Doing Business in Iran Amid Evolving Sanctions: Leveraging New Opportunities While Ensuring Compliance

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Doing Business in Iran Amid Evolving Sanctions: Leveraging New Opportunities While Ensuring Compliance WEDNESDAY, MARCH 30, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Barbara D. Linney, Member, Miller & Chevalier Chartered, Washington, D.C. Nichola Peters, Partner, Addleshaw Goddard, London The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 International Alert Implementation Day Brings Historic Shift in Iran Sanctions Policy Implementation Day under the Joint Comprehensive Plan of Action (JCPOA) occurred on Saturday, January 16, 2016, when the International Atomic Energy Agency (IAEA) verified that Iran had met its nuclear-related commitments under the JCPOA. IAEA verification triggered E.U. and U.S. sanctions relief under the JCPOA, but the sanctions lifted by the United States are limited compared to the broad rollback of E.U. sanctions, and the primary U.S. embargo and several secondary sanctions programs beyond the scope of the JCPOA remain in place. Implementation of U.S. sanctions relief included actions by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) and the Department of State, as well as the issuance of an Executive Order. Implementation of E.U. sanctions relief came in the form of a Council Decision providing that the Council Decision issued on Adoption Day would apply as from January 16, For a discussion of the Adoption Day measures, see our October 22, 2015 alert here. OFAC Actions Implementing Limited Primary Sanctions Relief On Implementation Day, OFAC took several steps to implement the three limited categories of U.S. primary sanctions relief agreed in the JCPOA. First, the Department of the Treasury's released the text of a general license allowing transactions relating to Iranian-origin foodstuffs and carpets, including certain related financing and brokering transactions. Importantly, however, this general license will not take effect until published in the Federal Register, and will have no retroactive effect. OFAC also released guidance on this general license in the form of FAQs L.1 and L.2. Second, OFAC issued a Statement of Licensing Policy under which it signaled its intention to begin accepting applications for licenses authorizing export, re-export, sale, lease or transfer to Iran of commercial passenger aircraft and parts and components for exclusively civil aviation end-use, as well as associated services. However, sanctions under the Iran-Iraq Arms Nonproliferation Act will continue to apply, and the licensed activities may not involve persons on the List of Specially Designated Nationals and Blocked Persons (SDN List). In addition, exports or re-exports to persons on the Department of Commerce's Denied Persons List and certain persons on the Entity List will require separate authorization from the Department of Commerce, which should be applied for at the same time as the application for the OFAC license is submitted. Newly released FAQs J.1 through J.8 provide additional guidance. Finally, OFAC issued General License H authorizing U.S. owned or controlled foreign entities to engage in transactions that would otherwise be prohibited by the Iranian Transactions And Sanctions Regulations (ITSR), except for several enumerated categories of transactions that remain off-limits for such entities. FAQs K.1 to K.13 provide guidance on the scope of the General License. The General License also addresses certain concerns of the U.S. persons who own or control such entities by authorizing U.S. persons to: (1) alter operating policies and procedures to the extent necessary to permit activities authorized by the General License and provide related training, and (2) make available to their foreign

