The 2012 National Defense Authorization Act Casts a Wide Net to Curb Iran's Nuclear Ambitions

On December 31, 2011, President Obama signed into law the 2012 National Defense Authorization Act (NDAA). The NDAA aims to curb Iran's nuclear program by punishing both Iranian and non-Iranian financial institutions that transact with Iran's petroleum industry. Although the NDAA does not directly target U.S. companies and individuals, it signals the potential for major shifts in both the U.S.' relationship with Iran as well as with its global trading partners. The NDAA:

• Blocks all property or interests in property of Iranian financial institutions which comes into the U.S. or into the possession or control of a U.S. person;
• Prohibits foreign financial institutions from opening correspondent or payable-through accounts in the U.S., if those foreign financial institutions have knowingly conducted or facilitated any significant financial transactions with the Central Bank of Iran or other Iranian financial institutions; and
• Prohibits foreign financial institutions owned or controlled by the government of a foreign country, such as a central bank of a foreign country, from opening and maintaining correspondent or payable-through accounts in the U.S. if those institutions engage in financial transactions for the sale or purchase of petroleum or petroleum products to or from Iran.

Unlike the U.S. sanctions programs administered by the U.S. Treasury Department's Office of Foreign Assets Control, the NDAA specifically prohibits the conduct of non-U.S. actors. Not only are Iranian financial institutions targeted, but foreign banks, including the central banks of other foreign nations, stand to lose access to the U.S. financial system if they transact with the Iranian banking or petrochemical industries.

The U.S. has dispatched emissaries to advocate adoption of this policy to its foreign trading partners, especially those in Asia. Senior Treasury and State Department officials met with their counterparts in China, South Korea and Japan this month in hopes of reducing the number of customers for Iranian oil. Those meetings resulted in varying degrees of cooperation.

Nevertheless, the NDAA has already provoked strong responses from Iran and may have spurred Iran to return to the negotiating table. Although Iran has threatened to blockade the Strait of Hormuz if its petroleum and banking industries are targeted, the rial, Iran's currency, is suffering rapid devaluation. Iran's President Ahmadinejad signaled this week Iran's willingness to return to multi-party nuclear talks, and inspectors from the International Atomic Energy Commission have already entered the country to discuss its nuclear program.

Although U.S. investors are not directly affected by the prohibitions of the NDAA, U.S. sanctions programs on Iran are currently in flux pending the escalating tensions. The U.S.' relationships with trading partners such as China may also become strained if the NDAA is enforced and foreign banks are prevented from accessing the U.S. financial system.