Compliance considerations of Iran sanctions

Compliance sanctions headaches have only just begun for foreign subsidiaries of U.S. parent companies, following President Donald Trump’s recent decision to withdraw the United States from the Iran nuclear deal, even as the European Union took contrary actions of its own.

In 2015, Iran committed to various limitations on its nuclear program as part of an agreement with other countries and coalitions—including the United States, the European Union, and the United Nations. This accord was called the Joint Comprehensive Plan of Action (JCPOA).

As part of the JCPOA, the United States in January 2016 lifted or waived certain “secondary sanctions,” effectively allowing non-U.S. entities access to the Iranian market without risking their access to the U.S. market to pursue Iranian deals. But those sanctions were re-imposed on May 8, 2018, when President Trump issued a Presidential Memorandum ceasing U.S. participation in the JCPOA, subject to certain wind-down periods.

As described in a series of frequently asked questions (FAQs) issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the re-imposed U.S. sanctions will take effect following a wind-down period of 90 days (by Aug. 6) for certain sanctions, and 180 days (by Nov. 4) for others, to give time for Iran-related transactions and contracts to be completed or terminated.

Greta Lichtenbaum, an international trade partner with law firm O’Melveny, says U.S. withdrawal from the JCPOA will have “a significant impact on multinational firms that have business interests in both the United States and Iran.”

Because U.S. “primary sanctions” remain in force, restricting persons and entities under U.S. jurisdiction from generally doing business with Iran, sanctions compliance implications resulting from U.S. withdrawal from the JCPOA most significantly apply to non-U.S. subsidiaries of U.S. parent companies. “For foreign companies, secondary sanctions have returned as a real threat, if they have any significant business in the United States,” says Theodore Kassinger, a partner at O’Melveny.

“For foreign companies, secondary sanctions have returned as a real threat, if they have any significant business in the United States.”
Theodore Kassinger, Partner, O’Melveny

Specifically, General License H, which authorized foreign entities of U.S. companies to do certain business in Iran, will be revoked by November. Additionally, sanctions against individuals and entities previously removed from the U.S. “Specially Designated Nationals List” also will be re-imposed.

The extractives industry, automotive and rail sectors, the shipping and shipbuilding sectors, and the financial and insurance industries will take a hard hit—but perhaps none harder than suppliers of commercial passenger aircraft and related parts and services, which had been specially licensed under the Iran nuclear deal. In an April 25 earnings call, Boeing CEO Dennis Muilenburg stressed that the company “understands the risks and implications around the Iranian aircraft deal. First and foremost, it’s important again to restate that we continue to follow the U.S. government’s lead here, and everything is being done per that process.”

Global implications

The question many companies are grappling with now is whether other general licenses or specific project waivers will be made available through which they can establish some aspects of trade. If not, the follow-up question is how to wind down that activity in the time allotted, says Adam Smith, former senior advisor to the director of OFAC and now a partner with law firm Gibson Dunn.  

As just one example, French oil and gas company Total announced on May 15 that it will not be able to continue its SP11 gas development project in Iran and will have to unwind all related operations by November, “unless Total is granted a specific project waiver by the U.S. authorities with the support of the French and European authorities. This project waiver should include protection of the company from any secondary sanction as per U.S. legislation.”

Sanctions to be re-imposed

The questions below address which sanctions will be re-imposed, and when, as described in a series of frequently asked questions issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control.
1.2. Which sanctions will be re-imposed after the 90-day wind-down period ending on August 6, 2018?
After the 90-day wind down period ends on August 6, 2018, the U.S. government will re-impose the following sanctions that were lifted pursuant to the JCPOA, including sanctions on associated services related to the activities below:
Sanctions on the purchase or acquisition of U.S. dollar banknotes by the Government of Iran; Issued on May 8, 2018
Sanctions on Iran’s trade in gold or precious metals;
Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
Sanctions on Iran’s automotive sector.
In addition, following the 90-day wind-down period that ends on August 6, 2018, the U.S. government will revoke the following JCPOA-related authorizations under U.S. primary sanctions regarding Iran:
The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR);
Activities undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (JCPOA SLP); and
Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.
Persons engaging in the activities listed above undertaken pursuant to the U.S. sanctions relief provided for in the JCPOA should take the steps necessary to wind down those activities by August 6, 2018, to avoid exposure to sanctions or an enforcement action under U.S. law.
1.3. Which sanctions will be re-imposed after the180-day wind-down period ending on November 4, 2018?
Following the 180-day wind-down period ending on November 4, 2018, the U.S. government will re-impose the following sanctions that were lifted pursuant to the JCPOA, including sanctions on associated services related to the activities below:
Sanctions on Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
Sanctions on transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
Sanctions on the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
Sanctions on the provision of underwriting services, insurance, or reinsurance; and
Sanctions on Iran’s energy sector.
In addition, effective November 5, 2018, the U.S. government will revoke the authorization for U.S.-owned or -controlled foreign entities to winddown certain activities with the Government of Iran or persons subject to the jurisdiction of the Government of Iran that were previously authorized pursuant to General License H.
Furthermore, no later than November 5, 2018, the U.S. government will re-impose, as appropriate, the sanctions that applied to persons removed from the List of Specially Designated Nationals and Blocked Persons (SDN List) and/or other lists maintained by the U.S. government on January 16, 2016.
Persons engaging in the activity listed above undertaken pursuant to the U.S. sanctions relief provided for in the JCPOA should take the steps necessary to wind down those activities by November 4, 2018, to avoid exposure to sanctions or an enforcement action under U.S. law.
Source: OFAC FAQs

