It’s no secret that Iran has been one of the hardest hit countries by COVID-19 (commonly referred to as the “coronavirus”). As in other countries, this outbreak has strained Iran’s healthcare system and has instigated a surge in demand for medical supplies. Due to the nature of Iran’s economy, many of these supplies must be imported from other countries. However, the Iranian government has claimed that U.S. sanctions are preventing Iran from accessing the lifesaving medical supplies it needs to fight the coronavirus. This client alert explains how the U.S. embargo against Iran affects the export of medicine and medical devices to Iran and the factors companies and NGOs around the world should consider before exporting such items to Iran.
While the coronavirus was raging in East Asia in February, two Iranians in the city of Qom that had previously tested positive for the virus passed away. These deaths marked the beginning of what has so far turned into one of the most severe of the global coronavirus outbreaks. As of this writing, Iran had reported almost 45,000 coronavirus cases and around 3,000 coronavirus-related deaths. Although many believe these numbers understate the true severity of the virus in Iran, they signify an overwhelming burden on Iran’s healthcare system. To combat the coronavirus, the Iranian Ministry of Health and Medical Education estimates that Iran needs almost 200 million face masks, 100 million pairs of disposable gloves, 1,000 ventilators, and hundreds of pieces of advanced medical equipment such as portable x-ray machines and sonography devices.
Iran’s need for medical equipment comes at a time when the Trump Administration is increasing its “maximum pressure” campaign against that country. Some have speculated that the Trump Administration might provide sanctions as the Bush Administration did in 2003 after a severe earthquake struck the Iranian city of Bam. However, in a press conference on March 20, President Trump and Secretary of State Pompeo indicated that they currently had no intention to ease sanctions to help Iran deal with the coronavirus outbreak. Rather, Secretary Pompeo stated that “the whole world should know that humanitarian assistance to Iran is wide open, it’s not sanctioned.” This statement indicates that rather than provide sanctions relief, the Trump Administration is content to allow companies, NGOs, and individuals wanting to send medicine and medical devices to Iran to rely on current exceptions to the Iran embargo. This raises the question of what these exceptions are and how easily one may rely on them.
The United States has maintained a comprehensive embargo against Iran, implemented by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), since 1995. The Iran embargo is comprised of two key components: (1) prohibitions that make it illegal for U.S. companies and their foreign subsidiaries to engage in virtually all Iran-related transactions, and (2) designation criteria and “secondary” or “extraterritorial” sanctions that threaten sanctions against foreign companies that conduct certain business with Iran. Engaging in activities that contravene either of these components has severe consequences. The maximum civil liability for an Iran-related sanctions prohibition is just over $300,000 or twice the value of the prohibited transaction, per transaction, whichever is greater. These prohibitions are strict liability, meaning OFAC may hold a company liable for even inadvertent violations. As we’ve previously discussed here and here, OFAC has never been shy about imposing steep fines on U.S. companies that deal with Iran, including through their foreign subsidiaries, or foreign companies that use the U.S. financial system to engage in Iran-related transactions.
The second component of U.S. sanctions against Iran is the threat that OFAC will designate foreign companies as Specially Designated Nationals (“SDNs”) for engaging in business with Iran. U.S. companies and individuals are generally prohibited from engaging in any dealings with SDNs and must “block” (i.e., freeze) any SDN property or property interests in their possession or control. Per OFAC guidance, these prohibitions also apply to any person owned 50 percent or more by SDNs. An OFAC designation is effectively a death sentence for foreign companies because it deprives them of access to the world’s largest economy and prevents them from using the U.S. dollar, the currency of international trade.
Through its maximum pressure campaign, the Trump Administration has wielded both components of the Iran embargo to economically isolate Iran from the rest of the world. The Trump Administration has aggressively fined companies that do business with Iran. Since President Trump took office in early 2017, OFAC has imposed approximately $1.45 billion in Iran-related penalties against U.S. and foreign firms alike. In a similar vein, OFAC has designated major organs of the Iranian government under its terrorism authorities, including notably, the Islamic Revolutionary Guard Corps in April 2019 and the Iranian Central Bank in October 2019, thereby subjecting them to some of the most severe sanctions the United States has to offer.
With the threat of steep fines, an OFAC designation, and the Trump Administration’s maximum pressure campaign, companies all over the world go to great lengths to avoid doing business with Iran. However, despite OFAC’s broad prohibitions on trade with Iran, there are a few narrow categories of trade companies may engage in with Iran with limited sanctions risk. Notably, OFAC maintains several general licenses (the “Iran Medical GLs”) authorizing U.S. companies – and foreign companies dealing in U.S.-origin items – to export medicine and medical devices to Iran provided the following conditions are satisfied:
- Any medicine or medical device exported must be properly classified as EAR99 under the Export Administration Regulations (“EAR”);
- Any medicine must not contain non-NSAID analgesics, cholinergics, anticholinergics, opioids, narcotics, benzodiazapenes, or bioactive peptides;
- Any medical devices must not be listed on OFAC’s List of Medical Devices Requiring Specific Authorization;
- The payment terms for the export must be one of the following:
- payment of cash in advance;
- sales on a non-transferrable open account receivable by the person extending the credit (i.e., trade credit);
- financing by a non-U.S., non-Iranian financial institution (including subsidiaries); or
- a letter of credit issued by a non-SDN Iranian financial institution that is advised by a non-U.S., non-Iranian financial institution (including subsidiaries);
- All exports must be shipped within 12 months of signing the contract for sale;
- None of the purchasers or importers are military, intelligence, or law enforcement; and
- None of the parties involved are SDNs (exports involving the Iranian government are usually allowed).