3 subsidiaries certain automated and globally integrated business support systems. FAQs K.1 to K.13 provide guidance on the scope of the General License. Notably, however, General License H does not authorize transfers of funds to, from or through a U.S. depository institution or a U.S.-registered broker or dealer in securities or use of the U.S. person's business support system in connection with such transfers. Other categories of transactions not authorized by General License H are: re-exportation with knowledge that the intended destination is Iran of U.S. origin export controlled services; re-exportation with knowledge that the intended destination is Iran of U.S. origin controlled goods or technology that has not been substantially transformed into foreign made product or incorporated into foreign made product of which such goods and technology represent less than 10% of the value of the foreign made product; transactions with persons listed on the SDN List, the List of Foreign Sanctions Evaders or the list of persons denied export privileges by the U.S. Department of Commerce; transactions involving Iranian military, paramilitary, intelligence or law enforcement entities or officials, agents or affiliates; transactions involving any item or information prohibited by or requiring a license under Part 744 of the Export Administration Regulations; activities sanctionable under various Executive Orders; and nuclear activity subject to the procurement channel of the JCPOA that has not been approved through the procurement channel process. However, FAQ K.13 does make it clear that "the exportation or re-exportation of U.S.-origin goods that are designated as EAR 99 from a third country to Iran without knowledge or reason to know at the time of export from the United States that the goods are intended specifically for Iran is not prohibited." In all other respects, the U.S. primary embargo that prohibits U.S. persons from engaging in trade and transactions with Iran unless authorized by a general or specific license from OFAC remains in effect, including the prohibitions on facilitation by U.S. persons. In addition, notwithstanding the implementation of secondary sanctions relief for those doing business with the government of Iran via removals from the SDN List, OFAC issued a new List of Persons Identified as Blocked Solely Pursuant to Executive Order in order to emphasize that such persons continue to meet the ITSR definitions of the term Government of Iran or Iranian financial institution. As such, their property remains blocked and U.S. persons are prohibited from dealing with them. Implementation of Secondary Sanctions Relief As agreed in the JCPOA, on Implementation Day the President issued an Executive Order terminating various Executive Orders imposing secondary sanctions on non-u.s. persons (Executive Orders 13574, 13590, and 13645) and amending Executive Order In addition, the contingent waivers issued on Adoption Day became effective. These actions, together with removal of over 400 individuals, entities and vessels from the SDN List, the List of Foreign Sanctions Evaders and/or the Non-SDN Iran Sanctions Act List, had the effect of lifting secondary sanctions applicable to the financial and banking, insurance, energy and petrochemical, shipping and shipbuilding, and automotive sectors, port operators, and trade in gold and precious metals and certain raw or semi-finished metals and software consistent with the JCPOA. Extensive joint guidance issued by the Departments of the Treasury and State and FAQs issued by OFAC provide a detailed description of these steps, the effect of which is to permit non-u.s. persons to engage in activities in the affected sectors without fear of reprisal in the form of U.S. secondary sanctions. Secondary Sanctions Remaining in Place After Implementation Day The U.S. JCPOA commitments to lift secondary sanctions focused only on nuclear-related sanctions. However, like the primary embargo, several other secondary sanctions programs will remain in place. Designation and blocking authorities under various statutes and Executive Orders will continue to apply to persons who engage in certain activities, including supporting terrorism, human rights abuses in Iran and proliferation of weapons of mass destruction. Other examples of remaining secondary sanctions include

4 correspondent and payable-through account sanctions, which will continue to apply to foreign financial institutions that knowingly facilitate significant financial transactions with SDNs or persons subject to remaining menu-based secondary sanctions, and menu-based secondary sanctions will continue to apply to persons who materially assist the Islamic Revolutionary Guard Corps or certain other SDNs or engage in transactions involving certain metals not approved by the JCPOA procurement channel or in support of Iran's military or its ballistic missile program. Designations of eleven individuals and entities for supporting Iran's ballistic weapons program the day after Implementation Day signaled the U.S. intent to continue to impose secondary sanctions under these remaining authorities as and when warranted. In addition, Iran remains designated as a state sponsor of terrorism and the JCPOA leaves that designation in place. As a result, restrictions on foreign assistance, the ban on defense exports, controls on exports of certain sensitive technology and dual-use items and various financial and other restrictions remain in place notwithstanding implementation of the JCPOA. Finally, although the U.S. Congress failed to block implementation of the JCPOA, there remains considerable Congressional support for additional statutory sanctions against Iran, so the possibility of new statutory sanctions in the future cannot be ruled out entirely. For questions or comments about this article, please contact the following authors: Barbara D. Linney, blinney@milchev.com, Larry E. Christensen, lchristensen@milchev.com, Timothy P. O'Toole, totoole@milchev.com, Also published as a Trade Compliance Flash on January 17, The information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing. This newsletter is protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this newsletter without prior written consent of the copyright holder.

