Iran Sanctions – U.S. Reimposes Sanctions After JCPOA Withdrawal, First Measures Come Into Effect

Dechert LLP

Dechert LLP

As expected, following his May 8, 2018, decision to withdraw the United States from the Joint Comprehensive Plan of Action (“JCPOA”), President Trump signed a new Executive Order (“E.O.”) on August 6, 2018, formally re-imposing certain sanctions with respect to Iran (the “New Iran E.O.”). The New Iran E.O. marks the end of the first 90-day wind-down period for JCPOA compliant activity, and certain categories of activity involving Iran and occurring after August 6, 2018, are now prohibited or sanctionable for U.S. and foreign persons. Additional authorities provided by the New Iran E.O., as well as under pre-existing statutes, will come into effect following the end of the 180-day wind-down period on November 5, 2018. Although the European Union officially amended its blocking regulation in an effort to prevent and protect EU businesses from complying with the re-imposed U.S. sanctions, the New Iran E.O. and the end of the 90-day wind down period underscore the immediate risks for non-U.S. companies doing business involving Iran.

The New Iran E.O.

In his May 2018 statement announcing the U.S. withdrawal from the JCPOA, President Trump stated his intent to re-impose “all of the U.S. nuclear-related sanctions that were lifted to effectuate the JCPOA.” Those sanctions had been imposed under four E.O.s that were revoked by President Obama in January 2016, as well as under four statutes under which presidential waivers had been issued pursuant to the JCPOA:

  • Iran Sanctions Act of 1996, as amended (“ISA”)
  • National Defense Authorization Act for Fiscal Year 2012 (“NDAA”)
  • Iran Threat Reduction and Syria Human Rights Act of 2012 (“TRA”)
  • Iran Freedom Counter-Proliferation Act of 2012 (“IFCA”)

Although guidance from the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) stated that the New Iran E.O. “broaden[ed] the scope of the sanctions” in effect prior to January 2016, the measures are essentially identical to those in place prior to the JCPOA. As previewed by the OFAC guidance released in May 2018, the New Iran E.O. reimposes, effective immediately, the following secondary sanctions applying to transactions by non-U.S. persons otherwise acting outside U.S. jurisdiction:

  • Iran’s acquisition of U.S. bank notes and precious metals: Blocking sanctions on foreign persons providing certain support for, or goods or services in support of, Iran’s purchase or acquisition of U.S. bank notes or precious metals (New Iran E.O., Section 1(a)(i)).
  • Iran’s automotive sector: Correspondent and payable-through account sanctions on foreign financial institutions (FFIs) knowingly conducting or facilitating financial transactions in connection with Iran’s automotive sector, and “menu-based” sanctions on foreign persons and their affiliates engaged in significant transactions for goods and services used in connection with Iran’s automotive sector. “Menu-based” sanctions authorize the relevant agency to select one or more sanctions from a menu of options (New Iran E.O., Sections 2(a)(i) and 3(a)(i)).
  • Iranian rials: Correspondent and payable-through account sanctions on FFIs knowingly conducting or facilitating significant transactions related to the Iranian rial or rial-based instruments, or FFIs which maintain significant rial-denominated funds or accounts outside of Iran (New Iran E.O., Sections 6(a)(i) and 6(a)(ii)).

Notably, the New Iran E.O. does not directly implement certain other sanctions also automatically coming into effect on August 6, 2018, as a result of the expiration of statutory waivers. Those additional measures now in effect include:

  • Iran’s trade in industrial metals, coal, and certain software: IFCA authorizes the imposition of menu-based sanctions on foreign persons knowingly selling or providing such materials if they are used for certain purposes, as well as correspondent and payable-through account sanctions on FFIs that knowingly facilitate significant transactions related thereto (IFCA, Sections 1245(a)(1)(B)-(C) and 1245(c)).
  • Iranian sovereign debt: TRA authorizes the imposition of menu-based sanctions on foreign persons knowingly purchasing, subscribing, or facilitating the issuance of sovereign debt or the debt of entities owned or controlled by the Government of Iran (TRA, Section 213(a)).

