Despite earlier prognostication that it could take into the Spring for the International Atomic Energy Agency (IAEA) to verify that Iran had met its initial commitments under the Joint Comprehensive Plan of Action (JCPOA) between the so-called P5+1 countries (i.e., the United States, United Kingdom, France, Russia, China, and Germany) and Iran, the US State Department confirmed on Saturday, January 16, that the necessary verification had occurred and that, accordingly, sanctions relief under the JCPOA was effective immediately. (Thus, January 16, 2016, is "Implementation Day" under the JCPOA.) Below, we provide an executive summary of what has taken place, followed by a more detailed overview of the Implementation Day sanctions relief.
The sanctions relief granted on Implementation Day is broad and substantial, but it is not a blanket removal of US government controls on trade with Iran. While the relief affords significant opportunities for non-US persons-and more limited opportunities for US persons-potentially to pursue trade with Iran, it is important to recognize that the US Government will likely maintain, or even intensify, scrutiny on business activities involving Iran and continue vigorously to enforce any violation of the sanctions that remain in place. In fact, the day after Implementation Day, OFAC issued new sanctions (on a Sunday afternoon) related to Iran's procurement of ballistic missiles, an obvious signal that the sanctions desk remains staffed notwithstanding Implementation Day. And, of course, Implementation Day's suspensions are just that-they are not removal of sanctions and they can be "snapped back" if Iran is found to be out of compliance with the JCPOA. There is also a risk that, come January 2017, a new US President would sign or issue new sanctions on Iran that effectively roll back some of the relief granted here. In short, companies must remain engaged and vigilant as they move forward with new business involving Iran.
To implement President Obama's Executive Order suspending sanctions1 as called for under the agreement, the Office of Foreign Assets Control (OFAC) issued a guidance document,2 a set of frequently asked questions,3 a general license,4 a statement of licensing policy,5 and a new final rule under the Iran Transactions and Sanctions Regulations (ITSR).6
Most of the guidance closely tracks the JCPOA and reflects expected suspension of various sanctions that, for the most part, affect non-US companies.7 OFAC's Implementation Day actions, however, are particularly notable in two ways.
First, US persons (a term that includes US citizens and permanent residents (green card holders), wherever located, and entities organized under US law or US state law and their foreign branches) remain almost entirely prohibited from transacting directly or indirectly with Iran. However, OFAC has suspended sanctions for non-US entities owned or controlled by US persons, and in a more comprehensive way than might have been expected. OFAC has issued a new general license (General License H) that not only puts such US-owned or -controlled foreign entities on nearly the same footing as their peers outside of the US, but it also authorizes US persons themselves to engage in certain preliminary activities to facilitate entry into the Iranian market by the non-US entities. It also permits US persons to "make available" certain automated globally integrated enterprise services, potentially allowing US companies to avoid costly changes to the way they function in order to segregate non-US subsidiaries with Iranian business. At the same time, this authorization is limited: US persons may not be involved in ongoing Iran-related operations or decision making of any US-owned or -controlled foreign entity engaging in activities with Iran, nor with any of the day-to-day operations.
Second, OFAC has clarified that the "delistings" effectuated under the JCPOA of certain entities from certain OFAC lists has not resulted in a blanket unblocking of all such affected entities. In particular, because Executive Order (E.O.) 13599, which blocks the property interests of the Government of Iran and all Iranian financial institutions, remains in force, the delistings have not unblocked any entities that qualify as either "Government of Iran" or Iranian financial institutions. As a result, OFAC has created a new list (the E.O. 13599 List) to reflect those entities "delisted" for purposes of the JCPOA but still subject to blocking by US persons (or in transactions subject to US jurisdiction).
Otherwise, as expected:
- The US embargo on Iran largely remains in place. Sanctions largely remain in effect for US persons. The US prohibition on virtually any transactions involving Iran remains in place, as applied to US persons. This has potential consequences even for non-US persons. Because the US banking system will continue to enforce the sanctions regime for US persons, even non-US companies no longer subject to the sanctions after Implementation Day may nonetheless risk having transaction payments blocked if they are denominated in US dollars and pass through the US banking system-unless specifically authorized by the US Government.