5 International Alert Iran Nuclear Deal: Adoption Day Brings Key Developments But No Immediate Sanctions Relief The Iran nuclear deal took effect on Sunday, October 18, Dubbed "Adoption Day" in the Joint Comprehensive Plan of Action inked on July 14, 2015 (the "JCPOA"), Sunday marked the kick-off of arrangements and preparations to be undertaken by the parties in anticipation of "Implementation Day" -- i.e., the date on which the International Atomic Energy Agency (IAEA) verifies implementation by Iran of its nuclear-related commitments and sanctions relief begins. In the United States, Adoption Day saw the issuance of a Presidential Memorandum directing the Secretaries of State, Treasury, Commerce and Energy to take all necessary steps to give effect to the U.S. commitments under the JCPOA. In addition, the Secretary of State issued contingent waivers of various statutory sanctions that will not become effective until Implementation Day. Sanctions subject to the waivers are certain "secondary" sanctions against non-u.s. persons under various provisions of the Iran Sanctions Act of 1996 (as amended); the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010; the National Defense Authorization Act for FY 2012; the Iran Threat Reduction Act of 2012; and the Iran Freedom and Counter-Proliferation Act of 2012, which affect activities in the Iranian energy, petrochemical, shipping, shipbuilding, port services, automotive and financial, banking and insurance sectors. Secondary sanctions relief also will include termination of certain Executive Orders on Implementation Day (including E.O , which authorized sanctions with respect to provision of support for Iran's energy and petrochemical sectors). Details of relief for U.S. persons from the "primary" U.S. embargo against trade with Iran will be issued by the Office of Foreign Asset Controls (OFAC) closer to Implementation Day, but are expected to include general licenses authorizing imports of Iranian-origin carpets and foodstuffs, and implementation of a favorable licensing policy for exports of commercial passenger aircraft and related parts and services to Iran for exclusively civil aviation end-use. Related controls on re-export of such items also will be eased. All such licenses, will, however, exclude activities or re-exports involving Specially Designated Nationals (SDNs). Thus, even after Implementation Day, the U.S. embargo affecting activities of U.S. persons will remain largely in place, and OFAC has signaled its intention to continue vigorous enforcement of the implementing regulations. What remains unclear is the extent to which Implementation Day will bring new opportunities for foreign entities owned or controlled by U.S. persons. OFAC has stated its intention to implement sanctions relief for such entities by issuing a general license, but the scope of the intended relief has not been released. Current regulations already contain a general license authorizing foreign entities owned or controlled by U.S. persons to avail themselves of existing general licenses authorizing certain activities by U.S. persons, so it seems likely that the new general licenses for importation of carpets and foodstuffs will extend to such entities. Likewise, it is reasonable to assume that the favorable licensing policy for civil passenger aviation activities will benefit such entities.

6 Less clear is the extent to which "secondary" sanctions relief applicable to other non-u.s. persons will apply to foreign entities owned or controlled by U.S. persons. Although the JCPOA contained a U.S. commitment to license non-u.s. entities that are owned or controlled by a U.S. person to engage in activities that are consistent with the JCPOA, the JCPOA also provided that U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to the JCPOA, unless authorized to do so by OFAC. The contingent waivers issued on Adoption Day explicitly contain similar provisions, but OFAC has not yet issued any formal indication of its intention to issue such authorizations. Even if such authorizations are issued, however, it must be noted that the secondary sanctions waivers are subject to a number of limitations, and most do not cover activities involving persons on the U.S. SDN List. While the JCPOA recites that the United States will "delist" many SDNs for the purposes of implementing the promised secondary sanctions relief, delisted entities falling within the definition of "Government of Iran" in OFAC's Iranian Transactions and Sanctions Regulations will remain subject to the primary U.S. embargo and off-limits for transactions with U.S. persons. Whether non-u.s. entities owned or controlled by them will be subject to the same limitations is not yet known. What is clear, however, is that OFAC intends to maintain the prohibition against U.S. person facilitation of activities by non-us persons that would be impermissible if undertaken by U.S. persons. This will create new risks for U.S. persons if their non-u.s. owned or controlled entities are granted authorizations that exceed the scope of authorizations applicable to U.S. persons. The European Union actions on Adoption Day provided much greater clarity for E.U. persons contemplating re-engagement with Iran. The E.U. Adoption day measures also emphasized the wide discrepancy between the scope of sanctions relief for U.S. persons and their owned and controlled foreign entities, on the one hand, and the new opportunities that will be available to E.U. persons, on the other hand. The Council Decision and Regulations issued on Adoption Day, with effect from Implementation Day, provide for the removal of most E.U. Iran nuclear-proliferation sanctions, as well as a precise picture of the prohibitions and licensing requirements that will remain, particularly in connection with nuclear and military activities. The E.U. sanctions targeting human rights violations in Iran, which were not subject to the E.U.'s JCPOA commitments, also remain in place, although these are limited to assets freezes and travel bans applicable to listed persons only, and prohibitions on the sales of certain carcinogenic or harmful substances and equipment that might be used for internal repression in Iran. Thus, Implementation Day will bring reinstatement of a wide discrepancy between U.S. and E.U. policies towards trade with Iran. Should the requisite IAEA approvals occur, both EU and U.S. sanctions relief will begin on Implementation Day. However, unlike their EU counterparts, U.S. persons are unable to enter into executory contracts regarding post-implementation Day activities, and indications are that OFAC will not be sympathetic to applications for licenses authorizing such contracts. This puts U.S. persons at a significant disadvantage as compared to their E.U. counterparts, even with respect to activities that are expected to be authorized following Implementation Day. There is no date certain for Implementation Day, so it may be some time (perhaps six to nine months, according to the latest U.S. government estimates) before Implementation Day happens. However, even on Implementation Day the sanctions will be suspended, not terminated, and other provisions of the JCPOA allow certain sanctions to "snap back" or be reinstated if Iran does not live up to its obligations under the JCPOA. Permanent sanctions relief will not come until "Transition Day" -- i.e., eight years after Adoption Day or upon a favorable IAEA report regarding Iran's pursuit of only peaceful nuclear activities. This means that those who take advantage of sanctions relief on Implementation Day will bear the risk of reinstatement of sanctions for a considerable period of time. Furthermore, the U.S. government has indicated that contracts entered into during the period of sanctions relief will not be grandfathered if snapback occurs. Of course, in addition to the possibility of snapback, those re-entering the Iranian market must also carefully manage a host of other risks, including anti-corruption risks, lack of transparency and terrorism.

