On January 16, 2016, the International Atomic Energy Agency confirmed that Iran had fulfilled its initial nuclear-related obligations under the Joint Comprehensive Plan of Action (JCPOA) that had been reached in July between the United States, the other P5+1 countries, the European Union, and Iran. (See July 31, 2015, Alert). As a result, on that day (Implementation Day) the UN, the United States, and the European Union lifted their nuclear-related sanctions against Iran. For European companies, this essentially means that, provided they comply with the EU’s export licensing requirements for shipments to Iran, they should be able to engage in most types of transactions with that country.
The same is not the case for U.S. companies and other U.S. persons – for the most part, they remain prohibited from engaging in transactions with Iran, although, as explained below, under certain circumstances, their separately-incorporated foreign subsidiaries may engage in certain transactions with Iran that previously were prohibited to them.
Following is a review of those Iran sanctions lifted by the United States.
1. Removal of nuclear-related secondary sanctions – Prior to January 16, foreign firms that engaged in certain transactions/trading with Iran related to that country’s
- financial and banking,
- energy and petroleum,
- shipping, shipbuilding, and port operations,
- gold and other precious metals,
- graphite, raw or semi-finished metals such as aluminum and steel,
- software for integrating industrial process, and
sectors were subject to the potential imposition by the United States of a broad spectrum of sanctions, up to and including, being blocked from engaging in transactions with the United States. Secondary sanctions were also imposable by the United States against (re)insurers of sanctionable transactions. On January 16, the threat of those secondary sanctions being imposed was removed.
However, U.S. secondary sanctions may still be imposed against foreign persons for transactions with the more than 200 Iranian or Iran-related Specially Designated Nationals (SDNs) remaining on the SDN List, the Iranian Revolutionary Guard Corps (IRGC) and its designated agents or affiliates, and activities in support of SDNs designated for Weapons of Mass Destruction (WMD) reasons or Iran’s support for international terrorism. In addition, clearance of U.S. dollar transactions involving Iranian persons by foreign banks through U.S. financial institutions remains prohibited.
Since, as part of the JCPOA, the United States also removed, on Implementation Day, approximately 400 Iranian entities, such as the Central Bank of Iran, a number of other Iranian financial institutions, the Islamic Republic of Iran Shipping Lines (IRISL), the National Iranian Oil Co., the Naftiran Trading Company, and the National Iranian Tanker Company from the SDN List, foreign person transactions with those entities will not result in the imposition of U.S. secondary sanctions. Moreover, Iranian banks that have been removed from the SDN List will be allowed to reenter the SWIFT messaging service network. Finally, Iran is being allowed to repatriate what is believed to be between $50-$100 billion in oil revenues held in third countries.
2. Removal of certain aspects of the U.S. direct embargo of Iran – The United States has imposed a comprehensive embargo on trade and financial transaction with, and investments in, Iran since at least 1995. This embargo is applicable to U.S. persons and items subject to U.S. export control jurisdiction. In 2012, this embargo was extended to cover the activities of foreign entities owned or controlled by U.S. persons.
In light of Implementation Day, the United States took steps in three specific and limited areas to lift its primary embargo against Iran. First, and perhaps of the greatest practical impact, the Office of Foreign Assets Control (OFAC) has issued a new general license (General License H), which authorizes foreign entities owned or controlled by U.S. persons to engage in transactions with Iran. However, such transactions are subject to a number of restrictions.
Whereas foreign subsidiaries of U.S. companies will be able to export to Iran U.S.-origin EAR99 items they bought for general inventory purposes, they will not generally be able to ship to Iran any other items subject to U.S. export control jurisdiction. Such items include not only those of U.S. origin, but also foreign-origin items containing more than 10 percent controlled U.S. content, and some foreign-origin items that are the direct product of U.S. technology. Second, no U.S. person, including the foreign subsidiary’s U.S. parent and U.S. citizens and permanent resident aliens working at the foreign subsidiary, can finance, guarantee, approve, or otherwise “facilitate” any Iranian transactions. Third, Iranian transactions cannot involve any transfer of funds to, from, or through a U.S. depository institution, nor can they involve any SDN, person/entity identified as a foreign sanctions evader, or certain other denied/sanctioned persons, or any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran or any official, agent, or affiliate thereof.
If foreign entities owned or controlled by a U.S. company engage in conduct with Iran not authorized by General License H, the parent company will be liable for any resulting civil penalties.
The OFAC prohibition on U.S. person facilitation of transactions by foreign affiliates with Iran is broad and includes most types of assistance for such activities, including such things as operational assistance and the provision of a wide variety of supporting services, such as logistics, accounting, and engineering.
However, General License H does authorize two types of previously prohibited facilitation activities. First, it authorizes U.S. persons to establish or alter operating policies and procedures to the extent necessary to allow a U.S. person-owned or -controlled foreign entity to engage in authorized transactions with Iran. This authorization is explained by OFAC to cover the involvement of U.S. person board members, senior management, and employees, as well as outside U.S. legal counsel or consultants to draft, alter, advise, or consult on such operating policies and procedures. U.S. persons can also provide training, advice, and counseling on new or revised operating policies and procedures.
Second, it authorizes making available to U.S.-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 authorized Iran transactions. However, computer and related business support systems cannot be used for any transfer of funds to, from, or through a U.S. depository institution or a U.S.-registered broker or dealer in securities.
In this regard, the term “automated” refers to a computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server that operates passively and without human intervention (except for routine or emergency maintenance) to facilitate the flow of data between and among the U.S. person and its owned or controlled foreign entities. U.S. persons would not be authorized to perform data entry or internal processing for the creation of a customer record. The term “globally integrated” refers to a computer, accounting, email, telecommunications, or other business support system, such as an ERP system, platform, database, application, or server, that is available to, and in general use by, the U.S. person’s global organization, including the U.S. person and its owned or controlled foreign entities.
The second action taken by OFAC to ease the U.S. direct embargo of Iran was the establishment of a favorable licensing policy for activities related to the export, reexport, sale, lease, or transfer to Iran of commercial passenger aircraft for exclusively commercial aviation use, and of related spare parts, components, and associated services. While licenses will still be required for shipments of such items, OFAC has committed to a favorable licensing policy provided that the items are used exclusively for commercial passenger aviation and the items are not for resale or retransfer to persons on the SDN List.
The third step taken by OFAC was the issuance, on January 21, of a general license to authorize the importation of Iranian-origin carpets and foodstuffs intended for human consumption, including caviar and pistachios. U.S. person dealings in such items are also authorized, provided that the transaction or dealing does not involve or relate to goods, technology, or services for exportation, reexportation, sale, or supply, directly or indirectly, to Iran, the Government of Iran, an Iranian financial institution, or any other Iranian-blocked person/entity.
The above actions taken by the United States provide a limited, but possibly important Iranian market opportunity, at least for some U.S. industries and foreign subsidiaries. However, the remaining restrictions on the new opportunities, particularly the retention of the facilitation prohibition, will mean that careful planning will be needed to take proper advantage of them. More broadly, the limited nature of the U.S. primary sanctions against Iran that are being lifted means that most transactions by U.S. persons involving Iran will remain prohibited and subject to licensing. Further easing of the embargo against Iran will have to await further improvements in diplomatic relations between the two countries.