Iran Sanctions

Bulletin 6

Council Regulation (EU) No 961/2010 (“Regulation”)

nigel.kushner@whalerocklegal.com

Observations

During 2010, UK exports to Iran have clearly been impacted by both US sanctions and by the swift, bold and unified action taken by the EU. The Euro may be crumbling, each Member State may be blaming each other for their financial woes but sanctions appear to be a common denominator behind which the EU has united.  In the meantime, China is substantially increasing trade with Iran, stepping into the shoes of the western companies who have chosen to pull out. That Iran has this week announced that petrol prices have quadrupled is of no surprise and is a direct result of sanctions.

G5+1 talks: The discussions between the G5 + 1 and Iran in Geneva this month made little headway although a further round of talks in Turkey may take place very soon. In the meantime, the US has hinted at further sanctions. Quite where they may go from here is hard to say and they themselves were muted as to what form this might take.

Withdrawal of banking facilities: We have witnessed some sorrowful stories this year involving hitherto successful British companies exporting to Iran being thrown into disarray because their banking facilities have been withdrawn at a whim. Why are banks doing this? The answer lies in pressure from the US and in part, because they would rather cut Iranian business because of the administrative burden arising out of the new regulations.

Passing the buck: One impact of recent sanctions is that each of the parties in a transaction is seeking to pass the responsibility for sanctions compliance to the other along the chain. For example, customs authorities in the EU require a declaration that the goods are not covered by the October EU regulations. Often, the declarations they require in turn from those involved in the transaction are ill thought out, are wider than required and are passed through the chain. You cannot rely on a counterpart confirming the transaction does not breach relevant sanctions regulations. You need to check for yourselves.

Export Licences: Before October 2010, exporters required an export licence and sometimes faced delays obtaining this. Today, an export licence is invariably not required - you can either ship the goods, or you cannot. Further, you cannot just plug a code for the goods into ECO’s “Goods Checker” and thereby determine if the goods are listed in any of the Annexes to the new EU regulation. You have to interpret a complex and sometimes vague list yourself. The need for internal or external technical expertise has never been greater.

Sanctions Clauses: Many companies accept a clause requiring compliance with sanctions without question. Do so at your peril. Many of these clauses do not provide protection, can bind you to sanctions regimes which would not otherwise bind you and instead open up a nice opportunity for your counterpart to wriggle out of a contract if the market moves.

Opportunities: With so many players pulling out of the market, a fantastic opportunity has manifested itself for those who understand Iranian business to increase their market share in areas where trade is permitted.

EU Sanctions

In July 2010, major EU sanctions were announced but not implemented. The only implementation in July related to IRISL (Islamic Republic of Iran Shipping Lines) and other “Designated Persons” who became subject to an asset freeze. In October 2010, we saw some heavy hitting EU sanctions implemented into the UK following the announcement of EU Reg. 961/2010 (“Regulation”). These were the sanctions announced in July 2010 albeit with a few tweaks. On the plus side, this overhaul created one document with one set of rules and everything is helpfully under one roof.  Parts of the Regulation are policed by BIS and others by HM Treasury. Consequently, for one transaction you could end up supplying similar information to two sets of bodies. The Regulation applies:

  • within the territory of the EU;
  • to any EU national inside or outside the EU;
  • to any legal person, entity or body incorporated or constituted under the law of an EU Member State; and
  • to any legal person, entity or body in respect of any business done in whole or part within the EU.

This last limb is the subject of much debate in terms of its scope and applicability.

The Regulation contains 5 principal sections, as follows:

  • Export & Import Restrictions;
  • Restrictions on Financing;
  • Freezing of Funds and Economic Resources;
  • Restrictions on Transfers of Funds and on Financial Services; and
  • Restrictions on Transport.

Export & Import Restrictions

There are 5 annexes listing categories of goods and technology which are prohibited or restricted:

  • Annex I - Dual use goods, technology and software;
  • Annex II - Goods and technology which could contribute to Iran’s nuclear related activities;
  • Annex III - Goods which might be used for internal repression in Iran;
  • Annex IV - Goods and technology (other than those listed in Annex II) which could contribute to nuclear related activities in general (Note there has been a change since October 2010 – previously you could request authorisation to export or be involved with these goods but for all intents and purposes you are prohibited to deal with them save for exceptional circumstances); and
  • Annex VI - This annex lists key equipment and technology for the oil & gas industry in Iran.

Superficially, if you are involved in any shape or form in a transaction regarding any goods or technology listed in the above annexes, then it is prohibited to sell, supply, transfer, or export, directly or indirectly, whether or not goods/technology originate in the EU, to any Iranian person, entity or body  or for use in Iran. It is also prohibited to provide, directly or indirectly, technical assistance, brokering services, financing or financial assistance in relation to items listed in these annexes. Finally, you must not participate, knowingly and intentionally in activities the object of which is to circumvent the above prohibitions.

Please remember- Annex VI oil & gas products are prohibited notwithstanding they may not be used in the oil & gas industry. However, there is a carve out for Annex VI oil & gas related products. If the transaction was entered into prior to 25 October 2010 then you can continue to perform the contract (in certain circumstances) if you give 20 working days advance notice to BIS.  BIS have been very helpful recently in turning around approvals more quickly where circumstances require this in order for a transaction to proceed.

It is prohibited to purchase, import or transport from Iran the goods & technology listed in Annexes I, II and III, whether or not the item concerned originates in Iran.

