Secretary of State Mike Pompeo’s announcement yesterday that the U.S. Government will not renew any of the significant reduction exemptions (SREs), previously granted to eight countries under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA), could significantly impair Iran’s ability to conduct international trade.  If fully implemented, this move would create a new, high level of risk for those engaging in continued trade in oil and related products with Iran. It also could directly impact ancillary activity such as shipping and insurance.  Moreover, any such move could have indirect effects on other, non-oil sectors that rely on third country banking arrangements to fund trade with Iran.  Although there are broad provisions of U.S. law restricting the President’s authority to impose sanctions for trade with Iran in agricultural commodities, food, medicine, and medical devices, even this trade could be indirectly impacted by reduced availability of funds and banking channels.  No sanctions restrictions have ever been imposed under the NDAA, although the firmness of U.S. policy in this area may now be put to the test, as the current SRE waivers are set to expire on May 2, 2019.

At the same time, even though the U.S. Government will not renew the eight existing SRE waivers, the actual imposition of sanctions under the NDAA could still be delayed.  This blog post provides some brief background on the NDAA and the SRE waivers, what the consequences of non-renewal of these waivers may be, and how the Trump Administration may use other provisions of law to delay action in this area in order to sidestep confrontations with China, India, Turkey or other major Iranian trading partners were they to refuse to back down in the face of U.S. sanctions threats as the “moment of truth” approaches.

Brief background on the NDAA oil sanctions and SRE waivers

The NDAA, Section 1245 of Public Law 112-81, was enacted on December 31, 2011, with the purpose of reducing and eventually eliminating Iran’s global oil trade, by threatening foreign financial institutions (FFIs), including national central banks, with being shut out from the U.S. financial system if they facilitate this trade.  However, the NDAA included an escape hatch for those countries that depended on oil and related products supplied by Iran – specifically, the President could waive the applicability of these sanctions on FFIs headquartered in a country covered by an SRE waiver, which could be issued if the country as a whole was found to have “significantly” reduced its oil imports from Iran during the previous 180-day period.  The key provisions of the NDAA have been in place since the end of 2011, although it was amended on August 10, 2012 by Sections 503 and 504 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA), and on January 2, 2013 by Section 1250 of the National Defense Authorization Act for Fiscal Year 2013. The NDAA is implemented in large part through the Iranian Financial Sanctions Regulations (IFSR), at 31 C.F.R. Part 561, along with applicable Executive Orders.

Getting into a bit more detail, the NDAA requires the President to restrict an FFI’s access to U.S. correspondent or payable-through accounts (largely cutting it off from U.S. dollar transactions) if the President determines that the FFI “has knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran” (CBI) or a U.S.-designated Iranian financial institution.  This trigger is not limited to significant financial transactions supporting oil trade with Iran; rather, the trigger for sanctions on an FFI covers any “significant” financial transaction with the CBI or a designated Iranian financial institution, regardless of the underlying nature of a related trade transaction and even in the absence of an underlying (non-financial) trade transaction.  The NDAA specifically targets Iranian trade in petroleum and petroleum products by extending these sanctions to any non-U.S. central bank that engages in financial transactions “for the sale or purchase of petroleum or petroleum products to or from Iran.”  But, on the other side of the coin, the SRE waiver provision insulated all FFIs headquartered in countries receiving SRE waivers from these NDAA sanctions for “significant” financial transactions across the board, not just those involving oil-related trade.  This “insulation” was good for a 180-day period, subject to extension by a renewal of the SRE waiver for the country.

Using these sanctions, which are focused on FFIs but which impact non-financial companies as well, the NDAA aimed to force down to zero all global oil trade with Iran over time.  In fact, it would indirectly put pressure on a broader swath of trade with Iran if fully implemented by reducing the availability of third country funds and banking channels for non-oil trade with Iran.  But since SRE waivers have been issued on a country-by-country basis to Iran’s major oil trading partners every 180 days while the NDAA has been in effect, these sanctions have not yet been fully implemented. Furthermore, these FFI-focused sanctions were largely suspended pursuant to the Iran nuclear deal – the Joint Comprehensive Plan of Action (JCPOA) – beginning in January 2016. While the NDAA came back into effect on November 5, 2018 as a result of the U.S. withdrawal from the JCPOA, this “snap-back” was immediately tempered by the eight SRE waivers that were issued on November 3, 2018 to China, Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey.  It is these waivers that Secretary Pompeo has said will not be renewed after they expire on May 2, 2019.

Many observers had expected the Trump Administration not to renew a few of the SRE waivers, such as those for Greece, Italy, and Taiwan, because these countries had reportedly already wound down their oil trade with Iran to zero.  But many had expected some of the other SRE waivers to be renewed, potentially with stricter terms.  The termination of all SRE waivers on May 2, 2019 was generally not anticipated, although certain Republican members of Congress, along with some elements inside the Administration, had been calling for accelerating the “path to zero” for Iran’s global oil trade.

