New changes to Iran sanctions: what you need to know

January 19, 2016

Export Controls & Economic Sanctions Alert

Author(s): Anjali Vohra, Alexandra Lopez-Casero, Douglas Dziak

On Saturday, January 16, 2016, the U.S. implemented the Joint Comprehensive Plan of Action (JCPOA) negotiated between the U.S., the UK, France, China, Russia, Germany and Iran. The U.S. sanctions relief creates significant business opportunities, primarily for overseas subsidiaries of U.S. companies, other non-U.S. companies and the U.S. commercial aviation industry. With a few exceptions, the sanctions relief does not extend to U.S. exporters for the time being. Additionally, under the new changes, essentially no U.S.-origin goods, technology, software or services can be exported by anyone to Iran, with the exception of commercial passenger aircraft and related parts and services, and the narrow scope of items that have been eligible for an export license under the existing rules.

Overseas subsidiaries of U.S. companies are now able to export to Iran

The most significant change to the Iran sanctions is the issuance of General License H (“GL H”), pursuant to which non-U.S. persons that are owned or controlled[1] by a U.S. person may engage in activities with Iran. The U.S. export control authorities implemented this new licensing mechanism through a general license (blanket authorization) rather than individual, company-specific licenses for each export. The fact that U.S.-owned or -controlled subsidiaries now benefit from a general license to do business in Iran is a significant breakthrough for U.S. multinationals and global companies headquartered in the U.S. A change to the Iran sanctions regime a few years ago effectively prohibited overseas subsidiaries of U.S. companies to engage in any business activities involving Iran.

The authorization under GL H is not limited to specific economic sectors or industries; however, it is still subject to some important limitations.

The sale or export to Iran may, among other things, not involve:

  1. U.S.-origin goods, technology, software or services;
  2. Foreign (non-U.S.) goods that are the direct product of U.S. technology, software or of a U.S. plant;
  3. U.S.-origin goods that are incorporated into a foreign-made product outside the U.S. if their aggregate value is at or above 10 percent of the total value of the foreign-made product;
  4. Transfers of funds to, from or through the U.S. financial system;
  5. Any individual or entity that has been blacklisted by the United States;
  6. Iranian military, paramilitary, intelligence or law enforcement entities, or their officials, agents or affiliates; or
  7. A prohibited end use, such as nuclear, biological or chemical weapons proliferation.

For example, a U.S. manufacturer of advanced coating solutions for the petrochemical industry is not allowed to export products to its German subsidiary knowing that the end user is in Iran. Otherwise, this exception for overseas subsidiaries would essentially undermine the primary sanctions and U.S. companies could freely export U.S. products to Iran through their overseas subsidiaries.

Additionally, within GL H, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has clarified the extent to which U.S. persons and entities may facilitate their foreign subsidiaries in doing business in Iran. U.S. persons are now authorized to engage in the following activities:

  1. Activities related to the establishment or alteration of operating policies and procedures of a United States entity or a U.S.-owned or -controlled foreign entity, to the extent necessary to allow a U.S.-owned or -controlled foreign entity to engage in transactions authorized by GL H; and
  2. Activities to make available to those foreign entities that the U.S. person owns or controls any automated and globally integrated computer, accounting, e-mail, 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 GL H.

This is a welcome clarification that also sheds light on OFAC’s general view of the problematic notion of “facilitation.” GL H also authorizes U.S. persons, including employees, outside legal counsel and consultants to provide training, advice and counseling on the new or revised policies and procedures described above, provided that these services are not provided to facilitate transactions in violation of U.S. law. For example, the authorization permits U.S. persons to be involved in the initial determination to engage in activities with Iran, but not in the Iran-related day-to-day operations of U.S.-owned or –controlled foreign entities.

Most U.S. companies will not be able to export to Iran (for now)

With a few exceptions, the sanctions relief generally does not extend to U.S. exporters for the time being. The primary sanctions, which apply to U.S. companies and have deep bipartisan support in Congress, remain in effect. The JCPOA does not include a specific timeframe for the lifting of the primary sanctions. As a result, U.S. exporters are generally not able to export to Iran under the current nuclear deal. Pursuant to the JCPOA, the U.S. government licensed three categories of activities: (i) a Statement of Licensing Policy allowing for the case-by-case licensing of the export, reexport, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran for exclusively civil, commercial passenger aviation end-use; (ii) general license GL H referenced above authorizing non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities involving Iran; and (iii) a general license authorizing the importation into the United States of Iranian-origin carpets and foodstuff, including pistachios and caviar, which will be effective upon publication in the Federal Register.

