U.S. Treasury Department Eases Sanctions Under Iran Nuclear Deal

25 January 2016 Legal News: U.S. Regulation of Exports & International Conduct Publication
Author(s): Gregory Husisian Christopher Swift

Legal News: U.S. Regulation of Exports & International Conduct

On January 16, 2016, the U.S. Treasury Department eased economic sanctions on Iran and issued new licenses authorizing three new categories of Iran-related business. Coming in the wake of the Joint Comprehensive Plan of Action (JCPOA) between Iran, the European Union (EU), and the five permanent members of the United Nations Security Council, these changes lifted some of the so-called “secondary sanctions” targeting foreign companies that conduct business with Iran. The new rules also suspended some of the restrictions imposed under the Iran Threat Reduction Act, which made U.S. parent companies liable for sanction violations committed by their foreign-incorporated subsidiaries. Together with sweeping changes in EU sanctions laws, these developments may make it easier for some non-U.S. companies to resume business with their Iranian counterparts.

Most U.S. sanctions still remain, however. As we previously reported, these include longstanding prohibitions against commercial and financial transactions involving Iran, the Iranian government, Iranian companies, Iranian financial institutions, or persons ordinarily resident in Iran. Iran also remains subject to strict controls under the Export Administration Regulations (EAR), which prohibit the export or re-export of most U.S.-origin goods, services, and technology to Iran—including by foreign companies located outside the United States. Because these prohibitions apply on an extraterritorial basis, multinational corporations subject to U.S. jurisdiction should carefully review U.S. sanctions and export control laws before they—or their non-U.S. affiliates—consider any activities involving Iran.

Secondary Sanctions Relief

Prior to the JCPOA, the U.S. government imposed a broad spectrum of secondary sanctions on non-U.S. entities conducting business with Iran. Non-U.S. companies engaging in transactions with the Iranian energy, automotive, shipping, or financial sectors faced enhanced sanctions under the Iran Sanctions Act of 1996 (ISA). Other statutes prohibited foreign entities from supplying certain materials to Iran, be it precious metals such as gold, or industrial products relevant to Iranian shipbuilding, nuclear, or ballistic missile activities. Executive orders also targeted foreign entities that tried to evade these secondary sanctions, including parties that would not normally be subject to U.S. jurisdiction. The goal was simple: force non-U.S. companies to choose between conducting business with Iran and the United States.

Many of these secondary sanctions are now suspended. Effective immediately, U.S. law authorizes Asian, European, and other non-U.S. companies to resume business with their Iranian counterparts in five key areas:

  • Automotive and industrial activities. Non-U.S. companies may resume trade in aluminum, coal, steel, and other products used for authorized industrial purposes. This includes non-U.S. origin computer software used to manage and integrate certain industrial processes. Non-U.S. companies may also sell or supply foreign-origin goods and services to the Iranian automotive sector, so long as U.S. persons are not involved.
  • Banking, finance, and insurance. Non-U.S. companies may resume transactions with the Iranian Central Bank and other sanctioned financial institutions, as well as transactions involving Iranian currency and Iranian government bonds. Sanctions on insurance, reinsurance, and underwriting related to certain commercial activities authorized under the JCPOA were also suspended.
  • Energy and petrochemicals. Non-U.S. companies may resume transactions involving Iranian petroleum, natural gas, and petrochemical products, including those involving the National Iranian Oil Company (NIOC) and Naftiran Intertrade Company (NICO). The U.S. government also suspended limitation on the volume of Iranian oil and gas that can be sold on global markets, as well as on foreign collaboration with the Iranian energy and petrochemical sectors.
  • Precious metals. Non-U.S. companies may resume trading in Iranian gold and other precious metals. This includes related transactions involving transportation, security, and insurance for these authorized commodities.
  • Shipping and maritime activities. Non-U.S. companies may conduct business with designated Iranian shipping companies, as well as engage in other maritime shipping transactions, such as maritime insurance, bunkering, port services, and related financial transactions. Sanctions were also suspended on non-U.S. persons that own, operate, control, or insure third-party vessels used to transport refined petroleum and petrochemical products to or from Iran.

