The start of 2016 has brought a substantial easing of the Iran sanctions. However contrary to the impression given by the press, several important trade restrictions still remain in place. Businesses are well advised to review carefully the new EU and US sanction regimes before heading off for new adventures in Iran.
On 16 January 2016, the International Atomic Energy Agency (IAEA) confirmed that Iran had fulfilled its nuclear-related commitments under the Joint Comprehensive Plan of Action (JCPOA). 16 January 2016 was therefore Implementation Day, the day on which the United Nations, the European Union and the United States eased sanctions against the Iran.
However, while reports by the general press often give the impression that the Iran sanctions have been completely lifted, the EU and in particular the US still maintain a significant number of restrictions. In general the lifting of EU sanctions has been much more wholesale (subject to some restrictions) as compared to the US. The US sanctions continue to restrict the ability of US persons to engage in trade with Iran and remain a minefield given the scope of the sanctions to impact upon those even outside the US.
This Briefing Note sets out an overview of the main changes to the EU and US sanctions after Implementation Day and provides some practical guidance on how to approach the new sanctions framework in your everyday business. In this context it also highlights the key issues for businesses considering seizing the opportunities for economic re-engagement with Iran.
Sanctions that have been lifted The EU has lifted the following trade restrictions (which had already been partially suspended):
- Prohibition on the import or transport of crude oil, gas, petroleum products;
- Prohibition on making available vessels designed for the transport or storage of oil or petrochemical products;
- Prohibitions related to key equipment for the Iranian oil, gas and petrochemical industries;
- Prohibitions related to shipping, shipbuilding and the transport sector (including naval equipment) and the provision of associated services to these sectors;
- Prohibition on the import and export of gold, precious metals and diamonds; and
- Prohibition on the export of coinage and notes to the Central Bank of Iran.
On the financial side restrictions on the provision of financial, banking and insurance services to Iran have been removed and monies can now freely be transferred between the EU and Iranian persons or entities. Authorisation and notification requirements for money transfers have been removed.
Also, over 400 persons and entities have been removed from the EU sanctions list, who are now free to do business with the EU.
Prohibitions that continue to apply
Not all EU sanctions have been lifted and the following prohibitions remain:
- The EU arms embargo;
- The prohibition on the sale, supply, transfer, export, purchase import or transport of items in Annex III to Council Regulation (EU) No 267/2012, being goods and technology contained in the Missile Technology Control Regime list and other goods that could contribute to the development of nuclear weapon delivery systems. The provision of technical or financial assistance relating to those goods is also prohibited; and
- Numerous entities and individuals remain subject to sanctions whether under the nuclear, anti-terrorism or human rights sanctions lists. It is prohibited to supply financial or economic resources to these designated parties, whose funds are frozen. Entities that remain listed include a number of banks, namely Ansar Bank, Bank Saderat Iran and Bank Saderat Plc and Mehr Bank.
Restrictions that remain in place
Certain activities which were once prohibited are now permitted subject to obtaining prior authorisation from the relevant national authority. The sale, supply, transfer and export of the following goods and provision of related services (brokering, financial and technical assistance) are permitted subject to prior authorisation from the relevant national authority (e.g. BIS in the UK or BAFA in Germany):
- sensitive goods and technology related to nuclear proliferation activities (including items controlled by the Nuclear Suppliers Group);
- enterprise planning software designed for nuclear or military use; • graphite and raw or semi-finished metals; and
- certain dual-use equipment i.e. items that can be used for civilian and military purposes and technology.
The EU's terrorism and human rights related restrictions remain in place including the requirement for prior authorisation for the export of equipment that might be used for internal repression, monitoring or intercepting communications.
The core of US sanctions, administered by the US Treasury Department's Office of Foreign Assets Control (OFAC) remain. It is crucial to be aware of the distinction between primary and secondary US sanctions in order to understand what sanctions relief applies. Whilst primary sanctions predominantly remain in place, secondary sanctions have been lifted.
"Primary Sanctions" are longstanding embargoes and trade restrictions that apply to US persons.
"Secondary Sanctions" apply to non-US persons and entities, even those with no connection to the US. These secondary sanctions were expanded in an effort to deter non-US persons from engaging in activities involving certain sectors of the Iranian economy, even where those activities occur entirely outside the US jurisdiction.
The applicability of the primary or secondary sanctions depends on whether an individual or an entity is a US or non US person and therefore it is also critical to understand what is meant by a US person.
"US Persons" includes US nationals, US lawful permanent residents, any person present in the US (regardless of nationality) and entities organised under US law (including US branches of foreign companies).
Foreign companies which are subsidiaries of US companies or which are predominantly controlled by US persons must take particular care, as those foreign companies which are classed as "US owned or controlled foreign entities" are also subject to primary sanctions (although a licence has been issued by OFAC to allow such entities to engage in transactions with Iran). A company will be a US owned or controlled foreign entity if a US person holds a 50% or greater equity interest in the company, holds a majority of the seats on the board of directors of the company or otherwise controls the actions, policies or personnel decisions of the company.
Generally, US persons can still not engage in transactions involving Iran or Iranian-origin products. There are two main exceptions:
- a licensing regime has been established to permit the re-export, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran for exclusively civil and commercial use. US persons may request specific authorisation from OFAC to engage in such transactions;
- A general licence will shortly be issued permitting US persons to deal in Iranian-origin carpets and foodstuffs. The licence will impose restrictions in relation to payment arrangements.
