Companies Are Warned Over Optimism for Future Negotiations

On January 20, 2014, the Iran Joint Plan of Action’s (JPOA) sanction relief went into effect and the United States Department of State and the Office of Foreign Assets Control (OFAC) published guidance on the implementation of the relief. This follows the November 24, 2013 signing of the JPOA where the P5+1 countries (the United States, Russia, China, France, and the United Kingdom, plus Iran) reached an initial agreement pursuant to which Iran agreed to restrict its nuclear program in exchange for limited sanctions relief.

But the sanctions relief is extremely limited in scope. Effectively, business is as usual for US companies and foreign companies owned or controlled by US companies since the sanction relief applies only to some limited secondary sanctions on non-US parties (with the exception of the civil aviation sanction relief). Therefore, US companies are cautioned to take a more realistic and measured view about doing business with Iran.

Moreover, although non-US companies have been swift to investigate the possibility of future business with Iran, State Department officials have been quick to warn against this “irrational exuberance” repeating President Obama’s estimate of a 50-50 chance of further progress on the next stage of negotiations recommencing in Germany later this month. The State Department and OFAC continue to emphasize their strong enforcement position toward the existing sanctions.

In fact, on February 6, 2014, OFAC introduced its foreign sanctions evaders (FSE) List pursuant to EO 13608. The FSE List includes persons sanctioned pursuant to EO 13608 for engaging in conduct relating to the evasion of US economic and financial sanctions with respect to Iran and Syria, which are identified, respectively, with the program tags [FSE-IR] and [FSE-SY]. US persons are generally prohibited from all transactions or dealings, whether direct or indirect, involving persons on this FSE List in or related to any goods, services, or technology (1) in or intended for the United States, or (2) provided by or to United States persons, wherever located. For more information on EO 13608 and its FSE List, please click here.

On the same day, February 6, 2014, however, OFAC also published substantial sanctions relief in the form of a revised General License D. In essence, the revised General License D authorizes the exportation, reexportation, or provision of certain hardware and software subject to the EAR by non-US persons outside the United States and the same by US persons, including foreign subsidiaries of US companies of certain hardware and software not subject to the EAR. This major expansion of General License D is discussed in a separate Arent Fox alert.

But to return to the JPOA relief, for non US persons, the JPOA six-month sanction relief clock has started ticking. Transactions related to the below services must be initiated and completed in the period from January 20 to July 20, 2014. This means that both the transaction in question and payment for the transaction must occur before July 21, 2014. In light of the short time period, companies would be well-advised to ensure credit terms of cash in advance or payment at delivery.

Additionally, the US sanctions relief does not extend to any transaction with persons on OFAC’s Specially Designated Nationals List (SDN), except Iranian depository institutions listed solely pursuant to EO 13599 (those designated by “[Iran]”) and those called out in the JPOA relief guidance.

The key areas of JPOA sanctions relief are summarized below:

US JPOA Sanction Relief — for Transactions Completed Within January 20–July 20, 2014

Iran’s Exports of Petrochemical Products

  • Temporarily suspending sanctions on transactions for the purchase of petrochemical products from Iran by non-US persons.
  • The US government will not impose sanctions on such transactions and, where needed, has executed waivers of relevant statutory sanctions to allow such transactions to occur, subject to certain conditions.
  • US sanctions are also suspended on the provision of associated services, including insurance, transportation, and financial services, by non-US persons required to facilitate Iranian petrochemical exports.

Iran’s Auto Industry

  • Temporarily suspending sanctions on transactions by non-US persons/US-owned or -controlled entities for the sale, supply, or transfer to Iran of significant goods or services used in connection with the Iranian automotive sector, including the sale of complete knock-down kits (CKDs).
  • US sanctions are also suspended for the provision of associated services, including insurance, transportation, financial services, and warranty and maintenance services by non-US persons in connection in connection with such transactions.

