The world reached a critical milestone on January 16, which was “Implementation Day” for the Joint Comprehensive Plan of Action (JCPOA) regarding Iran’s nuclear development program. The JCPOA is the agreement approved on July 14, 2015 by the United Nations (UN) Security Council. That historic deal was brokered between the five permanent members of the UN Security Council (the United States, China, France, Russia, the United Kingdom) plus Germany, the European Union (EU), and Iran. On January 16, the International Atomic Energy Agency (IAEA) officially verified that Iran has complied with the JCPOA regarding its nuclear program, which was also confirmed by the U.S. Secretary of State. Thus, under the JCPOA, the United States, the UN and the EU have all lifted certain nuclear-related sanctions on Iran. These regulatory changes culminated over ten years of coordinated international negotiations to persuade Iran to end its covert development of nuclear weapons.
Recap of Significant Legal Changes
As a predicate for other changes made by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), on Implementation Day, President Obama issued new Executive Order 13716 to revoke his previous Executive Orders 13574, 13590, 13622, and 13645, and sections 5-7 and 15 of Executive Order 13628, as provided in the JCPOA. Then, based on the new Executive Order, OFAC used Implementation Day to trigger several specific U.S. actions under the JCPOA:
- OFAC has created a new “general license” under its Iranian Transactions and Sanctions Regulations (ITSR) to allow the import into the United States of certain Iranian-origin foodstuffs (e.g., caviar and pistachios) and carpets without the delay or uncertainty of specific license approvals by OFAC;
- OFAC has issued a new “Statement of Licensing Policy” under the ITSR to declare that OFAC will now accept specific license applications for the export, sale, lease, or transfer to Iran of commercial passenger aircraft and parts and components exclusively for civil aviation use and will review such applications on a case-by-case basis. However, any such OFAC licensed transactions will continue to exclude persons on the List of Specially Designated Nationals and Blocked Persons (SDN List). Additionally, any such proposed transactions involving persons on the U.S. Commerce Department’s Denied Persons List or Entity List will require a separate approval from the Bureau of Industry and Security (BIS);
- OFAC has issued a new General License H to reduce some ITSR restrictions as applied to foreign subsidiaries of U.S. companies, so now those subsidiaries may conduct business that would otherwise be prohibited under the Iran Threat Reduction and Syria Human Rights Act (ITRSHRA);
- OFAC removed over 400 Iranian individuals, groups and business entities from the SDN List, OFAC’s Foreign Sanctions Evaders List, and the Non-SDN Iran Sanctions Act List; and
- OFAC announced that, as a matter of official policy, it will no longer apply its “secondary sanctions” or adverse consequences on non-U.S. persons solely for engaging in business activities with Iranian individuals and entities identified in Executive Order 13599.1
Recap of Remaining U.S. Barriers
Most importantly, all the basic trade sanctions imposed on U.S. companies and U.S. nationals to bar business transactions with Iran are, generally speaking, not reduced or altered under these Implementation Day steps. Thus, absent an OFAC specific license or some other authorization under the ITSR, U.S. persons may not export goods or services to Iran or import goods or services from Iran.
This new U.S. sanctions relief from Implementation Day will not authorize the direct transfer of funds to, through, or from U.S. financial institutions, so any newly or previously permitted transactions with Iran will still have to be conducted through third country banking facilities.
In addition, these Implementation Day changes will not change any other U.S. export control rules on goods or services, such as those applicable under the International Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR), apart from the export of so-called “EAR99” items to Iran in accordance with the EAR.
Moreover, any activities related to weapons proliferation, terrorism, human rights abuses, missile development, or support for the Iranian Revolutionary Guard will remain fully restricted, and OFAC sanctions will also continue in force against any persons who remain on the SDN List.
Finally, any officers or employees of companies based outside the United States who are U.S. nationals (that is, U.S. citizens or U.S. permanent residents) will remain individually subject to all the ITSR restrictions, so they still cannot approve, take part in or otherwise facilitate such transactions (apart from the modest authorizations set out in General License H, as explained below). This barrier for U.S. nationals applies regardless of whether they may work for a foreign subsidiary of a U.S. company or for a totally foreign business entity with no U.S. nexus.
Consequently, the partial lifting of these Iranian sanctions because of Implementation Day is limited and emphatically does not mean opening of the market in Iran for all U.S. businesses or all U.S. nationals.
The Potential Benefits and Risks for Foreign Subsidiaries of U.S. Companies
OFAC economic sanctions generally are focused only upon regulation of the actions of “U.S. persons,” a term that encompasses U.S. citizens, U.S. permanent resident aliens, foreign persons who are on U.S. soil and business entities formed under U.S. law. Generally speaking, such U.S. sanctions do not apply to foreign persons, such as the foreign subsidiaries of U.S. companies. Indeed, before 2012, foreign subsidiaries of U.S. companies could lawfully do business with Iran as long as no U.S.-origin goods or services and no U.S. national personnel were involved. However, ITRSHRA Section 218 changed U.S. law fundamentally and made all foreign subsidiaries of U.S. companies subject to OFAC’s Iranian sanctions to the same extent and degree as their U.S. parents. Thus, shortly after he signed ITRSHRA into law, President Obama issued Executive Order 13628, extending U.S. sanctions on Iran to include foreign subsidiaries of U.S. parent companies, and OFAC then later added a companion provision into the ITSR.