Foreign-Incorporated Subsidiaries of U.S. Companies

In addition to the secondary sanctions relief described above, OFAC has authorized the foreign- subsidiaries of U.S. corporations to engage in certain transactions with Iran (or persons subject to the jurisdiction of the Iranian government), as well as the government of Iran itself. Codified as General License H under the Iranian Transaction and Sanctions Regulations (ITSR), this measure allows separately incorporated foreign subsidiaries or joint ventures of U.S. companies to trade with Iran, provided they do so independently of the U.S. parent.

The publication of General License H eases the foreign subsidiary liability imposed by Congress under the Iran Threat Reduction Act. Like that statute, the license uses the term “owned or controlled” to cover situations where a U.S. company or person: (1) holds 50 percent or greater equity interest by vote or value; (2) holds a majority of seats on the board of directors; or (3) otherwise controls the actions, policies, or personnel decisions of the entity. While the OFAC does not define this third element in the license, it would likely cover situations where a U.S. parent company could block foreign transactions involving Iran or place personnel in senior positions at its foreign-incorporated affiliate.

To satisfy the criteria for General License H, offshore transactions with Iran must involve:

  • An entity incorporated under the laws of a foreign country (foreign branches and sales offices are not eligible); 
  • No U.S.-origin goods, services, or technology (unless they fall below the 10 percent de minimis threshold); 
  • No participation, facilitation, or oversight by U.S. citizens, legal permanent residents, or any person physically located in the United States; 
  • No other connection with U.S. territory (unless otherwise authorized); and 
  • No direct or indirect use of the U.S. financial system.

Significantly, General License H expressly authorizes U.S. companies to use their “automated” and “globally integrated” accounting, e-mail, and information technology systems to process authorized foreign subsidiary transactions with Iran – provided they do not implicate the U.S. financial system. Although the term “globally integrated” is not defined, it appears to encompass cloud-based computing and other business support services that are based in the United States and broadly available to company personnel overseas. The emphasis on “automation” is also notable given the longstanding prohibition on U.S. person participation, facilitation, or oversight of Iran-related transactions. While automated processes are now authorized, OFAC would likely construe any voluntary actions by U.S. persons – including sending a single e-mail approving an Iranian transaction – as prohibited facilitation.

The scope of this General License H is limited. In addition to satisfying the criteria identified above, foreign-incorporated subsidiaries must not engage in any exports prohibited by the EAR or any other transactions involving:

  • Entities or individuals appearing on OFAC’s list of Specially Designated Nationals (SDNs) or list of Foreign Sanctions Evaders (FSEs); 
  • Iranian military, paramilitary, intelligence, or law enforcement agencies (including their officers, agents, or affiliates); and 
  • Activities related to terrorism, human rights violations, weapons proliferation; or nuclear-related activities (with the exception of peaceful nuclear programs explicitly authorized under the JCPOA).

Companies that plan to use General License H should only do so in strict compliance with these restrictions. This will require foreign-incorporated subsidiaries to implement SDN and FSE screening regimes, conduct reasonable due diligence into their Iranian counterparts, and implement procedures to ensure continuing compliance. These measures require clear compliance policies and internal controls that are tailored to U.S. legal requirements and designed to ensure complete fealty with license requirements.

With this in mind, General License H contains a provision permitting U.S. corporations to establish compliance processes and procedures to ensure that foreign-incorporated subsidiaries comply with U.S. laws. While this measure would not permit U.S. persons to “structure” transactions with the purpose of evading U.S. sanctions, it would allow a U.S. parent company to implement recusal procedures and other measures designed to screen U.S. persons from offshore transactions, or prevent the shipment of U.S.-origin goods. This provision also covers legal advice on sanctions compliance—something that all U.S.-based companies should seek before allowing their foreign-incorporated affiliates to undertake authorized business with Iran.

Other Authorized Transactions

The JCPOA’s implementation brought two additional changes in U.S. sanctions on Iran. The first was a change in licensing policy that would allow U.S. companies (and foreign entities subject to U.S. jurisdiction) to export commercial aircraft, aircraft parts, and related services to Iran. OFAC will grant these licenses on a case-by-case basis, with coverage encompassing warranty, maintenance, repair, and safety inspections. All such exports must be for civilian purposes, however, and all export licenses will prohibit the transfer of any aircraft or related articles to SDNs or entities appearing on the U.S. Commerce Department’s Denied Persons List.

