On October 22, 2012, OFAC published a final rule that amends substantial portions of the Iranian Transactions Regulations (31 CFR Part 560) (ITR) and renames those regulations the “Iranian Transactions and Sanctions Regulations” (ITSR). The new ITSR arrive two weeks after the President issued Executive Order 13628 to implement Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA), which makes the prohibitions of ITSR (and all other OFAC rules and regulations established under the International Economic Emergency Powers Act (IEEPA) concerning Iran) applicable to foreign (i.e. non-U.S.) entities that are owned or controlled by a U.S. person (see our previous advisory, “URGENT: President Issues Executive Order Implementing Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 Eliminating Immediately the “Foreign Subsidiary Loophole”). However, as the new ITSR arrive just after the President issued Executive Order 13628, they do not include references to non-U.S. entities controlled or owned by U.S. persons. At this time, it is unclear if OFAC will further amend the ITSR to make clear how the ITSR’s prohibitions apply to non-U.S. parties.
Understanding the new ITSR is critical for exporters and service providers around the globe for two reasons. First, in addition to implementing new provisions and deleting some former provisions, the ITSR clarify and consolidate into one regulation several prohibitions, definitions, interpretations and licensing provisions that were previously found in multiple OFAC sources, including the predecessor ITR and numerous executive orders, policy statements and guidance available only on OFAC’s website. Second, the new ITSR contain many of the OFAC prohibitions now applicable to non- U.S. entities that are owned or controlled by a U.S. entity by virtue of Section 218 of ITRSHRA and Executive Order 13628.
Among the new provisions added to the ITSR are (1) expanded blocking provisions on the government of Iran and Iranian financial institutions that were previously in place only by executive order and statute, as well as (2) a new general license that authorize the export or re-export of “medicine” and “basic medical supplies” (both terms defined in the ITSR). These new provisions and other key aspects of the ITSR are summarized in the following section.
Overview of Revised and New Provisions in the ITSR
Implementation of Blocking Provisions into the ITSR
The ITSR incorporate certain requirements initially set forth in Executive Order 13599 and Sections 1245(c) and (d)(1)(B) of the National Defense Authorization Act for Fiscal Year 2012 (NDAA) regarding the blocking requirement for all government of Iran entities and all Iranian financial institutions, as well as related definitions, interpretations and licensing provisions. OFAC implemented these requirements into the ITSR as follows:
- A new Section 560.211 implements the blocking requirements for all property and interest in property of the government of Iran, Iranian financial institutions and others designated for acting on behalf of such entities that were previously in place under Executive Order 13599;
- A new Section 560.212, also consistent with Executive Order 13599, makes null and void any transfer of funds in violation of the ITSR;
- New Section 560.213 requires that blocked funds be held in interest-bearing accounts in the United States if blocked by U.S. persons and in similar interest-bearing accounts outside the United States if blocked outside the United States; and
- New Sections 560.322 through 560.327 define key terms in the new blocking prohibitions noted above or used elsewhere in the ITSR, including “blocked account; blocked property” (560.322); “interest” (560.323); “Iranian financial institution” (560.324); “property; property interest” (560.325); “transfer” (560.326); and “U.S. financial institution” (560.327).
For the most part, the provisions outlined above do not establish new obligations or prohibitions, but rather codify into the ITSR OFAC requirements previously established under executive order, particularly Executive Order 13599. For a more detailed discussion of the impact of these prohibitions, see our previous advisory, “United States Freezes Government of Iran Assets; Chart Summarizing Recent U.S. Sanctions on Iran.”
