On January 16, 2016, “Implementation Day” occurred under the Joint Comprehensive Plan of Action (JCPOA). This historic sanctions relief followed verification from the International Atomic Energy Agency (IAEA) that Iran implemented key nuclear-related measures, including reducing its uranium stockpile, dismantling uranium-enriching centrifuges, and removing and disabling the core of a nuclear reactor. Implementation Day marks the lifting of all nuclear-related United Nations and European Union (EU) sanctions against Iran.
For its part, the United States government (USG) fulfilled its commitments under the JCPOA by lifting secondary sanctions directed toward non-U.S. persons1 outside U.S. jurisdiction. Primary sanctions imposed on U.S. persons largely remain intact, with exceptions for certain imports of Iranian-origin luxury goods and licensing of goods and services related to commercial passenger aircraft.
Notably, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License H, which, as of Implementation Day, authorizes U.S.-owned or -controlled foreign entities (for ease of reference, “U.S.-controlled foreign subsidiaries”) to engage in trade with Iran if consistent with the JCPOA and U.S. laws. Prior to Implementation Day, U.S.-controlled foreign subsidiaries were subject to the same embargo restrictions as their U.S. parents. General License H specifies eight categories of activities that are not authorized, and U.S. parents as well as the U.S.-controlled foreign subsidiaries may be liable for conduct that falls outside the parameters of General License H.
Implementation of the JCPOA allows Iran to re-enter the global economy and provides immediate and significant opportunities for non-U.S. companies to enter Iranian markets, placing U.S. companies at a competitive disadvantage. Despite an uneven playing field, non-U.S. companies will be constrained by a complex network of U.S. secondary sanctions that are not part of the JCPOA, as well as primary sanctions that prohibit the export of U.S.-origin goods and services to Iran, any involvement of U.S. persons and access to the U.S. financial system. Companies that wish to pursue Iranian business should also be mindful that the JCPOA does not affect existing non-nuclear sanctions, including those relating to Iran’s support for terrorism; human rights abuses; proliferation of weapons of mass destruction; support for persons involved in human rights abuses in Syria; and support for persons threatening the peace, security or stability of Yemen.
II. Effectuating the U.S. Sanctions Relief Under the JCPOA
The architecture of the sanctions relief was put into place on a contingent basis on “Adoption Day,” October 14, 2015, the date on which the JCPOA became effective, and the JCPOA participants made plans consistent with their commitments to lift the sanctions effective on Implementation Day.
On Implementation Day, the USG took the following steps:
The contingent waivers of certain statutory sanctions provisions issued by the U.S. State Department on Adoption Day became effective;
The USG committed to refrain from exercising certain discretionary sanctions authorities;
The USG removed more than 400 individuals and entities from OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List), the Foreign Sanctions Evaders List (FSE List) and the Non-SDN Iran Sanctions Act List (NS-ISA List); and
The President issued an Executive Order that revoked Executive Orders 13574, 13590, 13622 and 13645, and sections 5-7 and 15 of Executive Order 13628.
OFAC has issued and posted several helpful documents on its website, including:
A statement of licensing policy for certain exports from the United States to Iran (the Statement of Licensing Policy);2
General License H, which is the general license authorizing U.S.-controlled foreign subsidiaries to enter into certain transactions involving Iran;3
A general license (effective upon publication in the Federal Register) that authorizes the importation into the United States of Iranian-origin carpets and foods;4
Guidance on the lifting of sanctions (together with the Department of State);5 and
Frequently asked questions related to the sanctions relief.6
Also on Implementation Day, the UN terminated relevant UN Security Council resolutions that imposed nuclear-related sanctions on Iran. The EU followed suit by lifting its economic and financial sanctions and suspending a related asset freeze and visa ban, effectively allowing EU companies to fully return to the Iranian oil and gas sector.
III. JCPOA: Secondary Sanctions Relief
Prior to Implementation Day, non-U.S. persons faced the threat of secondary sanctions if they engaged in business with Iranian counterparties in numerous sectors of the economy, even if such transactions occurred wholly outside the United States and lacked the involvement of any U.S. person or any connection with the U.S. financial system. As of Implementation Day, the USG lifted all nuclear-related secondary sanctions (subject to the limitations described below) that relate to (1) certain financial and banking activities; (2) insurance, reinsurance and underwriting services; (3) Iran’s energy and petrochemical sectors; (4) Iran’s shipping and shipbuilding sectors and port operators; (5) trade in gold and other precious metals; (6) trade in graphite, raw or semi-finished metals; and (7) Iran’s automotive sector. Non-U.S. persons may provide “associated services” that are ordinarily incident to the underlying activities for which sanctions have been lifted pursuant to the JCPOA, as long as the services are consistent with the JCPOA and do not involve activities that are otherwise sanctionable under U.S. law.
