The Iran Sanctions Landscape & Corporate Risk Management

Guest Article by Mike McNamara, Michael Zolandz, Peter Feldman & Jeffrey Krilla.

Among many sobering revelations coming out of the latest Wikileaks document dump – another quarter-million pages of classified documents posted – is that absolutely everyone is worried about Iran. The confidential cables reveal the extent to which government officials, analysts, diplomats and heads of state fear that containment of Iran’s nuclear ambitions has become an insoluble problem. For businesses engaged in foreign trade, and defense sector businesses in particular, the Iranian conundrum only heightens the need to comply with reinforced sanctions against doing business with the Islamic Republic.

In this article, members of the Public Policy & Regulatory practice at law firm SNR Denton take a deep dive into the political and enterprise risk management issues surrounding Iranian sanctions regimes. Non-compliance is no small matter, regardless of how tenuous or arm’s length a company’s connections with Iran. “As the nature of risk evolves, it is critical that the way companies monitor and evaluate risk adapts to the new landscape.” Welcome to the brave new world of global compliance, where the consequences of even an inadvertent failure can be especially heavy for defense sector firms…

• Categories of Risk
  
• Best Practices and Global Compliance Strategy
  
• The Architecture of Iran Sanctions
  
• Category 1: United Nations Security Council Sanctions
  
• Category 2: European Union and Other National Sanctions Regimes
  
• Category 3: United States Sanctions
  
• The Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA)
  
• Key Provisions: Banking relationships
  
• Key Provisions: Energy sector
  
• Key Provisions: Reports and Notifications
  
• Iran Sanctions Enforcement Trends
  
• Compliance Considerations
  

US-UK Treaty Aims to Ease ITAR Export Control Burdens

In December 2005, the interference of American arms export restrictions within the huge F-35 program became so burdensome that they became a high-level diplomatic problem. Despite the promises of 2 successive American Presidents, the ITAR exemptions that Britain had sought remained blocked in America’s legislature – and European initiatives to resume defense exports to China were not improving the situation in Congress. Meanwhile, MPs in Britain were becoming very insistent on a fix, and there was even talk of abandoning the F-35. The stakes were high.

In time, many of these issues were worked out. In August 2006, the US and UK reached a technology transfer agreement concerning the F-35 fighter, which would serve as a model for other F-35 industrial partners. By December 2007, Tier 1 partner Britain had signed the F-35’s Production, Sustainment & Follow On Development MoU. A broader fix was still on the agenda, however, and in July 2007 it materialized as a a treaty that would change the way the American and British defense firms cooperate on defense programs.

This Spotlight article aims to act as a one-stop briefing that explains the treaty’s motivation, key terms, and outstanding issues. It also links to the key documents, and keeps track of events en route to full implementation nearly 5 years later…

EDA Funding Civil UAV Integration Efforts

Hermes 450 –
note civil reg. #

Joint EDA/ESA contracts for research into UAV/satellite combinations. (Feb 8/10)

‘Swarming’ algorithms currently under development are trying to address the critical issue of ‘deconfliction’. Meanwhile, flying restrictions aimed at avoiding aerial collisions have put a serious crimp in the tactical usefulness of UAVs at the battalion level and below.

Deconfliction issues have also prevented civil UAV markets from reaching anything close to their full potential for border patrol, land surveying, etc. The task is not impossible – for instance, the Hermes 450, which is the basis of Britain’s Watchkeeper Mk450 system, is now civil certified in Israel. Which is why a May 2007 EUR 500,000 (then about $672,000) European Defence Agency initiative could be significant… and now, a EUR 50 million MIDCAS contract involving an array of European firms has been signed at the 2009 Paris Air Show.

• The EDA’s Goals
  
• Air for All
  
• Contracts and Events [updated]
  

Rapid Fire: 2010-02-08

• NATO Ministerial: Gates pledges greater sharing of classified technology with allies; NATO chief calls for more resources to train Afghan army and police, while France agrees to send 80 more trainers.

