In the past week, the US government took executive actions to continue its easing of the Burma and Iran sanctions regimes. On October 7, 2016, the U.S. government issued an Executive Order effecting the termination of the long-standing Burma sanctions regime. On the same day, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) updated the Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions under the Joint Comprehensive Plan of Action (“JCPOA FAQs”), providing, among other things, guidance clarifying that U.S. dollar-denominated foreign transactions with Iran, provided no US financial institutions or other US persons are involved, will not be prohibited.
Termination of the Burma sanctions regime
On September 14, 2016, the Obama administration announced that in light of the progress toward democratic transaction that happened in Burma in the past five years, the U.S. will terminate its Burma sanctions regime. On October 7, 2016, the U.S. Department of Treasury announced that the following administrative actions have been taken to end the regime as promised:
- President Obama has signed an Executive Order terminating the national emergency with respect to Burma. Among other things, the Executive Order revoked previously-issued Executive Orders that formed the framework of the U.S. Burma sanctions program. Sanctions authorized under legislation rather than Executive Orders are also waived.
- OFAC-administered Burmese Sanctions Regulations will be removed from the Code of Federal Regulations and will no longer be in effect.
- All individuals and entities blocked pursuant to the Burmese Sanctions Regulations have been removed from OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List. These persons include some important economic players in Burma such as the Asia World Group and its founder Steven Law and Htoo Group and its CEO U Tay Za. However, there are still Burmese individuals and entities remaining on the SDN list for reasons such as drug trafficking and dealing with North Korea.
- The U.S. Department of State will no long impose the Responsible Investment Reporting Requirements for U.S. persons investing in Myanmar.
In addition, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued an administrative exception to its previously imposed designation of "jurisdiction of primary money-laundering concern" on Burma under Section 311 of the USA PATRIOT Act. As a result, U.S. financial institutions will be allowed to maintain correspondent accounts with Burmese banks, subject to certain enhanced due diligence requirements.
This move by the U.S. government followed the earlier lifting of EU sanctions against Burma and should significantly boost Western investment in Burma. However, Burma remains a jurisdiction with high corruption and legal risks, and effective advice by experienced counsel should be sought in most investment transactions. We have a Burma-based team to advice our clients in navigating investment opportunities in Myanmar and have published a detailed legal guide (currently in its third edition) for your reference. If you have any question, please contact Guillaume Stafford at firstname.lastname@example.org.
Updated JCPOA FAQs
The update made on October 7, 2016 includes amended answers to questions C.7, C.15 and K.19 and new FAQs M.10, M.11 and M.12. Among other things, the updated JCPOA FAQs expressly states that non-U.S. financial institutions, including foreign-incorporated subsidiaries of U.S. financial institutions, may "process" (changed from "clear") transactions denominated in U.S. dollars or maintain U.S. dollar-denominated accounts that involve Iran or Iranian residents (including the Government of Iran), provided that such transactions or account activities do not involve, directly or indirectly, the United States financial system or any United States person, and do not involve any person on the SDN List or other sanctionable conduct. This means that non-U.S. banks can allow Iranian parties to use fully offshore U.S. dollar clearing arrangements, such as U.S. dollar nostro and vostro accounts with Iranian financial institutions, although great care should still be taken to ensure that the U.S. financial system or U.S. persons will not be inadvertently involved in such transactions and that due diligence procedures have been followed to ensure that no counterparties are on the SDN list. This move may also reflect the administration's intention to address concerns that US sanctions could undermine the U.S. dollar's status in international trade, despite earlier legislation introduced by Senators Marco Rubio and Mark Kirk to bar the administration from allowing an offshore U.S. dollar clearing system for transactions involving Iran (which has not progressed).
Since the relaxation under the JCPOA has been implemented, due diligence standards and procedures have been a key issue raised by many non-U.S. investors considering business opportunities in Iran. The updated FAQ also added specific guidance in this area as follows:
- OFAC does not consider engaging in transactions with an entity that is minority owned or otherwise controlled by an SDN sanctionable per se. It recommends exercising caution when dealing with such persons, but this will likely help simplify the risk assessment steps for counterparties that are clearly not majority-owned by SDNs.
- OFAC still has not specified due diligence procedures that should be followed, but it states that only checking the SDN List is not necessarily sufficient. This has generally been accepted in the market place – companies entering into Iran nowadays tend to consider not only the SDN status of their counterparties, but also the ownership structure of the counterparties and the underlying business nature of the proposed transactions. Due diligence should be conducted on a risk-based approach.
- Lastly, OFAC says that it does not expect a non-U.S. financial institution to perform due diligence on their customers' Iranian customers, unless there are reasons to believe that such a process is needed. Interestingly, this bright line rule corresponds with a joint fact sheet issued by Treasury and other banking agencies with regard to foreign correspondent banks, and likely indicates that the US does not want to chill foreign banks from financial transactions in Iran through "de-risking" by imposing onerous due diligence requirements.