Coupled with the de-listing of individuals and entities from the SDN List, the FSE List and the NS-ISA List (required by the JCPOA and necessary to effectuate removal of the secondary sanctions), non-U.S. persons no longer will be subject to sanctions for conducting transactions with de-listed entities or individuals (including the Central Bank of Iran).7 However, secondary sanctions will continue to apply to non-U.S. persons that deal with Iranian or Iran-related individuals and entities that remain or are placed on the SDN List after Implementation Day, including the Islamic Revolutionary Guard Cops (IRGC), or to activities that violate the non-nuclear secondary sanctions that remain in place.
Note that the permissible activities set forth in the JCPOA (all of which may begin on Implementation Day) may not transit the U.S. financial system, and U.S. financial institutions continue to be prohibited from processing payments involving Iran or Iranian entities (unless a specific exception applies). This limitation will severely hamper U.S.-dollar transactions conducted by non-U.S. persons, and U.S.-origin goods and services may not be employed.
A. Sanctions on Iran’s Energy and Petrochemical Sectors.
The USG will not pursue efforts to reduce Iran’s sale of crude oil, including limitations on the volume of crude sold and the jurisdictions that can purchase Iranian crude oil. The restriction on the use of proceeds of sales of Iranian petroleum and petroleum products for bilateral trade with Iran (previously applicable to 20 jurisdictions) no longer applies. Restrictions on Iranian oil revenues held abroad have also been lifted.
As a result, non-U.S. persons may now:
Purchase, acquire, sell, transport and market Iranian crude oil, petroleum products, petrochemical products and natural gas;
Invest in Iran’s oil, gas and petrochemical sectors;
Provide goods, services (including financial services) and technology used in connection with Iran’s energy sector;
Export, sell and provide refined petroleum products and petrochemical products to Iran; and
Engage in transactions with Iran’s energy sector, including the National Iranian Oil Company, the Naftiran Intertrade Company and the National Iranian Tanker Company.
B. Financial and Banking-Related Sanctions.
Non-U.S. persons, including foreign financial institutions, may engage in financial and banking transactions with individuals and entities removed from the SDN List, the FSE List and the NS-ISA List (including the CBI and other financial institutions), including the provision of financial messaging services, and opening and maintaining correspondent and payable-through accounts, investments, foreign exchange transactions and letters of credit. Non-U.S. persons may engage in transactions related to the Iranian rial, and provide U.S. bank notes to the Government of Iran, including providing material support for such transactions. Non-U.S. persons may also purchase, subscribe to and facilitate the issuance of Iranian sovereign debt.
Although foreign financial institutions may now engage in a host of financial and banking transactions related to Iran, U.S. laws continue to prohibit the knowing facilitation of significant financial transactions on behalf of any Iranian person on the SDN List and the facilitation or conduct of significant financial transactions for persons that remain designated in connection with Iran’s proliferation of weapons of mass destruction or Iran’s support for international terrorism. As noted above, the clearing of U.S. dollar or other currency-denominated transactions through the U.S. financial system or involving a U.S. person remains prohibited, unless a specific exception applies.
C. Sanctions on the Provision of Underwriting Services, Insurance or Reinsurance.
Non-U.S. persons may provide underwriting services, insurance or reinsurance for activities authorized under the JCPOA (and which do not involve persons on the SDN List), including with respect to the energy, shipping and shipbuilding sectors of Iran, for the National Iranian Tanker Company (NITC) and Islamic Republic of Iran Shipping Lines (IRISL) and vessels that transport crude oil, LNG, petrochemicals and other petroleum. Non-U.S. persons may pay claims arising from incidents that occurred prior to Implementation Day (provided that the underlying activity is not sanctionable post-Implementation Day). Claims that involve a U.S. person may not be paid after Implementation Day unless OFAC issues a specific license.8
D. Sanctions on Transactions with Iran’s Shipping and Shipbuilding Sectors and Port Operators.
Non-U.S. persons may now (i) sell, supply and transfer to and from Iran goods and services used in connection with Iran’s shipping and shipbuilding sectors; (ii) transact with entities that are part of the shipping and shipbuilding sectors of Iran, and with Iranian port operators (including those at Bandar Abbas); (iii) own, operate, control and insure vessels used to transport crude oil, petroleum products, petrochemical products and natural gas to or from Iran; and (iv) provide services associated with the foregoing.
