Earlier this year, the United States Government (USG) eased certain nuclear-related sanctions against Iran pursuant to “Implementation Day” of the Joint Comprehensive Plan of Action ( JCPOA) between the “P5+1” countries (United States, the United Kingdom, China, Russia, France and Germany), the European Union (EU) and Iran. The JCPOA’s purpose is to ensure that Iran’s nuclear program will be peaceful, and on January 16, 2016, the International Atomic Energy Agency (IAEA) certified that Iran has fulfilled its initial obligations under the JCPOA.
Following Implementation Day, the “P5+1” countries and EU lifted certain nuclear-related sanctions against Iran. These regulatory changes created areas of opportunity for U.S. businesses and non-U.S. businesses wishing to do business with Iran. Below is a summary of what Implementation Day means for U.S. businesses.
1. Exercise Caution - Many Restrictions Remain in Place for U.S. Companies
The USG issues country-based sanction programs and selective programs targeting specific individuals, companies or governmental agencies for many reasons. Although the USG lifted certain nuclear-related sanctions, sanctions related to anti-terrorism, human rights concerns and Iran’s ballistic missile program remain in place. The remaining restrictions continue, including the almost complete prohibition on U.S. persons conducting any type of business with Iran unless pursuant to a license granted by the Treasury Department’s Office of Foreign Assets Control (OFAC). In fact, additional missile-related sanctions were issued on January 17, 2016.
Before making sales, shipping goods, or even financing transactions, it is very important to check OFAC’s website or consult with legal counsel to ensure that you have complete information regarding the latest restrictions affecting countries and parties with which you plan to do business and even the countries and parties with which your customers plan to do business.
2. Some Flexibility for Non-U.S. Companies
The USG issues “secondary sanctions” generally directed at preventing non-sanctioned persons from doing business with sanctioned persons, even though the business takes place entirely outside of U.S. jurisdiction and does not involve U.S. persons. The non-sanctioned person who violates these secondary sanctions may itself be prevented from doing business in the U.S. For example, prior to Implementation Day, due to U.S. secondary sanctions, Chinese banks that transferred funds to Iranian banks were sanctioned and cut off from the U.S. financial system, which caused the vast majority of Chinese banks to stop sending or receiving wire transfers to or from Iran.
Following Implementation Day, the USG lifted nuclear-related secondary sanctions on Iran’s energy, shipbuilding, ports, automotive, gold and precious metals, software, and financial institutions and insurance sectors. In connection with lifting the secondary sanctions, the USG removed over 400 individuals and entities from export control lists maintained by OFAC, meaning that non-U.S. persons will no longer be subject to sanctions for conducting transactions with those individuals.
However, notwithstanding the lifting of secondary sanctions as set out above, secondary sanctions continue to apply to non-U.S. persons for conducting transactions with over 200 Iranian or Iran-related individuals and entities on OFAC’s Specially Designated Nationals and Blocked Persons List.
To ensure that you are not attempting to do business with or export to a restricted individual or company, you may search the various governmental agency sanctions lists, including, without limitation, the Consolidated Screening List, which is a consolidation of multiple export screening lists of the Departments of Commerce, State and the Treasury maintained by the Department of Commerce – Bureau of Industry and Security (BIS).
3. Some Flexibility for Foreign Subsidiaries of U.S. Companies
Pursuant to the JCPOA, the USG committed to license three categories of activity that would otherwise be prohibited under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR). These include (1) the sale of U.S. aircraft, parts and services exclusively for commercial passenger aviation to Iran; (2) the import of Iranian carpets and foodstuff into the U.S.; and (3) the conduct of certain activities by foreign subsidiaries of U.S. companies pursuant to General License H.
General License H authorizes U.S.-owned or -controlled foreign entities to engage in activities with Iran that are consistent with the JCPOA and U.S. law, including the export restrictions that remain in place. This license is meant to override previous restrictions on trade with Iran that were set forth under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560.215 (the ITSR). The ITSR prohibited U.S.-owned or -controlled foreign entities from knowingly engaging in any transaction, directly or indirectly, that would be prohibited if engaged in by a U.S. person. While General License H allows foreign subsidiaries more latitude to engage in trade with Iran, it contains important exceptions with respect to how U.S. persons may assist the foreign subsidiary and what goods may be shipped to Iran.
To assist the foreign subsidiary, U.S. persons, including board members, senior management, employees and outside legal counsel or consultants, may engage in activities related to the initial determination to engage in authorized activities with Iran, as well as the establishment or alteration of operating policies and procedures of the foreign subsidiary to the extent necessary to allow the foreign subsidiary to engage in authorized transactions with Iran. Note that U.S. persons may not be involved in ongoing Iran-related operations or decision making.
U.S. persons may also make available to the foreign subsidiary 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 Iran-related transaction by the foreign subsidiary. However, the authorized business support systems must operate passively and without human intervention to facilitate the flow of data between and among the U.S. company and the foreign subsidiary, and no business support system may be used in connection with any transfer of funds to, from, or through a U.S. depository institution or a U.S.-registered broker or dealer in securities.
Finally, General License H does not authorize export or reexport of U.S.-origin goods to Iran. Other restrictions, such as the prohibition on the export of items to persons on BIS’s Consolidated Screening List or to any military entity of Iran, also remain in place.
There are two important things to consider going forward.
- The JCPOA contains a so-called “snapback” provision whereby if the dispute resolution mechanism fails, the suspended sanctions may be re-imposed by any of the P5+1 countries. Additional sanctions against Iran may also be imposed for terrorism, human rights, missile technology or other reasons.
- The next major milestone in the JCPOA is Transition Day, which will occur eight years from Adoption Day (October 18, 2015), or when the IAEA concludes that all nuclear material in Iran “remains in peaceful activities,” whichever is earlier. On Transition Day, the USG will seek to terminate statutory secondary sanctions provisions and will remove certain individuals and entities from OFAC’s export control lists.
Given the ongoing restrictions for U.S. companies and limited flexibility for non-U.S. companies and foreign subsidiaries of U.S. companies, companies that conduct business with Iran, whether directly or indirectly, should exercise extreme caution to fully understand and manage the risks of their business dealings. We encourage clients to contact us to learn more about the risks and opportunities for specific transactions and organizations.