On May 8, 2018, President Trump exercised his authority to reimpose the secondary Iran sanctions that had been waived under the 2015 Joint Comprehensive Plan of Action (“JCPOA,” or the so-called “Iran Deal”). A number of intermediate courses of action were available, but the President opted for the most direct and complete. In signing (before the cameras) the National Security Presidential Memorandum, he directed that at the close of “wind-down” license periods of 90 or 180 days (depending on the sanctions involved), all prior statutory and Executive Order-imposed secondary sanctions be reimposed, all General Licenses (except those categorized as pre-JCPOA “humanitarian”) rescinded, and persons removed under JCPOA from the list of Specially Designated Nationals (“SDNs” or “Executive Order 13599 list”) maintained by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) eventually re-listed.
In brief, this means that any businesses with an American affiliation or ownership interest undertaking a deal with Iran will soon be exposed to enforcement actions. Banks will be prohibited from doing any business in Iranian rials – or in Iranian sovereign debt – or from facilitating any dollar-denominated transaction involving Iran. Manufacturers will be precluded from selling Iran software, steel, coal or aluminum, or trading with Iran in gold, silver or graphite. Current deals involving commercial aviation equipment or service will have to be unwound, as will any investment or transaction in ports, petrochemicals or in any part of the Iranian auto industry. The importation of carpets and even pistachios from Iran into the U.S. will be prohibited.
Whether the intervening “winding-down” windows will be used as an opportunity for the various parties to revive some sort of concerted approach to a new or restructured agreement is speculative at this point. Any discussion of policy or geopolitics is beyond the scope of this note. Instead, we briefly address (1) timelines and (2) assessing renewed compliance risk for international businesses.
After the President’s announcement, OFAC published guidance outlining the timelines applicable to reimposition of specific sanctions. The purpose of the “wind-down” periods is to permit U.S. and foreign businesses to end contracts, terminate business dealings and be compensated for work performed or goods delivered, effectively wrapping up their exposure and withdrawing their funds from Iran.
Sanctions Reimposed as of August 6, 2018
Sanctions on acquisition of U.S. dollar banknotes by the Government of Iran apply to:
- Iran’s trade in gold or precious metals;
- Direct or indirect sale, supply or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
- “Significant” transactions related to the purchase or sale of Iranian rials, or maintaining rial-denominated accounts outside of Iran;
- Purchase, subscription or facilitating the issuance of Iranian sovereign debt; and
- Iran’s automotive industry.
In addition, as of the same date, the U.S. will revoke the authorizations under the JCPOA for civil aviation imports and exports, for Iranian-origin carpets and foodstuffs, and transactions under General License I.
Sanctions Reimposed as of November 4, 2018
Sanctions on Iran’s port operators, shipping and shipbuilding sectors apply to:
- All petroleum-related transactions with (among others) the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”) and National Iranian Tanker Company (“NITC”), including the purchase of any petroleum or petrochemical products from Iran;
- Transactions by foreign financial institutions with the Central Bank of Iran and certain other designated Iranian banks;
- The provision of specialized financial messaging services to the Central Bank of Iran and certain other designated banks;
- Underwriting services, insurance or reinsurance; and
- Iran’s energy sector.
In addition, authorization for U.S.-owned or -controlled entities to engage in (and wind down) business with Iran or Iranian persons under General License H will be revoked as of that date.
RENEWED COMPLIANCE RISKS
For non-U.S. persons or businesses, the reimposition of secondary sanctions means that any traffic with Iran in goods, products or services of U.S. origin, containing 10 percent or more U.S. content, must cease by the end of the window. Moreover, no transaction or sale to Iran may involve or be facilitated in any way by a U.S. person, or use the U.S. financial system. Financial institutions investing in Iran sovereign debt may lose access to the U.S. financial system.
Finally, any dealings with any Iranian (or other) party on OFAC’s SDN or Designated Entities lists may result in immediate exposure to U.S. sanctions.
For U.S. persons or entities, unlicensed business with the government of Iran or persons subject to its jurisdiction is already prohibited. Reimposition of secondary sanctions – those imposed on non-U.S. actors – broadens and complicates compliance concerns.
Those U.S. enterprises doing business with Iran should use the “wind-down” period to wind up business, complete or withdraw from contract commitments and secure final payment. The Treasury’s issued guidance suggests that in a case where not all business could be completed within the allowed time window, some consideration might be given where the U.S. entity demonstrates that it had pursued all available means to comply in a timely fashion and had made “substantial progress” toward completion. In no instance, however, should new Iran contracts or business be initiated after May 8, 2018.
With European and other nations thus far hesitant to join the U.S. in restoring sanctions against Iran, U.S. entities doing international business will have a heightened burden with respect to any possible Iran business. They should (1) promptly audit and, if needed, revise all current diligence and compliance processes; and (2) inventory contracts, sales activities and contacts to determine any points at which they might connect with, or be in the chain of, business activity involving persons or entities doing business with Iran.
Existing and new business should:
- Be subjected to careful screening against the several OFAC SDN and Designated Entities lists;
- Review supply chain risk (supply chains, as well as sales channels, may lead to exposure); and
- Restructure standard agreements to ensure they include sourcing and end-user clauses prohibiting business with sanctioned entities.
The rescission of General License H may present particular problems. Under that License, non-U.S. enterprises owned or controlled (50 percent by vote or value, board majority or other “effective control”) by U.S. entities could deal with Iran provided no actual U.S. person was involved. With its revocation, such companies will likely face a choice: divestiture by the U.S. parent or ceasing/foregoing any Iran business. Such choices may involve complex contract and valuation questions. Similarly, foreign companies may face a parallel issue of whether to spin off U.S. subsidiaries or affiliates to avoid being subject to U.S. sanctions exposure.
In especially compelling cases, a special license may be sought from OFAC. It’s been reported that certain companies are already planning to appeal to the U.S. Administration to exempt or extend certain licenses for specific contracts – most prominently, the civil aviation equipment and services contracts (said to be worth a combined $49 billion) awarded to Boeing, which is expected to seek relief directly from the Administration, and to Airbus. (The latter is reportedly lobbying the French government to approach the White House on the matter, as is oil and gas company, Total.) Early statements by the U.S. Secretaries of State and Treasury do not appear to hold out much promise for these efforts – but this has all just begun, and there are 89 days remaining before the License expires.
In all cases, thorough and continuing due diligence is required in dealing with all counterparty, reseller and end-user matters. Prudent businesses should keep abreast of all OFAC bulletins and updates, and competent export counsel should be consulted in any uncertainties.