For those of you who follow U.S. economic sanctions closely, particularly those targeting Iran, you will be familiar with a section found in the new Iran sanctions bill, the Iran Threat Reduction and Syria Human Rights Act of 2012, dealing with unblocking of certain Iranian financial assets. This new section effectively directs Citibank to unfreeze 1.75 billion dollars blocked pursuant to previously existing Iran sanctions in order to payout a judgment to plaintiffs in litigation with the Government of Iran and the Central Bank of Iran over Iran’s alleged participation in the 1983 bombing of U.S. Marines barracks in Beirut. President Obama signed off on this bill earlier this month. The clause will now wreak havoc on the Central Bank of Iran’s claim to the funds currently blocked by Citibank.

The section referred to above, Section 502 of the Iran Threat Reduction and Syria Human Rights Act of 2012, deals with “interests in certain financial assets of Iran”. That section requires the unblocking of funds in which Iran or its monetary authorities have an equitable interest held in the U.S. or abroad for a foreign securities intermediary doing business in the United States, and those funds held in Citibank which are the subject of the Peterson et al. v. Islamic Republic of Iran et al., Case No. 10 Civ. 4518 (BSJ) (GWG) litigation for payments of judgement against Iran in U.S federal courts for damages for personal injury or death caused by an act of torture, extrajudicial killing, aircraft sabotage, or hostage-taking, or the provision of material support or resources for such an act, by Iran.

While it may seem surprising that Congress actually identified a particular case for which the law should apply, its not too shocking. After all, the law underlying U.S. economic sanctions is naturally inspired by contemporary political motivations. As such, it seems that the plaintiffs’ attorney in Peterson played the political game quite well in lobbying Congress to act in their favor in relation to these funds. However, the bigger question here is whether or not Congress’ actions undermine U.S. policy. U.S. economic sanctions are intended to protect the U.S. financial system from the introduction of illicit funds and to leverage the that financial system to coerce change in the behavior of the targeted party or nation. In essence, this means that blocked funds are used as a bargaining chip to compel change from a targeted party; not to punish the targeted party. However, Congress clearly intended to punish Iran with their inclusion of section 502. Once those funds are unblocked and paid out to the plaintiffs they can no longer be leveraged against Iran and the incentive for Iran to change its behavior is reduced. This isn’t the first time something like this has happened. Congress acted similarly in the early 2000s in regards to funds blocked pursuant to Iraq sanctions. However, this latest action by Congress seems to be representative of a larger shift in U.S. policy away from sanctions as a method of diplomacy to a form of punishment.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrari-legal.com.