On November 5, 2018, the US Treasury Department’s Office of Foreign Assets Control (OFAC) took a number of steps to complete the re-imposition of sanctions on Iran. On May 8, 2018 (outlined in our briefing), US President Donald Trump announced that the United States would withdraw from the multilateral agreement widely known as the “Iran Deal,” or the Joint Comprehensive Plan of Action (JCPOA). In so doing, the US administration committed to re-impose all US nuclear-related sanctions on Iran that had been lifted under the JCPOA, following wind-down periods of 90 and 180 days. November 4, 2018, was the last day of the longer, 180-day wind-down period.
Which Iran sanctions have been re-imposed?
This means that, as of November 5, the balance of US sanctions on Iran that had been in place prior to the JCPOA are now effectively reinstated, including sanctions on:
- Iran-related trade in gold, precious metals, graphite, and certain other metals
- The sale of US dollar banknotes to the Government of Iran
- Iranian rials and Iranian sovereign debt
- Iran's automotive, energy, port, shipping, and shipbuilding sectors
- Purchases of petroleum, petroleum products, and petrochemical products from Iran
- The Central Bank of Iran and other Iranian financial institutions
- Underwriting, insurance, and reinsurance
Furthermore, US owned or controlled foreign entities are once again treated as US persons and required to comply fully with the US sanctions on Iran. Also on November 5, 2018, OFAC added more than 700 persons to its List of Specially Designated Nationals and Blocked Persons (SDN List), including persons that were removed from the SDN List under the JCPOA. This is in addition to the designation on October 16, 2018, of 20 Iranian entities, financial institutions and investment companies for providing financial support to the Basij Resistance Force.
The sanctions that have been re-imposed are broad and are certain to have a significant impact on trade with Iran. According to a detailed press release from the US Treasury Department, the sanctions designations mark the “highest-ever level of US economic pressure on Iran.” Some activities with Iran, nevertheless, remain permissible. Considered and reasonable compliance measures will be more important than ever for companies that decide to continue engaging in business with Iran.
What Iran activities are still permissible?
OFAC’s FAQs indicate that even though the United States has re-imposed Iran sanctions that cover broad ranges of conduct, certain Iran-related activities continue not to be targeted by US sanctions. For example, US persons are still permitted to export agricultural commodities, food, medicine and medical devices to Iran under certain conditions and exceptions. A key condition for many carve-outs, however, is that SDNs cannot be involved.
OFAC also states in its FAQs that non-US, non-Iranian persons are allowed to be made whole for debts or other obligations owed to them by an Iranian counterparty. Where a non-US, non-Iranian person has delivered goods, services, loans or credits to Iran that were permissible under the sanctions in effect at the time, undertaken pursuant to a written agreement entered into before May 8, 2018, and provided in full before the end of the applicable wind-down period, repayment under the terms of the agreement should be permissible. OFAC will consider the permissibility of debts or obligations that do not satisfy all of these conditions on a case-by-case basis.
OFAC’s FAQs, however, are not comprehensive, so OFAC encourages parties to reach out to OFAC or the US State Department for guidance in circumstances that are not addressed in the FAQs, such as receiving payment for activities undertaken during the wind-down period that involve an SDN.
In addition, certain activities with Iran are not covered under the sanctions, even after the re-imposition of US secondary sanctions on Iran after November 4. These include dealings by non-US persons with entities and individuals in Iran that are not SDNs, provided that those dealings are also in sectors of the Iranian economy that are not currently targeted under sector-specific secondary sanctions.
It is also important to note that not all activities in sectors targeted by US sanctions are caught. For example, OFAC has provided an FAQ that describes the “energy sector” of Iran “to include activities involving the exploration, extraction, production, refinement, or liquefaction of petroleum, natural gas, or petroleum products in Iran,” but does not appear to necessarily include non-oil or petroleum energy activities.
The US sanctions on Iran may expand over time to include more sectors, or OFAC may update its guidance or interpretations, so any Iran-related activities should take into account existing and emerging sanctions compliance risks.
What are the significant reduction exceptions?
The United States has announced that it will grant waivers to eight countries that have committed to significantly reducing Iranian oil purchases (India, China, Italy, Greece, Japan, South Korea, Taiwan and Turkey) to allow them to continue buying Iranian oil, dealing with the Central Bank of Iran to finance such purchases, and engaging in limited bilateral trade with Iran that would otherwise be targeted by the re-imposed US sanctions on Iran. According to US Secretary of State Pompeo, two of the countries will eventually “completely end imports as part of their agreements.”
The significant reduction exceptions permit these activities by financial institutions where the exempted country “has primary jurisdiction over” that institution. The United States will review these waivers periodically, requiring exempted countries to prove that they have significantly reduced their imports of Iranian oil. Prior to the implementation of the JCPOA, a significant reduction was around 18 percent.
Even if a country did not receive any significant reduction waiver, funds currently held at the financial institution in that country on behalf of the Central Bank of Iran may still be used to facilitate humanitarian trade with Iran. The United States has not, however, issued a formal response to a joint letter from the E3 (Germany, France, and the United Kingdom) in June 2018 requesting a broader exemption from the US secondary sanctions for EU companies.