• European defense ministers call for speedy conclusion to talks on troubled Airbus A400M military airlift program.

• The US Navy UCAS program receives $2 billion QDR push.

• US Army pays $253.3 million to service US Stryker vehicles around the world.

• Australia ready to OK final version of $547 million integrated HF communications system for armed forces.

• US Navy orders $122.5 million in spares and extra engine maintenance for V-22 Osprey.

• Obama administration beefs up missile defense budget. BMD report focuses on regional missile threats.

• Romania to allow US ballistic missile defense inceptor missiles to be deployed, following US cancellation of larger BMD deployments in Poland and the Czech Republic.

• Boeing gets $99.3 million order to supply 13 more AH-64D Block II helicopters to the US Army.

• Which defense firms will benefit from FY 2011 defense budget?

• Northrop Grumman feels Pentagon heat over KC-X aerial refueling tanker RFP.

• Taiwan’s order for Eurocopter EC225s could strain China-European Union relations – but hasn’t, so far.

• Asia-Pacific nations revamp their fighter inventories.

• DARPA has enlightened view on funding for ArcLight, a long-range strike weapon that could be launched using the MK 41 system onboard ships and subs.

• US military sends bomb-sniffing dogs to Iraq.

BAE & VT Group Finalize, then Dissolve, UK Surface Ship JV

As part of Britain’s Defence Industrial Strategy, the Labour Party government and Ministry of Defence actively sought to reduce the number of companies involved in naval surface ship building and maintenance. In fact, they wanted just one company to deal with. Monopolies tend to drive prices up and effectiveness down, but the Ministry of Defense believed that a long-term partnering arrangement with performance guarantees could counteract that natural tendency. They also believed that the expected volume of warship construction and maintenance could no longer support more than one sizeable firm. Rather than force the merger, they dangled a sizeable carrot: they would not issue contracts for the planned CVF aircraft carrier program until they had a single entity to deal with.

Almost a year after the original July 25/07 Heads of Terms signed by BAE systems, VT Group, and the UK MoD, BAE Systems plc finalized a legally binding Framework Agreement with VT Group plc (‘VT’) to establish the BVT Surface Fleet Ltd. joint venture as the UK’s premier provider of surface warships and through-life support. The firm would become the UK Government’s strategic partner for the design, build and support of future warships, and will also pursue export opportunities. The joint venture targets total net savings to the government in excess of GBP 700 million (currently about $1.4 billion) to be shared 70/30 between the MoD and the BVT. These net savings, and the extent to which the parties will actually benefit, remain to be seen in practice.

The joint venture is now a single venture again, as BAE Systems buys out its partner…

$80M to Rolls-Royce for C-130J Engine Spares and Parts

AE 2100D3 inspection

Rolls-Royce announced an $80 million contract to provide AE 2100D3 spare engines and parts to power new C-130J military transport aircraft for the U.S. Air Force, U.S. Marine Corps, the Royal Norwegian Air Force and the Indian Air Force. The contract, which is managed by Robins Air Force Base in GA, includes an initial 27 AE 2100D3 spare engines and parts for delivery through 2011.

The AE 2100D3 engine is a modular turboprop engine with 4,600 shaft-horsepower. The AE engine line is produced by Rolls-Royce and manufactured in Indianapolis, IN. Along with the AE 3007 and AE 1107C-Liberty, the engine line has totaled more than 37 million hours of service.

French President Tries to Set French Defense on a New Course

“Il n’y a pas de liberte, il n’y a pas d’egalite, il n’y a pas de fraternite sans securite.”
— French President Nicolas Sarkozy

By mid 2007 it seemed that France’s President Sarkozy was softening on defense after an electoral stumble. In July 2007, Sarkozy put together a group that was tasked it with creating a White Paper to define France’s future defense policy. The last time an exercise of this type had been conducted was in 1994.

