Foreign subsidiaries of U.S. companies will receive significant sanctions relief under the Iran deal, but to what extent?

As we previously have observed, most U.S. sanctions relief under the Joint Comprehensive Plan of Action (JCPOA) is directed at non-U.S. persons, which stand to benefit from an eventual dismantling of the U.S. “secondary” sanctions regime targeting the Iranian energy, shipping, shipbuilding, financial, and automotive industries.

But notably, the JCPOA specifically excludes entities “owned or controlled” by U.S. persons from the definition of “non-U.S. person”. Such foreign subsidiaries of U.S. companies are subject to the “foreign sub rule” under section 218 of the Iran Threat Reduction and Syria Human Rights Act (ITRSHA), which provides that foreign subs are subject to the U.S. embargo against Iran to the same extent as U.S. persons. This essentially cuts off foreign subs from most trade with Iran, similar to the Cuba embargo (and dissimilar from other embargoes).

But while the JCPOA takes with one hand, it appears to give with another. Annex II to the agreement provides that on “Implementation Day”—the date on which the IAEA verifies Iran’s compliance with the first round of its commitments—the United States will “[l]icense non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA” (emphasis added).

The policy goal seems clear enough. Non-U.S. companies are queuing up to reenter Iran, but foreign subs of U.S. companies—which before 2012 were technically free to trade with Iran, subject to precautions that assured the independence of their actions—remain subject to the foreign sub rule, putting them at a competitive disadvantage.

Less clear, however, is the extent of the sanctions relief to be accorded to foreign subs, which turns on what activities are considered “consistent with” the JCPOA. A fair reading is that U.S. authorities will permit foreign subs to engage in activities that other non-U.S. persons will be able to perform without risk of secondary sanctions—i.e., transactions related to the Iranian energy, shipping, shipbuilding, financial, and automotive industries. Foreign subs may also be permitted to provide “associated services” (such as insurance, technical assistance, financial services, and brokering) in support of such activities.

The licensing mechanism for this sanctions relief is not entirely clear at this time, but likely will come in the form of a general license issued by OFAC.

This licensing raises an interesting issue of statutory and constitutional interpretation, since the ITRSHA provides that the President can only terminate the foreign sub rule if he certifies to Congress that Iran has ceased its support for terrorism and “verifiably dismantled” its nuclear, biological, and chemical weapons and ballistic missiles programs. That is why the President is more likely to chip away at the rule through licensing, rather than try to lift it entirely.

With that in mind, it is important to note that there remains a fundamental question of whether the scope of sanctions relief for foreign subs will go beyond those specific activities and industries targeted by secondary sanctions. Moreover, even with regard to authorized activity, there remain some important compliance steps to consider in managing residual but potentially significant risks.

With regard to the scope of sanctions relief, as per the foreign sub rule, foreign affiliates of U.S. companies will—absent a clear authorization from OFAC—be prohibited from engaging in Iran trade that is unrelated to the JCPOA, such as the export of most consumer goods to Iran. Whether that makes sense from a foreign policy/national security perspective (i.e., permitting foreign subs to invest in Iran’s hydrocarbon sector, but not permitting the supply of consumer electronics) can be debated. This relates to how “level” a “playing field’ the President intended to provide to foreign affiliates of otherwise still-restricted U.S. companies.

As for compliance steps related to authorized activity, whatever the scope of sanctions relief provided to foreign subs under the JCPOA may be, a broad range of restrictions will remain in effect. First, foreign subs—like all non-U.S. persons—will presumably remain subject to the reexport restrictions of the Export Administration Regulations. Also, for those areas where the Administration will not lift “secondary sanctions” under the JCPOA, foreign subs of U.S. companies will likewise remain restricted and will need to navigate those risks as they conduct otherwise authorized business. Furthermore, to the extent foreign subs are licensed to pursue certain business with Iran, they will need to be careful to avoid any involvement by U.S. persons (whether related or otherwise), including any U.S. person employees, officers, or directors absent an explicit OFAC authorization, which may not be provided.

For now, the needed clarity eludes the business community, but guidance from OFAC is expected, and interested stakeholders should make their questions and views known to the agency.