With all of the non-U.S. business community now rushing forward to expand business ties with Iran after Implementation Day, the Obama Administration has issued General License H to reset the U.S. rules regarding foreign subsidiaries of U.S. companies, restoring their ability to trade with Iran in non-U.S. origin goods and services provided by non-U.S. national personnel effectively to the same degree as was possible before ITRSHRA and Executive Order 13628. Clearly, through General License H, the Administration is doing what little it can to help equalize the economic opportunities for U.S. companies in light of the Implementation Day sanctions relief that will be felt much more broadly by non-U.S. companies and financial institutions.
Using General License H, U.S. parent companies could now relax some of their global compliance procedures to allow, if they wish, their foreign subsidiaries to do business again with persons in Iran so long as those subsidiaries are only dealing in foreign-produced goods and services and do not involve any U.S. national personnel in the provision, approval or facilitation of such transactions. Moreover, under General License H, those U.S. parent companies can also allow their global financial, computer processing and telecommunications systems to be used to support such foreign subsidiaries to do business with persons in Iran and not be liable for “facilitation” of such trade activity with Iran.
All this said, however, there will be a high and somewhat uncertain compliance burden on U.S. companies seeking to navigate the narrow legal channels under General License H and the sharp penalties for “facilitation” violations under the ITSR. Many U.S. firms had worked out such careful parent-subsidiary compliance procedures before the ITRSHRA and Executive Order 13628 changes, but, since 2012, those firms have typically followed a more simplistic “no business with Iran” formula. To be able now to restore such nuance and distinctions again will likely require extensive compliance planning and retraining of personnel, both in the parent companies and in the affected foreign subsidiaries, in line with these new OFAC rules.
It should also be recalled, under ITRSHRA Section 219, U.S. companies whose shares are publicly traded in the United States must make affirmative disclosures of their business activities in Iran, if any. Any resumption of foreign subsidiary trade with Iran can thus carry both operational and public disclosure consequences for U.S. firms.
Direct U.S. Company Business with Iran
In addition to the new opening for U.S. commercial aircraft sales noted above, certain U.S. companies have long been allowed to conduct business directly with persons in Iran under certain exemptions and general licenses under the ITSR:
Information and informational materials exemption, which includes publications, books, films, recorded music or other media, as defined in the ITSR, whether commercial or otherwise, and regardless of the format or medium of transmission (there is also a separate but related general license for “publishing”);
Travel related services exemption, which includes transactions “directly incident” to travel, such as business done by air carriers, hotels, and travel agencies;
Food and agricultural commodities general license, which covers food and agricultural products identified on OFAC’s list of eligible items;
Pharmaceuticals and medical devices general license, which covers pharmaceuticals and medical devices identified on OFAC’s list of eligible items; and
Personal communications devices and software authorization, including items covered by OFAC General License D-1.
Despite these explicit regulatory pathways for some U.S. businesses to do certain limited kinds of business with persons in Iran, it must be noted again that U.S. financial institutions remain barred from handling the transfer of funds to or from Iranian financial institutions, so payments for such permitted transactions must still be handled through third country banks.
The Uncertain Future for U.S.-Iran Business
It now remains to be seen if the evolving geopolitical conditions for U.S.-Iran relations will continue to foster more expanded business ties with Iran in the coming years. If the JCPOA framework holds, U.S. companies might expect further sanctions relief in the future. Specifically in the longer term, if Iran remains in compliance through July 20, 2023 (known in the JCPOA as the “Transition Day,” which is eight years after the UN Security Council’s adoption of the accord), the JCPOA states that the U.S. Government would then formally seek new legislation from Congress to allow the lifting of those U.S. sanctions that have, up to now, been mandated by Congress and that are therefore outside the discretion of any President to lift without such Congressional approval.
However, as the United States has now entered a crucial election year in which both the White House and many seats in Congress will be in play, it is far too early to predict whether the U.S. Government will remain committed to the course thus far charted by President Obama and Secretary of State Kerry. Indeed, the Republican majorities in both houses of Congress had already voted to oppose this P5+1 settlement with Iran at the outset, and the settlement was only able to move forward on the U.S. side because those majorities were not “veto-proof” as enough Democrats stood with the President. What direction U.S. foreign policy toward Iran will take as of January 2017 will thus depend greatly on the November 2016 federal election results and, of course, on the future conduct of Iran itself in adhering to its commitments made in the JCPOA.
While non-U.S. businesses and financial institutions can thus take significant comfort from Implementation Day and can once again begin to plan their business expansions and even investments in Iran (which Iran much desires after so many years in economic isolation), U.S. companies and financial institutions have far less to contemplate in the Iranian market in the near term. Indeed, for the longer term, U.S. companies would be well advised to await better insights into the policy views and practical choices of the next Administration and the next Congress that can only be known in 2017 and later.
1. Technically, non-U.S. persons (apart from foreign subsidiaries owned by U.S. companies) were and are not subject to the direct or primary sanctions imposed under the ITSR. Nonetheless, under U.S. law, non-U.S. companies trading above certain limits with such listed Iranian persons potentially risked losing their ability to sell their goods or services to the U.S. Government, to access any U.S. financial markets for listing of their securities, or to borrow money from any U.S. financial institutions, all of which had long deterred many third-country companies or banks from doing business with Iran. Under the JCPOA, the United States agreed that it would no longer impose such consequences on third country companies or banks after Implementation Day, and OFAC has now confirmed that new stance.