Gold and Other Precious Metals

  • Temporarily suspending sanctions with respect to transactions by non-US persons for the sale, supply, or transfer to or from Iran of gold and other precious metals.
  • US sanctions are also suspended on the provision of associated services, including insurance, transportation, and financial services, by non-US persons in connection with such transactions.
  • This sanction relief does not permit transactions for the sale of precious metals to Iran involving Iranian funds held in restricted overseas accounts (Restricted Funds).

Civil Aviation

  • The United States is adopting a licensing policy to permit the supply and installation of spare parts necessary for the safety of flight of Iranian civil aviation, for safety-related inspections and repairs in Iran, and for associated services, provided that OFAC has issued any required licenses.
  • Statement of Licensing Policy: OFAC issued a new Statement of Licensing Policy (SLP) that covers certain activities related to the safety of Iran’s civil aviation industry. The SLP will establish, during the JPOA Period, a favorable licensing policy regime under which US persons, US-owned or -controlled foreign entities, and non-US persons involved in the export of US-origin goods can request specific authorization from OFAC to engage in transactions to ensure the safe operation of Iranian commercial passenger aircraft, including transactions involving Iran Air. To see OFAC SLP, please click here.
  • Transactions may not involve persons on the SDN List other than Iran Air or non-designated Iranian banks.
  • Companies are well-advised to get their license applications in ASAP to OFAC, and to indicate if there is any risk that payment might occur after the JPOA Period.

Iran’s Export of Crude Oil

  • This relief allows China, India, Japan, the Republic of Korea, Taiwan, and Turkey to maintain their current average level of imports from Iran during the JPOA Period and renders non-sanctionable a limited number of transactions for the release in installments of an agreed amount of revenue to Iran for receipt at participating foreign financial institutions in selected jurisdictions.
  • US sanctions are also suspended for the provision of associated insurance and transportation services by non-US persons to the extent necessary to facilitate the purchase of crude oil at current levels to the above jurisdictions.

Facilitation of Humanitarian and Certain Other Transactions

  • Establishes “a financial channel to facilitate humanitarian trade for Iran’s domestic needs using Iranian oil revenues held abroad. Humanitarian trade [is] defined as transactions involving food and agricultural products, medicine, medical devices, and medical expenses incurred abroad. This channel could also enable transactions required to pay Iran’s UN obligations…and direct tuition payments to universities and colleges for Iranian students studying abroad.” JPOA.
  • In furtherance of the JPOA, the P5+1 and Iran are establishing mechanisms to further facilitate the purchase of, and payment for, the export of food, agricultural commodities, medicine, and medical devices to Iran, as well as to facilitate Iran’s payments of UN obligations, Iran’s payments for medical expenses incurred abroad by Iranian citizens, and Iran’s payments of an agreed amount of governmental tuition assistance for Iranian students studying abroad. Foreign financial institutions whose involvement in hosting these new mechanisms is sought by Iran will be contacted directly by the US Department of the Treasury and provided specific guidance.
  • Please note that the new mechanism for humanitarian trade transactions is not the exclusive way to finance or facilitate the sale of food, agricultural commodities, medicine, and medical devices to Iran by non-US persons not otherwise subject to the ITSR, which is not generally sanctionable so long as the transaction does not involve persons designated in connection with Iran’s support for international terrorism or Iran’s proliferation of weapons of mass destruction (WMD) or WMD delivery systems. Therefore, transactions for the export of food, agricultural commodities, medicine, and medical devices to Iran generally may be processed pursuant to pre-existing exceptions and are not required to be processed through the new mechanism.
  • In fact, the US Government has stated that it will not identify what the banking channels will be for the new payment mechanism. Instead, State Department officials have indicated that US companies will learn from their Iranian counterparts how the payments may be made. No doubt the US government has their reasons for proceeding in this roundabout fashion, but US exporters seeking only to conduct trade in humanitarian products have has been authorized by general and specific licenses for years must be wondering how the new mechanism can possibly facilitate anything when their own government will not, or cannot, tell them what it is.

Further guidance on the implementation of these measures can be found here and here.