E. Sanctions on Iran’s Trade in Gold and Other Precious Metals.
Non-U.S. persons may now directly or indirectly sell, supply, export or transfer to or from Iran or the Government of Iran, gold, silver, platinum and other precious metals.
F. Sanctions on Trade with Iran in Graphite, Raw or Semi-Precious Metals.
Non-U.S. persons may now directly or indirectly sell, supply, export or transfer to or from Iran, graphite, raw or semi-finish metals such as aluminum and steel, coal and software for integrating industrial processes, subject to certain restrictions (such as the transfer of such materials or software may not be for use in the military or ballistic missile programs of Iran).
G. Sanctions on the Sale, Supply or Transfer of Goods and Services Used in Connection with Iran’s Automotive Sector.
Non-U.S. persons are permitted to directly or indirectly sell, supply and transfer to Iran goods and services used in connection with Iran’s automotive sector. Note, however, that non-U.S. persons continue to be prohibited from exporting or reexporting goods, technology or services from the United States to Iran, and from reexporting items containing 10% or more U.S.-controlled content if the non-U.S. person has reason to know the reexport is intended specifically for Iran or the Government of Iran.
H. Limitations on Lifting of Secondary Sanctions.
Notwithstanding the significant secondary sanctions relief as of Implementation Day, non-U.S. persons must be vigilant to avoid violations of U.S. sanctions laws that remain in place. First, non-U.S. persons continue to be prohibited from knowingly engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran. Second, secondary sanctions remain fully applicable to transactions with persons on the SDN List designated for non-nuclear reasons, including the IRGC and its designees and affiliates. The IRGC’s entrenched and often opaque involvement in many aspects of the Iranian economy will require heightened due diligence. Third, U.S.-dollar denominated transactions may not cleared by or through U.S. financial institutions or the use of U.S. correspondent accounts.
IV. JCPOA: Primary Sanctions Relief
A. U.S.-Controlled Foreign Subsidiaries.
Under General License H, U.S.-controlled foreign subsidiaries may now generally engage in trade with Iran, subject to the usual caveats of the JCPOA framework that the activities fall within the nuclear-related scope of the JCPOA and do not involve (i) U.S. persons, (2) the direct or indirect exportation of goods, technology or services from the United States, (3) use of the U.S. financial system, or (4) any entity on the SDN or FSE Lists.9
General License H does not permit U.S. parents to be involved in or facilitate the activities of their controlled foreign subsidiaries except in two limited respects. A U.S. parent (including its senior management, board members and employees as well as external consultants and legal counsel) may be involved in the decision-making regarding the subsidiary’s entry into business in Iran, as well as the establishment of new internal operating policies and procedures or the alteration of existing policies and procedures to the extent necessary to allow the foreign subsidiary to act within the scope of General License H. Once this preparatory step is accomplished, the U.S. parent (and any U.S. employees located abroad) must cease all involvement with its foreign subsidiaries’ activities under the General License and all activities must be ring-fenced from any U.S. nexus. Second, U.S. persons are allowed to continue to grant the foreign subsidiary access to 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 under General License H.
How U.S. persons and their foreign subsidiaries will navigate the contours and limitations of the General License H will evolve over time and will require further clarification from OFAC. In its guidance document and FAQs, OFAC emphasized several times that U.S. persons continue to face liability risks for facilitating conduct under primary sanctions that is unlawful. Moreover, U.S. persons may be exposed to liability for acts of their foreign subsidiaries that are outside the scope of General License H.
B. Primary Sanctions Applicable to U.S. Persons.
Not much has changed after Implementation Day with respect to the primary domestic embargo except with respect to certain imports and commercial passenger aviation.
To implement its commitment under the JCPOA, OFAC established a favorable licensing policy through which U.S. persons and, where there is a nexus to U.S. jurisdiction, non-U.S. persons may request specific authorization from OFAC to engage in transactions for the export, reexport, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran. In accordance with the Statement of Licensing Policy, the licensed items must be used exclusively for commercial passenger aviation, and any specific licenses issued will include appropriate conditions to ensure that licensed activities will not involve any person on the SDN List. The Statement of Licensing Policy does not address the extent to which any involvement of U.S. financial institutions is permissible.
