The Iran Regulation sets out detailed rules on the operation of the EU sanctions against Iran and provides clarity and definition of key terms referred to in the Council Decision.
The Iran Regulation is immediately legally binding on Member States and on EU citizens and companies. However, we expect that the Iran Regulation will be enacted at national level into the law of each Member State.
The UK has already started the implementation process. As of 3:00pm on Wednesday 27 October 2010 a new statutory instrument came into force (S.I. 2010/2613, The Iran (European Community Financial Sanctions) (Amendment) Regulations 2010). This statutory instrument enforces the financial sanctions against persons listed by the European Council who are engaged in, directly associated with or providing support for Iran’s proliferation-sensitive nuclear activities or the development of nuclear weapons delivery systems (set out in Annex VIII of the Iran Regulation) and it provides for criminal penalties in the event that the sanctions are breached.
We can expect to see further UK legislation in the coming months, which will give effect to other aspects of the Iran Regulation, for example enforcing the import and export restrictions which target the Iranian oil and gas industry.
The Iran Regulation applies:
- within the territory of the European Union, including its airspace;
- on board any aircraft or any vessel under the jurisdiction of a Member State;
- to any person inside or outside the territory of the Union who is a national of a Member State;
- to any legal person, entity or body which is incorporated or constituted under the law of a Member State; and
- to any legal person, entity or body in respect of any business done in whole or in part within the Union.
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Key aspects of Iran Regulation
Below is a summary of the key aspects of the Iran Regulation.
Import and export restrictions
The Iran Regulation maintains the previous EU restrictions regarding trade with Iran in respect of goods or technology which could contribute to enrichment-related, reprocessing or heavy water-related activities, or to the development of nuclear weapons systems and it maintains a restriction on the export to Iran of dual-use goods and technology.
The provision of technical assistance, training, investment services, brokering services, financing or financial assistance (including grants, loans and export credit insurance) in respect of the provision of nuclear-related technology to Iran is also prohibited, as is the participation in any activity which is aimed at circumventing this prohibition.
Oil and gas sector restrictions
The Iran Regulation prohibits the supply of certain ‘key equipment and technology’ for the ‘key sectors’ of the Iranian oil and gas industry to any Iranian person, entity or body or for use in Iran
The restricted key equipment and technology is set out in Annex VI to the Iran Regulation. The list in Annex VI is split into two main categories: ‘Exploration and Production of Crude Oil and Natural Gas’ and ‘Refining and Liquefaction of Natural Gas’. Under each main category there are several sub-headings (for example, equipment, materials, software etc.) and in respect of each of the sub-headings further detail is provided. As expected, Annex VI covers all types of equipment and technology related to the exploration and drilling for oil and natural gas and their refining and liquefaction - a fairly wide definition of ‘upstream’.
The Iran Regulation sets out the ‘key sectors’ of the Iranian oil and gas industry, which follow the headings set out in the Council Decision:
- exploration of crude oil and natural gas;
- production of crude oil and natural gas;
- refining; and
- lliquefaction of natural gas,
(the Key Sectors).
Interestingly, in the Iran Regulation the Key Sectors are noted merely as a way of categorising the prohibited ‘key equipment and technology’ listed in Annex VI. In this respect, the prohibition set out in the Council Decision was framed in more restrictive terms because it required the intended recipients of the ‘key equipment and technology’ to be engaged in one or more of the ‘key sectors’ of the Iranian oil and gas industry, whereas the Iran Regulation applies to any Iranian person, entity or body irrespective of whether they are engaged in the Key Sectors; thus it has a much wider application.
It is also worth noting that the definition of an ‘Iranian person, entity or body’ is very wide, as it includes any legal person, entity or body, inside or outside Iran, owned or controlled directly or indirectly by the State of Iran, a natural person in, or resident in, Iran or any entity having its registered office in Iran. As such, this includes any enterprise owned in whole or in part (including minority shareholdings) by Iranian persons.
The Iran Regulation also sets out restrictions on the provision of financial or technical assistance or brokering services in respect of Annex VI key equipment and technology. The definition of ‘technical assistance’ is very broad, as it includes any technical support related to repairs, development, manufacture, assembly, testing, maintenance, or any other technical service, and may take forms such as instruction, advice, training, transmission of working knowledge or skills or consulting services; including verbal forms of assistance.
The Iran Regulation contains a carve-out for pre-existing trade contracts concluded prior to 25 October 2010 (the date of the Iran Regulation) and in respect of pre-existing contracts concluded before 26 July 2010 (the date of the Council Decision) and related to an investment in Iran before 26 July 2010. However, in order to take advantage of this carve-out, concerned entities must ensure that they have notified the competent authority of the relevant Member State of the transaction or assistance at least 20 working days in advance of such transaction or assistance.
The Iran Regulation follows the Council Decision in that it imposes additional inspection requirements on EU Member States in respect of goods imported from or exported to Iran. For example, all vessels which transport cargo from or to Iran shall be subject to the requirement of additional pre-arrival or pre-departure information in respect of all goods brought into or out of a Member State.
