The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) recently made significant changes to the U.S. sanctions regulations related to Iran. On 22 October 2012, OFAC amended the Iranian Transactions Regulations (ITR), renamed the regulations to be called the Iranian Transactions and Sanctions Regulations (ITSR), and reissued the rules in their entirety. Given the nature of the changes, companies should review their global operations related to Iran in detail. Some changes resulted in the elimination of license exceptions. Other changes offer opportunities to companies by creating new general licenses for trade without the need for a specific license. Please let us know if you would like to discuss further any of these provisions.
- Many of the changes are designed to implement Executive Order 13599, which was issued in February 2012 to impose blocking ("freezing") on the property and interests in property of the Government of Iran, or any entities owned or controlled by it (the blocking was effective on 6 February 2012 but OFAC has now amended its regulations to implement these requirements).
- The new regulations also implement certain provisions of the National Defense Authorization Act for Fiscal Year 2012, enacted on 31 December 2011.
- The ITSR include new definitions, revisions to reflect current U.S. policy, and several new general licenses that authorize activities previously requiring a specific license.
- The ITSR also codify certain OFAC statements of policy that had previously appeared on OFAC’s website.
- While some of the revisions include welcome changes to ease certain activities (for example, an additional form of payment covered by a general license for sales of food/medicine/medical supplies, or a new general license to authorize certain journalistic activities), other revisions include removal of authorities that previously existed, resulting in new restrictions (e.g., excluding payments/funds transfers from general authorizations for activities incidental and necessary to licensed activities, disallowing exports of insubstantial U.S. content that would undergo substantial transformation or incorporation into a foreign-made end product in a third country when the U.S. person knows (or has reason to know) that such third country product is intended for Iran.)
- A number of changes raise questions regarding OFAC’s intent and/or interpretation in light of confusing or unclear language in new provisions, including revisions related to the general license for activities involving Iranian-origin goods that have been substantially transformed or incorporated in a third country, or the new language related to the scope of authorized release of technology/technical data to Iranian students present in the United States on a valid visa, which does not appear to correspond well to the terms of the U.S. Export Administration Regulations (EAR).
- Blocking requirements
The blocking requirements that have been in place since the February issuance of Executive Order 13599 are now reflected in section 560.211 of the ITSR, and sections 560.212 through 560.214 set forth consequences and requirements flowing from the blocking provisions. As a reminder, all property and interest in property of the Government of Iran, including the Central Bank of Iran or any other entity owned or controlled by the Government of Iran, that is in the United States or comes within the United States or the possession or control of a U.S. person is subject to blocking ("freezing"). This requirement has been in place since 6 February 2012 for U.S. persons (including foreign branches of U.S. entities) but the regulations have now been amended to include this requirement. We note that, as of 9 October 2012, non-U.S. entities that are owned or controlled by U.S. persons are prohibited from engaging in, among other things, transactions involving the Government of Iran (unless the activity is authorized under the ITSR for a U.S. person to engage in). Consequently, even non-U.S. subsidiaries of U.S. companies cannot deal in property or interests in property of the Government of Iran or entities owned or controlled by it.
Because the ITR did not historically impose blocking requirements, many of the new changes to the ITSR result from addition of general blocking provisions that exist in other OFAC sanctions regimes that have historically included blocking requirements (e.g., requirements to hold blocked funds in interest bearing accounts and related provisions for maintenance of such accounts). Please note that blocking is not limited to money or financial accounts and applies to contracts, accounts receivable, and other interests in property, as those are broadly defined under the ITSR.
- Ordinarily incident transactions
Section 560.405 of the ITR previously stated that all transactions ordinarily incident to a licensed transaction and necessary to give effect thereto, were also authorized, with certain stated exceptions. Section 560.405 keeps this authorization language, but specifically excludes from this authorization "payments or transfers of funds." The preamble to the regulatory changes states: "Thus, payments or transfers of funds no longer are considered ordinarily incident to a licensed transaction and instead must be authorized by a general or specific license." See page 64665 of the attached Federal Register notice. For payments for food, medicine, and medical devices that are licensed under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), this exclusion will have more limited impact because such payments are explicitly dealt with in other provisions of the ITSR discussed more fully below (including general licenses that are available for TSRA-eligible sales).
- TSRA licensing changes
The new regulations contain a general license for exports and reexports of EAR99 medicine and certain basic EAR99 medical supplies, as set forth in the attached. The list of eligible medical supplies is available here and is different than the BIS Illustrative List of EAR99 medical devices. Please note that replacement parts are not covered. Medicine in the context of the general license does not include cosmetics nor certain types of narcotics and other drugs listed in the now revised 31 CFR 560.530. In addition, sales to military or law enforcement purchasers in Iran are not allowed.
