What US-Owned or Controlled Foreign Subsidiaries Who Want to Trade Legally with Iran Need to Know

On January 16, 2016, the US Department of State and the US Department of Treasury’s Office of Foreign Assets Control (OFAC) announced the lifting of certain US sanctions against Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA). We have previously provided you with a summary of the changes resulting from JCPOA’s Implementation Day, which marks the International Atomic Energy Agency (IAEA)’s verification that Iran has fulfilled its nuclear-related obligations under the JCPOA.

We are breaking down OFAC’s licensing and guidance package in parts, beginning with one of the most opaque parts of the US commitments: the US Government would “[l]icense non-US entities that are owned or controlled by a US person to engage in activities with Iran that are consistent with this JCPOA.” This commitment raises the following questions:

  • What types of business activities by those foreign subsidiaries would be deemed “consistent with the JCPOA”; and
  • What US parents (including US employees working abroad) and foreign entities can (and cannot) do.

OFAC has provided answers to these questions in General License H (GL H) and in FAQs, K.1-K.13 which we summarize below.

We can only conclude that the H in General License H stands for “Holy Moly!” – meaning that it is a real general license that does allow non-US subsidiaries a real opportunity to reenter the Iranian market – but, as to be expected, General License H has some very important restrictions!  

What business activities does GL H authorize?

GL H authorizes an entity owned or controlled by a US person and established or maintained outside the US to engage in most transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by the Iranian Transactions and Sanctions Regulations (ITSR).

An entity is “owned or controlled” by a US person if the US person: (1) holds a 50 percent or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity. This does NOT include foreign branches of US persons as these are considered “US persons” and thus, do not qualify for GL H.

Because GL H is a general license it does not require any application for a specific license. In other words, now that GL H is in effect, US-owned or -controlled foreign entities can use it BUT must comply with its terms and not engage in any prohibited transactions.  

What can’t US-owned and controlled foreign entities do?

In short, any transactions that are not “consistent with the JCPOA.” These include:

  • The direct or indirect exportation or reexportation of goods, technology, or services from the United States without separate authorization from OFAC;
  • Transferring funds to, from, or through the US financial system;
  • Transacting with any individual or entity on List of Specially Designated Nationals and Blocked Persons (SDN List), List of Foreign Sanctions Evaders, or any activity that would be prohibited by non-Iran sanctions administered by OFAC if engaged in by a US person or in the US;
  • Any activity prohibited by, or requiring a license under the Export Administration Regulations (EAR) or with a person on the Bureau of Industry and Security (BIS)’s Denied Persons List or Entity List (unless authorized by BIS);
  • Transacting with any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;
  • Any activity that is sanctionable under Executive Orders (EO) 12938, 13382, 13224, 13572, 13582, 13611, 13553 13606, and sections 2 and 3 of Executive Order 13628, including in relation to Iran’s proliferation of weapons of mass destruction and their means of delivery, including ballistic missiles, international terrorism, Syria, Yemen, Iran’s commission of human rights abuses against its citizens; and
  • Any nuclear activity involving Iran that is subject to the procurement channel established in United Nations Security Council Resolution 2231, ¶16, and the JCPOA, section 6 of Annex IV, and that has not been approved through the procurement channel process.

Employees of US-owned and controlled foreign entities can also use US parent’s “Authorized Business Support Systems” necessary to store, collect, transmit, generate, or otherwise process documents or information related to authorized transactions provided that there is no US person intervention (i.e., US person performs data entry or internal processing for creation of a customer record). As described below, “Authorized Business Support Systems” are automated and globally integrated computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to authorized transactions.  

What can and can’t US parents (and US employees working abroad) do?

OFAC has carefully crafted GL H to continue to prohibit US parents and persons from ALL actions facilitating or approving Iranian transactions by US-owned or controlled foreign entities EXCEPT two:

  1. Activities related to the establishment or alteration of operating policies and procedures of a US entity or a US-owned or controlled foreign entity, to the extent necessary to allow a US-owned or controlled foreign entity to engage in authorized transactions.

In other words, as explained in more detail in the OFAC FAQ, K.6 and K.7, US persons from senior management to compliance personnel, including outside compliance personnel such as outside counsel, can establish or alter existing policies to enable their foreign subsidiaries to do business in Iran that is consistent with GL H. Critically, this includes the involvement of US persons in the initial determination of whether the US-owned or controlled foreign entity will engage in activities with Iran authorized by GL H. US persons can also train, advise, and counsel personnel in both the parent and the subsidiaries on these new policies.

However, once an initial determination is made, the US parent and US persons working in those subsidiaries cannot take any part in the actual transactions or related day-to-day activities including approving, financing, facilitating, or guaranteeing any Iran-related transaction by the foreign entity. Additionally, such transactions cannot involve (1) US-origin products, (2) the reexport of items containing 10 percent or more US export-controlled content if undertaken with knowledge or reason to know that the reexport is specifically for Iran or the Government of Iran (except where separately licensed by OFAC, e.g. under AGMED, personal communication devices or other licenses), or (3) the use of the US financial system.

  1. Activities to make available to US-owned or controlled foreign entities any “automated” and “globally integrated” computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to the authorized transactions.

OFAC defines an automated system as one that operates passively and without human intervention to facilitate the flow of data between the US parent and its owned or controlled foreign entities. US persons are limited to only the establishment or maintenance of the automated system. To assist companies, OFAC provides examples of what would constitute an automated system:

  • An enterprise resource planning (ERP) system that utilizes a US-based server – without any human intervention in the United States – to generate a purchase order initiated by a Dubai-based, non-US person employee of a US-owned or controlled foreign entity; 

and what sort of human intervention would disqualify the system from being considered “automated”:

  • If the ERP system required the intervention of an individual located in the United States to complete a request initiated by a Dubai-based, non-US person employee of a US-owned or controlled foreign entity, such as a US person performing data entry or internal processing for the creation of a customer record. 

Additionally, the automated system must be “globally integrated,” meaning it must be broadly available and in general use by the US parent’s global organization. This provision of GL H authorizes US third party service providers to make available to US-owned or controlled foreign entities authorized business support systems that they provide to the US parent company.  

The GL H: Holy Moly!

Obviously, US corporations with non-US subsidiaries need to consider whether they wish to take advantage of GL H and put in place operating policies that permit legal trade with Iran. US persons remain liable for transactions conducted by a US-owned or controlled foreign entity that fall outside the scope of GL H. Therefore, given the restrictions on GL H, and risks with US persons slipping over this fine line, this will not likely be a lightly taken decision.

In short, GL H may turn out to be a “Holy Moly there’s a lot of work here to be done!”