A View From the Trenches: The Practical Impact of the Iran JCPOA on US and Non-US Companies
We have spent the last few days on the ground in Europe and in the US advising clients on the impact of the January 16, 2016 Implementation Day sanctions relief under the Joint Comprehensive Plan of Action (JCPOA) with Iran.
Now that Executive Order 13716 and the regulatory changes to the US Treasury Department's Office of Foreign Assets Control's (OFAC) Iranian Transactions and Sanctions Regulations have been published in the Federal Register, and we have had the benefit of initial discussions with the regulators and our clients, we wanted to provide you a summary of the lessons learned and practical impact of these changes on US and non-US persons and companies.
As discussed below, the best way to describe this week's actions in terms of sanctions relief is that the calendar has been rolled back to mid-2010 and most dealing with Iran that were prohibited then involving US financial transactions and US products are still prohibited today.
1. Despite Various Reports Most US Primary Sanctions on Iran Remain and Changes Were Limited to Application of Secondary Sanctions Affecting Non-US Companies and Non-US Financial Institutions
During the past few days we have seen the following headlines in major newspapers in the US and around the world:
These headlines are inaccurate and misleading, particularly as they relate to most aspects of the US sanctions on Iran.
Despite the various media reports to the contrary nearly all US sanctions and export controls on Iran that have been effect since the mid-1980s remain in place. The only sanctions relief offered by the US government was to scale back the "secondary" (or extraterritorial) sanctions on non-US persons, companies and banks that were greatly expanded since 2012. However, most of the other aspects of the long-standing US sanctions program on Iran (referred to as primary sanctions) remains in place. In addition, the export and reexport controls on Iran administered by the Commerce Department's Bureau of Industry and Security (BIS) have not been modified in any way.
We have confirmed that most reports suggesting specific non-US companies were rushing back into Iran or had already signed contracts with the Government of Iran (GOI) are not accurate. In addition, we are already seeing evidence that many US persons and companies have been misled into overestimating the scope of sanctions relief offered by the US under the JCPOA.
Given the extensive restrictions remaining on the export and reexport of US product to Iran, the significant financial restrictions remaining in place, and the potential risks of non-compliance, even non-US companies should proceed cautiously and only after identifying all remaining prohibitions that are relevant.
2. Scope of Sanctions and Export Controls Remaining in Effect on US Persons, US-Based Companies and US Origin Goods, Software and Technology
The following is a summary of the current restrictions on US persons, US-based companies and US goods, software and technology.
As has been the case since the Clinton Administration, US persons, meaning US citizens, green card holders (permanent resident aliens), entities formed under US law and any person located within the United States, remain broadly prohibited from involvement in activity involving Iran, the GOI or persons on any US list of sanctioned or prohibited parties (i.e, OFAC's SDN List and BIS Entity List).
US-origin goods, software and technology cannot be exported or reexported to Iran in most cases. General and specific licenses (authorizations) can be used for humanitarian items to Iran, such as US origin agricultural products, medical devices and medicines.
Non-US subsidiaries that are owned or controlled by a US individual or company are now authorized by OFAC General License H to engage in certain activities with Iran. However several significant restrictions remain, and any business with Iran could create direct legal risk for the US investor. See sections 4 and 5 below.
It remains generally prohibited for US banks to process payments relating to Iran, the GOI, Iranian banks or sanctioned persons, including US dollar payments related to authorized activities by non-US entities owned or controlled by a US person or related to activities no longer covered by US secondary sanctions. While several hundred Iranian banks and companies were removed from OFAC's SDN List, more than 200 Iranian and Iran-related parties remain on the list and remain subject to secondary sanctions.
3. Significant Restrictions Remain for Non-US Companies in Dealing With Iran
While most of the US secondary (extraterritorial) sanctions have been lifted on Iran (see section 7 below), a number of US sanctions applicable to non-US persons remain (see section 8 below).
Not all EU sanctions on Iran have been lifted and the EU continues to imposed export controls on many products to Iran. In addition, many countries continue to prohibit activities relating to Iran, or require prior authorization from the appropriate regulator. As of this writing, Canada has not made any changes to its very broad sanctions program on Iran.
