On 20 January 2014, as part of the Joint Plan of Action, the U.S. and EU have implemented "limited, targeted, temporary and reversible" relief from certain sanctions measures in return for Iran's agreement to commence the winding down of certain aspects of its nuclear program. This limited easing is valid for a six-month period only, until 20 July 2014, and if there is no comprehensive agreement with Iran by that time, those EU and U.S. sanctions that have been temporarily suspended will come back into force. We have outlined below key aspects of this development and its impact on U.S. companies (and their non-U.S. subsidiaries) as well as on foreign companies that are not ultimately owned or controlled by U.S. persons/entities.
- Executive summary
There is NO real impact on U.S. companies and any non-U.S. entities owned or controlled by them (including foreign subsidiaries and 50/50 joint ventures) because they remain subject to the full scope of primary U.S. sanctions that prohibit virtually all dealings with Iran and those sanctions remain fully in force (they have NOT been suspended).
The only exception relates to the ability of U.S. companies (or non-U.S. entities owned or controlled by U.S. persons) to obtain specific licenses from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) for the provision of certain safety-of-flight services and/or parts/components for certain Iranian commercial passenger aircraft.
U.S. companies selling food, medicine, or medical devices pursuant to OFAC’s general or specific licenses may be able to benefit from a new mechanism that would be established to facilitate such authorized sales.
Non-U.S. companies (which are not ultimately owned or controlled by U.S. persons or U.S. entities) can benefit from limited temporary easing of certain EU sanctions and certain secondary U.S. sanctions, which will not prohibit certain exports of petrochemicals from Iran, activities involving sales of gold/precious metals to/from Iran, sales for the Iranian auto sector, and certain exports of Iranian crude oil to six eligible countries during the six-month period.
With some limited exceptions, none of those activities can involve Iranian persons or entities who are Specially Designated Nationals (SDNs).
For companies subject to EU jurisidiction, the restrictions on dealing with EU listed persons/entities also remain applicable.
Non-U.S. companies can also benefit from the new mechanism to facilitate authorized sales of food, medicine, or medical devices, as well as from an increase in the thresholds for financial transactions with Iran that require prior authorization from EU authorities.
Mandatory reporting to the U.S. Securities and Exchange Commission (SEC) by companies filing annual/quarterly reports (including foreign companies that are issuers required to file such reports) has to be assessed in more detail because a number of Iran-related activities could still trigger SEC reporting obligations even if they are covered by the temporary easing.
- U.S. sanctions
On 20 January 2014, the U.S. State Department and OFAC issued Joint Guidance and FAQs, as well as a Statement of Licensing Policy, that relate to the temporary easing of certain U.S. sanctions against Iran.
- Impact on U.S. companies and non-U.S. entities owned or controlled by U.S. persons/entities
As noted above, the temporary easing does NOT provide any relief for U.S. companies or foreign companies that are ultimately owned or controlled by U.S. persons (including foreign subsidiaries of U.S. companies) because none of the primary U.S. sanctions are subject to the suspension. OFAC’s broad sanctions continue to restrict the ability of U.S. companies, their foreign subsidiaries and joint ventures, and U.S. citizens or U.S. permanent residents (green card holders), even if they are living and working outside the United States, from engaging in virtually all activities with or involving Iran or Iranian-origin goods or services. The only exception relates to possible licensing by OFAC of certain activities related to the safety of civil aviation in Iran, including by passenger aircraft owned or operated by Iran Air. Specifically, a license could be obtained from OFAC for
services related to the inspection of commercial aircraft and parts in Iran or a third country;
services related to the repair or servicing of commercial aircraft in Iran or a third country; and/or
shipment of goods or technology, including spare parts, to Iran or a third country.
Although transactions involving Iran Air can be licensed, please note that other Iranian airlines designated as SDNs will not be covered by this favorable licensing policy. OFAC has indicated that it will try to process those applications expeditiously but there is no guaranteed turnaround time as some of them can involve complex issues. The licenses will expire on 20 July 2014, and all activities undertaken pursuant to a license must be completed by that time.
For companies that are engaged in the authorized sales of food, medicine, or medical devices to Iran, the joint guidance indicates that U.S./EU and Iran are in the process of establishing mechanisms to further facilitate the purchase of, and payment for, such humanitarian transactions.
Although the guidance does not specify the exact mechanisms nor does it identify foreign banks that will process such transactions, it indicates that OFAC will directly contact foreign banks who will be hosting these new mechanisms and will provide such banks with specific guidance.
The U.S. government has clarified that this new mechanism is not the exclusive way to finance or facilitate such authorized sales, and companies may continue to rely on pre-existing exceptions to process such transactions for the sale of food, medicine, or medical devices.
