John E. Smith, John P. Carlin, Nicholas J. Spiliotes, Panagiotis C. Bayz, Felix Helmstädter, David A. Newman, and Jennifer S. Talbert
Global Risk + Crisis Management and National Security, CFIUS, Sanctions + Export Controls
On November 5, 2018, the United States enacted the second of two powerful phases of the “snap-back” of Iran sanctions, re-imposing sanctions that were lifted by the United States in 2016 as a result of the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal. As a result of the U.S. government’s actions, non-U.S. individuals and entities – anywhere in the world – face the threat of powerful U.S. sanctions against them if they engage in trade or other transactions with Iran involving sanctioned parties or across a wide swath of key Iranian industry sectors, such as energy, financial, insurance, shipping, shipbuilding, port operations, automotive, gold and other precious metals, and mining.
In many respects, these new sanctions go beyond a pure snap-back of the Obama era sanctions, including the addition of more than 700 individuals, entities, aircraft, and vessels to the U.S. government’s blacklist, including the approximately 400 targets removed from the sanctions list as a result of the JCPOA and more than 300 targets that had never been listed before. In other respects, however, the United States did not go as far as it had threatened with its “maximum pressure campaign” and allowed waivers for the continued import of Iranian oil for eight jurisdictions – including China, India, Japan, and Turkey – reflecting the collision between the Trump Administration’s desire to impose tough sanctions and the reality that a number of countries were determined to continue importing oil from Iran, despite the Administration’s objections.
The key takeaways are:
In January 2016, pursuant to the JCPOA, the United States suspended its nuclear-related secondary sanctions, and the EU suspended its nuclear-related sanctions (following a lifting of United Nations sanctions), after the International Atomic Energy Agency determined that Iran had implemented its key nuclear-related commitments outlined in the JCPOA.
In announcing the withdrawal of the United States from the JCPOA on May 8, 2018, President Trump directed the U.S. Departments of State and the Treasury to re-impose sanctions that were lifted or waived as part of the JCPOA in two phases: the first after a 90-day wind-down period ending August 6 and the second after a 180-day wind-down period ending November 4. In conjunction with the first phase of the snap-back, the president issued Executive Order 13846, which outlined the sanctions on Iran that would be re-applied. See our client alert for a more detailed description of this first set of snap-back sanctions.
What Sanctions Snapped Back on August 7?
The first phase of the snap-back, which took effect on August 7, authorized OFAC to once again be able to impose secondary sanctions on non-U.S. individuals or entities for transactions related to:
What Sanctions Snapped Back on November 5?
The second phase of the snap-back, re-imposed on November 5, resulted in the following actions by OFAC: the addition of over 700 Iran-related individuals, entities, aircraft, and vessels to the SDN List, the issuance of public guidance in the form of additional Frequently Asked Questions (FAQs) related to the sanctions, and the publication of a technical amendment to the Iranian Transactions and Sanctions Regulations (ITSR). In addition to the threat of secondary sanctions for transactions with any of the hundreds of additional Iran-related parties on the SDN List, after November 5, non-U.S. individuals and companies risk secondary sanctions for transactions involving the following activities or sectors of the Iranian economy:
As part of the November 5 snap-back announcement, OFAC issued detailed guidance to assist companies in complying with the new U.S. sanctions. This guidance, which includes 15 new FAQs, clarifies, in particular, the following three points:
First, non-U.S., non-Iranian persons may continue to receive payment for contracts for goods and services that had been fully delivered by the end of the August 6 or November 4 wind-down period. As long as the agreement between the non-U.S. person and Iranian counterparty was entered into prior to May 8, 2018, and the activities were consistent with U.S. sanctions in effect at the time of delivery, the U.S. government will allow the non-U.S., non-Iranian person to receive payment for those goods or services according to the terms of the written agreement.
Second, U.S.-owned or -controlled foreign subsidiaries incorporated in other countries must apply restrictions “akin to blocking” on transactions outside the United States involving SDNs or other Iranian persons – creating a direct conflict of law for U.S. subsidiaries in the EU that are required to comply with both U.S. sanctions and the EU Blocking Statute.
Finally, transactions for the sale of agricultural commodities, food, medicine, and medical devices to Iran remain largely exempt from the sanctions, except such transactions may not involve anyone designated in connection with Iran’s support for terrorism or WMD proliferation.
NDAA Waivers/Significant Reduction Exceptions
Under Section 1245(d)(1) of the National Defense Authorization Act (NDAA), the United States can “prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account by a foreign financial institution that the President determines has knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran or another Iranian financial institution designated by the Secretary of the Treasury [as an SDN].” However, the NDAA also provides that, if the president determines a country importing Iranian crude oil has “significantly reduced” its Iranian oil imports, the Secretary of State may grant a waiver to foreign financial institutions in that country allowing for certain transactions with the CBI or other sanctioned banks for petroleum purchase transactions, subject to certain conditions. After passage of the NDAA in 2012, the State Department granted NDAA waivers to 20 countries, although the number of countries granted such waivers – which expire after six months unless renewed – dropped significantly in the years prior to the JCPOA taking effect.
In connection with the November 5 snap-back, Secretary of State Pompeo officially announced NDAA waivers for China, India, Italy, Greece, Japan, South Korea, Taiwan, and Turkey, stating that each of the countries had “demonstrated significant reductions in the purchase of Iranian crude over the past six months” and that the United States intended to continue negotiations to “get all of the nations to zero.” Under the NDAA, these waivers are valid for 180 days and potentially renewable for 180-day periods.
