Alerts and Updates
Sanctions will indirectly apply to Asian entities that trade with or do business in Iran, because U.S. persons will be extremely cautious when dealing with them in case they unwittingly find themselves dealing with sanctioned assets.
On 8 May 2018, President Donald Trump announced his decision to reintroduce U.S. sanctions on Iran by ceasing the United States’ participation in the Joint Comprehensive Plan of Action (JCPOA) relating to Iran. His National Security Presidential Memorandum (NSPM) of the same date orders all cognizant U.S. government agencies to take steps to “snap back” to the primary sanctions and regulations in place prior to the effective date of the JCPOA. These actions will also effect certain changes to the primary sanctions regime, in addition to the actions that will impact the secondary/nuclear related activities that were covered by the JCPOA.
So what does this mean for Asian businesses? Is it relevant? Is it a concern?
This Alert briefly looks at the U.S. sanctions regime against Iran, who it applies to and when the sanctions will begin to apply.
U.S. Sanctions on Iran — A Brief Refresher
In general terms, U.S. sanctions prohibit transactions with countries, entities and individuals who are deemed to have taken actions that are against U.S. foreign policy. Sanctions can apply to whole countries and also specific named individuals or entities, known as specially designated nationals (SDNs)—as is the case with much of the U.S. Iran sanctions programme. All U.S. sanctions are administered by the Office of Foreign Assets Controls (OFAC), which sits in the U.S. Department of the Treasury.
There is no one law or statute which codifies U.S. sanctions against Iran. Rather, the sanctions programme is set out in a series of executive orders issued by the president, statutes passed by Congress as well as United Nations Security Council Resolutions (implemented by OFAC). These laws are further codified by OFAC in its regulations.
As a general rule, U.S. federal regulations on sanctions (when in effect) will require U.S. businesses to block or freeze assets that they receive from Iranian entities subject to the sanctions. Naturally, this will apply to foreign businesses trading with Iran who interact with U.S. businesses, and most notably, U.S. banks.
In addition, the Iran sanctions programme blocks access to the U.S. financial system for foreign entities who knowingly do business with certain sanctioned Iranian entities. The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA) applies to foreign financial institutions in this way. CISADA works by preventing any foreign financial institution breaching certain U.S. Iran sanctions from opening or maintaining U.S. correspondent accounts or U.S. payable-through accounts with any U.S. financial institutions. U.S. persons who violate this (by providing such accounts) may be subject to civil penalties of up to the greater of $250,000 or twice the transaction value, and criminal penalties for wilful violations of up to $1 million and 20 years in prison.
How Do U.S. Sanctions Apply to Asian (i.e., non-U.S.) Businesses?
Strictly speaking, U.S. law (including sanctions law) applies to U.S. persons and activities that take place in the United States.
However, there are two practical exceptions to this involving the Iran sanctions.
First, sanctions will indirectly apply to Asian (non-U.S.) entities that trade with or do business in Iran, because U.S. persons will be extremely cautious when dealing with them in case they unwittingly find themselves dealing with sanctioned assets.
Second, laws like CISADA will directly affect foreign financial institutions (including Asian banks) which do not comply with certain U.S. Iran sanctions, as those institutions may find themselves blacklisted and unable to use the U.S. financial system. This, in practice, has a knock-on effect on Asian businesses who deal with Iran. Because of the risk of being blacklisted, Asian banks will exercise caution when dealing with clients or potential clients with business in or with Iran, in case U.S. sanctions are being violated. Such clients or potential clients will become high risk, and banks may, in certain cases, deem that risk too great and refuse to deal with such clients or potential clients.
Because of the practical effects of the U.S. Iran sanctions programme on non-U.S. entities, the president’s 8 May 2018 announcement will be very relevant, and should be a concern to, any Asian business which deals with Iran.
The 8 May 2018 NSPM directs the U.S. Treasury Department to immediately prepare for the reimposition of all U.S. sanctions lifted or waived in connection with the JCPOA—to be accomplished as “expeditiously” as possible and in not later than 180 days from the date of the NSPM (i.e. by 4 November 2018).
The Treasury secretary’s steps will include two wind-down periods. Certain wind-down activities must be accomplished within a 90-day period from 8 May 2018; others must be accomplished within a 180-day wind-down period. Certain waivers that had been granted by the secretary of the Treasury will be kept in place during the applicable wind-down period.
Precautionary Steps That Can Be Taken
U.S. foreign policy under the current administration has been subject to a change, and it is possible that the president’s 8 May 2018 announcement could be subject to further revisions in the future.
That said, Asian businesses who deal with Iran (whether via trade, direct investment or otherwise), should now carefully consider whether their activities violate U.S. sanctions. Even if that risk is minimal, being able to show that a company’s business does not violate sanctions will make dealing with U.S. commercial partners and U.S. and non-U.S. financial institutions much easier.