Existing exceptions to primary sanctions will remain in place i.e. OFAC authorisations that permit US parties to export agricultural commodities, medicine and medical supplies. OFAC has now also issued "General Licence H" which allows US owned or controlled foreign entities to engage in certain business activities with Iran. This is discussed further below.
Secondary Sanctions – what has been lifted?
Most restrictions on non-US entities and persons have been lifted including those on the energy, petrochemical, automotive, shipping and ship building sectors. Non-US persons are free to engage in trade in gold, precious metals, graphite and raw or semi-finished metals such as aluminium, steel and coal. The provision of insurance services and certain financial and banking services is also now permitted. Sanctions on associated services have been lifted for each of the above activities. Associated services means any service necessary and ordinarily incident to the underlying activity for which sanctions have been lifted. This includes technical assistance, training, insurance, re-insurance, brokering, transportation or financial service.
Secondary Sanctions – what restrictions remain in place?
Whilst 400 individuals and entities have been removed, more than 200 individuals or entities remain sanctioned on the Specially Designated Nationals List (SDN List). Those still listed include Ansar Bank, Bank Saderat, Mehr Bank and Mahan Air. Non-US persons must take care not to engage in transactions with entities or individuals that remain listed, including facilitating financial, material or other support. New parties can be added to the SDN list and only one day after Implementation Day, OFAC listed 11 parties for their involvement in procurement activities in support of Iran's ballistic missile program.
Further, non-US persons are still subject to compliance issues if they engage in transactions that cause US persons to violate the Iran sanctions, such as if a non-US person is involved in a US dollar payment that passes through the US financial system.
What is the scope of General Licence H which permits US owned or controlled foreign entities to engage in business with Iran?
General Licence H permits US owned or controlled entities to engage in transactions that are consistent with the JCPOA i.e. in those areas where secondary sanctions have been lifted. Entities must still refrain from engaging in transactions involving those on the SDN list and the Government of Iran (including any military, intelligence or law enforcement entity of the Government or any agents or affiliates thereof).
The transfer of funds to, from, or through the US financial system in regard to Iran related transactions is prohibited. Further, US owned or controlled entities are subject to the restrictions on exportation of goods, technology or services from the US. For example, they are not allowed (without separate authorisation from OFAC) to:
- ship any items from the US to Iran if the items are destined for Iran or the Government of Iran at the time they leave the US; or
- re-export from a third country, directly or indirectly, any goods, technology or services that have been exported from the US if they know or have reason to know that that the items are intended specifically for Iran, where the items are controlled for export from the US to Iran.
What involvement can US persons have in transactions involving Iran conducted through US owned foreign entities under General Licence H?
US parent companies whose subsidiaries are considering engaging in business with Iran, must be careful not to fall foul of sanctions. Careful thought will need to be given to ensure that the Iran related activities of the US owned foreign entity remain completely distinct from the US parent.
US persons cannot perform "associated services" unless specifically licensed by OFAC. There are only two main exceptions where US persons can be involved in the Iran related activities of foreign subsidiaries.
US persons can engage in activities related to the establishment or alteration of operating policies and procedures of a US entity or a US owned or controlled foreign entity to the extent necessary to allow the foreign entity to engage in transactions with Iran authorised by General Licence H. This permits US persons to be involved in the initial determination to engage in activities with Iran, and covers the involvement of US persons who may be hired as legal counsel or consultants to draft or advise on such operating policies and procedures necessary to allow the foreign entity to engage in business with Iran. However, the involvement of US persons must not go any further and they must not participate in the ongoing Iran-related day to day operations or decision making of the foreign owned entity after this initial determination.
US persons can also make any "automated" and "globally integrated" business support systems available to their owned/controlled foreign entities. Such systems include computers, accounting, email, telecommunications or other business support systems, platforms, databases or servers necessary to store, transmit, generate or otherwise process documents or information related to transactions by foreign entities. Any active involvement of a US person in these systems is prohibited. For example, it is acceptable for a support system on a US based server to generate (without human intervention in the US) a purchase order for an Iranian company initiated by a foreign based, non US person who is an employee of the US owned foreign entity. However, if the support system required the intervention of a US person to complete the request initiated by the foreign based, non US person, such as a US person performing data entry, such activity would not be permitted and would be a breach of the sanctions.
Practical implications and key questions
From an EU perspective, the result of Implementation Day is that most economic business transactions are permitted and the UK government, for example, has confirmed that it fully supports economic re-engagement with Iran and will support and assist economic operators that look to exploit opportunities with Iran.
From a practical viewpoint, international banks will likely have an important role in how fast western companies can enter Iran. As international transactions are still predominantly conducted in USD and virtually all large EU banks have US subsidiaries, they will likely take a cautious approach towards transactions with Iran, in particular considering the wider US sanctions and the fact that several EU banks are still "recovering" from US fines. However, without guaranteed capital flows, it will also be difficult for businesses to enter the Iranian market.
Before engaging in new activities in Iran, EU entrepreneurs should consider the following:
- Am I dealing with a designated person or entity (have I checked both the EU and OFAC sanctions lists)?
- Have I checked the beneficial ownership of the Iranian entity to ensure it is not owned or controlled by a person or entity which continues to be listed?
- Is the proposed trade, product or material restricted?
- How and to/from whom can payments be made and received?
- Will my bank assist in facilitating the transaction?
- Have I considered any other challenges in the Iranian business environment which might impact my transaction (such as political risks and issues of good governance and local laws)?
- For US owned foreign entities – what involvement would the US parent company have in the proposed Iranian transaction and does this breach US sanctions?