On June 8, 2016, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) updated its list of Frequently Asked Questions (FAQs) Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA). These updates build on OFAC’s existing JCPOA FAQs and further clarify the scope of sanctions relief that the U.S. Government instituted on Implementation Day (January 16, 2016). For more information on Implementation Day, please see our blog post here. In particular, OFAC offered additional guidance related to the parameters for foreign entities that are owned or controlled by U.S. persons and the lifting of certain financial and banking sanctions. This is the first time OFAC has provided public guidance about some of the issues described below (e.g., recusal policies, management issues for U.S. parent companies), and such guidance is relevant in contexts beyond U.S. sanctions targeting Iran.
Aggregating interests of multiple U.S. persons in foreign entities
- Both the Iranian Transactions and Sanctions Regulations (“ITSR”) and General License H(“Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person”) apply to foreign entities owned or controlled by “a United States person” in the singular, which has led to some confusion regarding foreign entities with multiple U.S.-person owners. U.S. persons for purposes of U.S. sanctions targeting Iran are U.S. citizens and permanent resident aliens/Green Card holders, wherever located or employed; entities organized under U.S. laws and their non-U.S. branches; and any individuals and entities physically located in the United States.
- In the updated FAQs, OFAC made clear that it would consider a foreign entity to be owned or controlled by U.S. persons if:
- the aggregated equity interests by vote or value held by U.S. persons were 50 percent or more; or
- one or more U.S. persons, in the aggregate, hold(s) a majority of seats on the board of directors.
- Under certain circumstances, a foreign entity may also be subject to the ITSR if one or more U.S. persons, in the aggregate, otherwise control(s) the major decisions of the foreign entity.
- OFAC clarified that it would not consider a foreign entity that is publically traded or whose ownership interests are widely dispersed to be U.S.-owned or -controlled solely because U.S. persons, in the aggregate, passively hold more than 50 percent of the shares.
Amending policies under General License H
- OFAC confirmed that, where U.S. persons, in the aggregate, own or control a foreign entity, those U.S. persons are permitted to amend the policies and procedures of U.S. entities that own a portion of the foreign entity, as well as the policies and procedures of the foreign entity itself, to the extent necessary to allow the foreign entity to engage in authorized transactions with Iran.
- OFAC also explained that, under General License H, a U.S. person may change the operating policies and procedures of a U.S. entity or a foreign entity multiple times, so long as such changes are not intended to facilitate any particular Iran-related transaction.
- In the updated FAQs, OFAC confirmed that third-country entities may engage in Iran-related transactions even if U.S. persons serve in senior positions (e.g., CEO, CFO, COO, director) in such foreign entities.
- OFAC stated that a foreign entity may transact with Iranian persons so long as senior U.S. persons are “walled off” or “ring-fenced” from Iran-related business. The same is true for other U.S.-person employees of the foreign entity.
- OFAC further suggested that, with respect to Iran-related transactions, foreign entities consider instituting a blanket recusal policy for U.S. persons as opposed to case-by-case abstentions, the latter of which run the risk of constituting prohibited “facilitation” under the ITSR.
Management of foreign entities by U.S. parent companies
- In the case of a U.S. parent company that owns or controls a foreign entity engaged in Iran-related transactions under General License H, OFAC specified in the updated FAQs that the parent company and its board members, senior management, and employees may continue to be involved in the foreign entity’s day-to-day operations related to non-sanctioned jurisdictions.
- OFAC also confirmed that a U.S. person may receive reports from foreign entities that include details on transactions with Iran pursuant to General License H.
- In other words, U.S. parent companies are not required to recuse themselves from all management or corporate governance of foreign entities that engage in Iran-related business pursuant to General License H. However, U.S. persons may not attempt to influence or otherwise facilitate (e.g., approve, process, finance) Iran-related business decisions or transactions of such foreign entities based on reports received.
Guidance for financial institutions
- In the updated FAQs, OFAC reiterated its existing position that U.S. financial institutions may transact with non-U.S., non-Iranian financial institutions that do business with Iranian financial institutions that are not on OFAC’s List of Specially Designated Nationals and Blocked Persons.
- Third-country financial institutions may do business with both Iranian and U.S. financial institutions so long as such business is separate from each other. In this regard, third-country financial institutions may not route Iran-related transactions through U.S. financial institutions or in any other way involve U.S. persons in Iran-related transactions unless authorized by OFAC. To address this compliance risk, OFAC advised that third-country financial institutions should have appropriate controls in place to ensure that they do not route Iran-related transactions through U.S. financial institutions.