On November 5, 2018, applicable wind-down periods for certain transactions with Iran ended and the second and final set of U.S. secondary sanctions that had been lifted pursuant to the Iran nuclear deal – the Joint Comprehensive Plan of Action (“JCPOA”) – came back into effect. As a consequence, companies engaging in or facilitating sanctionable or prohibited business after November 5 now face a significant risk of sanctions or enforcement action by the U.S. government, even if such business was initiated prior to the U.S. withdrawal from the JCPOA in May.
Changes in Iran Sanctions After November 5
As discussed in previous OnPoints, Iran Sanctions – President Trump’s Announcement of US Withdrawal from JCPOA and Iran Sanctions – U.S. Reimposes Sanctions After JCPOA Withdrawal, First Measures Come Into Effect, U.S. secondary sanctions with respect to Iran implicate a broad array of activities engaged in by non-U.S. companies.1 The secondary sanctions that came back into force on November 5 target:
- Iran’s port operators, and shipping and shipbuilding sectors, and certain transactions therewith;
- Petroleum-related transactions, including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
- Transactions by foreign financial institutions with the Central Bank of Iran and certain Iranian financial institutions on the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) (see OnPoint Non-U.S. Financial Institutions Face Increased U.S. Sanctions Risks);
- The provision of specialized financial messaging services to the Central Bank of Iran and certain Iranian financial institutions on the SDN List;
- The provision of underwriting services, insurance, or reinsurance to SDNs or for sanctioned activities with Iran; and
- Iran’s energy sector, and certain transactions therewith.
November 5 also marked the end of the wind-down authorization for U.S.-owned or -controlled foreign entities, which are again subject to the U.S. primary sanctions regime with respect to Iran (under the JCPOA, certain activities had been authorized pursuant to General License H).
Permitted Transactions After November 5
Certain, limited transactions involving Iran are permitted, and/or will not be sanctionable, even after November 5:
- OFAC has stated that non-U.S., non-Iranian companies may receive payment for goods or services fully provided or delivered to an Iranian counterparty by November 4 if (1) such provision or delivery was pursuant to a pre-May 8 contract; (2) the transactions did not involve SDNs and were otherwise consistent with U.S. sanctions laws in effect at the time of execution; and (3) the payment does not involve U.S. persons or the U.S. financial system.2
- Transactions related to the provision of agricultural commodities, food, medicine, and medical devices to Iran also remain broadly authorized for U.S. companies and U.S.-owned or -controlled foreign entities, and such transactions generally will not subject non-U.S. companies to secondary sanctions unless they involve certain SDNs that have been designated in connection with Iran’s support for international terrorism3 or proliferation of weapons of mass destruction4 (hereinafter “Excepted SDNs”).
- Similarly, exports by non-U.S. companies to Iran of certain consumer goods that are not expressly targeted by U.S. sanctions are not sanctionable -- provided they (1) do not involve U.S. persons or transit the U.S. financial system, and (2) do not involve Excepted SDNs.
- The provision of specialized financial messaging services to the Central Bank of Iran or Iranian financial institutions that are not Excepted SDNs is not sanctionable. This ensures that Iranian banks that are blocked solely pursuant to E.O. 13599 are not cut off from the international financial system, and means that non-U.S. companies and banks can continue to conduct certain trade through them.
Finally, the Administration has issued waivers for purchases of Iranian crude oil to eight countries, namely China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey. These waivers are authorized by statute if the President determines that a foreign country has “significantly reduced” its volume of crude oil purchases from Iran, and are temporary exemptions requiring re-assessment every six months. They except foreign financial institutions located in those countries from potential secondary sanctions that would apply to significant transactions with the Central Bank of Iran or designated Iranian financial institutions, as well as certain other secondary sanctions provisions that could impact the provision of associated services. However, U.S. Treasury Secretary Mnuchin has also made clear that the Administration’s “goal is to reduce Iranian oil exports to zero as fast as possible,” which suggests the waivers may be short-lived.5
Secondary Sanctions: Expect Aggressive Enforcement Against Non-U.S. Companies
The U.S. government has signaled an aggressive approach to the re-imposed secondary sanctions regime.