The New Iran E.O. also includes several other provisions reimposing sanctions on the following sectors, but which will only become effective on November 5, 2018:

  • Iran’s port operators, and shipping and shipbuilding sectors (New Iran E.O., Section 1(a)(iv)).
  • Petroleum and petrochemical-related transactions, including with the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), and the Central Bank of Iran (CBI) (New Iran E.O., Sections 1(a)(ii), 2(a)(iii), 2(a)(iv), 2(a)(v), 3(a)(ii), 3(a)(iii), 3(a)(iv), 3(a)(v), 3(a)(vi)).
  • Additional transactions with certain Iranian and non-Iranian persons added to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) (New Iran E.O., Sections 1(a)(iii), 1(a)(iv), 2(a)(ii).

Finally, the New Iran E.O. expands the menu of sanctions that can be imposed on entities engaging in certain petroleum and petrochemical transactions after November 5, 2018, by authorizing the imposition of targeted measures (e.g., visa restrictions) on principal executive officers, principals, and/or controlling shareholders and a prohibition on U.S. persons making certain investments in the entity.

As with certain sanctions coming into effect on August 6, 2018, the New Iran E.O. does not directly implement certain other statutory sanctions that will nevertheless come into effect on November 5, 2018, including those related to the provision of specialized financial messaging services and insurance, reinsurance, and underwriting services to Iran. Businesses should not assume that these statutory provisions will not be implemented or enforced, despite their absence from the New Iran E.O., as they will automatically go into effect upon lapse of their statutory waivers.

OFAC Guidance Regarding Payments Received After Wind-Down Period

The U.S. government also updated its guidance on the re-imposition of sanctions on August 6, 2018. Most relevantly, OFAC clarified under what circumstances persons could receive payment for goods or services “fully provided or delivered” prior to the expiration of the relevant wind-down period, if such payment is received on or after August 6 or November 5, without exposing themselves to primary or secondary sanctions.

For non-U.S., non-Iranian businesses, payment can be received after the wind-down period for goods and services provided they were (1) fully provided or delivered (i.e., all actions and obligations necessary to receive payment are satisfied); (2) the transaction was pursuant to a pre-May 8, 2018, written contract or agreement; (3) the activities were consistent with U.S. sanctions in effect at the time; and (4) no U.S. persons are involved.

For foreign entities that are owned or controlled by U.S. persons, payments following the end of the wind-down period must be specifically licensed by OFAC. The guidance states that OFAC will evaluate such requests on a case-by-case basis, but that they will generally deny requests to receive payments for activities not authorized under the wind-down authorization or not undertaken pursuant to a pre-May 8, 2018, written contract or agreement.

Practical Impact

The practical effect of these developments is to return the U.S. secondary sanctions regime to the status quo pre-JCPOA. However, the New Iran E.O. does expand upon the U.S. primary sanctions regime in one critical respect: U.S. owned or controlled foreign entities, which will again be subject to U.S. primary sanctions with respect to Iran on November 5, 2018, will also become subject to U.S. primary sanctions if they engage in transactions with non-Iranian persons added to the SDN List pursuant to the New Iran E.O. For instance, an EU subsidiary of a U.S. company could be subject to OFAC enforcement if it signed a contract with another EU company that has been added to the SDN List pursuant to the New Iran E.O. Until now, OFAC’s sanctions have not prohibited a foreign subsidiary from dealing with a non-Iranian SDN. Although many such transactions would likely have subjected U.S. owned and controlled foreign entities to potential secondary sanctions pre-JCPOA (on the basis that they were providing material support to an SDN), they may now result in civil or criminal liability under U.S. law.

For other foreign businesses, the implications of the New Iran E.O. are less clear but no less serious. Immediately after the announced withdrawal from the JCPOA in May, U.S. officials signaled a very aggressive posture and stated that they would not, for instance, grandfather JCPOA-compliant business for EU companies. Similarly, they publicly indicated that they expected foreign countries to reduce their imports of Iranian crude oil to zero before November 5, essentially nullifying a “significant reduction” exception under the NDAA. More recently, however, officials have moderated their tone, suggesting that statutory exceptions and licenses could be granted on a case-by-case basis. The New Iran E.O. does little to clarify the Administration’s current posture, but does grant it significant discretion to target a wide range of activity, effective immediately. Given the Trump Administration’s rapidly shifting approach on other issues relating to international trade and national security, from tariffs to North Korea, businesses should plan for the worst while continuing to strategize and advocate for a more pragmatic approach.

Dechert will continue to monitor sanctions-related developments and issue updates as appropriate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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