April 20, 2010 | Dow Jones

US-Iran Sanctions Reporting Provision Poses Risk

A reporting provision in bipartisan Iran sanctions legislation under consideration in the U.S. Congress could pose a major risk for companies conducting business with the pariah state.

A small section in the legislation expected to soon be passed into law requires the administration to publish every six months a report listing companies working with the Iranian Revolutionary Guard Corps, or IRGC, its affiliates and front companies.

Although an existing law called the Iran Sanctions Act gives the administration the power to censure energy companies that conduct business with Iran, the executive office has been reluctant to apply it. Instead, the administration largely relied on multilateral sanctions against Iran and quiet diplomacy, which policy analysts say has been largely successful, especially in the financial industry and in putting some major oil and gas projects on hold.

But one of Iran’s major vulnerabilities–relying on imported gasoline for a substantial portion of its fuel needs–has largely been uninhibited and overlooked by the U.S. Many western companies still broker gasoline deals with Iran, insure tankers and provide project contracting support.

While the legislation looks at a comprehensive set of fiscal measures and sectors, one of its chief sections focuses on leveraging that refined petroleum vulnerability into diplomatic action. Specifically, it lowers the financial threshold for violations to $200,000 for the refined products sector and expands the definition to companies that provide services, technology, information and support, including underwriting, financing, brokering and shipping.

Experts say the new provision will give a more hawkish Congress a role in scrutinizing relationships between the IRGC entities and international companies, putting pressure on the administration to levy sanctions and to think twice about using its right to waive violations, as it now does.

Sanctioned foreign companies wouldn’t be able to tap the U.S. financial market, be it for loans or loan guarantees, said Brad Ockene, a Chicago-based lawyer for Lovells LLP.

Mark Dubowitz, executive director for the Foundation for Defense of Democracies, said new disclosure requirement is a shot across the bow at those companies that are doing business with blacklisted Iranian entities and the affiliations on the same lists as al Qaeda.

“It may encourage companies to cooperate closely with Treasury and State in ending these business ties with the IRGC lest they find themselves subject to Congressional investigation, public censure and further legislative action,” Dubowitz said.

The IRGC, the military conglomerate listed by the U.S. as an organization supporting nuclear proliferation and terrorism, has boosted its power by increasingly entering into Iran economic sectors. For example, it now owns Khatam-al-Anbiya Construction Headquarters, or GHORB, an engineering company involved in some of the country’s biggest oil and gas projects. Listed on the resume of the current oil minister, Masoud Mirkazemi, are positions as the former chairman of the IRGC’s Center for Strategic Studies and an IRGC logistics commander.

The bills have strong bipartisan backing in both chambers of Congress and are expected to sail through votes expected in coming weeks. An aide in the Senate Majority Leader’s office said her boss supports the bill and is mindful of the rocky diplomatic negotiations, but no date had been set for consideration. It’s likely that Iran’s defiance of the international community’s mandates to stop nuclear enrichment will likely fortify and accelerate Congressional action.

Although State Department officials have all but admitted that a raft of companies have been in violation of the existing Iran Sanctions Act, political decisions have meant the administration has decided not to pursue those companies.

Europe-based companies Vitol Holding BV, Trafigura Group, Glencore International AG, Royal Dutch Shell PLC (RDSA, RDSA.LN), Total SA (TOT) and India’s Reliance Industries Ltd. (500325.BY) are some Iran’s biggest refined petroleum suppliers. According to Dubowitz’s group, British, German, Japanese and Norwegian insurance and reinsurance companies underwrite the gasoline shipments to Iran.

With the Iranian gasoline industry worth an estimated $6 billion to $9 billion a year, he said IRGC entities are likely involved either directly in the trade or through affiliated entities.

Administration officials say the State Department is reviewing a number potential violations of the existing Iran Sanctions Act, but it’s uncertain whether the administration will pursue the allegations.

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