It is also prohibited to provide bunkering or ship supply services, or any other servicing of vessels by nationals of Member States to Iranian-owned or contracted vessels, including chartered vessels, where there are reasonable grounds to believe that the vessel carries items prohibited under the Iran Regulation or contained on the Common Military List, with the exception of services necessary for humanitarian purposes or if the cargo has been inspected, and if necessary, seized and disposed of.
Restrictions on investment
It is prohibited to invest in or acquire any Iranian enterprise engaged in the manufacture of restricted goods or technology (set out in Annexes I, II and III) or engaged in the Key Sectors. In respect of this restriction, the Iran Regulation provides further guidance as to what is included within the Key Sectors:
- ‘exploration of crude oil and natural gas’ includes the exploration for, prospection of and management of crude oil and natural gas reserves, as well as the provision of geological services in relation to such reserves;
- ‘production of crude oil and natural gas’ includes bulk gas transmission services for the purpose of transit or delivery to directly interconnected grids; and
- 'refining’ means the processing, conditioning or preparation for the ultimately final sale of fuels.
In respect of oil and natural gas, it is also prohibited to enter into joint ventures, cost sharing arrangements or various other forms of co-operation with an Iranian person, entity or body engaged in the transmission of natural gas. As an Iranian person, entity or body is so widely defined this could easily include entities outside of Iran.
The Iran Regulation contains a carve-out in respect of the prohibition on investment in an Iranian entity engaged in the Key Sectors where the transaction is required by a pre-existing contract concluded prior to 26 July 2010 (the date of the Council Decision). However, as above, in order to take advantage of this carve-out, companies must ensure that they have notified such contracts to the competent authority of the relevant Member State at least 20 working days in advance of the transaction.
The Iran Regulation reiterates the measures set out in the Council Decision regarding relations between EU and Iranian financial institutions in respect of branches, subsidiaries and correspondent relationships.
In addition, as outlined in the Council Decision, the transfer of funds to and from an Iranian person, entity or body which is between €10,000 and €40,000 must be notified to the relevant Member State authority (as set out in Annex V). Where the funds are transferred to Iran, the EU person giving the order for the transfer (i.e. the account holder) must provide the notification. Where the funds are received from Iran, the EU person executing the transfer (i.e. the receiving EU financial institution) must provide the notification.
Any transfers in excess of €40,000 require a prior authorisation from the competent authority of the Member State concerned. Such authorisation will only be granted where the authorities are satisfied that the transfer will not contribute to Iran's proliferation sensitive activities or to prohibited activities in the Key Sectors. Authorisation will be deemed to be granted where no objection has been raised by the authorities within 4 weeks of the submission of the request.
The provision of insurance or reinsurance to Iran or its Government, and its public bodies, corporations and agencies, to any Iranian enterprises, or to natural or legal persons, entities or bodies acting on behalf of or at the direction of Iran or its Government or any Iranian enterprise is prohibited. It is also prohibited to participate in activities intended to circumvent the prohibition, whether knowingly or intentionally.
The Iran Regulation contains a carve-out in respect of insurance or re-insurance which is provided to an owner of a vessel, aircraft or vehicle, where that vessel, aircraft or vehicle is chartered by Iran or its Government, and its public bodies, corporations and agencies, or any Iranian enterprise which is not listed in Annexes VII or VIII of the Iran Regulation.
The Iran Regulation also clarifies the meaning of ‘acting on behalf of or at the direction of’, whereby a person, entity or body shall not be considered to act at the direction of Iran or its Government or any Iranian enterprise where that direction is for the purposes of docking, loading, unloading or safe transit of a vessel or aircraft temporarily in Iranian waters or airspace.
Further, the prohibition on the provision of insurance or reinsurance to the Iranian entities referred to above does not apply in respect of the provision of compulsory or third party insurance to those Iranian persons, entities or bodies based in the EU. Therefore, entities such as National Iranian Tanker Company (NITC), as en entity based in the EU (all of NITC’s fleet are either Malta or Cyprus flagged vessels), are eligible for P&I cover and trading in and with the EU. The reason for this is that the cover provided by P&I clubs is usually compulsory under oil pollution conventions.
Similarly, the prohibition on the provision of insurance does not apply to the provision of health and travel insurance to individuals acting in their private capacity, provided that those persons are not listed in Annexes VII and VIII of the Iran Regulation.
The Iran Regulation confirms that contracts concluded before the Iran Regulation may be complied with, for example claims may be paid. However, existing contracts may not be extended or renewed following the entry into force of the Iran Regulation on 25 October 2010.
It is a defence to breach of any of the prohibitions set out in the Iran Regulation if the entity concerned can demonstrate that they did not know, and had not reasonable cause to suspect, that their actions would infringe the prohibitions. Ignorance is not sufficient - there has to be an element of due diligence.
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