4. Impact on Non-US Companies Owned or Controlled by US Persons
General License H issued on January 16, 2016 authorizes entities formed under the law of a non-US country that are owned or controlled by a US individual or entity to engage in transactions involving Iran, subject to several limitations. Note that this does not apply to offices or branches outside the United States that are part of an entity formed under US law. See also the helpful OFAC guidance in FAQs K1 – K13.
Since October 2012, such non-US entities had been generally prohibited from dealing with Iran under the OFAC regulations (31 C.F.R. § 560.215), which provides that:
"Except as otherwise authorized pursuant to this part, an entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States."
Thus, non-US subsidiaries owned or controlled by a US company were treated as if they were US persons, and their actions in violation of the Iran sanctions regulations could be imputed to their parent companies. General License H effectively rolls the regulatory clock back to before October 2012, providing that:
"Except as provided in paragraph (c), an entity owned or controlled by a United States person and established or maintained outside the United States (a “U.S.-owned or -controlled foreign entity”) is authorized to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by 31 C.F.R. § 560.215."
This may create a meaningful opportunity for some non-US subsidiaries of US companies to (re)enter the Iranian market. This will depend on case-by-case analysis of a number of factors.
Covered non-US entities must continue to comply, as if they were US persons, with certain US sanctions relating to Iran:
- general prohibitions on exports from the United States (31 C.F.R. § 560.204), reexports from another country (31 C.F.R. § 560.205), transfers of funds through US banks or broker-dealers, and transactions with persons that remain on the SDN List or Foreign Sanctions Evaders List maintained by OFAC;
- the end-use restrictions under Part 744 of the Export Administration Regulations (EAR) or prohibitions on dealing with denied parties under Parts 764 or 766 of the EAR; and
- other OFAC sanctions as they relate to Iran, the GOI, Iranian banks and other persons targeted under Iran sanctions, including Executive Orders 12938 and 13382 (relating to weapons of mass destruction (WMD) and missiles), 13224 (international terrorism), 13572 and 13582 (Syria); 13611 (Yemen), 13553 and 13606, and sections 2 and 3 of Executive Order 13628 (human rights abuses in Iran).
In addition, covered non-US entities cannot engage in transactions that must go through the Iranian civil nuclear procurement channel established by the JCPOA that have not been approved through that channel, or transactions with any “military, paramilitary, intelligence, or law enforcement entity” of the GOI, or any official, agent, or affiliate thereof.
5. Rules for US Parent Companies With Non-US Subsidiaries That Deal With Iran
To OFAC and the State Department's credit, General License H addresses certain “facilitation” issues inherent in the relationship between a US parent company and a non-US subsidiary. This occurred after these issues were brought to the attention of the senior OFAC and State Department staff involved in implementing the JCPOA
A. Operating policies and procedures
General License H authorizes a US parent to establish or alter its operating policies and procedures, or those of the non-US entity it owns or controls, to the extent necessary to allow the non-US entity to engage in authorized transactions involving Iran. Absent this authorization, such changes in policies or procedures would fall expressly within the definition of prohibited “facilitation” in the OFAC regulations (31 C.F.R. § 560.417). The OFAC guidance clarifies that:
- US persons, including senior management of a US parent company or its owned or controlled non-US entities, can be involved in the initial determination whether to engage in activities with Iran authorized by General License H.
- US person board members, senior management, and employees of either a US parent company or an owned or controlled non-US entity can be involved in the establishment or alteration of operating policies and procedures of the parent or non-US entity, to the extent necessary to allow the non-US entity to engage in transactions authorized by General License H.
- US persons can act as outside legal counsel or consultants to draft, alter, advise, or consult on such operating policies and procedures.
General License H does not authorize US person involvement in ongoing Iran-related operations or decision-making of its owned or controlled non-US entity after the determination to enter Iran has been made and policies / procedures are established. To be clear, US persons may not be involved in the Iran-related day-to-day operations of a US-owned or controlled non-US entity, including by brokering, referring, approving, financing, facilitating, or guaranteeing any Iran-related transaction by the non-US entity.
B. Automated global business support systems
The US parent may make available to an owned or controlled non-US subsidiary 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 authorized by General License H.
The OFAC guidance explains that the term “automated” refers to any of the aforementioned systems that operate “passively and without human intervention to facilitate the flow of data between and among the United States person and its owned or controlled foreign entities.” It goes on to explain that “globally integrated” includes those systems that are “available to, and in general use by, the United States person’s global organization, including the United States person and its owned or controlled foreign entities.”
