Back in May 2018, President Trump announced the United States’ intention to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose secondary sanctions on Iran.
The announcement was accompanied by 90- and 180-day wind-down periods during which non-US persons could wrap up transactions entered into prior to May 8 and that were otherwise consistent with the terms of the JCPOA. November 5, 2018 marked the expiration of the final wind-down period and re-imposition of secondary sanctions on a broad swath of Iranian persons and sectors of Iran’s economy.
Some of the key takeaways from this action include:
Lots More SDNs!
According to Treasury Secretary Mnuchin more than 700 individuals, entities, aircraft and vessels were sanctioned, and over 300 of these designations were new targets.
Nearly 250 entities were moved from the EO 13599 (Government of Iran list) list to Iran/SDN lists. Some of these were also designated on the SDN list for other reasons or have additional associated secondary sanctions. Watch out for the phrase “Additional Sanctions Information - Subject to Secondary Sanctions” as that is the key flag for secondary sanctions.
There are two types of designations, which mean different things to non-US companies that are NOT US-owned or -controlled:
- Financial institutions whose only designation is [IRAN] with no mention of “Additional Sanctions Information - Subject to Secondary Sanctions”– These financial institutions are not subject to secondary sanctions. Thus, non-US companies that are NOT US-owned or-controlled can do business with [IRAN] entities without risking secondary sanctions PROVIDED the business does not involve other secondary sanctions areas (such as petroleum, petrochemical, gold or other independent grounds for secondary sanctions). For example, a European company can sell food to Iran using an Iranian bank only designated as [IRAN], provided no other party is an SDN. US companies and non-US persons, however, who are US-owned and -controlled violate US law by doing business with the Iranian bank and must block its property absent an OFAC license (which in the case of food exports from the US to Iran might be available).
- Entities and Persons with “Additional Sanctions Information - Subject to Secondary Sanctions” [IRAN], and in many cases additional designations [SDGT, NPWMD, IRAN-HR etc.] – These entities are SDNs. Therefore, non-US companies that are NOT US-owned or -controlled doing business with them risk secondary sanctions. US companies and non-US persons who are US-owned and -controlled violate US law by doing business with them and must block their property (see below).
Secondary Sanctions Concerns for Non-US Persons NOT Owned or Controlled by US Persons:
The provision or delivery of goods or services (including the extension of additional loans or credits) to an Iranian entity or person after November 4, 2018, may subject a non-US person to secondary sanctions, even if done pursuant to a contract entered into prior to May 8, 2018, if the transaction is in a sector or with an SDN triggering secondary sanctions.
BUT, non-US persons who are not US-owned or -controlled can still receive payment for contracts entered into prior to May 8, 2018, provided the goods or services were fully provided or delivered to Iran prior to applicable wind-down date. (Any payments must be consistent with US sanctions and not include US persons or the US financial system nor involve any of the new SDNs).
Non-US persons, including foreign financial institutions, may be subject to secondary sanctions for receiving payment for transactions undertaken during the wind-down period if the payment involves a person that has been added to the SDN list (see above), regardless of whether it was previously on the EO13599 List to which secondary sanctions did not apply.
The re-imposition of secondary sanctions also prompted amendments to the Iranian Transactions and Sanctions Regulations (ITSR) to include blocking sanctions relating to support for the Government of Iran’s purchase or acquisition of US bank notes or precious metals; certain Iranian persons; and Iran’s energy, shipping, and shipbuilding sectors and port operators.
The re-imposition of sanctions has had an immediate impact on the provision of specialized financial messaging services to certain Iranian banks, including the Central Bank of Iran and Iranian banks designated in connection with Iran’s support for international terrorism or WMD proliferation. SWIFT, the world’s leading provider of secure financial messaging services, announced that it is suspending certain Iranian banks from access to its services.
Primary Sanctions Concerns for Non-US Persons Owned or Controlled by US Persons:
Non-US persons who are US-owned or -controlled CANNOT receive payment for contracts entered into prior to May 8, 2018. Such persons will need to apply to OFAC for a specific license.
Non-US persons who are US-owned or-controlled are required to block property of the government of Iran and entities designated as Iran in the same way as their US parent persons. This requirement applies to both a person whose property is blocked solely pursuant to the ITSR (e.g., SDN tag [IRAN]) as well as other sanctions programs (i.e., SDN tags [SDGT] for counterterrorism or [NPWMD] for nuclear proliferation).
Strategic Reduction Exceptions (SREs) Granted for Eight Countries to Purchase Iranian Oil
The US granted temporary exceptions to eight countries to continue to purchase Iranian oil: China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey.
If a foreign financial institution in a country that was not granted a SRE holds funds belonging to the Central Bank of Iran (or a non-designated Iranian bank), those funds may be used to facilitate humanitarian trade with Iran, including transactions for the sale of agricultural commodities, food, medicine and medical devices, as well as bilateral trade between the foreign financial institution’s home country and Iran (provided that trade is not subject to additional secondary sanctions).
The provision of certain services relating to the import of Iranian petroleum by a SRE country is not sanctionable to the extent the purchase meets the requirements of NDAA 2012 section 1245(d)(4)(D), and may include services provided certain sanctioned sectors, i.e., Iran’s shipping and port operation sectors, as long as no entities involved are SDNs in connection with international terrorism or WMD proliferation.
October 16, 2018 SDN Designations
In a somewhat confusing move, prior to the JCPOA wind-down expiration, on October 16, 2018 OFAC announced the removal of several entities, including several major Iranian banks, from the EO 13599 List and their transfer to the SDN list. This sent foreign entities scrambling to figure out how and whether to deal with pending transactions involving the recently designated Iranian banks. At first glance, to many, this move appeared to stem from the United States’ JCPOA withdrawal, as a result of which, many entities that appeared on the EO 13599 List of entities owned or controlled by the Government of Iran and Iranian financial institutions, would be transferred back to the SDN list, no later than November 5.
However with further clarification, it became evident that the October 16 designations were made independently of any JCPOA considerations and, as such, went into effect immediately rather than on November 5. By making no mention of the JCPOA, the press release suggested that the designations were not related to JCPOA actions on or before November 5.
OFAC designated several Iranian financial institutions and other entities as Specially Designated Global Terrorists (SDGTs) pursuant to Executive Order 13224, for their support to designated global terrorist organizations. For example, Bank Mellat, Sina Bank and Parsian Bank, all of which appeared on the EO 13599 List were moved to the SDN List as SDGTs.
Further, in anticipation of deceptive measures Iran may employ with the JCPOA wind-down, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published an advisory on October 11, 2018. The aim of the advisory is to assist financial institutions in understanding their legal obligations under US sanctions and AML/CFT authorities, as well as the red flags potentially indicative of Iranian entities’ attempts to manipulate the global financial system. The deceptive measures are not limited to the financial sector, but may also involve shipping companies, the trade in precious metals, and virtual currency, to name a few.
In announcing the recent designations and publishing its advisory, the US Treasury Department is calling on international companies to further “sophisticate their compliance programs in anticipation of [Iran’s] continued attempts to circumvent sanctions.”