Total further stressed that it “cannot afford to be exposed to any secondary sanction, which might include the loss of financing in dollars by U.S. banks for its worldwide operations (U.S. banks are involved in more than 90 percent of Total’s financing operations), the loss of its U.S. shareholders (U.S. shareholders represent more than 30 percent of Total’s shareholding) or the inability to continue its U.S. operations (U.S. assets represent more than $10 billion of capital employed).”

Sanjay Mullick, a partner with law firm Kirkland & Ellis, notes that “the big hook here is that the global economy is largely a U.S. dollar economy.” Total’s response is just one example highlighting how significant a role U.S. banks play in the financing of many global companies. “Secondary sanctions are discretionary, meaning the United States can draw the sword, but doesn’t necessarily have to use the sword—but the deterrent effect is quite powerful, nonetheless,” he says.

In response, the European Commission on Friday announced steps to preserve the interests of European companies investing in Iran and to demonstrate the EU’s commitment to the Iran nuclear deal. “As long as the Iranians respect their commitments, the EU will of course stick to the agreement of which it was an architect,” European Commission President Jean-Claude Juncker said in a statement. “But the American sanctions will not be without effect, so we have the duty—the Commission and the European Union—to do what we can to protect our European businesses.”

As part of a series of countermeasures, the European Commission on Friday activated the Blocking Statute, which forbids EU companies from complying with the extraterritorial effects of U.S. sanctions, allows companies to recover damages arising from such sanctions from the person causing them, and nullifies the effect in the EU of any foreign court judgments based on them. The aim is to have the measure in force before Aug. 6, 2018, when the first batch of U.S. sanctions take effect.

Sanctions compliance implications

From a broader compliance standpoint, sanctions compliance officers of companies that have relied on the JCPOA waivers must immediately assess how these “snapback” sanctions affect them, and act now. “Whether you’re dealing with products or services, order or contract fulfillment, outstanding payments—those are the kinds of rubber-meets-the-road issues that have to be handled,” Mullick says. 

Identify Iran-related touchpoints. The first step companies should take is to identify their Iran-related touchpoints, both direct and indirect. Questions to consider, for example, include: Do any non-U.S. subsidiaries conduct business with Iranian counterparties? Where do your ships port? Are you transacting in U.S. dollars?

Take an assessment of those touchpoints. “What companies should do is take an inventory of their activities related to Iran,” Kassinger says. That involves assessing not only what existing contracts there may be, but understanding what delivery schedules there are and how that fits into the wind-down period; what’s in the pipeline for potential contracts that could be rewarded; what payments are owed; and what operational, organizational setups have been put in place to handle business with Iran.

Review existing contracts. Companies should also review existing contracts with Iranian counterparties and any other agreements that touch Iran to assess how to fulfil the terms of the contract, or terminate it, before the wind-down period approaches. In terms of contract fulfilment, the Treasury Department clarified in its FAQs guidance that where a non-U.S, non-Iranian person is owed payment after the conclusion of the wind-down periods for goods or services fully provided or delivered to an Iranian counterparty “and such activities were consistent with U.S. sanctions in effect at the time of delivery or provision, the U.S. government would allow the non-U.S., non-Iranian person to receive payment for those goods or services according to the terms of the written contract or written agreement.” 

For goods or services not fully provided or delivered to an Iranian counterparty, “suppliers should be in discussions with their Iranian customers on how to handle matters already contracted for that may not be completed within the wind-down periods,” Kassinger says.

Revise relevant policies and procedures, and then communicate them. Internal sanctions compliance policies, procedures, and controls will also need to be updated to reflect the snapback sanctions, says Katherine Toomey, a partner with law firm Lewis Baach. They should then communicate those changes to relevant employees, subsidiaries, portfolio companies, and other business partners.

“It’s critical that everybody has a good sense, at least in broad strokes, of what the changes could mean for them,” says Adam Smith, Gibson Dunn. If questions surface, they should be immediately raised to those with expertise in this area, such as to the sanctions compliance officer or outside counsel.

The wild card among all this uncertainty is whether any sort of U.S. renegotiation occurs between now and November.  “It’s a tough one because the dust hasn’t settled,” Smith says. “We don’t know a lot about how this is going to play out.”