General License H expressly excludes from its authorization the use of business systems in connection with any transfer of funds to, from, or through a United States bank or broker-dealer.
All other prohibitions set forth in the OFAC regulations – including the prohibition against facilitation set forth in 31 C.F.R. § 560.208 – continue to apply to US parent companies, except as otherwise authorized.
Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions. Very broad US primary sanctions remain in place unchanged, except for two specific changes made pursuant to the JCPOA. These two changes are a new general license for imports to the US of Iranian carpets and foodstuffs, and an expanded specific licensing program for exports to Iran of aircraft and related equipment and services.
Under the aircraft licensing program, US and non-US companies may now apply to OFAC for a specific license (authorization) to export to Iran commercial passenger aircraft for exclusively civil aviation end-use, and spare parts, components and services for such aircraft. This specific licensing program might not result in significant exports for some time, as potential exporters seek clarity on how it will function. Also OFAC could take several months to process license applications, as was the case under the narrower aviation licensing program initiated in January 2014 under the interim agreement with Iran known as the Joint Plan of Action (JPOA).
With the January 16 sanctions relief, we could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List and from secondary sanctions could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).
In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions.
Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions.
We could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).
In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions. And non-US banks may now be able to engage in payments with most (but not all) major Iranian banks.
Many non-US companies considering exports to Iran of items with US content, or to the US of items with Iranian content, are working through the complex provisions of the OFAC regulations and the EAR administered by BIS related to incorporation, de minimis levels, and substantial transformation of such content. These rules remain unchanged, but the new OFAC guidance reconfirms some key points:
- Non-US persons remain prohibited from directly or indirectly reexporting to Iran from a third country items originating in the US or containing 10 percent or more by value of US-controlled content (meaning US content classified under an ECCN other than EAR99).
- However, the OFAC guidance also confirms that it is not generally prohibited for non-US persons or companies to reexport EAR99 items from a third country to Iran, if no US person is involved, the items have come to rest outside the US, were not procured from the US in order to be sent to Iran, and no prohibited end-uses or end-users are involved.
Non-US persons will no longer be penalized under US secondary sanctions for engaging in the following activities, unless their conduct involves any of the other activities or persons that remain sanctioned (see #8 below):
- investing $20 million or more in the development of the Iranian upstream or downstream oil, gas or petrochemical sectors;
- providing to Iran goods, services, technology, information or support for the development of Iranian petroleum resources or Iranian production of gasoline, diesel or jet fuel;
- providing to Iran gasoline, diesel or jet fuel, or assisting with Iran’s import of such fuel;
- selling, leasing or providing to Iran or the GOI goods, technology or services for Iran’s production of petrochemicals;
- transactions involving crude oil, petroleum or petrochemicals from Iran, or involving the National Iranian Oil Company (NIOC) or its subsidiaries, though certain such sanctions were suspended in January 2014 under the Joint Plan of Action (JPOA);
- providing insurance or reinsurance for NIOC or the National Iranian Tanker Company (such sanctions were suspended under the JPOA);
- assisting GOI acquisition of US bank notes or precious metals, or purchasing or facilitating the issuance of GOI debt;
- entering into a joint venture with the GOI regarding petroleum or uranium resources outside of Iran;
- owning, operating or insuring a vessel transporting crude oil from Iran (except pursuant to the JPOA sanctions suspension) or concealing its transportation of crude, gasoline, diesel or jet fuel from Iran, or transporting to or from Iran goods related to terrorism or WMD;
- selling or supplying to Iran significant goods or services used in the Iranian automotive sector (such sanctions were suspended under the JPOA), or the Iranian energy, shipping, or shipbuilding sectors;
- selling or supplying to or from Iran precious metals (such sanctions were suspended under the JPOA);
- a significant transaction involving Iranian rials, a derivative based on the rial, or funds or accounts outside Iran denominated in the rial; and
- insurance or reinsurance of activities listed above, or paying a claim arising from any such activity prior to Implementation Day if no person on the SDN list is involved.