- The US is suspending most "secondary" sanctions against non-US companies that engage in business in Iran in the following sectors:
- energy and petrochemical;
- shipping, shipbuilding, and ports;
- gold and other precious metals;
- financial institutions; and
- US sanctions involving the following activities by non-US persons remain in effect:
- the export or re-export of goods, technology, and services to Iran of items that contain 10 percent or more US-controlled content, or that are otherwise subject to controls on exports to Iran under the ITSR, Export Administration Regulations (EAR), or International Traffic in Arms Regulations (ITAR);
- transfers of certain weapons-related technology;
- transactions involving Specially Designated Nationals (SDNs), including the Islamic Revolutionary Guard Corps. (IRGC) and entities it owns or controls; and
- facilitating or supporting transactions involving certain human rights abuses in Iran or international terrorism.
I. Sanctions Relief for US Persons
Aside from sanctions relief related to the export or re-export to Iran of commercial passenger aircraft and related parts and services, and a general license authorizing US persons to import Iranian-origin carpets and foodstuffs (including pistachios and caviar), there is very little relief directly afforded US persons under the JCPOA. The broad embargo on trade with Iran remains largely in effect for US persons.
That being said, the headline of OFAC's Implementation Day actions is the issuance of General License H (GL H), which authorizes "Certain Transactions Relating to Foreign Entities Owned or Controlled by a US Person." While OFAC signaled months ago that to comply with the JCPOA commitments it would license non-US companies (i.e., companies not organized under US or US state law) owned or controlled by US persons8 to engage in trade with Iran that is permissible for other non-US companies, it was unclear what this license would encompass and if, in fact, non-US companies would be able to take advantage of it. In particular, under the ITSR, US persons may not "facilitate" transactions between non-US persons and Iran that they themselves would be prohibited from engaging in directly.
With the issuance of GL H, however, OFAC has also authorized US persons to engage in certain activities that will likely permit many more US-owned or -controlled non-US companies from taking advantage of the new authorization than may have been expected.
A. Establishment Activities By US Persons Authorized
First, and most importantly, under GL H, US persons may engage in "activities related to the establishment or alteration of operating policies and procedures of a United States entity or a US-owned or -controlled foreign entity" to the extent necessary to allow a US-owned or -controlled foreign entity to engage in transactions with Iran that are authorized by GL H. In other words, the US owner or controller can be involved in the initial decision to have its non-US subsidiary engage in trade with Iran.
OFAC explains that "this authorization in GL H is intended to cover the involvement of US person board members, senior management, and employees of either a US parent company or a US-owned or -controlled foreign entity in the establishment or alteration of operating policies and procedures of the US parent company or any of its owned or controlled foreign entities, to the extent necessary to allow any of the US-owned or -controlled foreign entities to engage in transactions with Iran authorized under GL H. The authorization for US persons is also intended to cover US persons who may be hired as outside legal counsel or consultants to draft, alter, advise, or consult on such operating policies and procedures. Under this provision of GL H, US persons, including senior management of a US parent company or its owned or controlled foreign entities, may be involved in the initial determination to engage in activities with Iran authorized by GL H, as well as the establishment or alteration of the necessary policies and procedures."
GL H does not, however, authorize US person involvement in ongoing Iran-related operations or decision making of a US-owned or -controlled non-US company engaging in activities with Iran authorized by GL H after these actions are taken. US persons may not be involved in the Iran-related day-to-day operations of a US-owned or -controlled foreign entity, including by approving, financing, facilitating, or guaranteeing any Iran-related transaction by the foreign entity.
