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January 25, 2016

Understanding changes to U.S. sanctions under the Iran nuclear deal

On January 16th, as a result of Iran verifiably meeting its nuclear commitments under the Joint Comprehensive Plan of Action (JCPOA), aka the Iran nuclear deal, the U.S. lifted the bulk of its secondary sanctions on Iran, which targeted certain sectors of Iran’s economy, including its financial services; energy and petrochemical; automotive; gold and precious metals; and shipping, shipbuilding and port sectors.[1] It is extremely important to understand that the primary sanctions prohibiting U.S. companies and U.S. persons[2] from engaging in transactions with Iran remain in place. OFAC has reinforced the continuing effect of the primary sanctions by noting that, with limited exceptions, U.S. persons and U.S. companies “continue to be broadly prohibited from engaging in transactions or dealings with Iran and the Government of Iran unless such activities are exempt from regulation or authorized by OFAC.”

In connection with the updates to the sanctions program, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) published a guidance document and set of frequently asked questions (FAQs), which provide helpful information relating to the lifting of these “secondary sanctions.” “Secondary sanctions” are those sanctions directed toward non-U.S. persons for conduct that occurs entirely outside U.S. jurisdiction and does not involve U.S. persons. The “primary sanctions” against Iran that prohibit U.S. persons, including U.S. companies and U.S. individuals wherever they may be located, from engaging in transactions or dealings with Iran, have not been lifted.

Although U.S. persons and U.S. companies generally remain prohibited from engaging in Iran-related transactions, the U.S. has taken steps to authorize certain transactions based on its commitments in the JCPOA, including the issuance of General License H, which authorizes transactions relating to foreign entities owned or controlled by a U.S. person, subject to certain conditions. In addition, OFAC issued a Statement of Licensing Policy, which establishes a favorable licensing policy for both U.S. and non-U.S. persons to request authorization to engage in transactions for the sale of commercial passenger aircraft and related parts and services to Iran, and OFAC issued a general license authorizing the import into the U.S. of Iranian-origin carpets and foodstuffs.

While foreign companies that are owned or controlled by a U.S. parent company generally now have much greater latitude to engage in transactions involving Iran, it is important to note that they will continue to be prohibited from knowingly engaging in (1) conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran, and (2) conduct that causes the export of goods or services from the U.S. to Iran.

Below, we focus on how the issuance of General License H impacts U.S. companies and their foreign subsidiaries.

General License H – Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a U.S. Person

The new general license authorizes foreign entities owned or controlled by U.S. persons to engage in many transactions with Iran from which they were previously prohibited.[3] BUT, there are several important limitations on these activities, generally prohibiting any involvement by U.S. persons and goods and services coming from the U.S.
Specifically, General License H does not authorize foreign entities owned or controlled by U.S. persons to engage in transactions involving:

The FAQs published by OFAC provide helpful information on understanding the scope of transactions that are now authorized by the general license. Importantly, FAQ K.13 notes that the export or reexport of U.S.-origin EAR99 goods from a third country to Iran is authorized so long as the reexporter had no knowledge or reason to know at the time of export from the U.S. that the goods were intended specifically for Iran. This FAQ also reiterates that U.S. owned or controlled foreign entities continue to be prohibited from reexporting from a third country items containing 10% or more U.S.-origin controlled content, if the reexport is undertaken with knowledge or reason to know that the reexport is intended specifically for Iran.

While U.S. persons remain generally prohibited from being involved in Iran-related transactions, General License H does permit U.S. persons (including U.S. person board members, senior managers, and employees of foreign subsidiaries), to engage in activities related to the establishment or alteration of operating policies and procedures of either the U.S. company or any of its owned or controlled foreign entities, to the extent necessary, to allow the owned or controlled foreign entity to engage in transactions permitted under the general license. In addition, the general license permits U.S. companies to make certain automated[6] and globally integrated[7] business support systems available to the foreign entities they own or control, provided that these systems are necessary to store, collect, transmit, generate, or otherwise process documents or information related to transactions authorized under the general license.

Activities that are not authorized by the general license with respect to U.S. persons and U.S. companies, include:

The guidance document and FAQs provided by OFAC include further information on the types of activities that are authorized by U.S. persons under the general license.

If you would like further information on these changes, please contact us.

*The information contained in this article is for informational purposes only and is not legal advice. You should seek the advice of legal counsel to determine how the JCPOA will affect your business, company, or organization.

[1] Secondary sanctions continue to apply to non-U.S. persons for conducting transactions with Iranian individuals or Iran-related entities who are listed on the Specially Designated Nationals and Blocked Persons List (“SDN List”).
[2] The term U.S. person means any U.S. citizen, permanent resident alien, entity organized under the laws of the U.S. or any jurisdiction within the U.S. (including foreign branches), or any person in the U.S. See 31 C.F.R. § 560.314.
[3] An entity is considered “owned or controlled by a U.S. person” if a U.S. person (1) holds a 50% or greater equity interest (by vote or value) in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity.
[4] See 31 C.F.R. § 560.204.
[5] General License H does not authorize U.S. owned or controlled foreign entities to reexport controlled U.S. origin items (those listed on the Commerce Control List of the EAR and requiring a license for export to Iran) from a third country to Iran without a license. See also 31 C.F.R. § 560.205.
[6] “Automated” refers to a computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server that operates passively and without human intervention to facilitate the flow of data between and among the U.S. person and its owned or controlled foreign entities.
[7] "Globally integrated" refers to a computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server that is available to, and in general use by, the United States person's global organization, including the United States person and its owned or controlled foreign entities.