Substantial easing of Iran sanctions alongside continued limitations and risks

March 2016 | SPOTLIGHT | GLOBAL TRADE

Financier Worldwide Magazine

On 16 January 2016, ‘Implementation Day’, the sanctions on Iran and Iranian entities were substantially eased. This day marks a major milestone set out in the Joint Comprehensive Plan of Action (JCPOA), the Iran nuclear deal that was finalised in July 2015.

Per the JCPOA, Implementation Day was announced after the International Atomic Energy Agency’s confirmation that Iran had completed its initial JCPOA obligations with respect to dismantling and repurposing aspects of its nuclear program. Following Implementation Day, EU and United Nations sanctions have all broadly been eased; US sanctions have not.

US sanctions relief

US sanctions on Iran have included the ‘blacklisting’ of more than 700 individuals and entities on the US Treasury Department’s Office of Foreign Assets Control’s (OFAC’s) list of Specially Designated and Blocked Nationals (SDN list), as well as economic restrictions imposed on entities under US jurisdiction (primary sanctions) and restrictions on entities outside US jurisdiction (secondary sanctions). The majority of relief provided under the JCPOA as of Implementation Day primarily concerns secondary sanctions.

Secondary sanctions – prohibitions on non-US entities engaging with Iran

Until Implementation Day, non-US financial institutions, corporations and individuals faced US sanctions exposure if they engaged with certain Iranian persons or in transactions with specified Iranian sectors –even if the transactions had no connection to the US, US persons, or the US dollar. The US has now lifted secondary sanctions with respect to non-US parties’ engaging with certain Iranian financial and banking institutions, including: (i) the provision of US bank notes to the government of Iran; (ii) the purchase, subscription or facilitation or the issuance of Iranian sovereign debt, including government bonds; (iii) the provision of correspondent banking services; (iv) the provision of financial messaging services (such as SWIFT); (v) the provision of insurance, reinsurance and underwriting services to Iran; (vi) Iran’s energy and petrochemical sectors, including dealings with the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), and the National Iranian Tanker Company (NITC); (vii) Iran’s shipping, shipbuilding sectors and port operators, including calls at key Iranian trading facilities such as the Port of Bandar Abbas; (viii) Iran’s trade in precious metals and software; (ix) Iran’s trade in graphite, raw or semi-finished metals; and (x) Iran’s automotive sector.

The US revoked several sanctions-focused Executive Orders, waived portions of numerous pieces of sanctions legislation, and removed over 400 individuals and entities from the SDN List, including most of Iran’s major financial institutions and oil and energy firms.

Limits to secondary sanctions relief. The risk of secondary sanctions continue to attach to transactions by non-US parties with Iranian persons who continue to be on the SDN List, the Islamic Revolutionary Guard Corps (IRGC) and its designated agents or affiliates, and any other persons on the SDN List designated due to their association with Iran’s proliferation of weapons of mass destruction or Iran’s support for international terrorism.

The removal of secondary sanctions does not mean that parties can use US services or institutions to engage with Iran. With few exceptions, US persons continue to be barred from exporting goods, services or technology to Iran, or processing Iranian-related transactions in the US.

Primary sanctions – prohibitions on US persons and those under US jurisdiction engaging with Iran

The US is only providing primary sanctions relief with respect to transactions involving foreign subsidiaries of US corporate parents, commercial passenger aviation, and the importation of Iranian foodstuffs and carpets.

Foreign subsidiaries of US companies. On Implementation Day, OFAC issued a regulatory exemption (General Licence or GL) to foreign companies ‘owned or controlled’ by US persons to engage in activities with Iran “consistent with the JCPOA”. This General Licence, ‘GL H’, allows such companies to transact in and with Iran. However, GL H imposes several constraints on such transactions due to OFAC’s interpretation of which dealings are inconsistent with the JCPOA and/or contrary to other US laws. GL H does not, inter alia, permit foreign subsidiaries of US parents to engage in Iran-related dealings involving the direct or indirect exportation of goods, technology or services from the US to Iran, the transfer of funds to, from or through the US financial system, or any entity on the SDN List.

Transactions undertaken by foreign subsidiaries violating these prohibitions would not receive the benefit of the General Licence and could lead to US sanctions liability for both the US parent and its subsidiary.

GL H implies that a significant firewall must be built between the US parent and its foreign subsidiary with respect to the subsidiary’s Iran dealings. However, OFAC has provided two dispensations that allow some contact between the parent and subsidiary.

First, the US parent – and US persons at the parent company or US persons outside the company retained by the parent – can establish or alter the parent’s operating policies and procedures to the extent necessary to allow the foreign subsidiary to engage in Iran activities without involving the parent or other US persons, and the US parent can continue to make available to its foreign subsidiary any “automated and globally integrated computer, accounting, email, 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 the foreign subsidiary’s transactions with Iran.

OFAC has noted that the goal of the licence and the two dispensations is to allow US persons, including senior management of US corporate parents, to be involved in the initial determination to engage in activities with Iran, but not to be involved in the Iran-related day-to-day operations of their foreign subsidiaries.

Commercial passenger aviation. Under the JCPOA, the US pledged to allow the provision of commercial passenger aircraft and related parts and services to Iran, including goods with substantial US content. To implement this commitment, OFAC will consider granting individual exemptions (Specific Licences) to companies in the aviation sector. Companies will need to apply to OFAC for such a licence and, if granted, the licence will also cover US persons providing services “ordinarily incident and necessary” to transactions associated with the conveyance of civil aircraft to Iran. The “ordinarily incident and necessary” services are time- and transaction-limited and will only be licensed for specific conveyances, holders of these Specific Licences must insist on strong compliance measures.

Importation of Iranian foodstuffs and carpets. For this relief, OFAC will issue a General Licence to cover US persons’ purchases of Iranian-origin food and carpets and services ordinarily incident and necessary to such transactions. US financial institutions will be able to be involved in these transactions, but OFAC will continue to restrict almost all direct connections between US banks and their Iranian counterparties which will usually mean that transactions between the US and Iran for Iranian food or carpets will require intermediation by a third-country financial institution.

Next steps and the way ahead

Implementation Day does not conclude the Iran sanctions story, but it does end an important chapter in economic restrictions on Iran. While the US could re-impose all of its unilateral sanctions on Iran in a snap-back scenario, the rest of the world may be unwilling to return to a pre-JCPOA world.

Judith Alison Lee is a partner and Adam M. Smith and Mehrnoosh Aryanpour are of counsel at Gibson, Dunn & Crutcher LLP. Ms Lee can be contacted on +1 (202) 887 3591 or by email: jalee@gibsondunn.com. Mr Smith can be contacted on +1 (202) 887 3547 or by email: asmith@gibsondunn.com. Ms Aryanpour can be contacted on +1 (202) 955 8619 or by email: maryanpour@gibsondunn.com.

Judith Alison Lee, Adam M. Smith and Mehrnoosh Aryanpour

Gibson, Dunn & Crutcher LLP