By taking this hawkish turn on Iran sanctions policy, the Trump Administration may find itself on a collision course with China, India, Turkey, and other major trading partners with Iran, unless it seeks to use one of the other provisions of the NDAA and related laws to continue to delay the imposition of sanctions that would otherwise be required after May 2nd to the extent sanctionable activity continues after that point.  But this clearly was not the message from Secretary Pompeo.  When asked about the termination of the SRE waivers during an April 22, 2019 press briefing, he responded, “we’ve made clear: If you don’t abide by this, there’ll be sanctions. Right? This is what we’re laying out this morning. We have a requirement and – to conduct these transactions, one almost always needs to participate in the financial markets, and we intend to enforce the sanctions. We don’t lay out sanctions that we don’t have any intention of encouraging countries to cooperate with.”  The White House also released a statement saying “We [i.e., the United States, Saudi Arabia, the UAE and other U.S. “friends and allies”] have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market.”  Francis Fannon, Assistant Secretary of State in the Bureau of Energy Resources, indicated in a press briefing that the “wind-down” period under the NDAA will not extend beyond May 2nd, and stated “we’ve been very clear in terms of our path to zero, and we’re pleased to see that global market conditions and cooperation from other partners allow us to close out this year to zero.”  These statements suggest that the Administration may in fact take sanctions action against FFIs in any country that continues to conduct oil trade with Iran after the expiration of the SRE waivers on May 2nd, if such FFIs engage in significant financial transactions with Iranian banks, with the goal of reducing Iran’s trade in petroleum and petroleum products to zero by the end of this year, if not sooner.

However, in the same press briefing, Secretary Pompeo seemed to open the door to potential flexibility on the Administration’s approach to implementing the NDAA sanctions, stating: “Look, we’ve always tried – and I think we’ve always been very fair about this – if there is a particular transaction that is incidental – all right, so I don’t want to foreclose the possibility, but there will be no waivers that extend beyond the 1st of May.”  While not a model of clarity, that statement could be read to indicate that the Administration is not going to “foreclose the possibility” of granting some leniency or pursuing other avenues to avoid the immediate imposition of sanctions under the NDAA in “particular” cases.

Other ways the Administration could continue to delay the imposition of sanctions under the NDAA  

Picking up on that ambiguous statement, how could the Administration avoid outright confrontation with certain significant U.S. trading partners or allies that continue to conduct oil trade with Iran when it comes to these FFI sanctions that are soon to be fully effective?

  • First, the Administration could determine that certain FFI transactions with Iran (e.g., the “incidental” transactions Secretary Pompeo referenced in his remarks to the press above) are not “significant” and therefore do not require the imposition of sanctions under the NDAA.  However, this path would face both administrative and political challenges if there were large-scale ongoing trade with Iran that involved traditional trade financing or payments through normal banking channels.  This option could work best for declining to take action against continuing trade that may be viewed as a “wind-down” of contracts or agreements entered into while the SRE waivers were in effect.  It could also work for smaller-scale and otherwise not “significant” activity.
  • Second, the Administration could find that it has the authority to waive the NDAA sanctions provisions under certain circumstances for 120-day periods, based on a determination that doing so would be “in the national security interest of the United States.”  However, these broad “national security interest” waivers require reporting to Congress and certifications of fact, such as “that the country with primary jurisdiction over the foreign financial institution otherwise subject to the sanctions faced exceptional circumstances that prevented the country from being able to reduce significantly its purchases of petroleum and petroleum products from Iran,” along with a requirement to specify “any concrete cooperation the President has received or expects to receive as a result of the waiver.”  Still, this provision is relatively broad and could be used in select cases to refrain from imposing FFI sanctions under the NDAA.
  • Third, the Administration could waive the effectiveness of the NDAA sanctions provisions temporarily by finding that, in a particular 180-day period, there is not “a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.”  These determinations are to be informed by periodic U.S. government reports “on the availability and price of petroleum and petroleum products produced in countries other than Iran” during each such period.  But this seems highly unlikely in the immediate future. Assistant Secretary Fannon, in the press briefing referenced above, stated that “we have a very well supplied oil market right now . . . We just face a much better oil picture globally than we did six months ago, and it will only improve from here.”  A U.S. State Department Fact Sheet on this issue makes similar points, including that “we have commitments from oil producing countries, including the Kingdom of Saudi Arabia and the United Arab Emirates, to increase oil production to offset reductions in Iranian oil exports.”  So it would probably take unexpected changes to the supply/demand balance in the oil market in order for the Administration to delay the imposition of sanctions under the NDAA for this reason.

There may be other legal authorities that the Administration could invoke.  But at the end of the day this will be a largely economic, political and diplomatic decision, with global and regional security implications, framed to some extent by applicable law.

Broader implications for US sanctions on Iran 

If the Trump Administration were to plow ahead with full global implementation of the NDAA’s FFI sanctions, the effects would be broad and deep.  It is important to note that the impact would not be limited to FFIs or to transactions in which the CBI or another Iranian financial institution is involved.  Some of the other sanctions provisions that would come back into effect as a result of the removal of the SRE waivers for countries currently subject to such waivers include those targeting, among others:

  • Any person determined to have knowingly engaged in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran;
  • Persons determined to provide goods, services or other support to the energy sector of Iran; and
  • Foreign financial institutions that knowingly conduct or facilitate any significant financial transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran.

Conclusion

While the announcement that the Trump Administration will not renew the existing SRE waivers on May 2nd is a significant development, it remains to be seen whether or how the U.S. Government will proceed in imposing sanctions on banks and other parties in countries that continue to trade in petroleum and petroleum products with Iran.

View Original Source
Photo of Peter Jeydel Peter Jeydel

Peter Jeydel‘s practice focuses on US export controls and economic sanctions, including the Commerce Department’s Export Administration Regulations (EAR), the State Department’s International Traffic in Arms Regulations (ITAR), and sanctions regulations administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) and the State Department. His practice spans all aspects of these regimes, including counseling, compliance, transactional advice, licensing and opinions, disclosures, and enforcement actions. He has also represented companies and individuals seeking de-listing from OFAC’s sanctions list. In addition, Pete has assisted clients in anti-corruption matters, including under the US Foreign Corrupt Practices Act (FCPA), and has experience handling reviews and investigations by the Committee on Foreign Investment in the United States (CFIUS).

Read Pete’s full bio.