7 Finally, an additional word of caution for companies with multilateral operations -- only China, the European Union, France, Germany, Russia, the United Kingdom and the United States participated in the discussions leading up to the JCPOA, and only the European Union and the United States made sanctions commitments, although pursuant to a July 20, 2015 resolution of the UN Security Council (UNSC), Implementation Day will bring termination of certain UNSC resolutions, subject to "snapback" and certain remaining restrictions on the transfer of proliferation sensitive goods. However, in recent years many other countries have implemented unilateral sanctions against Iran, and while some (Switzerland, for example) are expected to follow the JCPOA lead, others, like Canada, are not. Multilateral companies contemplating doing business in Iran must therefore ensure that the entities, personnel and goods, services and technology and financial transactions involved in their operations are in compliance with a variety of potentially applicable sanctions regimes. For more information, please contact: Barbara D. Linney, blinney@milchev.com, The information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing. This newsletter is protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this newsletter without prior written consent of the copyright holder.

8 International Alert OFAC Authorization of Contingent Contracts for Commercial Passenger Aviation Sales to Iran Accompanied by New Sanctions On March 24, 2016, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a new general license designed to streamline the processing of applications for specific licenses for activities related to the export or re-export to Iran of commercial passenger aircraft and related parts and services pursuant to the licensing policy announced in January upon implementation of the Joint Comprehensive Plan of Action (JCPOA). At the same time, OFAC added four new "FAQs" to previously issued guidance. The FAQs clarify the scope of the new general license and stipulate the information required to be provided in support of specific license applications. However, as it did upon implementation of the JCPOA, OFAC concurrently sanctioned entities and individuals for supporting Iran's ballistic missile program and Iranian airline Mahan Air, which remains designated for support of the Islamic Revolutionary Guard Corps (IRGC) and numerous terrorist groups. The New General License & FAQs New General License I (GL I) authorizes U.S. persons to negotiate and enter into so-called "contingent contracts" for activities eligible for authorization under 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. According to the note to paragraph (a)(1) of GL I, "contingent contracts" include "executory contracts, executory pro forma invoices, agreements in principle, executory offers capable of acceptance such as bids or proposals in response to public tenders, binding memoranda of understanding, and any other similar agreement." In addition, new FAQ J.12 provides that negotiation of and entry into a nondisclosure agreement (NDA) in connection with the negotiation of a contingent contract also is authorized. However, the scope of GL I is limited in that no contingent contracts may be signed with persons on OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List). As discussed below, simultaneous designations of additional SDNs connected with Iran's aviation industry highlight the importance of due diligence to ensure that this condition is met. Furthermore, GL I and FAQs J.9 and J.10 make it clear that a specific license from OFAC still is required in order to authorize performance of the activities contemplated by a contingent contract. Any contingent contract entered into under GL I must contain an express condition that performance is contingent upon issuance of a specific license. While FAQ J.9 states that non-u.s. persons are not prohibited from entering into contingent contracts for the re-export of eligible aircraft, parts or services (and thus need not rely on General License I in order to do so), the FAQ re-emphasizes that non-u.s. persons do require a specific license from OFAC in order to perform such contracts. Presumably, in view of General License H, these statements apply equally to non-u.s. entities owned or controlled by U.S. persons, but the risk of facilitation remains for U.S. parent entities who do not take appropriate steps under General License H to allow the foreign entities to engage in transactions authorized by General License H. The broad requirement for a specific license prior to performance raises the question whether a contingent contract entered into under GL I may include any obligations to be performed prior to issuance of a specific