That group eventually returned with its report, and on June 17/08, President Sarkozy made a speech outlining the key elements of that future direction. The decisions made will change the shape of French defense spending, and will launch an attempt to implement an interlocking set of procurement, infrastructure, and political reforms and changes.

That plan has implications for NATO and the EU, while it received cabinet approval for a 6-year spending plan.

Europe’s GMES/Kopernikus: Dual-Use Eyes in Space

(click to visit)

Over at C4ISR Journal, “Europe’s declaration of independence” covers a EUR 2.3 billion (about $3.6 billion) Global Monitoring for Environment and Security (GMES) satellite constellation. EADS-Astrium will build the satellites, which fit into the growing trend toward “civil” satellites whose fine resolution and advanced sensors give them dual-use potential. Euroconsult in Paris predicts that the next 10 years will see almost 200 Earth observation satellites placed in orbit, some of which will have dual-use capability.

The EU is not alone in believing that environmental changes could become a significant driver of interstate conflict in a crowded world, and responses to natural disasters often require quick imagery in order to assess and plan a response. In addition to that kind of environmental monitoring, GMES will also serve as an independent check on other countries’ satellite data concerning weapons of mass destruction, genocide, et. al. This is not a formal requirement, but several European defense ministers have already expressed interest.

The GMES project was recently renamed Kopernikus, and given the tag line “observing our planet for a safer world.” By 2011, Sentinel-1 is expected to be a cloud-piercing radar satellite delivering 5 meter data blocks of imagery. By 2012, the Sentinel-2 mapping satellite would be added, with a number of sensors to measure environmental trends in key areas. Sentinel-3 will add a radar altimeter. See also: GMES official site | European Union Satellite Centre GMES page | ESA’s GMES page.

EDA Gets Budget Boost as Europeans Make Pledges

The EU’s European Defense Agency has been busy during its short lifetime, attempting to create more transparent competition with fewer set-asides in European defense spending, consolidate national programs into international ones, work to develop technology and standards for UAV civil certification, and get some level of agreement regarding future areas of defense investment. Now a deal reached on Nov 19/07 will see the EDA budget take a significant jump from EUR 22 million (2007) to EUR 32 million in 2008. France had pushed to give the agency a 3-year budget, but Britain vetoed the proposal. A Reuters report quotes a senior British official as saying that “We don’t back a budget without seeing what we are paying for…”

The ministers pointed to “existing gaps” in strategic transport (NATO C-17 and the delayed A400M programs), force protection, and intelligence (vid. AGS et. al.) as key focus areas they hope the EDA will pursue. The ministers also set a series of “collective but voluntary” pledges, as part of a “framework for a joint Strategy on Defence Research & Technology.” Pledges include grow spending on new equipment from 19.4% to 20%, growing spending on multinational programs from 21% to 35%, and growing spending on R&D from 1.2% to 2%, with collaborative R&D spending doubling from 10% of that to 20%. Even so, those pledges to “spend more, spend better and spend more together,” are only useful if they are backed by action. This is an issue that has been a complaint in other venues as well, amidst future projections that show overall spending dropping or holding steady over the next 7 years. EDA release | EDA head report to the Council [PDF] | eu Council 2008 Guidelines for the EDA [PDF] | EU Observer story | DID multi-link Spotlight Article: “EU Procurement Challenges & Defense Weakness Debated“.

EU Set to Regulate Combat Aircraft Emissions

Eurofighter, Spain

Aviation Week’s Ares reports that The European Parliament will vote on including military aviation in the EU’s greenhouse gas emission trading scheme (ETS) during its plenary session in Strasbourg, France, this week. Military aircraft were not originally included, but an amendment to the draft legislation calls for flights performed by military aircraft to be included in the ETS unless they are “part of an international mission.”

If the aircraft are included, the cost of purchasing emissions credits would be added to the price of training flights and other military activities – presumably including local disaster relief, unless this too was exempted.

Amusingly, the Green party has criticized the European Parliament itself for the emissions its members and staff cause, by moving back and forth from Brussels and Strasbourg to hold plenary sessions.