U.S. will issue specific licenses for exports of commercial passenger aircraft and related parts and services to Iran

As noted above, OFAC issued a Statement of Licensing Policy (SLP) establishing a favorable licensing policy regime pursuant to which U.S. companies may request specific authorization from OFAC to (i) export, re-export, sell, lease or transfer to Iran commercial passenger aircraft for an exclusively civil aviation end-use; (ii) export, re-export, sell, lease or transfer to Iran spare parts and components for commercial passenger aircraft; and (iii) provide associated services, including warranty, maintenance and repair services and safety-related inspections, for all the foregoing, provided that the licensed items and services are used exclusively for commercial passenger aviation.

U.S. companies must apply for an individual, company-specific license for each export, which allows OFAC to review each export on a case-by-case basis. Still, the ability to export commercial passenger aircraft and related parts and services to Iran is a major change to the Iran sanctions and opens up significant opportunities to companies in the U.S. aviation industry.

Most secondary sanctions have been lifted for non-U.S. companies

Most of the U.S. extraterritorial sanctions that applied to non-U.S. companies (that are not owned or controlled by U.S. companies) until last week have been lifted. Much to the chagrin of U.S. companies, non-U.S. companies that do not have a nexus to the U.S. are the primary beneficiaries of U.S. sanctions relief. This does not come as a surprise, as officials had indicated in the months leading to the negotiations that sanctions relief would only involve so-called secondary sanctions.

Secondary sanctions are essentially U.S. sanctions against non-U.S. companies that do business with sanctioned countries, such as Iran, e.g., European or Asian companies that are not owned or controlled by U.S. companies. Such companies do not need to ensure that their transaction fits under GL H. However, some basic restrictions apply. For example, none of the transactions with Iran may involve U.S.-origin goods, technology or services; persons blacklisted by the U.S.; or transfers through the U.S. financial system.

Less SDNs in Iran

The U.S. has taken a fairly large number of Iranian entities and individuals off the Specially Designated Nationals (SDN) list, Foreign Sanctions Evaders List and Non-SDN Iran Sanctions List. This will significantly facilitate business for non-U.S. companies (and overseas subsidiaries of U.S. companies) able to export to Iran, given that so far a large number of Iranian entities and individuals, including most major banks, are on the SDN list. This change generally does not benefit U.S. companies, as they continue to be barred from doing business in Iran, regardless of whether or not the potential Iranian business partner is (or is not) on the SDN list or other U.S. prohibited persons lists.

Export compliance considerations

The above summary provides a broad overview of the new changes. U.S. companies, their overseas subsidiaries and non-U.S. companies need to continue to adhere to the remaining Iran sanctions and carefully follow the changes and how they apply to them if they are interested in doing business in Iran. U.S. companies in particular should remember that the U.S. export control authorities will continue to enforce the primary sanctions. If U.S. companies intend to explore business opportunities in Iran through their overseas subsidiaries, the first step would be to identify which of its products can be exported to Iran and from where under both the U.S. and other applicable rules, such as the ones issued by the European Union. Companies will also need to implement specific, written policies and procedures, and carefully train personnel to ensure that the exports do not run afoul of the applicable sanctions regulations.

Political reaction

While there is likely to be criticism from members of Congress and some presidential candidates, particularly after Iran’s recent ballistic missile test that resulted in new sanctions on Sunday, there are few legislative options that would force President Obama to reverse the terms of the agreement that led to the lifting of the sanctions. Last September, the U.S. Senate rejected an attempt to block the terms of the agreement, and Congress did not include any policy riders in the most recent legislation to fund the government that would slow its implementation. Thus, while we expect to hear considerable criticism of the changes in the sanctions regime, absent a significant international event—a geopolitical black swan—the next opportunity to change the terms of the agreement is unlikely to occur until after the U.S. election in November when a new administration takes over. Nevertheless, as the sanctions that the president declared in response to the ballistic missile test demonstrate, the situation remains volatile, particularly depending on the activities of the Iranian government that may illicit a U.S. response.

  1. Under this provision of the JCPOA, a non-U.S. entity is owned or controlled by a U.S. person if the U.S. person: (i) holds a 50 percent or greater equity interest by vote or value in the entity; (ii) holds a majority of seats on the board of directors of the entity; or (iii) otherwise controls the actions, policies or personnel decisions of the entity.
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