Under the JCPOA, the USG also committed to license the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar. Effective upon publication in the Federal Register, OFAC will amend the regulations to add a general license that allows the importation of such goods and the issuance of letters of credit by U.S. depositary institutions, subject to restrictions on the involvement of any blocked person, including the Government of Iran or Iranian financial institution, or the credit or debit of an Iranian account.
Implementation Day under the JCPOA marks a historic event in the history of U.S. economic sanctions against Iran, although the JCPOA diminishes primary sanctions only at the margins. Assuming that Iran complies with its obligations under the JCPOA and no “snap-back” of sanctions occurs, it is anticipated that European and other non-U.S. firms will work creatively to penetrate Iranian markets that now are lawfully accessible.
However, the lifting of sanctions on Implementation Day will not necessarily translate to immediate business in Iran for non-U.S. persons and U.S.-controlled foreign subsidiaries. Numerous factors and uncertainties complicate the legal and commercial landscape, which all non-U.S. persons should take into account when assessing the risk of transacting business in Iran or with Iranian entities:
The degree to which non-U.S. (particularly European) financial institutions may be willing to participate in Iranian business remains to be seen, especially given the aggressive enforcement activities of OFAC over the past several years and the huge fines paid and reputational damage incurred by many multinational banks. Many banks may wait for further clarity from the USG before they feel comfortable with the risk exposure and level of due diligence required to avoid the remaining secondary sanctions (such as with respect to transactions that might involve the IRGC).
The divergence of EU and U.S. sanctions laws post-Implementation Day will result in additional compliance and legal risks for the companies that are subject to both jurisdictions.
The U.S. Congress and Republican Party will continue to push for additional sanctions, although the current administration will veto any legislation that conflicts with the USG’s commitments under the JCPOA.
If a Republican is elected president in November, the USG may renege on the Obama administration’s commitments under the JCPOA or impose additional impediments to doing business in Iran.
OFAC and the U.S. State Department will tailor and augment the guidance over time—the Implementation Day rules are part of an evolving process whereby the USG will act as consistently as it can under the JCPOA without running afoul of statutory constraints.
Without further clarification from OFAC and the establishment of some bright lines, the cloud of facilitation is expected to chill the activities of U.S.-controlled foreign subsidiaries.
The possibility of a “snap back” of pre-Implementation Day sanctions may have a further chilling effect. Although the USG has committed to refrain from imposing penalties for conduct that was permissible prior to the snap-back, contracts will not be grandfathered and would need to be terminated.
Implementation Day opens the door to business with Iran by non-U.S. persons, but the path forward is fraught with many legal, compliance and practical challenges. While many non-U.S. companies are eager to commence or resume business with Iran, many other firms may not have the appetite to assume the attendant risks without further interpretative guidance from the USG to inform their risk assessment.
1 A “non-U.S. person” is any entity or individual that is not a “U.S. person.” A “U.S. person” is a U.S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. Non-U.S. persons include foreign subsidiaries and affiliates established or maintained outside of the United States that are owned and controlled by U.S. persons, but these entities are subject to special rules and are not treated like non-U.S. persons owned by non-U.S. parents.
2 See Statement of Licensing Policy for Activities Related to Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services, available at: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/lic_pol_statement_aircraft_jcpoa.pdf.
3 See “General License H: Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person,” available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_glh.pdf.
4 This general license will be published in the Federal Register on January 21, 2016, and a pre-publication version is available at: https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-01227.pdf.
5 See “Guidance Relating to the Lifting of Certain U.S. Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day,” available at: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/implement_guide_jcpoa.pdf. The new U.S. sanctions rules in place for both non-U.S. persons and U.S. persons are complex and will likely be augmented by further guidance from OFAC in the coming weeks and months.
6 See “Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day,” available at: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf.
7 These individuals and entities are set out in Attachment 3 to Annex II of the JCPOA.
8 U.S. persons may not participate in reinsurance syndicates that involve coverage of or payment of claims to Iranian individuals or entities.
9 Paragraph (c) of General License H enumerates the various exclusions, which are inconsistent with the JCPOA and other U.S. laws.