Restrictions on Financing of Certain Enterprises

You cannot grant a financial loan or credit to, acquire or extend a participation in, or create a joint venture with an Iranian person, entity or body engaged in the:

  • manufacture of goods/technology listed in the Common Military List, or Annex I or II;
  • who are engaged in the manufacture of equipment which might be used for internal repression;
  • or who are engaged in exploration or production of crude oil and natural gas, the refining of fuels or the liquefaction of natural gas, (although there is a partial exemption for contracts or agreements concluded before July 26 2010)

Freezing of Funds and Economic Resources

This section substantially replicates the old rules on asset freezes. Annex VII lists UN sanctioned entities and Annex VIII lists EU sanctioned entities. They are often called “Designated persons”. They include companies, individuals and banks. All funds and economic resources belonging to, owned, held or controlled by Designated Persons shall be frozen. No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of Designated Persons. The participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent these measures is prohibited.

Payments due by Designated Persons under contracts concluded or obligations which arose before the date of designation may be released if the funds are used for a payment by a Designated Person; the contract or obligation does not relate to goods in Annex I, II, III and VI; and this will not result in funds or economic resources being made available, directly or indirectly to or for the benefit of a Designated Person.

Payments due under contracts concluded, or obligations which have arisen before the date of designation may be paid but will be frozen. So you may have to wait a while to get your money out but you must make payments in.

IRISL - Funds and economic resources of IRISL and of designated entities owned or controlled by IRISL are to be frozen. It is prohibited to load and unload cargoes on and from vessels owned or chartered by IRISL in EU ports (note there is an exemption for prior contracts). There is no requirement to impound or detain such vessels.

Restrictions on Transfers of Funds

Any transfer of funds to or from an Iranian person entity or body in excess of €10,000 must be notified to HM treasury or will be subject to prior authorisation by HM Treasury. “Transfer of funds” means any transaction carried out on behalf of a payer through a payment service provider by electronic means, with a view to making funds available to a payee at a payment service provider. This applies irrespective of whether the payer and the payee are the same person.

Payments of €10,000 or less: There are no requirements. These can be made as normal unless there are a series of transactions below €10,000 that appear to be linked. If this is the case, they should be notified to a competent authority.

Payments of more than €10,000 but less than €40,000: These must be notified in advance to a competent authority, whatever the transaction is for.

Payments of €40,000 or above: If they relate to foodstuffs, healthcare, medical equipment or humanitarian purposes, they must be notified in advance to a competent authority. If they are for any other purpose, they must be submitted to a competent authority in advance for authorisation.

Who is an “Iranian person, entity or body”? This means:

  • the State of Iran or any public authority thereof;
  • any natural person in, or resident in, Iran;
  • any legal person, entity or body ie a company having its registered office in Iran; and
  • any legal person, entity or body, i.e. a company inside or outside Iran, owned or controlled directly or indirectly by one or more of the above mentioned persons or bodies. This definition catches some English companies. For example, every English company that is a subsidiary of an Iranian company is potentially caught.  

Transfers of funds of €40,000 or more, must be authorised in advance. The authorisation will generally be given unless there are reasonable grounds to determine that the transfer of funds would contribute to certain defined activities. An authorisation shall be deemed granted, if the authority has received a request in writing for an authorisation and, within four weeks, has not objected in writing to the transfer of funds.

The Regulation requires that notifications and requests for authorisation relating to the transfer of funds to an Iranian person, entity or body shall be addressed by or on behalf of the payment service provider of the payer to the competent authorities of the Member State where the initial order to execute the transfer is given.

Notifications and requests for authorisation relating to the transfer of funds from an Iranian person, entity or body must be addressed by or on behalf of the payment service provider of the payee to the competent authorities of the Member State in which the payee is resident or the payment service provider is established. For example, where a payee in the UK is to receive a transfer of funds to an account with a bank in the UK, the bank must notify or seek authorisation as appropriate from the Treasury.

If you enter into a contract, obligation or agreement under which you may need to make or receive a series of payments to or from an Iranian person, entity or body over a period of time, it is possible to seek a single authorisation to cover all payments under the contract. A copy of the underlying contract (e.g. loan facility, letter of credit) together with details of the schedule of payments and any other relevant information should be supplied with each notification or prior authorisation request. You should make clear on the application that you are seeking authorisation for all payments under the contract. If authorisation is granted, no further prior authorisation would then be required, except in circumstances where actual payments differ from those scheduled under the contract.

Credit and Financial Institutions

There are prohibitions on:

  • opening bank accounts with financial institutions domiciled in Iran;
  • establishing correspondent banking relationships with financial institutions in Iran; and
  • opening representative offices in Iran and establishing joint ventures with financial institutions in Iran.

Branches and subsidiaries of Iranian financial institutions in the EU must notify the authorities of all transfers.

It is prohibited to provide insurance or re-insurance to the Government of Iran and its public bodies, an Iranian person or entity (other than a natural person), or a person acting on behalf of or at the direction of either of these groups. This does not prevent the provision of insurance to the owner of a vessel which is chartered to the Government of Iran and its public bodies, or to an Iranian person or entity, which is not listed in Annex VII or VIII.

It is permitted to provide compulsory or third party insurance to Iranian persons or entities based in the EU.

The extension or renewal of insurance contracts entered into prior to the entry into force of the Regulation is prohibited, but the Regulation does not prohibit compliance with agreements concluded before that date.

Restrictions on Transport

When goods are brought into or leave the customs territory of the EU from or to Iran, all pre-arrival and pre-departure information is to be submitted to the customs authority of the relevant Member State. The person responsible for submitting the information is under an obligation to declare whether the goods are covered by the Regulation or by the Common Military List of the EU. You may well find such declarations being passed along the chain in a transaction and for all parties to have to provide this. If the customs authority has reason to believe that prohibited goods are being carried, they are obliged to inspect the cargo.

20th December, 2010

This Bulletin is a guide and is not intended to be a substitute for taking legal advice. Whale Rock Legal Limited and the author accept no responsibility for any actions taken or not taken in reliance on it.

For more information, please contact us.