How do the re-imposed sanctions impact banking, payments, and Iran's financial services sector?
The re-imposed sanctions that target Iran’s financial services sector include the addition to the SDN List of more than 70 Iranian or Iran-linked financial institutions and their foreign and domestic subsidiaries. As a result, non-US persons who conduct significant transactions with certain SDN financial institutions could risk being targeted by US secondary sanctions. Not all of the newly-listed Iranian SDN financial institutions will be subject to secondary sanctions, however, as evidenced in OFAC’s notes to the SDN List itself and as OFAC states in a newly-published FAQ (explaining that certain dealings with Iranian SDN financial institutions that are blocked solely pursuant to E.O. 13599 because of their affiliation with the Government of Iran, as opposed to dealings with Iranian SDN financial institutions blocked for other reasons like providing support for terrorism, will not trigger US secondary sanctions). As a result, it may be possible for non-US persons to continue conducting significant financial transactions with a subset of Iranian SDN financial institutions provided that such non-US persons are able lawfully to do so under their own countries’ sanctions regimes.
SWIFT and facilitation of payments
The US sanctions also target specialized financial messaging services to financial institutions added to the SDN List for support of terrorism or weapons of mass destruction proliferation. In connection with these sanctions, the Society for Worldwide Interbank Financial Communications (SWIFT), a Belgian financial messaging platform that facilitates cross-jurisdictional payments, announced on November 5 that it will disconnect certain Iranian financial institutions from its service. Although SWIFT is not itself a financial institution, it plays a major role in enabling the flow of funds across borders. Lack of access to SWIFT might make it effectively impossible for a country to pay for imports and receive payment for exports. It is not yet clear whether the Iranian SDN financial institutions that are not subject to US secondary sanctions will maintain connections to SWIFT.
It can be permissible from a US sanctions perspective for a non-US entity to conduct business with Iranian customers using cryptocurrency, although such transactions can raise a number of compliance risks, including money laundering. The Financial Crimes Enforcement Network (FinCEN) issued an advisory report on October 11, 2018, to US financial institutions warning about, among other things, Iran’s attempts to evade US sanctions by using cryptocurrency. The report recommends that financial institutions implement internal controls designed to comply with US sanctions. OFAC has issued guidance that the same principles that govern transactions in standard currencies govern transactions in cryptocurrencies.
The re-imposition of sanctions has reportedly led Iran to start developing its own cryptocurrency as an alternative domestic currency and alternative means of accessing the international financial system. This could alleviate Iran’s reliance on financial services such as SWIFT and could make payments more difficult to trace and penalize. Because the purpose of such a currency would be to circumvent sanctions, OFAC would likely view such cryptocurrency unfavorably, as it has in connection with Venezuela’s attempt to establish its own cryptocurrency. OFAC issued an executive order earlier this year prohibiting US persons from dealing in the Venezuelan government’s cryptocurrency and has stated that the same principles that govern transactions in regular currencies govern transactions in cryptocurrencies.
Iran may seek to continue selling oil to the international community using a barter system, thereby avoiding the restrictions on the US dollar and Iranian rial and the involvement of cross-border payments. Any such transactions could still breach US sanctions, however, and OFAC guidance states that financial institutions involved in a barter arrangement related to the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran could be sanctioned.
How has Europe reacted?
The European Commission and certain EU member states (including France, Germany and the United Kingdom) have discussed setting up an alternative payment mechanism to facilitate continuing transactions with Iran that would not implicate US sanctions restrictions. The reported Special Purpose Vehicle (SPV) would remove individual financial institutions from transactions by offsetting Iranian purchases against its oil and gas sales, with the aim of enabling European exporters and importers to pursue legitimate trade with Iran. The development of this mechanism appears to have stalled, however, as no EU member state has yet agreed to host the project. EU diplomats have nevertheless expressed confidence that the mechanism will be legally in place in the coming weeks, with implementation in early 2019.
As an immediate response to the re-imposition of US extraterritorial sanctions against Iran, the EU updated its Blocking Regulation on August 7, 2018. According to the Blocking Regulation, “EU operators” (including EU nationals residing in the EU and legal persons incorporated within the EU) are prohibited from complying with certain US secondary sanctions against Iran, unless authorized to do so by the European Commission.
In addition, the Blocking Regulation:
- nullifies the effect in the EU of any non-EU decision, including court rulings or arbitration awards, based on the re-imposed US secondary sanctions;
- allows EU operators to recover damages arising from the application of the re-imposed US secondary sanctions; and
- allows EU operators to request an authorization to comply with the re-imposed US secondary sanctions, if not doing so would cause serious harm to their interests or the interests of the EU; however, it appears that only a handful of EU companies have applied for an authorization thus far.
EU operators are still free to choose whether to start working, continue, or cease business operations in Iran for commercial reasons, as long as the EU operators’ decisions are not based on compliance with the US secondary sanctions targeted by the Blocking Regulation.
The US government and the Trump Administration have made Iran sanctions a priority. Between re-imposing the full US secondary sanctions on Iran and adding further individuals and entities to the SDN List, navigating the US sanctions on Iran has become more challenging and even more important.