B. US Persons May "Make Available" Automated, Globally Integrated Business Services
Second, GL H includes an authorization that appears designed to permit ongoing integration of US and non-US enterprises, to a limited extent, even if the non-US enterprises trade with Iran. GL H authorizes US persons to "make available" any automated and globally integrated computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to transactions by foreign entities they own or control that are authorized by GL H (Authorized Business Support Systems), including systems provided by third parties. OFAC has provided additional guidance on what this means:
OFAC explains that the term "automated" refers to Authorized Business Support Systems that operate passively and without human intervention to facilitate the flow of data between and among the US parent company and its owned or controlled foreign entities. OFAC offers the following examples:
[A]n enterprise resource planning (ERP) system that utilizes a US-based server - without any human intervention in the United States - to generate a purchase order initiated by a Dubai-based, non-US person employee of a US-owned or -controlled foreign entity would be considered "automated" for the purposes of GL H. In contrast, if the ERP system required the intervention of an individual located in the United States to complete a request initiated by a Dubai-based, non-US person employee of a US-owned or -controlled foreign entity, such as a US person performing data entry or internal processing for the creation of a customer record, such system would not be considered "automated" for the purposes of GL H.
Likewise, the term "globally integrated" refers to an Authorized Business Support System that is broadly available to, and in general use by, the US parent company's global organization, including the US parent company and its owned or controlled foreign entities. OFAC offers the following examples:
[A] sales lead database maintained on a server at a US parent company that is broadly available to, and in general use by, the US parent company's non-US entities would be considered "globally integrated" for the purposes of GL H. In contrast, a similar database containing information maintained in the United States that is not broadly available to the US parent company's non-US entities or lines of business performed by such entities would not be considered "globally integrated" for the purposes of GL H.
C. Several Categories of Transactions Remain Prohibited for US-Owned or -Controlled Foreign Entities
OFAC notes in its guidance that although non-US entities owned or controlled by US persons are no longer subject to the general embargo, transactions that involve the following remain prohibited:
- the direct or indirect exportation or re-exportation of goods, technology, or services from the United States (without separate authorization from OFAC);
- any transfer of funds to, from, or through the US financial system;
- any individual or entity on the SDN List or any activity that would be prohibited by non-Iran sanctions administered by OFAC if engaged in by a US person or in the United States;
- any individual or entity identified on the Foreign Sanctions Evaders (FSE) List;
- unless authorized by the US Department of Commerce, activity prohibited by, or requiring a license under, part 744 of the US Export Administration Regulations (EAR) or a person whose export privileges have been denied pursuant to part 764 or 766 of the EAR;
- any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any officials, agents, or affiliates thereof;
- any activity that is sanctionable under E.O. 12938 or 13382 (relating to Iran's proliferation of weapons of mass destruction and their means of delivery, including ballistic missiles); E.O. 13224 (relating to international terrorism); E.O. 13572 or 13582 (relating to Syria); E.O. 13611 (relating to Yemen); or E.O. 13553 or 13606, or section 2 or 3 of E.O. 13628 (relating to Iran's commission of human rights abuses against its citizens); and
- any nuclear activity involving Iran that is subject to the procurement channel established pursuant to paragraph 16 of UNSCR 2231 (2015) and section 6 of Annex IV of the Joint Comprehensive Plan of Action of July 14, 2015, and that has not been approved through the procurement channel process.
II. "Delisting" Actions
OFAC also removed the individuals and entities specified in Attachment 3 to Annex II of the JCPOA from the Specially Designated Nationals (SDN) List, the Foreign Sanctions Evaders (FSE) List, and/or the Non-SDN Iranian Sanctions Act (NS-ISA) List.9 As a result of these removals, non-US persons are no longer subject to secondary sanctions for engaging in transactions with the individuals and entities set out in Attachment 3 to Annex II of the JCPOA, including the Central Bank of Iran and other Iranian financial institutions. For example, foreign financial institutions will no longer be subject to sanctions for facilitating transactions with Iranian financial institutions that have been delisted, and non-US insurers and reinsurers will not be subject to sanctions for providing services to delisted entities.
