This alert is an update on the position set out in our client alert of 22 October 2012 (the "October Alert"), which can be found here.
Background and Regulation
On 22 December 2012, the European Council published Council Regulation (EU) No. 1263/2012 (the "Regulation")1. This Regulation amends Regulation 267/2012 of 23 March 2012, and implements the measures set out in Council Decision 2012/635/CFSP published on 15 October 2012 (the "Decision")1, which was the focus of our October Alert.
As explained in the October Alert, the measures contained in the Decision were only effective as against the governments of Member States themselves. Now, with the publication of the Regulation, those measures are implemented and brought into force as against all EU persons, companies and other entities. The Regulation also adds further detail to those measures.
We set out below the key provisions of the Regulation which affect the energy/commodities, shipping and financial sectors.
a) Key measures affecting the energy/commodities sectors
With the publication of the Regulation, the following is prohibited:
(i) Natural gas: to purchase, import or transport into the EU, natural gas which originates in Iran or has been exported from Iran. It is also prohibited to swap (defined for these purposes as exchange natural gas streams of different origins) natural gas originating in Iran or exported from Iran. Natural gas includes the following products: natural gas condensates, natural gas in liquefied state, natural gas in gaseous state, propane, and butanes. The Regulation provides that contracts satisfied by use of a pipeline directly connected to the natural gas transmission grid of the EU without any inlet point intended to facilitate the purchase or increase export of natural gas originating in Iran should not be affected by this prohibition on natural gas imports.
(ii) Graphite and Metals: to sell, supply, transfer or export graphite and raw or semi-finished metals, directly or indirectly, to any Iranian person, entity or body, or for use in Iran. The exact items to which this prohibition applies are listed in Annex VIIB to the Regulation. These include, amongst others: graphite, iron and steel, copper, nickel, aluminium, lead, zinc and tin.
(iii) Technical assistance or brokering services: to provide, directly or indirectly, technical assistance or brokering services related to the goods listed in Annex VIIB to the Regulation (as in (ii) above), or related to the provision, manufacture, maintenance and use of goods listed in Annex VIIB to any Iranian person, entity or body, or for use in Iran.
(iv) Industrial processes: to sell, supply, transfer or export key equipment or technology for integrating industrial processes (as listed in Annexes VI and VIA of the Regulation), directly or indirectly, to any Iranian person, entity or body, or for use in Iran. Annexes VI and VIA include key equipment and technology for the following key sectors of the oil and gas industry in Iran: exploration and production of crude oil and natural gas, refining and liquefaction of natural gas and petrochemical industry. As above in (iii), the prohibition extends to any related technical assistance or brokering services related to the items listed in Annexes VI and VIA.
In relation to the above listed prohibitions, the provision, directly or indirectly, of financing or financial assistance (including financial derivatives, insurance, reinsurance and brokering services where relevant), regarding the newly prohibited activities, will also amount to sanctionable conduct.
The prohibition in (i), above, does not apply to:
(a) Natural gas that has been exported from a State other than Iran, when the exported gas has been combined with gas originating from Iran within the infrastructure of a State other than Iran;
(b) The purchase of natural gas within Iran by nationals of Member States for civilian purposes, including residential heating or power, or the maintenance of diplomatic missions; or
(c) The execution of contracts for the delivery of natural gas originating in a state other than Iran into the EU.
The prohibition in (iii), above, does not apply to contracts (or ancillary contracts necessary for the execution of such contracts) concluded prior to 22 December 2012, and performed before 15 April 2013.
The prohibition in (iv), above, does not apply to:
(a) In relation to the exploration or production of crude oil and natural gas or refining or liquefaction of natural gas: Contracts concluded prior to 27 October 2010 and performed before 15 April 2013. Further, it does not apply to contracts or agreements concluded prior to 26 July 2010 and relating to an investment in Iran made prior to 26 July 2010;
(b) In relation to the petrochemical industry: Contracts2 concluded prior to 24 March 2012 and performed before 15 April 2013. Further, it does not apply to contracts or agreements concluded prior to 23 January 2012 and relating to an investment in Iran made prior to 23 January 2012;
(c) In relation to the industries as in points (a) and (b) above: Contracts2 concluded prior to 16 October 2012 and performed before 15 April 2013. If also related to an investment in Iran: (i) relating to the industries as in points (a) and (b) concluded prior to 26 July 2010, or (ii) relating to the petrochemical industry contracts concluded prior to 23 January 2012; or
(d) Provision of technical assistance intended solely for the installation of equipment or technology delivered in accordance with points (a) - (c) above: provided that the competent authority of the Member State (HM Treasury) is notified at least 20 working days prior to so doing.
b) Key measures affecting the shipping sector
With the publication of the Regulation, the following is prohibited:
(i) To provide vessels designed for the transport or storage of oil and petrochemical products to Iranian persons or entities. It is also prohibited to provide such vessels to any person or entity unless the provider has taken appropriate action to prevent the vessel from being used to carry or store oil or petrochemical products that originate in Iran or have been exported from Iran. "Appropriate action" is not defined in the Regulation, and it is likely that this will be assessed on a case-by-case basis.
