By: Neil Ray and Curtis Dombek

The risks of trading with Iran have never been greater. U.S. and European authorities, in particular, are scrutinizing exports to Iran more closely than ever under both sanctions and export control laws. On January 23, 2012, the Council of the European Union (EU) adopted an unprecedented package of sanctions complementing the existing EU sanctions against Iran.  The new sanctions reflect the EU’s deepening concern over the nature of Iran’s nuclear program.  The new measures include:

• an asset freeze on additional entities, including the Central Bank of Iran and Bank Tejerat;
• a ban on the purchase, import, or transfer from Iran of crude oil, petroleum, and petrochemical products;
• a ban on the sale, supply, or transfer of key equipment and technology (which includes  the provision of financial and technical assistance) for the Iranian petrochemical industry; and
• a ban on the sale, purchase, transportation, or brokering of gold, precious metals, and diamonds, to or from the Government of Iran.

The embargo on Iranian crude oil, petroleum, and petrochemical products will be phased in to allow EU Member States that import crude oil and related products from Iran to find alternative suppliers. No new contracts may be signed and existing contracts will be honored only until May 1, 2012 for petrochemical products and July 1, 2012 for crude oil and petroleum products. In addition, by May 1, 2012, the EU will review the impact of the ban on crude oil and petroleum contracts to determine its effectiveness and whether affected Member States have been able to secure alternative suppliers.  It has been reported, however, that the Iranian government is considering cutting off supplies to the EU immediately in retaliation for the EU action and denying EU Member States the benefit of the intended phase-in.

The sanctions will greatly curtail what has traditionally been a significant trading relationship worth some $19 billion in terms of goods imported to the EU from Iran—90% of this trade has involved oil and related products.  U.S. Secretary of State Hillary Clinton and U.S. Secretary of the Treasury Timothy Geithner issued a joint statement welcoming the EU’s decision and commenting that the measures “are consistent with steps the U.S. previously has taken and the new U.S. sanctions that the President signed into law on December 31, 2011.”

As mentioned above, the new measures supplement existing EU sanctions, which have been introduced on a gradual basis since 2007.  The existing measures include:

• an arms and nuclear goods and technology embargo (including dual-use goods) and a ban on EU investments for Iranians engaged in uranium mining and nuclear production;
• a ban on investing in the Iranian oil and gas sector; and
• financial-services restrictions such as: a ban on Iranian and EU banks opening branches or forming joint ventures; a ban on trading or issuing Iranian government or public bonds; and financial reporting requirements for money transferred to and from Iranian banks.

Enforcement of these new sanctions is left to each of the individual EU Member States.  Most Member States have criminal sanctions in place.  In the UK, for example, violations of the assets freeze can result in seven years in prison and unlimited fines; violations of the trade-related prohibitions carry a prison term of up to ten years.

The EU sanctions also may be supplemented by national Member State controls.  The UK, for example, prohibits transactions and business relationships with all Iranian banks, not just those subject to the EU-wide asset freeze.

The breadth of the new EU and U.S. sanctions heightens the risk that sanctioned parties will attempt to preserve their businesses by using front companies.  U.S. and European companies in all sectors, and especially the oil and petroleum sector, should enhance their screening of counterparties to reduce the risk of violations.