Pursuant to the President’s May 8, 2018, memorandum announcing the United States’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA), the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) proceeded with its plan to reimpose nuclear-related sanctions against Iran. On November 5, 2018, OFAC fully reinstated all sanctions in effect prior to the JCPOA. This action will have a somewhat limited impact on U.S. persons, who, following the JCPOA’s implementation, remained required to abide by U.S. sanctions imposed against Iran. With the revocation of General License H and the expiration of the general license in 31 CFR § 560.537, the primary U.S. sanctions prohibitions again apply to non-U.S. persons owned or controlled by U.S. persons pursuant to 31 CFR § 560.215. European subsidiaries of U.S. companies may face particular challenges due to the conflict between the applicability of the U.S. sanctions prohibitions and the obligations under the European Union (EU) Blocking Regulation. Non-U.S. persons will see the return of so-called secondary sanctions, and those in Europe may also face challenges balancing obligations under the European Union (EU) Blocking Regulation with the now-reinstated U.S. secondary sanctions.
Now that the changes have been in place for a couple months, non-U.S. companies are again dealing with considerations related to new SDN designations and the revival of secondary sanctions in connection with their activities. In that context and given the potential conflicting requirements and risks under U.S. sanctions and the EU Blocking Regulation, review of company policies and procedures may be warranted.
Renewed SDN Designations
As was true prior to the United States’ withdrawal from the JCPOA, U.S. persons are generally prohibited from dealing with Specially Designated Nationals (SDNs). On November 5, 2018, OFAC designated more than 700 parties — including individuals, banks and other entities, aircraft, and vessels — as SDNs, placing them on the Specially Designated Nationals and Blocked Persons List (SDN List). Many of these parties, which include those formerly blocked solely under Executive Order 13599 for being linked to the Government of Iran or Iranian financial institutions, were previously removed from the SDN List as part of the JCPOA’s implementation.
In some cases, these returned SDNs have been relisted not only under the original Iran program designation but also additional sanctions programs, which may limit the applicability of general licenses authorizing specific activities. The Administration has stated that the sanctions action is not meant to target the Iranian people, however, and the general licenses authorizing the export and reexport of agricultural commodities, food, medicine, and medical devices to Iran, contained in the Iranian Transactions and Sanctions Regulations at §§ 560.530 and 560.532, remain available. All conditions associated with the use of these general licenses must still be satisfied.
With this recent expansion of SDN designations under the Iran sanctions and other programs, companies should be particularly vigilant in vetting parties with which they deal, including any Iranian financial institutions through which payment may be made, to ensure compliance with the reimposed sanctions. OFAC has maintained an aggressive enforcement posture with respect to the primary sanctions regimes, particularly for transactions involving SDNs.
Secondary Sanctions Revived
An additional significant impact of the changes to the Iran sanctions is the reimposition of secondary sanctions — those imposed on non-U.S. persons for activities that would not otherwise be subject to the U.S. sanctions prohibitions. The secondary sanctions may be levied against non-U.S. persons when those persons engage in certain activities that are contrary to U.S. sanctions policy. The secondary sanctions do not make specific conduct illegal, but instead specify conduct that is contrary to U.S. foreign policy and identify certain ramifications for engaging in such conduct. The risk that secondary sanctions will be imposed, and especially which specific sanctions action may be taken, is therefore less concrete and transparent than the risk of enforcement under the primary sanctions regimes.
For example, a non-U.S. person found to have engaged in conduct specified in one of the secondary sanctions provisions, such as providing support for an Iranian SDN, could itself be designated as an SDN, such that all of its property and interests in property within the U.S., or in the possession or control of U.S. persons wherever located, would be blocked. Under OFAC’s 50% rule, this blocking action would also apply to the property and interests in property of any other entity owned 50% or more by the designated party, to the extent such property or interests in property come within the United States or the possession or control of U.S. persons. The designated non-U.S. person, and any subsidiaries, would thereby be essentially cut off from the U.S. financial market. Non-U.S. persons sanctioned under the secondary sanctions may also face: restrictions on opening or maintaining U.S. correspondent or “payable through” accounts; denial of entry into the United States for corporate officers of a sanctioned entity; denial of licenses required to export items from the United States or items containing sufficient U.S.-origin content; denial of Export-Import Bank of the United States privileges; and/or restrictions on U.S. investment in sanctioned entities, among other penalties.
It is unclear at this time whether or how OFAC will use the secondary sanctions, which can be quite severe, to penalize non-U.S. parties who engage in conduct that is contrary to U.S. foreign policy. The simple threat of being subjected to U.S. secondary sanctions, however, may result in a significant chilling of specified sanctionable activities, such that OFAC avoids having to show its hand with respect to this new tool for some time.
The EU Blocking Regulation
The picture has been further complicated for businesses in Europe by the inclusion of the U.S. measures concerning Iran within the scope of the EU Blocking Regulation. The Blocking Regulation (officially known as Regulation 2271/96) is an EU regulation seeking to limit the extraterritorial impact of particular legislation or sanctions adopted by a third country (such as the U.S.). It was originally introduced in the context of U.S. sanctions against Cuba.
The Blocking Regulation prohibits EU businesses from complying with the U.S. sanctions. Technically, any EU business complying with the U.S. sanctions could face prosecution and fines. A further aspect of the Blocking Regulation is that it provides a basis for EU businesses to claim damages for any loss suffered as a result of being required to comply with the U.S. sanctions.
Competing Approaches and the Path Forward
The Trump Administration has stated that its strategy is to apply “maximum economic pressure”1 to force Iran’s hand in negotiating an agreement that would replace the JCPOA. It remains unclear if or when Iran may be willing to negotiate a new comprehensive nuclear deal, and it is expected that these secondary sanctions will remain in effect at least until such a deal is reached. What has been made clear, however, is that EU companies may face penalties under the Blocking Regulation intended to prevent the extra-territorial reach of U.S. sanctions for abiding by the U.S. sanctions against Iran: in a recent statement, an aide to EU Foreign Affairs Chief Federica Mogherini declared that EU companies that comply with the U.S. secondary sanctions “will, in turn, be sanctioned by the EU.”2
The risk of enforcement under the EU Blocking Regulation appears low, perhaps lower than the likelihood of exposure to U.S. secondary sanctions. Given the rising tension between the U.S. and EU approaches, however, now is an appropriate time to review internal and external communications regarding business with Iran, as well as corporate policies, practices, and procedures that may govern such business, to assess and manage sanctions-related compliance risks. Examining and, where necessary, updating corporate communications and policies is prudent and ensures your organization is accounting for both the reinstated U.S. sanctions and the EU’s intensified enforcement posture. These updates should be crafted to balance the U.S. and EU approaches to Iran by, for example, employing neutral language (i.e., not explicitly tied to either policy) that is supported by legitimate, non-sanctions-related business reasoning whenever possible.
, The White House (Aug. 6, 2018), https://www.whitehouse.gov/briefings-statements/statement-president-reimposition-united-states-sanctions-respect-iran.
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