Increasing ‘Extraterritorial’ Application of U.S. Trade Control Laws to Non-U.S. Businesses
In its effort to curtail Iran’s weapons proliferation and nuclear ambitions over the last several years, the United States has strengthened economic sanctions against Iran and has increasingly enforced these laws against third-country companies that do business with Iran. While many of the new and enhanced enforcement efforts are directed at financial institutions, they can and do affect all entities doing business with Iran, even with regard to companies and/or transactions that have little or no direct connection to the United States.
For many years, the principal subject of U.S. extraterritorial trade sanctions enforcement was the U.S. embargo against Cuba. The Iran-Libya Sanctions Act of 1996, however, provided for a limited expansion of this concept to Iran, authorizing sanctions on non-U.S. individuals and entities engaging in various transactions related to Iran’s energy sector or certain Iranian weapons programs. This law, which remains in effect today as the Iran Sanctions Act, has been used by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) to impose sanctions on non-U.S. companies in the energy and shipping sectors.
More recently, the U.S. government has focused its attention on seeking to prevent non-U.S. financial institutions from doing business with Iranian banks. In 2010, Congress passed and President Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act, which effectively cut off from the U.S. financial system banks that knowingly engaged in certain activities involving Iran's support for terrorism and development of weapons of mass destruction. The U.S. Government exercised this authority for the first time in 2012 by excluding two non-U.S. banks from access to U.S. financial institutions.
Early this year Congress enacted the National Defense Authorization Act for Fiscal Year 2012, which required the president to block the property and interests in property subject to U.S. jurisdiction of all Iranian financial institutions, including the Central Bank of Iran (CBI). In February 2012, President Obama issued Executive Order (EO) 13599, blocking all property and interests in property of the Government of Iran, including the CBI and all Iranian financial institutions. This was followed in May 2012 by EO 13608, which prohibited transactions by U.S. persons involving such blocked entities, effectively cutting these entities off from the U.S. marketplace and financial system. Then, in August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act, which extended liability to U.S. companies for sanctions violations by their non-U.S. subsidiaries—an extraterritorial application of the Iran sanctions similar to the longstanding Cuba sanctions.
These extensions of Iran sanctions enforcement have made conducting even legal business in Iran more difficult, as payments may only be processed in particular ways and through non-Iranian third-country banks. Many banks worldwide are increasingly wary of any dealings involving Iran and may refuse to participate in such business, even if it is legal in the countries where they operate. Likewise, many companies selling food, medicine and medical products to Iran in transactions licensed by OFAC have experienced difficulties in obtaining payment because banks have simply refused to participate in the transactions. More directly, companies and individuals who run afoul of sanctions programs' prohibitions may have sanctions imposed on them, including lost access to the U.S. financial system, exclusion from physically entering the United States and more.
U.S. authorities have also been applying other trade control laws besides economic sanctions to non-U.S. persons dealing with Iran. Specifically, under U.S. export control laws non-U.S. persons may not re-export from a third country, directly or indirectly, any goods or technology that have been exported from the United States if they know the re-exportation is intended specifically for Iran, and the exportation of the goods or technology from the United States to Iran would have been subject to export license application requirements under any U.S. regulations. In some cases, U.S. prosecutors have sought extradition and criminal enforcement against persons who knowingly violated these prohibitions, even though those persons may have never set foot in the United States and may have been carefully complying with the laws of their home countries.
In sum, in light of the increasingly aggressive extraterritorial application of U.S. trade sanctions and other trade control laws, individuals and entities worldwide should take extreme care to avoid violating the laws of the United States in any transactions involving Iran.