Foreign financial institutions in countries that receive significant reduction exceptions are allowed to engage in certain transactions with the CBI or other sanctioned Iranian banks, as long as: (1) the transactions involve bilateral trade only; (2) any funds owed Iran as a result of such trade are credited to an account in the significantly reducing country; and (3) no transactions occur with banks sanctioned for support for terrorism or WMD proliferation. Additionally, while the waivers apply to natural gas transactions, they do not apply to Iranian petrochemical products.
U.S.-Owned or -Controlled Foreign Subsidiaries
As part of the November 5 snap-back, OFAC revoked the prior authorization for U.S.-owned or ‑controlled foreign subsidiaries to engage in certain Iran-related business, so long as such transactions did not implicate U.S. primary or other applicable sanctions. After November 5, foreign subsidiaries of U.S. companies are generally subject to many of the same prohibitions as their U.S. parent. Additionally, OFAC confirmed that such foreign subsidiaries are required to impose restrictions “akin to blocking,” rather than simply rejecting certain Iran-related transactions, meaning that such foreign subsidiaries must, like their parents, “freeze” certain assets subject to Iranian sanctions. Such a requirement may raise legal conflicts for such subsidiaries – which are incorporated in other countries – and they may have to choose whether to comply with U.S. laws or the laws of their host jurisdiction, which (like the EU) may prohibit compliance with U.S. sanctions.
Heightened Need for Rigorous Sanctions Compliance
The Trump Administration has aggressively messaged its intent to enforce sanctions against individuals and entities that violate the sanctions or engage in sanctionable trade with Iran. As President Trump tweeted on August 6 with the first set of snap-back sanctions: “Anyone doing business with Iran will NOT be doing business with the United States.” Similarly, OFAC stated in its wind-down FAQs that it “will continue to target aggressively anyone who engages in such sanctionable activity, regardless of whether the individual or entity was removed from the SDN List on Implementation Day [of the JCPOA].”
The listing of over 700 new Iranian SDNs will require U.S. and third-country companies to exercise enhanced due diligence and “know your customer” procedures to ensure they do not engage in transactions involving SDNs or sanctionable conduct. OFAC, the agency primarily responsible for implementing and enforcing U.S. economic sanctions, can bring enforcement actions against Americans and others who violate the sanctions within the jurisdiction of the United States as well as sanction non-U.S individuals and entities – adding them to its list and cutting them off from the U.S. financial system – if they engage in significant transactions that involve sanctioned Iran-related parties or certain sectors of the Iranian economy.
On October 11, the Financial Crimes Enforcement Network (“FinCEN”) released an advisory to assist U.S. financial institutions in detecting “illicit transactions” related to Iran. The advisory states that FinCEN expects Iran to use deceptive tactics such as using front companies, fraudulent documents, transactions involving exchange houses, falsified shipping documents, and virtual currencies in order to evade sanctions previously suspended by the JCPOA.
In a press release regarding the advisory, a Treasury official stated: “As we expect Iran to continue to attempt to engage in wide scale sanctions evasion while simultaneously using its resources to fund a broad array of malign activity, financial institutions should continue to sophisticate their compliance programs to keep these actors from exploiting them.” Such a statement signals the Treasury’s heightened expectation that Iran will attempt to evade and overcome U.S. sanctions in full force, and that the Treasury will be on high alert to combat this evasion, resulting in higher risks for financial institutions and global operating companies, especially those lacking strong and effective compliance programs.
The EU Blocking Statute
As we have previously written, institutions doing business in the United States and EU will face particular challenges as they attempt to navigate the stark conflict between the laws of the two jurisdictions. In addition, of the eight jurisdictions granted significant reduction exceptions on November 5 for Iranian oil imports, two are EU Member States: Greece and Italy. However, the EU and other EU Member States did not receive such waivers. Thus, the potential conflict of laws issues will not only remain but also apply more broadly due to the additional U.S. sanctions re-imposed with the second phase of snap-back and the differing U.S. rules now in place toward the EU regarding Iranian oil imports.
Already as a reaction to the first phase of the re-imposition of U.S. sanctions, the EU updated its so-called Blocking Statute through EU Commission Delegated Regulation on August 7. With this update, and the EU and its Member States constantly re-confirming, most recently by a joint statement by the EU, France, Germany, and the UK on November 2, the EU aims to ensure the full and effective implementation of the JCPOA, to protect EU businesses, and to preserve effective financial channels with Iran. Accordingly, a substantive conflict of laws between the United States and the EU has emerged, affecting U.S. companies active in the EU as well as EU companies doing business in the United States; the two jurisdictions’ rules also apply individually to the senior management and employees of such companies.
It remains unclear if and to what extent Member State authorities will enforce any violation of the Blocking Statute. However, applicable Member State laws and regulations allow for severe penalties, including imprisonment or administrative fines.
It also remains to be seen whether specific measures the EU is considering to promote Iran-related business will work. For example, the EU proposes to implement a Special Purpose Vehicle (SPV) to enable the financing of Iran-related business and provide a payment channel. Although the EU planned to have the SPV available prior to the second phase of the snap-back, it is not operational yet; the most recent joint statement by the EU, France, Germany, and the UK on November 2 confirmed that work to set up such a vehicle is still in progress, without indicating a specific timeline.
The United States has been consistent and clear in messaging that it intends to aggressively enforce the snapped back Iran sanctions. Companies around the world engaged in Iran-related activities – whether directly or indirectly – should carefully evaluate any such transactions and undertake appropriate diligence measures in light of the legal and reputational risks of falling under the scrutiny of OFAC and the rest of the U.S. government.
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