Addition of New General Licenses for Medicine and Basic Medical Supplies
The ITSR substantially amend the licensing provisions for agricultural commodities, medicine and medical devices in Section 560.530 and related sections that implement the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA). There are several new general licenses. The amendments affecting TSRA exports and re-exports are as follows:
- a new general license has been added at Section 560.530(a)(3) authorizing the exportation or re-exportation of “medicine” (the definition of which in Section 560.530(e)(2) is unchanged from the ITR) and “basic medical supplies” (for which a new definition is provided) to Iran, although certain categories of medicines,1 replacement parts for medical devices and exports to military or law enforcement purchasers are excluded from the new general license;
- under Section 560.530(a)(3)(i) all exports or re-exports authorized under the general license must be shipped within the 12-month period beginning on the date of the signing of a contract for the exports or re-exports;
- the phrase “basic medical supplies” is newly defined in Section 560.530(a)(3)(ii) to mean those medical devices (which term remains unchanged from the ITR, at Section 560.530(e)(3)) that are included on the list of “Basic Medical Supplies” published on OFAC’s website; and
- yy Section 560.530(f) now clarifies that cosmetic products do not qualify as “medicine” for TSRA licensing purposes.
With regard to the list of basic medical supplies now eligible for export to Iran under general instead of specific license, OFAC explained in the Federal Register notice issuing the ITSR that this list would contain medical devices for which OFAC previously did not require an official Commodity Classification Request (CCATS) of EAR99 issued by the Department of Commerce prior to requesting an OFAC specific license under the TSRA licensing program. In the past, OFAC has described its policy on CCATS in various ways, but the general understanding was that “simple” medical devices—meaning those without a power supply or complicated moving parts—did not require a CCATS and the exporter could self-classify the item as EAR99 for TSRA licensing purposes. Other more “complex” medical devices required an official CCATS from the Department of Commerce. However, the initial list of basic medical supplies published by OFAC is a narrow one and does not include all items for which OFAC previously did not require a CCATS. Moreover, the OFAC list is narrower than the list of EAR99 medical devices that the Department of Commerce has made available for TSRA licensing purposes for the past decade. OFAC stated it will publish updates to the list of approved basic medical supplies in the Federal Register, but it did not specify any process whereby exporters can request a specific change to the list. We are hopeful that OFAC’s TSRA licensing division will make such procedures clear in the near future. In the meantime, any export or re-export of medical devices not on the list continues to require a specific license from OFAC.
Importantly, the new general license for medicines and basic medical supplies can be utilized by non-U.S. entities that are owned or controlled by U.S. persons. This is a critical development because many such entities were, prior to the October 9 issuance of Executive Order 13628, not subject to OFAC licensing requirements at all and could freely engage in exports and re-exports of medicine and medical devices to Iran. After Executive Order 13628, such entities were required to cease supply of medicines and medical devices to Iran until they obtained a TSRA license, which could take six to seven months. The general license obviates the need for many, but not all, licenses for these non-U.S. entities to supply medicine and medical devices to Iran. For those transactions not eligible for the general license, there is no other option other than to halt supply to Iran and obtain a specific OFAC license.
Changes to Provisions Governing Payments for Authorized Transactions and Activities Ordinarily Incident to Authorized Transactions
OFAC has also revised the authorization for “transactions ordinarily incident to a licensed transaction” in Section 560.405 to exclude “payments or transfers of funds.” Consequently, the method of payment or transfer for an authorized transaction must be covered by a general (e.g., Sections 560.516 or 560.532 of the ITSR) or a specific OFAC license.2 This means there may be circumstances where an export of medicine or medical supplies can be made under the new general license at Section 560.530(a)(3), but may nonetheless require a specific license if the payment structure is not authorized in the ITSR.
Other changes to the provisions governing payment and contracting for licensed transactions include the following:
- Section 560.530(b) provides a general license for arrangement of exportation and re-exportation of covered products that require a specific license, including entry into executory contracts and making other arrangements identical to those authorized previously under the same section of the ITR.