- Impact on Non-U.S. companies (not owned or controlled by U.S. persons/entities)
Because virtually all of the areas involving limited temporary easing relate to secondary U.S. sanctions that target foreign companies (i.e., those that are not owned or controlled by U.S. persons/entities), such companies may benefit from this limited relief for specified activities that have no U.S. nexus (i.e., when the activity does not involve U.S. persons/entities, U.S. currency, or items/software/technology subject to U.S. law). We note that most of the secondary sanctions that the U.S. has imposed against foreign companies still remain in place, and the suspension only applies to the activities set out below. In general, secondary U.S. sanctions continue to restrict foreign companies from dealing with Iranian SDNs even if the activity is otherwise covered by those identified as eligible for a temporary suspension. Specifically, the temporary easing of secondary U.S. sanctions effectively involves a suspension of the prohibition on:
- the export of petrochemical products from Iran when no SDN is involved, other than specifically enumerated petrochemical companies identified in the Annex to the U.S. guidance (we note that this measure does not authorize the provision of petrochemical products to Iran);
- he sale or transfer to Iran of goods or services used in connection with the Iranian automotive sector, provided that the transaction does not involve any SDNs (other than certain Iranian banks) and that the goods at issue are not subject to U.S. law due to their origin or level of U.S. content;
- the sale of gold and other precious metals to or from Iran, provided that the transaction does not involve any SDNs other than agencies or instrumentalities of the Iranian government designated only for its ownership/control by the government and certain Iranian banks;
- the provision of certain services and parts to ensure the safe operation of Iranian commercial passenger aircraft (if a foreign company needs spare parts or technology subject to U.S. law in order to provide these safety-of-flight services, such activities would require a specific license from OFAC);
- the export of Iranian crude oil to China, India, Japan, Republic of Korea, Taiwan, and Turkey, provided that the transaction does not involve any SDNs other than the National Iranian Oil Company (NIOC) or the National Iranian Tanker Company (NITC), or certain Iranian banks; and
- the provision of “associated services” that are ordinarily incident to the underlying activities eligible for the temporary easing (such necessary services include insurance, transportation or financial services).
Please note that the entirety of a transaction has to be completed during the suspension period (including any deliveries, payments, etc.). The U.S. government has advised that there will be no “grandfathering” of activities that start during the suspension but that are not completed by the time the suspension ends.
- EU sanctions
With effect as of 20 January 2014, the EU has introduced amendments to the sanctions against Iran by Council Regulation 42/2014 amending Council Regulation 267/2012: These newly adopted measures suspend certain EU sanctions against Iran for a six-month period as part of the implementation of the Joint Plan for Action agreed by Iran with the EU, U.S., China, and Russia to reach a solution to Iran's nuclear program on 23 November 2013.
Effectively, the following EU measures are covered by the temporary sanctions relief:
- suspension of the prohibition on the provision of transport and insurance/reinsurance in relation to crude oil or petroleum products (more specifically: "petroleum oils and oils obtained from bituminous minerals, crude," as classified under HS code 2709.00) originating in Iran or imported/exported from Iran
- suspension of the prohibition to import, purchase, transport, and provision of related services (e.g., financial assistance, insurance/reinsurance) in relation to petrochemical products originating in Iran or exported from Iran; in this regard, EU member states may authorize the release of frozen funds and facilitate the provision of funds and economic resources to the Iran Ministry of Petroleum for the execution of contracts for import, purchase, or transport of petrochemical products that originate in Iran or have been imported from Iran
- suspension of the restrictions to purchase, import or transport, and to provide related services (e.g., technical assistance or brokering) in relation to gold, silver, precious metals, and diamonds
- increase the thresholds tenfold for financial transactions to and from Iran regarding non-sanctioned trade that require prior authorization from EU authorities:
- Involving Iranian banks
Transfers concerning foodstuffs, healthcare, medical equipment for agriculture or humanitarian purposes, equal to or above EUR1 million will require prior authorization.
Other transfers equal to or above EUR100,000 will require prior authorization.
- Involving non-Iranian banks
Transfers equal to or above EUR400,000 will require a prior authorization.
- SEC reporting
Companies that are required to file annual/quarterly reports with the SEC have to separately analyze the mandatory disclosure obligations under section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012. There are different reporting triggers under section 219, which added section 13(r) to the Securities and Exchange Act of 1934. A number of the activities eligible for temporary easing described above may still require reporting to the SEC under one or more of the reporting triggers in section 13(r)(A)-(D), including (D)(i)-(iii).
The SEC has not yet expressed a view whether it will consider this temporary lifting pursuant to the Joint Guidance (and the associated waivers identified in the guidance) as a “specific authorization” from a federal agency for purposes of the carve-out from reporting set forth in section 13(r)(D)(iii) for activities that involve an entity owned or controlled by the Iranian government. Foreign companies should carefully assess their SEC disclosure obligations if an activity is eligible for suspension.
We also note that any activities that involve SDNs designated for WMD proliferation or global terrorism reasons would be reportable as those are not subject to the same reporting carve-out in section 13(r)(D)(iii). For example, safety-of-flight services provided to Iran Air pursuant to a specific OFAC license may still be reportable under section 13(r)(D)(ii). You should consult with counsel before determining whether an activity requires reporting in a quarterly or annual report filed with the SEC.