized legal services. and payments for legal services, as defined in the Iranian Transactions and Sanctions Regulations (“ITSR“).

Indeed, the prohibitions set out in the EOs apply except to the extent provided by laws or regulations, orders, directives or licenses. Section 560.525 (a) sperm 560.525 (d) of the ITSR authorizes activities and payments related to the initiation and conduct of legal proceedings, including arbitration proceedings, inside or outside the United States.

OFAC clarified that the transactions and activities authorized under this general authorization include reasonable and customary payments for the provision of legal services, as well as legal costs and fees.4) The authorization therefore probably also extends to the payment of registration fees and advances on costs. Note, however, that acceptance of these payments may still be subject to licensing under section 560.525 (d) (1) of the ITSR, and that the activities and transactions in question “should not involve persons designated on [the SDN List] in connection with Iran’s support for international terrorism or the proliferation of weapons of mass destruction (WMD), except where waived or authorized.5)

In any case, despite the existence of the aforementioned general authorization relating to legal services, it must be noted that the potential exposure to secondary sanctions weighs heavily on both banks and arbitral institutions. Financial institutions, in particular, are keenly aware of the proliferation and potential risks of US secondary sanctions, the failure of which could result in a bank being cut off from correspondence and transit accounts in the United States, or, in some cases, the designation of an SDN. As conservative market players, banks therefore often prefer to refrain entirely from conducting or facilitating any transaction with Iranian counterparties, even unsanctioned, and to avoid handling funds that may be linked to Iran.

While arbitral institutions have made a point of publicly declaring that sanctions only complicate but do not hamper the administration of arbitration proceedings, arbitral institutions and their banks should diligently monitor the risk of secondary sanctions in the assessment. current and future cases involving Iranian parties.

This article first appeared on the Kluwer Arbitration Blog here.

Written by Mercédeh Azeredo da Silveira, Stephan den hartog of AZHA Lawyers solidify

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