The regulations were also revised at part 560.532 to generally license additional financing terms for sales of food, medicine, and the basic medical supplies. Payment of cash in advance, sales on open account and financing by third-country institutions continue to be covered. In addition, letters of credit issued by Iranian financial institutions who are blocked solely pursuant to the ITSR are generally licensed (in the past, a specific license was needed to use such letters of credit). Iranian banks that are designated as NPWMDs (or under another sanctions program) will not qualify for this provision, as they are blocked and subject to restrictions other than just the ITSR.
- Transactions related to Iranian-origin goods and exports of insubstantial U.S. content
The ITR previously contained a provision at 560.407(c) stating that transactions relating to "goods containing Iranian-origin raw materials and components" were not prohibited if the raw materials or components had been incorporated into manufactured products or substantially transformed in a third country by a person other than a United States person. This provision (c) has been removed from the ITSR, but the same language has been incorporated in subpart (a) that generally deals with imports into the United States so it is unclear whether OFAC intended to limit to scope of this interpretative provision in a substantive way. We also note that the ITSR maintain the prior language in 560.407(b) stating that transactions related to "Iranian origin goods" that have not been incorporated into manufactured products or substantially transformed in a third country are prohibited. That provision could also be read as providing authorization for goods that have been substantially transformed or incorporated in a third country.
In addition, the ITSR remove in its entirety the former text appearing in section 560.511 of the ITR, which had allowed certain exports of insubstantial U.S. content to a third country for substantial transformation or incorporation into a foreign-made end product in a third country (not the U.S. or Iran), even when the U.S. person knew that such third country products will be ultimately destined for Iran. The preamble to the new ITSR regulations state that former section 560.511 was removed because it was "no longer consistent with U.S. policy." See page 64665 of the attached Federal Register notice. As a result of this revision, U.S. persons can no longer provide goods, technology, or services to a person in third country with knowledge or reason to know that such goods, technology, or services are intended specifically for use in the production of, or commingling with, or for incorporation into goods, technology, or services that will be directly or indirectly supplied to Iran.
- Entities owned by blocked persons
Previously OFAC had posted on its website guidance stating the agency’s position that a person whose property is blocked is considered to have an interest in all property of any entity which it owns a 50 percent or greater interest. The ITSR now explicitly include a regulatory provision to address this point with respect to persons and entities blocked by the provisions of 560.211 in the new ITSR (e.g., the Government of Iran).
- Journalistic activities
We note that section 560.519 of the ITSR has been expanded to include a new general license authorizing a number of activities related to journalistic work, such as hiring support staff, leasing office space in Iran, and other listed activities subject to the caveats noted in this provision. Previously, a specific license had to be obtained from OFAC to operate a news bureau in Iran and engage in those same activities. While prior regulations stated a favorable licensing policy for consideration of such specific licenses, this revision obviates the need to apply for a specific license if the conditions of the new general license are met.
- Educational activities and conferences
The ITSR contain a new general license at 560.544 for certain educational activities of U.S. persons in third countries, such as recruitment, hiring, and employment of faculty ordinarily resident in Iran, recruitment and enrollment of students ordinarily resident in Iran, and certain exchange agreements with Iranian universities. There are a number of conditions and limitations to this general license that might necessitate the need for a specific license.
In addition, new section 560.554 of the ITSR allows certain importations of Iranian-origin services and activities related to participating in public conferences, performances, and exhibitions. However, the new language of general license set forth in section 560.505(d) regarding the circumstances under which technology or software could be released to Iranian students who are attending school in the United States raises concerns that this OFAC regulatory provision could be interpreted as being more restrictive than the existing provisions of the EAR. Specifically, OFAC’s general license mentions only one of the exemptions under the EAR for items that are not subject to the EAR (i.e., it specifically references educational information as defined in part 734.9 of the EAR). However, there are several other EAR provisions that would exclude technology from being subject to the EAR (e.g., due to being published in a patent application or information resulting from fundamental research). Section 560.505(d) of the ITSR does not appear to account for those other items not subject to the EAR when specifically enumerating the circumstances under which Iranian students present in the United States can receive technology or software.
- Non-commercial personal remittances
Processing of non-commercial personal remittances to Iran was previously buried in the text of section 560.516(a)(2) of the ITR, which dealt with processing of payments by U.S. depository institutions. The ITSR now include a separate general license at section 560.550 for certain non-commercial personal remittances involving Iran, making it clear that such activities have been (and remain) authorized.