9 license. In the export control context, for example, it would not be unusual for a major contract contingent upon issuance of an export license to require the exporter to file the license application by a certain date and require the buyer to pay a deposit towards the purchase price or even a fee for preparation and submission of the application. On the one hand, GL I authorizes "all transactions ordinarily incident to the negotiation of and entry into" contingent contracts, but the requirement for a specific license prior to performance appears to rule out many typical commercial terms designed to protect the exporter. Importantly, while FAQ J.12 clarifies that an NDA is an authorized contingent contract for the purposes of GL I, it also makes it clear that enforcement of an NDA entered into in connection with negotiation of a contingent contract is not authorized by the new general "and may require separate authorization." The FAQ makes no mention of enforcement of other types of contingent contracts, but given the insistence upon a specific license prior to performance, it appears that OFAC does not expect contingent contracts to contain any obligations to be performed prior to issuance of the license. New FAQ J.11 offers guidance on applying for specific licenses pursuant to the Statement of Licensing Policy. This FAQ states that applications, at a minimum, should include: the types and number of aircraft being exported or leased; the Export Control Classification Number(s) for the aircraft, related parts and/or technology being exported or leased; the Iranian airline receiving the aircraft; the proposed end-use of the aircraft; and any other information that may be relevant to the processing of the request, including as much detail about the transaction as possible. These requirements suggest that OFAC expects applicants to complete their negotiations and arrangements for sales of eligible aircraft, parts and services before requesting a specific license from OFAC. GL I now provides the authorization necessary to allow U.S. persons to do so, albeit perhaps not as clear or broad an authorization as might have been desirable. The new general license and related FAQs also fall short of addressing uncertainty regarding the scope of parts eligible for licenses under the Statement of Licensing Policy when the parts in question are common to both commercial passenger aircraft and other civil aircraft. If a part can be used in other civil aircraft as well as commercial passenger aircraft, does this mean that the part does not meet the exclusive use requirement, or does the requirement for exclusive use in commercial passenger aviation pertain only to the intended use in Iran? In addition, OFAC has not yet clarified the relationship between facilitation by U.S. persons of conduct abroad and permissible exports of parts and components to a third-country original equipment manufacturer (OEM) that manufactures non-commercial passenger aircraft. Such exports are not prohibited by Section of the Iranian Transactions and Sanctions Regulations unless intended "exclusively or predominantly" for Iran. These and other uncertainties regarding the U.S. implementation of the JCPOA remain to be clarified by future guidance. The New Sanctions The limited additional relief provided by GL I was accompanied, as was implementation of the JCPOA, by simultaneous designations under Executive Orders targeting proliferators of weapons of mass destruction and terrorism and those who support them. Treasury officials took the opportunity to reiterate that these Executive Orders were beyond the scope of JCPOA relief, and emphasized the U.S. government's "steadfast commitment" to continue to use all available tools, including sanctions, to counter Iran's ballistic

10 missile program and its support for terrorism. Persons added to the SDN List as a result of these designations included additional Commands of the IRGC, two affiliates of a previously designated Iranian industrial group, two U.K. entities and two U.K. individuals and two U.A.E. businesses. All are now subject to blocking of property or asset freezing by U.S. persons and banks. In addition, foreign financial institutions that facilitate transactions for them could be exposed to correspondent or payable-through account sanctions denying access to the U.S. financial system, and foreign persons who support them risk being designated as SDNs and blocking of their property. The new designations are a sobering reminder of the care that must be taken by U.S. or foreign persons wishing to take advantage of the opportunities to trade with Iran provided by implementation of the JCPOA. Transactions by U.S. persons with SDNs remain off-limits, and transactions by non-u.s. persons with SDNs may still expose them to secondary sanctions. For questions or comments about this article, please contact: Larry E. Christensen, lchristensen@milchev.com, Barbara D. Linney, blinney@milchev.com, Kuang H. Chiang, kchiang@milchev.com, Also published as a Trade Compliance Flash on March 28, The information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing. This newsletter is protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this newsletter without prior written consent of the copyright holder.