Individuals and entities meeting the definition of the Government of Iran or an Iranian financial institution, however, as those terms are defined under the ITSR, remain persons whose property and interests in property are blocked pursuant to E.O. 13599 and § 560.211 of the ITSR. As a result, in addition to the embargo on most trade with Iran, US persons must also continue to block the property and interests in property of all individuals and entities that meet the definition of the Government of Iran or an Iranian financial institution, regardless of whether the individual or entity has been identified by OFAC as meeting those definitions. Individuals and entities that have been previously identified by OFAC as meeting the definition of the Government of Iran or an Iranian financial institution are marked with an asterisk in Attachment 3 to Annex II of the JCPOA. Following Implementation Day, these individuals and entities continue to meet the relevant definitions and continue to be persons whose property and interests in property are blocked pursuant to E.O. 13599 and § 560.211 of the ITSR. In order to clarify which individuals remain blocked despite being "delisted," OFAC has created a list of persons identified as blocked solely pursuant to E.O. 13599 (E.O. 13599 List).
Finally, anyone doing business in Iran should recognize that US dollar clearing transactions are likely conducted by US banks and therefore subject to US jurisdiction. Accordingly, such transactions could be blocked if they involve persons subject to blocking by OFAC, including those entities on the E.O. 13599 List.
III. US Sanctions Relief for Non-US Persons (Secondary Sanctions Relief)
OFAC's guidance expands on the JCPOA's secondary sanctions relief and states that the following activities by non-US persons are no longer sanctionable:
A. Energy, Petrochemical, Shipping, Shipbuilding, and Port Operating Sectors.
Non-US persons are now able to do the following without any dollar limitation:
- Purchase, transport, and insure the transportation of petroleum, petroleum products, petrochemical products, and natural gas from Iran.
- Sell, transport, and insure the transportation of refined petroleum products to Iran.
- Sell, lease, or provide goods, services, technology, information, or support that could facilitate or contribute to (1) the maintenance or enhancement of Iran's ability to develop its petroleum resources; (2) the maintenance or expansion of Iran's domestic production of refined petroleum products, including construction, modernization, or repair of petroleum refineries or directly associated infrastructure;10 (3) the enhancement of Iran's ability to import refined petroleum products; or (4) the maintenance or expansion of Iran's domestic production of petrochemical products.
- Make an investment11 that directly and significantly contributes to the enhancement of Iran's ability to develop petroleum resources.
- Participate in a joint venture with respect to the development of petroleum resources anywhere in the world where the Iranian Government is a substantial partner or investor and could receive technological knowledge or equipment not previously available to Iran that could directly and significantly contribute to the enhancement of Iran's ability to develop its petroleum resources.
- Provide significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction in connection with the energy, shipping, or shipbuilding sectors of Iran, including to National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), National Iranian Tanker Company (NITC), and Islamic Republic of Iran Shipping Lines (IRISIL), South Shipping Line, and port operators of Bandar Abbas.
- Conduct "associated services"12 for each category of activities above.
B. Automotive Sector
Non-US persons will be able to-without any dollar limitation-sell, supply, or transfer to Iran goods or services used in connection with the automotive sector of Iran, and conduct "associated services."
C. Gold and other precious metals
Non-US persons will be able to-without any dollar limitation-sell, supply, or transfer to or from Iran gold and other precious metals, and conduct "associated services."
D. Software and metals
Non-US persons will be able to, without any dollar limitation, sell, supply, or transfer to or from Iran graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes, and conduct "associated services."
E. Financial and Banking-related Sanctions
Non-US financial institutions (Foreign Financial Institutions) are now able to do the following without any dollar limitation.
- Deal with Iranian rials, including
- conduct and/or facilitate transactions related to the purchase or sale of Iranian rials or a derivative whose value is based on the exchange rate of the Iranian rial; and
- maintain significant funds or accounts outside Iran denominated in the Iranian rial.
- Assist the Government of Iran in acquiring US bank notes.
- Provide specialized financial messaging services to, or enable or facilitate direct or indirect access to such messaging services, for the Central Bank of Iran and other Iranian financial institutions listed in the JCPOA's Attachment 3.
- Purchase, subscribe to, facilitate the issuance of Government of Iran sovereign debt, including governmental bonds.