(ii) To sell, supply or transfer key naval equipment and technology for the construction, maintenance or refit of vessels to Iran, Iranian or Iranian-owned entities. The exact items to which this prohibition applies are listed in Annex IV to the Regulation.
(iii) To supervise and/or participate in the design, construction and repair of oil tankers and cargo vessels flying the Iranian flag, or owned, chartered or operated by an Iranian person or entity.
(iv) To provide, from 15 January 2013, flagging and classification services to oil tankers and cargo vessels flying the Iranian flag, or owned, chartered or operated by an Iranian person or entity.
In relation to (i), (ii) and (iii) above, the provision of financing, financial assistance, technical assistance and brokering services, as applicable, regarding the prohibited activity, will also amount to sanctionable conduct.
The prohibition in (i) above does not apply to certain contracts concluded prior to 23 January 2012, as specified in Articles 12 and 14 of Regulation 267/2012. The prohibition in (iii) above does not apply to contracts (or ancillary contracts) concluded prior to 22 December 2012 and performed prior to 15 February 2013.
In relation to (ii) above, the "force majeure" exception detailed in the October Alert still applies, i.e. the prohibition does not apply to the supply of listed equipment and technology to a non-Iranian-owned or controlled vessel which has been forced into an Iranian port or Iranian territorial waters as a result of force majeure.
The Regulation contains an additional exemption relating to bunkers. Questions had previously arisen over whether the prohibitions in respect of crude oil, petroleum and petrochemical products would extend to bunkers stemmed, as opposed to just the carriage of those products as cargo.
The EU has now extended the exemptions relating to the import, purchase and transport of crude oil and petroleum products to include:
(i) The purchase of bunker oil produced and supplied by a third country other than Iran, intended for the propulsion of vessels’ engines; and
(ii) The purchase of bunker oil for the propulsion of the engines of a vessel which has been forced into an Iranian port, or Iranian territorial waters, as a result of force majeure.
The notable absence from these new provisions is bunkers of Iranian origin. If such bunkers are stemmed (in circumstances which do not fall within the force majeure exception), the prohibitions in respect of crude oil and petroleum products are likely to be triggered.
c) Financial Transactions
The Regulation prohibits transfers between EU financial institutions and:
(i) Credit and financial institutions and bureaux de change domiciled in Iran;
(ii) The branches and subsidiaries of such institutions domiciled within and outside the jurisdiction of Member States; and
(iii) Financial entities domiciled outside Iran, but controlled by persons or entities domiciled in Iran.
The Regulation, like the Decision before it, also prohibits the provision of export credits, guarantees and insurance to nationals or entities involved in trade with Iran.
The Regulation sets out (i) exceptions to these prohibitions and (ii) certain transfers which can be authorised by Member States. For example, payments to satisfy claims by or against an Iranian entity may be authorised, provided such payment does not contribute to any prohibited activity.
Authorisation will be dealt with on a case-by-case basis, and it is likely that Member States will take a strict approach. As such, no assumptions should be made as to whether a particular transaction will be authorised.
It is important to note that no authorisation or notification is required where an otherwise prohibited transaction amounts to below Eur.10,000 (with limited exceptions). It is, however, prohibited to break up a large transaction into a number of smaller payments of under Eur.10,000.
The Regulation sets out in detail the processes to be used for authorised transactions, and if an authorised transaction is to be made, these processes should be followed to the letter.
The Regulation also requires EU financial institutions to conduct enhanced vigilance, including close monitoring of account activity and maintaining records of transactions for a period of five years.
Conclusion The sanctions legislation is now very detailed and wide ranging, and these latest measures yet again increase the difficulties in dealing and trading with Iran. Extreme caution must be used in entering into any transaction which involves an Iranian party, either directly or indirectly, or Iranian goods.
It is strongly recommended that legal advice is sought if there are any concerns over whether a particular transaction will breach any sanctions legislation.
If you have any queries about the contents of this alert, or the sanctions regimes in general, please contact one of the authors of this alert or your usual contact at Reed Smith.
1. The European Council’s Decisions and Regulations can be found here.
2. All references to "contracts" in this section include ancillary contracts necessary for the execution of such contracts.
Client Alert 2013-002