The second change is a revision of the ITSR that would permit the import of Iranian-origin carpets and food products, including pistachios and caviar. This amendment authorizes transactions ordinarily incident to these imports, so long as they do not implicate SDNs, the Iranian government, or direct funds transfers through Iranian financial institutions. This new General License will take effect once OFAC publishes the amendments in the Federal Register. As with all Iran-related transactions, however, U.S. persons may not conduct this newly-authorized business with SDNs, FSEs, or other blacklisted parties. This means that denied party screening and effective compliance policies are just as important for Iranian imports as they are for newly-authorized exports.

Caveats and Concerns

Four additional risks merit careful consideration:

  • First, many of the aforementioned changes are implemented under Executive Orders and subject to the JCPOA’s so-called “snapback” provisions. While the goal is to encourage Iran’s compliance with the JCPOA, this approach may also create uncertainty for companies that rely on the sanctions relief described above. Companies that plan to conduct business with Iran should closely monitor future changes in U.S. sanctions and export controls to ensure compliance with these and other applicable laws. We also recommend that companies conducting authorized activities in Iran structure their contracts and transactions in a manner that will allow them to terminate this business quickly if the sanctions are re-imposed.
  • Second, U.S. law continues to target SDNs, FSEs, and certain persons associated with the Iranian Government. These prohibited parties play a substantial role in the Iranian economy and frequently own or control entities involved in international transactions. This means that easing the Iranian sanctions only amplifies the risks of dealing with blacklisted entities – including those aggressively seeking new business opportunities with companies subject to U.S. jurisdiction. Implementing a robust due diligence process before entering into Iran-related transactions is therefore essential.
  • Third, OFAC and the U.S. Department of Justice will continue to enforce a broad spectrum of laws prohibiting transactions with Iranian weapons proliferatorshuman rights violators, and Iranian entities that support or sponsor terrorism. This includes the newly-imposed sanctions targeting 11 entities and individuals involved in procurement for Iran’s ballistic missile program—an action that came just 24 hours after OFAC eased sanctions to implement the JCPOA. Because these sanctions programs continue to operate on an extraterritorial basis, multinational corporations should continue to screen their customers (and other transaction parties) against the SDN list, even when the underlying transaction may be authorized.
  • Finally, companies that file quarterly or annual reports with the Securities and Exchange Commission (SEC) must still disclose whether their foreign-incorporated affiliates conduct business with the Iranian government or other entities subject to U.S. terrorism and non-proliferation sanctions. These mandatory disclosures have no materiality thresholds, and apply even if the foreign-incorporated affiliate is operating under the auspices of a General License. With OFAC, Congress, and activist groups closely monitoring these public disclosures, offshore transactions with Iran may still expose publicly traded companies to government inquiries, shareholder lawsuits, and negative publicity.

Compliance Strategies

As shown above, OFAC eased some U.S. sanctions on Iran while implementing new requirements for U.S. companies and their foreign-incorporated affiliates. These changes make sanctions compliance more complex. Where multinational companies previously imposed a wholesale ban on transactions involving Iran, they must now examine different rules that apply to different entities operating in different jurisdictions. This means that companies that are contemplating renewing or initiating trade with Iran should re-examine their export controls and sanctions compliance programs – including internal controls, denied party screening, and compliance training. With OFAC committed to aggressive sanctions enforcement even after the JCPOA, and with the ITSR largely untouched, no multinational company should engage Iran without the proper policies and procedures in place.

Dealing with comprehensively sanctioned countries like Iran requires a capacity to navigate complex laws that change constantly in response to global events. It also demands a clear understanding of how OFAC, the Department of Justice, and other U.S. government enforcement agencies interpret these laws — particularly when it comes to asserting their extraterritorial jurisdiction. All of these factors underscore the need to consult with qualified legal counsel to assess the state of the law and determine whether your company can proceed. While headlines may herald diplomatic breakthroughs and new business opportunities, there is still no replacement for prudence, diligence, and effective sanctions compliance.

This Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about emerging issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or one of the following:

Gregory Husisian
Chair, Export Controls & National Security Practice
Washington, D.C.

Christopher M. Swift
Senior Counsel, Export Controls & National Security Practice
Washington, D.C.

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