- Conduct "associated services."13
F. Insurance-related Sanctions
With the lifting of sanctions on associated services, non-US persons may now provide underwriting services, insurance, or re-insurance in connection with activities consistent with the JCPOA, including activities with individuals and entities who have been delisted, including underwriting services, insurance, or re-insurance in connection with activities in the energy, shipping, and shipbuilding sectors of Iran, for NIOC or NITC, or for vessels that transport crude oil, natural gas, liquefied natural gas, petroleum, and petrochemical products to or from Iran.
IV. Non-US Person Activities That Remain Sanctionable
Below is a non-exhaustive list of non-US person activities-in broad terms-that remain sanctionable. Some will no longer be sanctionable on and after Transition Day, which will occur eight years after the initial adoption of the JCPOA (90 days after July 20), while others will remain sanctionable on and after Transition Day.
A. Non-US Person Activities That Will Remain Sanctionable Until Transition Day.
Non-US persons continue to be prohibited from the following activities:
- Conducting and/or facilitating transactions with Iranian individuals and entities set out in Attachment 4 to Annex 2 of the JCPOA (Attachment 4 appears to include SDNs that have directly contributed to Iran's nuclear proliferation activities -- e.g., Fulmen Group).
- Transferring to or acquiring from Iran equipment and technology: (1) controlled under multilateral control lists (Missile Technology Control Regime, Australia Group, Chemical Weapons Convention, Nuclear Suppliers Group, Wassenaar Arrangement); (2) of the same kind as those on multilateral lists but falling below the control list parameters, when it is determined that such items have the potential to make a material contribution to Weapons of Mass Destruction (WMD) or cruise or ballistic missile systems; (3) with potential to make such a material contribution, when added through case-by-case decisions; and (4) on US national control lists for WMD/missile reasons that are not on multilateral lists -- consistent with the US approach to other non-nuclear weapon states under the Treaty on the Non-Proliferation of Nuclear Weapons (NPT).
- Participating in specified types of joint ventures that involve any activity relating to the mining, production, or transportation of uranium.
B. Non-US Person Activities That Will Remain Sanctionable Irrespective of the JCPOA (i.e., Activities That Remain Sanctionable on Implementation Day With No Suspension or Termination Contemplated Under the JCPOA).
Non-US persons will continue to be prohibited from the following activities:
- US controls on the exportation or re-exportation of goods, technology, and services to Iran imposed under the ITSR, EAR, and ITAR remain in place. Unless exempt from regulation or authorized under the relevant regulations, the re-exportation by non-US persons of items that contain 10 percent or more US-controlled content with knowledge or reason to know that the re-exportation is intended specifically to Iran or the Government of Iran, is generally prohibited without a license.
- Conducting transactions with Iranian entities and individuals on the SDN List (on Implementation Day, OFAC delisted a large number of persons and entities.14 As noted above, some of the entities that were "delisted" remain blocked for US persons. Accordingly, this means that transactions with all such persons (identified on the E.O. 13599 List),15 if subject to US jurisdiction (e.g., if they involve US dollar clearing) remain subject to sanctions.
- Assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, the IRGC and its officials, agents, or affiliates the property and interest in property of which are blocked (collectively referred to herein as IRGC).
- Assisting, sponsoring, or providing material, or technical support for, or goods or services to or in support of: (1) Iran's military or ballistic missile program; (2) Iran's support for international terrorism; or (3) Iran's human rights abuses.
As noted above, the US Government will likely maintain, or even intensify, scrutiny on business activities involving Iran and continue to vigorously enforce any violation of the sanctions that remain in place, such as those involving persons who continue to be listed on the SDN and FSE lists. Furthermore, Implementation Day's suspensions are just that-they are not removal of sanctions and they can be "snapped back" if Iran is found to be out of compliance with the JCPOA. There is also a risk that the outcome of US elections in 2016 could result in a Presidential Administration or Congress hostile to sanctions relief and open to new sanctions that effectively roll back the relief described above.16 In short, companies must remain engaged and vigilant as they move forward with new business involving Iran.