The requirement that all medicine and medical devices be EAR99 means many types of sophisticated hospital equipment may not qualify for the Iran Medical GLs, including certain diagnostic imaging equipment the Iranian government says it needs to fight the coronavirus outbreak. However, many other EAR99 items do qualify, such as coronavirus test kits, cotton swabs, face masks, and medical gloves. Therefore, U.S. companies and foreign companies dealing in U.S.-origin items may export many of the medicines and medical devices Iran says it needs to combat the coronavirus outbreak, assuming they can locate a bank willing to handle the financial part of the transaction.
If OFAC authorizes U.S. and foreign companies to export many of the medicines and medical devices to Iran that Iran needs, one might ask why the Iranian government still faces significant shortfalls. The answer primarily comes down to: (1) the risk an export would fall outside the scope of the Iran Medical GLs, and (2) the difficulty of obtaining payment from Iran.
As shown above, the Iran Medical GLs impose a number of conditions on exporters that are difficult to verify. For example, take the requirement that none of the parties involved are SDNs. Exporters can easily screen the information provided by the Iranian purchaser to see if they are on OFAC’s SDN List, but it is not as easy to determine – particularly in Iran’s non-transparent economy – if a non-SDN is 50 percent or more owned by SDNs and thus subject to the same prohibitions. This difficulty is compounded by the fact that U.S. sanctions against Iran prohibit the importation of due diligence services from Iran that would assist an exporter attempting to determine the beneficial owners of an Iranian counterparty. (For example in 2017, OFAC fined the due diligence firm IPSA International Services $259,000 for hiring subcontractors to conduct due diligence on individuals in Iran who were participating in Canada’s citizenship by investment program.) Since OFAC’s rules are strict liability, exporters may choose not to export medicine and medical devices to Iran that the Iran Medical GLs would likely authorize to avoid any potential OFAC issues.
Even if an exporter is willing to take the risk, their bank might not be. As we’ve discussed in a previous client alert, OFAC’s average financial institution civil monetary penalty last year was $127 million. Such steep fines and the threat of sanctions against foreign financial institutions that facilitate trade with Iran have made most financial institutions extremely risk averse and loath to process any Iran-related transactions that OFAC has not specifically licensed. Most exporters will not ship their products to Iran for free, and therefore the unwillingness of financial institutions to process medicine and medical device payments may prevent such exports from going forward.
The Trump Administration seemed to recognize the negative impact its maximum pressure campaign was having on humanitarian trade with Iran when it announced a new humanitarian mechanism last fall. According to the U.S. government, this mechanism is designed to ensure Iran does not use humanitarian trade to fund its malign activities, although outside observers criticized the mechanism as overly onerous. To use the humanitarian mechanism, participating governments and financial institutions must commit to conducting enhanced due diligence on humanitarian transactions with Iran and provide the U.S. Treasury Department with a substantial and unprecedented amount of information on a monthly basis. The Treasury Department then evaluates the information to determine whether a particular financial channel would expose the parties involved to OFAC sanctions. As of this writing, the only government participating in the humanitarian mechanism appears to be Switzerland, which implements the mechanism through an agreement with the U.S. government called the “Swiss Humanitarian Trade Arrangement.” Given the burdens involved in relying on the humanitarian mechanism, it remains to be seen whether it will effectively facilitate the export of medicine and medical devices to allow Iran to combat its coronavirus outbreak.
As we’ve previously discussed, while the Trump Administration has engaged in its maximum pressure campaign, the European Union (“EU”) has been developing ways to preserve its trade with Iran. The most significant of these efforts has been the Instrument for Supporting Trade Exchanges (“INSTEX”), which is a barter mechanism to allow EU companies to trade with Iran without using the U.S. financial system. While many doubted whether INSTEX would ever get up and running, the German Federal Foreign Office announced on March 31, 2020, that INSTEX had successfully concluded its first transaction by facilitating the export of medical goods from Europe to Iran. If INSTEX transactions like these accelerate, EU companies may have an alternative mechanism to sell medical goods to Iran.
As the coronavirus outbreak overwhelms the Iranian healthcare system, those who want to help should review whether they can export medicine and medical devices to Iran without specific authorization from OFAC. The Iran Medical GLs allow exports of these items, subject to several conditions, including that the items be properly classified as EAR99, do not contain certain chemicals, and are not listed on OFAC List of Medical Devices Requiring Specific Authorization, and that the payment and shipment terms meet certain criteria. This long list of conditions and the Trump Administration’s maximum pressure campaign has likely dissuaded many companies from exporting medicine and medical devices to Iran that they otherwise could. However, any company that wants to export medicine and medical devices to Iran should ensure those items qualify under the Iran Medical GLs and check with their financial institutions to ensure those institutions will process related payments. Once a company has confirmed its financial institution will process Iran-related medicine and medical device payments, the company should ensure the contract, payment, and shipment terms for any sales to Iran comply with the Iran Medical GLs. Additionally, EU companies wanting to export non-U.S. medical goods to Iran should consider whether it makes sense to utilize INSTEX.