Over the past year, the big news for companies doing or considering business in Iran has been the scaling back of U.S. and EU economic sanctions. Many global businesses are now permitted to operate in this once prohibited market. Before we celebrate too enthusiastically, however, let’s stop for a moment to consider a potential challenge for some companies trying to capitalize on this new opportunity.
This time, we are focusing on a conundrum specific to companies that contract with the U.S. government.
U.S. Sanctions Developments. To recap, back in July 2015, the United States and its allies reached a nuclear accord (the Joint Comprehensive Plan of Action or JCPOA) with Iran, which culminated in the easing of certain restrictions on conducting business in or with Iran.
From a U.S. perspective, one of the most newsworthy developments was the issuance, by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), in January 2016, of General License H. Among other things, GL H permits non-U.S. subsidiaries of U.S. companies to engage in many transactions with Iran that were previously off-limits.
OFAC also waived the application of other sanctions, such as those under Section 5(a) of the Iran Sanctions Act (ISA). As a result, non-U.S. companies, including non-U.S. subsidiaries of U.S. companies, may now engage in certain previously-prohibited transactions related to the development, production and exportation of Iranian petroleum products. See e.g., Guidance Relating to the Lifting of Certain U.S. Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day, § VI.D.1 p. 37.
Government Contractors. Unfortunately, however, companies that contract with the U.S. government, and their subsidiaries, may not be able to capitalize on some of the opportunities presented by the amended sanctions. This is because U.S. government contractors are apparently being required to certify their compliance with some sanctions that are no longer in place.
As many readers know, all U.S. government contractors are required to register on the System for Award Management (SAM). Each year, as part of its SAM registration renewal, each contractor must represent and certify to compliance with certain provisions of the Federal Acquisition Regulation (the FAR). Mis-certifications may be deemed false statements to the U.S. government, with potential ramifications under the False Claims Act.
Among the provisions to which contractors must certify is FAR 52.225-25, which indicates that neither the contractor nor any person owned or controlled by it “engage[s] in any activities for which sanctions may be imposed under section 5 of the Iran Sanctions Act.”
Analysis. As discussed above, ISA Section 5(a) sanctions are precisely those that OFAC waived for non-U.S. companies during the implementation of the JCPOA. In other words, government contractors are being required to certify that neither they, nor their subsidiaries, engage in activities for which sanctions may be imposed under section 5(a) of the ISA, even though U.S. sanctions now allow non-U.S. companies to engage in those activities.
Accordingly, though now permitted to do so under U.S. sanctions, non-U.S. companies that contract with the U.S. government, and non-U.S. subsidiaries of U.S. government contractors, may not sell, lease or provide certain goods, services or other support to facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products. The government contractor will otherwise be unable to certify to compliance with FAR 52.225-25 and will thus be ineligible to bid on or perform U.S. government contracts.
Conclusion. It appears that the FAR does not yet fully incorporate the eased restrictions on trade with Iran that resulted from the JCPOA. It seems likely that FAR 52.225-25 will eventually be amended to reflect the current state of U.S. sanctions. But until that occurs, non-U.S. subsidiaries of U.S. companies (and any non-U.S. company that itself contracts with the U.S. government) should steer clear of activities listed in section 5 of the ISA.