- OFAC eliminated the List of Persons Blocked Solely Pursuant to Executive Order 13599 (“E.O. 13599 List”) and moved the Government of Iran entities and Iranian financial institutions that had been added to the E.O. 13599 List pursuant to the JCPOA back to the SDN List.6 In addition, OFAC identified some 200 individuals and vessels tied to Iran’s shipping and energy sectors, as well as an Iranian airline and more than 65 of its aircraft. Finally, OFAC newly designated 50 Iranian banks and their subsidiaries as Excepted SDNs, subjecting certain transactions with them to secondary sanctions (transactions with Iranian banks that are on the SDN List but which are not Excepted SDNs are not generally subject to secondary sanctions).
- OFAC has also indicated, through recent actions, that it will expect a heightened level of due diligence for any non-U.S. persons doing any business in or with Iran. For instance, on October 16, 2018, OFAC designated 20+ Iranian corporations and financial institutions for providing support to a sanctioned paramilitary force. Specifically, Bank Mellat was sanctioned for providing support to Mehr Eqtesad Bank, which was designated that same day for providing support to the Basij Resistance Force, which was also designated that day for providing support to the IRGC. This chain of liability approaches a “know your customers’ customers” standard, at least with respect to secondary sanctions on Iran.
- An October 11, 2018, advisory published by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) emphasizes the risks financial institutions face after November 5. The advisory highlights Iran’s anticipated sanctions evasion schemes after November 5, for instance, through the utilization of front or shell companies, abuse of virtual currency or precious metals, and exploitation of commercial shipping.
As discussed in this OnPoint, EU Seeks to Contain the Impacts of U.S. Reimposition of Extra-Territorial Sanctions on Iran, the EU Blocking Regulation took effect on August 6, 2018, which prohibits EU persons from complying with any “requirement or prohibition” which is “based on or resulting from” compliance with U.S. extraterritorial measures (for example, a bank refusing to support an Iran-related transaction). It also gives an EU person the right to recover damages against any entity (again, such as a bank) which causes it loss by complying with certain U.S. sanctions on Iran.
On September 25, 2018, the EU also announced its plan to establish a “Special Purpose Vehicle” (“SPV”). According to European diplomats, the SPV would create a barter system to exchange Iranian oil for European goods or services of same value without money changing hands, thereby avoiding the U.S. financial system. Such SPV is unlikely to be operational until early next year, and it remains to be seen whether many EU companies will seek to utilize it, given that they would remain exposed to U.S. secondary sanctions.
Conclusion and Practical Suggestions
Businesses and financial institutions need to carefully assess their potential exposure to U.S. sanctions now that the pre-JCPOA sanctions regime is back in full force, while also taking into account other considerations, such as the EU Blocking Regulation. They will need to pay special attention to transactions that might indirectly involve Iran or Iranian parties, especially where they are exporting to or dealing in neighboring countries that have substantial commercial links to Iran, and exercise heightened due diligence where appropriate. For instance, if a non-U.S. company is exporting automotive equipment to the UAE, it may need to expand the scope of its due diligence to ensure that the UAE buyer is not re-exporting the automotive equipment to Iran.
Companies are also advised to consider whether U.S. general licenses or exemptions might apply to their specific transactions: for instance, general licenses are currently available for certain exports of most agricultural commodities, medicines, and medical devices, certain personal communications devices/software/services (GL D-1), and academic exchanges and certain educational services (GL H). Even if a company is not itself subject to primary sanctions, general licenses or exemptions would be useful because they may protect the company, and intermediaries such as banks which may be asked to support aspects of such licensed transactions, from secondary sanctions liability.