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Jan 13, 2012, 04.26 AM IST | Source: Reuters

Q+A - New Iran sanctions law lets Obama pull his punches

IRAN-USA-SANCTIONS:Q+A - New Iran sanctions law lets Obama pull his punches

By Arshad Mohammed

WASHINGTON (Reuters) - Washington's latest sanctions on Iran target Tehran's ability to sell crude oil but they give U.S. President Barack Obama wide latitude to pull his punches and avoid imposing penalties.

Below is a description of the sanctions Obama signed into law on December 31, the timelines to carry them out, the ways Obama can avoid imposing them and the ambiguities in the law that may be interpreted by his administration.

U.S. lawmakers crafted Section 1245 of the National Defense Authorization Act for fiscal year 2012 as part of a campaign to restrain Iran's nuclear program, which the United States suspects of being designed to produce nuclear weapons.

Iran says its program is for civilian purposes to generate electricity so it can export more of its valuable oil and gas.

WHAT ACTIONS CAN TRIGGER SANCTIONS?

The sanctions target foreign financial institutions that conduct petroleum and non-petroleum transactions with Iran's central bank or other blacklisted Iranian financial entities.

For non-petroleum transactions, from February 29 the law requires the president to punish private banks that "knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran" or other blacklisted entities.

For oil-related transactions, from June 28 the law allows the president to sanction foreign banks that carry out financial transactions "for the purchase of petroleum or petroleum products from Iran" provided several conditions are met.

Foreign central banks and state-owned financial institutions are only subject to the sanctions for petroleum transactions, allowing them to conduct other business with the Central Bank of Iran without risk of running afoul of the new law.

The law provides a blanket exception for sales of food, medicine or medical devices to Iran, which are not subject to the sanctions.

It also requires the president to block assets of Iranian financial institutions if they fall under U.S. jurisdiction. According to a congressional aide, such transactions at present are "bounced" or rejected.

WHAT SANCTIONS ARE PERMITTED UNDER THE LAW?

Three sets of punishments are possible:

- the president can prohibit a foreign bank from opening certain accounts in the United States, substantially curtailing its access to the U.S. financial system;

- the president can prevent foreign banks from maintaining such existing accounts or, in a lesser punishment, "impose strict conditions" on such accounts;

- the president can impose a series of other sanctions under the International Emergency Economic Powers Act, or IEEPA, which among other things gives him the authority to block any transaction involving assets under U.S. jurisdiction and to regulate or prohibit foreign exchange transactions, bank transfers and imports or exports of currencies or securities.

WHAT LATITUDE DOES THE PRESIDENT HAVE TO AVOID SANCTIONS?

The legislation offers several ways for the president to avoid imposing sanctions if he chooses.

In the case of non-petroleum transactions by private banks, before applying sanctions the president must "determine" that the bank has "knowingly" carried out or facilitated a "significant" financial transaction.

The terms "knowingly" and "significant" are not defined in the legislation, giving the president some discretion as to how he may interpret them.

Before applying sanctions on foreign banks for petroleum transactions, the law calls for the following steps:

- By February 29, and every 60 days thereafter, the U.S. government must send Congress a report on the availability and price of non-Iranian oil and petroleum products.

- By March 30, and every 180 days thereafter, the president must make a determination whether the price and supply of non-Iranian oil and petroleum products are sufficient to allow consumers to "significantly" cut their purchases from Iran.

- The president can only apply sanctions for petroleum transactions if he determines there is enough non-Iranian supply for countries to "significantly" reduce their Iranian purchases.

- The law gives the president an explicit exemption under which he can choose not to apply sanctions if he determines that the country with primary jurisdiction over the bank has "significantly reduced" its volume of crude oil purchases.

The phrase "significantly reduced" is not defined, again giving the administration some discretion.

Finally, the law provides broad "waiver" authority under which the president may waive sanctions for up to 120 days, and every 120 days thereafter, if he determines that it "is in the national security interest of the United States."

If he does so, he must also submit a report to Congress "providing a justification for the waiver" and describing any concrete cooperation he has received, or expects to receive, as a result of the waiver.

The law also requires the president to encourage oil producers to increase their output and to try to persuade countries that buy oil from Iran to ensure Iran uses the revenues to buy only non-luxury consumer goods from them.

WHAT HAS THE ADMINISTRATION SAID ABOUT IMPLEMENTING THE LAW?

Relatively little. A senior Obama administration official told reporters on Thursday the administration was still working that out, adding, "I would expect us to be able to give greater clarity very shortly."

Congressional aides expect the administration to issue rules in the coming weeks to define some of the ambiguous language and to give banks enough time to ensure they are in compliance by February 29.

WHAT TERMS IN THE LAW MAY BE DEFINED IN UPCOMING RULES?

The law provides no definition for the following terms:

- "knowingly conducted or facilitated";

- "any significant financial transaction";

- "impose strict conditions" on certain bank accounts;

- "to permit a significant reduction" in the volume of petroleum and petroleum products purchased from Iran;

- "significantly reduced its volume of crude oil purchases from Iran."

ARE THERE PRECEDENTS ON HOW TO INTERPRET THESE TERMS?

While U.S. officials have been cagey about exactly what they may do, the senior U.S. official said the administration was likely to define the term "significant financial transaction" without making reference to a specific number.

In the past, the administration has cited various factors to be weighed in deciding whether transactions are "significant," including their size, number and frequency; whether they entail deceptive practices; and other "relevant factors."

U.S. officials say they are intent on implementing the law but are trying to do so collaboratively, sending out teams to talk to oil consumers and producers about how to carry it out without roiling the oil markets, undercutting economic growth or causing undue hardship for countries dependent on Iranian oil.

"We're not trying to make enemies of our friends," a second senior administration official told Reuters this week.

(Reporting By Arshad Mohammed; Editing by Vicki Allen and Peter Cooney)

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