- the ITSR amend Sections 560.530 and 560.532 governing arrangements for, and financing of, TSRA sales to provide that the payment terms and financing for sales pursuant to the new general license for medicine and basic medical supplies must be limited to, and consistent with, those stipulated in Section 560.532;
- Section 560.532(a) continues to provide for payment by cash in advance, sales on open account or financing by third-country financial institutions that are not U.S. persons, Iranian financial institutions or the government of Iran, but now also allows for payment by a letter of credit issued by an Iranian financial institution blocked solely pursuant to Part 560 (i.e., financial institutions designated solely under the ITSR and designated with the “[IRAN]” tag and no others on the SDN list entry, which includes the various “private” Iranian banks added to the SDN List on July 12, 2012);
- authorized Iranian financial institution letters of credit must be initially advised, confirmed or otherwise dealt in by a third-country financial institution that is not a U.S. person, an Iranian financial institution or the government of Iran before they are advised, confirmed or dealt with by a U.S. financial institution;3 and
- Section 560.532(b) states that OFAC may issue specific licenses on a case-by-case basis for payment terms and trade financing not authorized by the general license at Section 560.532(a).
While the new general license allowing use of certain Iranian financial institutions is promising in theory, in reality there remain substantial risks and problems involved in financing and receiving payments for TSRA-licensed exports. There are a limited number of Iranian financial institutions that are eligible to issue letters of credit for exports authorized under TSRA and Section 560.532, and a limited number of advising banks willing to work with Iran trade even if licensed. Moreover, there is a possibility that the eligible financial institutions may be acting on behalf of other Iranian financial institutions that are not eligible, which is a difficult compliance risk to manage.
Other Key Changes from the ITR to the ITSR
There are a number of other differences between the ITR and ITSR that warrant mention.
First, the definition of “person; entity” in Section 560.305 has been expanded slightly. Specifically, whereas the ITR referred to a “partnership, association, trust, joint venture, corporation or other organization,” the ITSRA definition includes the additional language “group” and “subgroup.” This may enable OFAC under Section 218 to assert licensing and enforcement jurisdiction over non-U.S. “entities” that are not formally incorporated or otherwise established under local law, such as a “business unit” or “division” of a corporation, where such “groups” or “subgroups” are controlled by U.S. persons or entities.
Second, OFAC has dropped from the ITSR Section 560.511 of the ITR because it is “no longer consistent with U.S. policy.” This provision previously authorized exports of items by U.S. persons knowing that the exports were for “transformation or incorporation into a foreign-made end product in a country other than the United States or Iran, intended specifically or predominantly for Iran or the Government of Iran” under certain circumstances. This provision was unique in the ITR in that it allowed export transactions to proceed even when there was knowledge by the U.S. exporter of a subsequent re-export to Iran (in fact, to use this provision, the exporter was required to “ascertain” certain facts about the transaction with Iran). By contrast, there is nothing in the new ITSR to indicate OFAC has changed its position on the so-called “general inventory” grounded in Section 560.204 for certain exports made to third countries, even as applied to non-U.S. entities controlled or owned by U.S persons.
Lastly, Appendix A to Part 560, which listed government of Iran-controlled financial institutions and other entities, has been abolished because all of those entities are now on the SDN List.
Conclusion: Critical Issues Unresolved
While the new ITSR add some clarity to key aspects of the current Iran sanctions regime and offer a number of general licenses that will facilitate humanitarian trade with Iran, there are many questions and unresolved issues that remain.
Chief among them is that payment for exports authorized under TSRA and the ITSR provisions implementing TSRA will continue to be problematic as the global banking system remains skittish about involvement with Iran trade, even if authorized by OFAC.
In addition, the narrowness of the initial list of “basic medical supplies” will force a number of U.S. companies to continue seeking specific licenses for items that are clearly EAR99, and non-U.S. entities controlled by U.S. persons to seek specific licenses and a temporary cessation of supply while awaiting approval of their specific licenses.
Third, the expanded definition of “entity” adopted by OFAC in the ITSR is potentially a signal that OFAC intends to apply the prohibitions of the ITSR broadly to non-U.S. entities now subject to OFAC requirements under Section 218 of the ITRSHRA and Section 4 of Executive Order 13628. We note that Section 13 of Executive Order 13628 uses the same definition as the new ITSR definition.
An updated Alert will follow if and when OFAC issues further regulations or guidance that clarify any of these unresolved issues.