January 21, 2016

Iran Sanctions Lifted? Implementation Day Creates Compliance Minefield

U.S.-Iranian relations took a major step forward on January 16, 2016, with the arrival of “Implementation Day” under the Joint Comprehensive Plan of Action (JCPOA). Although this may present new business opportunities in Iran, U.S. companies should proceed with caution as the U.S. sanctions relief is nuanced and complex.

“Implementation Day” signals verification by the International Atomic Energy Agency that Iran has complied with its nuclear reduction obligations under the JCPOA. As a result, the U.S. and the other P5+1 nations were required to provide certain sanctions relief to Iran. President Obama issued a new Executive Order on January 16 implementing the suspension of those sanctions, and the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) followed suit by issuing a new general license, statements of licensing policy and official guidance on the effects of Implementation Day.

The key takeaway is that Implementation Day does not mark the end of all U.S. sanctions on Iran. In fact, many of the most stringent sanctions on Iran remain intact. Ultimately, the big winners of Implementation Day are Iran and foreign companies doing business with Iran because of the elimination of “secondary sanctions” (which apply only to the activities of non-U.S. persons). U.S. persons continue to be prohibited from conducting business with Iran generally, with limited exceptions. This disadvantages U.S. companies vis-à-vis the rest of the world unless they can avail themselves of the narrow carve-outs permitted by the U.S. government. Failure to tread carefully can result in significant liability for U.S. companies.

The parties impacted by Implementation Day fall into three categories: (i) U.S. persons (individuals and entities), (ii) foreign companies owned or controlled by U.S. persons, and (iii) foreign persons not owned or controlled by a U.S. person.

Here are the “need to know” effects of Implementation Day:

What Does Implementation Day Do?

For U.S. Persons:

  • It permits certain types of “facilitation” activities by U.S. persons. U.S. persons are now allowed to engage in specific and limited types of “facilitation” activities with respect to their foreign subsidiaries. Generally, a U.S. person cannot “facilitate” any transaction with Iran, meaning approving, financing, facilitating or guaranteeing it. General License H provides the following carve-outs to that rule and allows U.S. persons to:
    • Establish or alter corporate policies and procedures necessary to allow U.S.-owned or -controlled foreign entities to engage in transactions involving Iran; and
    • Make available to U.S.-owned or controlled foreign entities certain automated and globally integrated business support systems, such as accounting, email, telecommunications and enterprise resource planning (ERP) services.

Note that these exceptions to the prohibition on “facilitation” are narrow. The first exception does not permit U.S. persons to be involved in day-to-day operations of foreign subsidiaries to approve, finance, facilitate or guarantee any Iran-related transactions. However, this exception does permit U.S. lawyers and other advisors to draft, alter, advise or consult on the operating policies and procedures of the U.S. parent company and its foreign subsidiary, so long as they do not advise on methods to evade the law or on day-to-day matters regarding Iranian transactions. The second exception requires that all business support systems be “automated” (meaning that they operate passively and without any human intervention, other than routine or emergency maintenance services), and they must be broadly available to and in general use by the U.S. parent company and its owned or controlled foreign subsidiaries.

  • It adopts a favorable licensing policy regarding civil aircraft. OFAC issued a statement of licensing policy which provides a favorable licensing regime for U.S. persons to export, re-export, sell, lease or transfer to Iran exclusively for civil aviation end use commercial passenger aircraft, spare parts and components, and related services (such as warranty, maintenance and repair services and safety-related inspections). This is not a general license, and U.S. persons must apply for a specific license from OFAC on a case-by-case basis (which OFAC may grant or deny in its discretion).

  • It provides a general license for importing Iranian-origin carpets and foodstuffs. U.S. persons are now permitted to import into the U.S. Iranian-origin carpets and other textile floor coverings and foodstuffs intended for human consumption. Both types of imports are limited to specific classifications under the U.S. Harmonized Tariff Schedule. No separate license application is required for products meeting the conditions of the general license.

Foreign Subsidiaries of U.S. Persons:

  • It permits foreign subsidiaries of U.S. companies to do business with Iran (with certain restrictions). Foreign companies owned or controlled by U.S. persons are now permitted to engage in transactions, directly or indirectly, with the Government of Iran or any other parties in Iran under General License H. Such activity was formerly prohibited under the Iranian Transactions and Sanctions Regulations (ITSR). General License H eliminates that restriction but retains some prohibitions on foreign subsidiaries with respect to Iran, such as:
    • No exporting, re-exporting, selling or supplying any goods, technology or services from the U.S. to parties in Iran;
    • No exporting, re-exporting, selling or supplying any goods, technology or services to Iran that are subject to the Export Administration Regulations (EAR) (which includes foreign-made goods containing U.S. content or made using U.S.-origin technology);
    • No transferring funds to Iranian parties through any U.S. depository institution;
    • No transacting with any parties on OFAC’s Specially Designated Nationals List (SDN List) or List of Foreign Sanctions Evaders (FSE List);
    • No transacting with any military, paramilitary, intelligence or law enforcement entity of the Government of Iran;
    • No engaging in activities related to Iran’s proliferation of weapons of mass destruction, international terrorism or Iran’s commission of human rights abuses; and
    • No engaging in nuclear-related activities involving Iran that are subject to procurement channel restrictions by the United Nations Security Council or the JCPOA.