8. Remaining US Sanctions and Export Controls Applicable to Non-US Persons
As noted below, most US sanctions and export controls relating to Iran remain in place. Many can have direct or indirect application to non-US persons seeking to re-engage in business with Iran:
A. Secondary sanctions can still be imposed for any of the following activities.
- Materially assisting, sponsoring or supporting any of the more than 200 Iranian persons remaining on the SDN list, or for a financial institution, engaging in a significant transaction involving any such person. These sanctions are broad - for example, the Iranian Revolutionary Guard Corps (IRGC) and its affiliates, which play an important role in several sectors of the Iranian economy, are still covered on the SDN list.
- For a non-US bank, (i) a significant transaction involving any person on the SDN list for reasons related to Iran’s proliferation of WMD or terrorism, or (ii) any transaction involving WMD, terrorism or money laundering activities by the GOI.
- The provision of financial messaging services (eg SWIFT) to Iranian banks that remain on the SDN List, which include Ansar Bank, Bank Saderat, Mehr Bank
- Sales of goods or services to Iran or other transactions subject to the Iranian nuclear procurement channel established by the JCPOA, without approval under that channel.
- Selling or supplying to or from Iran graphite, raw or semi-finished metals, coal or software for industrial processes, if the transaction supports the military or missile program of Iran.
- Exporting or providing goods, services or technology to Iran or a third country knowing they would contribute to Iranian WMD or advanced conventional weapons capabilities.
- Supplying or operating telecoms equipment, technology or services that could be used to commit human rights abuses or for censorship, surveillance or network disruption.
B. US primary sanctions remain on Iran, meaning US persons are generally prohibited from transactions or dealings involving Iran, the GOI, an Iranian bank, or any person on an OFAC sanctions list. A non-US person could be penalized under the primary sanctions for taking action within the United States or causing another person to do so, in a transaction involving Iran, the GOI or a sanctioned person.
C. US and non-US persons can be added to a US sanctions list if they engage in deceptive transactions for sanctioned persons, support activities related to terrorism, proliferation of WMD or missiles, undermine the peace, security or stability of Yemen or certain other countries, or engage in activities covered by other OFAC sanctions programs.
D. Any US or non-US company listed on a US stock exchange must disclose in its quarterly and annual reports a range of activities that the company or its affiliates engage in involving the GOI (unless authorized by the US), the Iranian energy sector or certain sanctioned persons.
E. US and non-US persons are required to certify, at the time of any US government contracting or US Export-Import Bank financing, that neither it nor any entity it owns or controls engages in certain activities relating to Iran.
F. Public pension and retirement funds may be restricted under US state or local laws from investing in or purchasing goods or services from companies doing business with Iran.
G. In December 2015 Congress modified the US Visa Waiver Program to require individuals in the 38 participating countries to go through a full US visa application process if, since March 2011, they have been in Iran, Iraq, Syria or Sudan for any reason. This could have an impact on executives and other staff that travel between the US and these countries and require these individuals to obtain visas to enter the US for business or personal travel.
9. Next Steps, Snap-Back Risk and Iran Sanctions Enforcement and Compliance Considerations
We expect there will be a great deal of Iran-related interest and activity in the coming weeks as companies, investors and financial institutions assess what they can and cannot do in Iran. In addition, there are already a number of unanswered questions on various aspects of the changes that have been made and we will continue to engage with OFAC, BIS and the State Department to seek clarification on these questions.
US and non-US companies that decide to engage in authorized business in Iran must also weigh the potential of the so-called "snap-back" or reimposition of sanctions on Iran. While the risk of the reimposition of sanctions on Iran if they fail to uphold their end of the JCPOA is unclear, OFAC has said that if sanctions are reimposed there will be no “grandfather clause” for pending transactions. In addition, the US has also made clear that any transactions conducted after the snap-back occurs are sanctionable and there is no provision in the JCPOA that protects contracts signed prior to snap-back. In addition, given that there will be a new US president in less than one year, it remains to be seen whether the next Administration will choose to uphold the US commitments made in the JCPOA.
With respect to enforcement, the Treasury Department has previously stressed that it will continue to “vigorously enforce" all US sanctions on Iran that have not been suspended. Given that the US Congress will be closely monitoring the JCPOA and the significant sanctions and export controls that remain, we expect that OFAC, BIS and other US law enforcement agencies will remain vigilant in combating conduct that remains prohibited by US law. We expect that Iran will remain the primary target of US sanctions and export control enforcement.