Foreign Persons (Generally):

  • It lifts “secondary sanctions” on Iran related to certain industries and products for foreign persons. OFAC now permits foreign persons (including foreign subsidiaries of U.S. persons) to engage in transactions with Iran without a license in the following industries: finance, banking, energy, petrochemical, shipping, shipbuilding, automotive, insurance and reinsurance. Foreign persons can also export and sell the following products to Iran without a license: gold and precious metals, graphite, raw and semi-finished metals such as aluminum and steel, coal and certain software. As noted above, these are all “secondary sanctions,” meaning that they apply to the activities of foreign persons only (including foreign subsidiaries of U.S. persons). U.S. persons are still prohibited from transacting with Iran in these industries or with respect to these products unless specifically licensed by OFAC.

  • It removes over 400 individuals and entities from the blocked parties lists. OFAC now permits foreign persons (including foreign subsidiaries of U.S. persons) to engage in transactions with the parties removed from the SDN List, FSE List and the Non-SDN Iran Sanctions Act List, as identified on Attachment 3 to Annex II of the JCPOA. The removal of the 400 names from those lists means foreign persons (including foreign subsidiaries of U.S. persons) will no longer be subject to sanction for engaging in transactions with those parties. U.S. persons are prohibited from transacting with any Specially Designated Nationals or blocked persons, including the 400 who were de-listed in connection with Implementation Day.

What Doesn’t Implementation Day Do?

U.S. Persons:

  • It does not eliminate the general sanctions program with respect to activities by U.S. persons. Implementation Day only removes certain nuclear-related “secondary sanctions,” meaning the sanctions that apply to the activities of foreign persons with Iran. The U.S. trade embargo on Iran remains in full effect, and U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with Iran or its government unless subject to the new specific license for aircraft, parts and related services or the pre-existing licensing programs (such as for medical devices, medicines and food products).

  • It does not eliminate all “facilitation” by U.S. persons. As noted above, U.S. persons can only advise on implementation compliance procedures and provide limited support services to their foreign subsidiaries for transactions with Iran. A firewall must be established between the U.S. parent and the foreign subsidiary to ensure that no U.S. persons (i) are involved in day-to-day management with respect to Iranian transactions, or (ii) provide support services that go beyond automated operational support. The scope of these carve-outs is extremely narrow and may make implementation of revised procedures a headache for multinational companies. OFAC has not provided guidance on the contours of such policies and procedures, so U.S. companies should proceed with caution.

Foreign Persons (including Foreign Subsidiaries of U.S. Persons):

  • It does not permit goods, technology, software or services subject to the EAR to be exported or re-exported to Iran without a license. Although foreign persons are now permitted to transact with Iran after the lifting of the “secondary sanctions,” they are still prohibited from selling to Iran any U.S.-origin goods, technology, software or services, or any other items subject to the EAR. This includes goods, software or technology manufactured outside of the U.S. containing more than a de minimis amount of U.S. content or manufactured using U.S.-origin technology. Foreign persons (including foreign subsidiaries of U.S. persons) need to be mindful of this re-exporting restriction. Failure to comply can result in violations of the EAR or other U.S. export control laws. U.S. persons are still subject to the trade embargo on Iran, so they cannot export anything to Iran regardless of its country of origin.

  • It does not eliminate all sanctions programs impacting Iran. Implementation Day only removes certain “nuclear-related” sanctions on Iran, but other sanctions programs remain unaffected, such as those relating to Iran’s support for terrorism, Iran’s human rights abuses, Iran’s proliferation of weapons of mass destruction, Iran’s support for persons involved in human rights abuses in Syria, and Iran’s support for persons threatening the peace, security and stability of Yemen. The persons subject to those sanctions programs are blocked by the U.S. government on the SDN List. This means that foreign persons (including foreign subsidiaries of U.S. persons) must refrain from doing business with those blocked persons or be subject to penalty. To help foreign persons identify the parties who continue to be blocked, they will now be identified on the SDN List as “Subject to Secondary Sanctions.”

  • It does not permit transfers of funds to Iranian parties through the U.S. financial system. U.S. financial institutions and U.S. branches of foreign financial institutions are still prohibited from engaging in any finance or banking activities related to Iran. Even if a foreign subsidiary of a U.S. company is permitted to conduct the transaction, a U.S. depository institution or a U.S. branch of a foreign financial institution cannot process the transaction if an Iranian party has an interest. This includes “U-turn” transactions (which require a U.S. financial institution or U.S. branch of a foreign financial institution to clear U.S. dollar transactions) between foreign persons and parties in Iran. This may be a major stumbling block to the lifting of the secondary sanctions for industries like oil and gas, where dollar-denominated transactions are common. U.S. persons are still prohibited from transacting with any Iranian financial institutions.

So where does this leave us? Unfortunately, there are a number of open questions for the U.S. private sector to resolve, absent further guidance from OFAC:

  • Can a foreign subsidiary of a U.S. company repatriate funds derived from Iran to the U.S. parent?
  • If those funds cannot be repatriated, can they be used to finance other foreign operations or do those funds “taint” other investments that might throw off dividends to U.S. persons?
  • Although U.S. persons can now engage in limited “facilitation” of transactions with Iran, where is the dividing line between permitted and prohibited activities, which may be blurry in practice?
  • Will publicly-traded U.S. companies still be required to report Iran-related transactions by their foreign subsidiaries in their annual reports?
  • Will foreign banks be willing to process transfers with Iranian parties, or have the multi-million dollar penalties assessed by OFAC in the past made them gun shy?

Implementation Day marks an important milestone in U.S.-Iranian relations, but there are few direct benefits for U.S. companies. U.S. entities with foreign operations may find that they have an indirect route to the Iranian market, but those opportunities should be pursued with caution. The coming weeks and months may present additional guidance from OFAC, but in the meantime U.S. persons should take a conservative and measured approach to exploring the untapped Iranian market.

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