US trade sanctions and export controls targeting Iran have attracted increasing attention from Chinese companies doing business in Iran or with Iran counterparties. This client alert aims to provide a high-level overview on US trade sanctions and export controls targeting Iran, their implications (particularly in terms of their extraterritorial application), and the potential penalties that can be imposed on companies and their executives and employees in the event of violations.Read more…
On November 5, 2018, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) took several actions to finalize the re-imposition of sanctions against Iran in response to President Trump’s May 8, 2018 decision to cease the United States’ participation in the Joint Comprehensive Plan of Action (“JCPOA”). See our previous blog posts here regarding the President’s May 8, 2018 decision to cease the United States’ participation in the JCPOA and here regarding Executive Order (“EO”) 13846, issued on August 6, 2018, which consolidated and reissued several sanctions provisions that had been suspended or revoked while the JCPOA was in effect.Read more…
On August 6, 2018, President Trump issued Executive Order 13846, “Reimposing Certain Sanctions with Respect to Iran” (the “New Iran EO”), which formally reimposes certain sanctions on Iran that had been suspended or revoked as part of the United States’ commitments under the Joint Comprehensive Plan of Action (“JCPOA”). The New Iran EO, which was issued to coincide with the end of the 90-day wind-down period announced on May 8, 2018 and detailed in our previous blog post, reimposes a wide range of sanctions on Iran that were in effect prior to the implementation of the JCPOA pursuant to pre-existing legal authorities, and also expands the scope of those sanctions, as described below. Read more…
US Withdrawal from the JCPOA
On May 8, 2018, President Trump announced that the United States will be withdrawing from the JCPOA, culminating months of uncertainty around the fate of the Iran nuclear deal. The announcement came ahead of a May 12 deadline for the renewal of a key sanctions waiver. As described here, the last sanctions waiver occurred on January 12, 2018 amidst statements by President Trump that the waiver would be the last unless what President Trump considered “flaws” in the deal were fixed. In his May 8 speech, President Trump announced that the United States would re-impose nuclear sanctions against Iran.
Many of these sanctions, including so-called “secondary sanctions” that primarily target non-US companies engaging in business in or with Iran entirely outside US jurisdiction, were waived as part the US Government’s commitments under the JCPOA. By way of reminder, the sanctions relief under the JCPOA was mostly with respect to these secondary sanctions, whereas primary sanctions (applicable to US Persons) were left intact, with the exception of a few general licenses and favorable licensing policies (which themselves will be revoked as a result of today’s announcement).
Following the President’s announcement, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) released guidance, including new FAQs, regarding the implementation of the President’s decision. As described in this new guidance, the President’s announcement, as implemented by the US Treasury and State Departments, revokes any sanctions waivers issued to implement JCPOA sanctions relief and has replaced them with temporary waivers to provide for the wind down of previously-authorized activities in Iran in keeping with newly-established, 90-day (ending on August 6, 2018) and 180-day (ending on November 4, 2018) wind-down periods for activities involving Iran.
Sanctions Wind-Down Periods
OFAC’s guidance indicates that it will implement 90-day and 180-day wind-down periods for Iran-related activities that were authorized under the US JCPOA sanctions relief. During the wind-down periods, OFAC will take steps to allow US Persons to wind down previously-authorized operations or business in Iran and to receive payments under agreements entered into before May 8, 2018 until the end of the applicable wind-down period (i.e., until August 6, 2018 or November 4, 2018). Non-US persons wishing to avoid the risk of US secondary sanctions following the end of the applicable wind-down period can also take advantage of the wind-down periods to cease engaging in the sanctionable activities described below. OFAC has advised that it will consider whether any “new” Iran-related activities were engaged in during the wind-down periods when considering potential enforcement or secondary sanctions with respect to activities engaged in after the expiration of the wind-down periods, effectively cautioning parties about entering into “new” business after May 8, 2018.
90-Day Wind-down Period Ending on August 6, 2018
The following sanctions will be re-imposed after the 90-day wind-down period ends (i.e., on August 7, 2018):
After the 90-day wind-down period ends, the US Government will also revoke the following JCPOA-related authorizations under US primary sanctions targeting Iran:
180-Day Wind-down Period Ending on November 4, 2018
The following sanctions, which are largely those relating to Iran’s oil and energy sector, will be re-imposed after the 180-day wind-down period ends (i.e., on November 5, 2018):
General License H to be Revoked
OFAC’s guidance indicates that it will revoke General License H, authorizing US-owned or -controlled non-US entities to engage in certain Iran-related activities, as soon as administratively feasible. General License H will be replaced by a new general license authorizing the wind down of activities authorized under General License H (the “GL H Wind Down General License”). The GL H Wind Down General License will expire on November 4, 2018.
US-owned or -controlled non-US entities will be authorized to wind down operations or business in Iran conducted pursuant to General License H and to receive payments under contracts entered into before May 8, 2018. As above, OFAC effectively signaled caution with respect to “new” activities under General License H between May 8, 2018 and November 4, 2018.
In short, it appears that all parties who were designated on the Specially Designated National and Blocked Persons List (“SDN List”) under the Iran sanctions program prior to the implementation of the JCPOA will be re-designated as SDNs after November 5, 2018. OFAC expects to move parties identified as meeting the definition of the terms “Government of Iran” or “Iranian financial institution” (as those terms are defined in the ITSR) from the List of Persons Blocked Solely Pursuant to E.O. 13599 (which, as described here, was introduced as part of the JCPOA sanctions relief) to the SDN List. In addition, parties that were removed from the SDN List as part of the JCPOA sanctions relief will be re-listed on the SDN List by no later than November 5, 2018. As was the case prior to Implementation Day of the JCPOA, effective November 5, 2018, non-US persons engaging in transactions with these parties could be exposed to US secondary sanctions.
What Is Authorized During and After Wind Down?
A key consideration, of more importance to US Persons and US-owned or -controlled non-US entities than other non-US persons, given that they are directly subject to US jurisdiction and must rely on wind-down authorizations, is whether the activity being wound down is pursuant to a written contract or written agreement entered into prior to May 8, 2018. Questions may arise, and must be considered as to which activities and dealings can be related back to an existing pre-May 8, 2018, agreement, and which could possibly be deemed to be new business not authorized under the wind-down authorizations.
In the context of non-US, non-Iranian persons, the OFAC FAQs make clear that receipt of payments after the wind-down period (i) for goods or services fully performed or delivered to an Iranian counterparty prior to the expiration of the wind-down period, (ii) pursuant to a written contract or written agreement entered into prior to May 8, 2018, and (iii) that are otherwise consistent with US sanctions in place at the time of delivery or provision, would be allowed. Whether such post-wind-down payments are permitted as to US Persons and US-owned or -controlled non-US entities is not made clear in the OFAC FAQs, so we would expect OFAC to issue more guidance on this and other issues as questions arise.
As a result of the re-imposition of sanctions, financing and funds flows into/out of Iran will become extremely difficult, if not impossible. Iran will likely again be cut off from global financial messaging systems. Non-US banks should be expected to take a harder stand against processing Iran-related funds transfers, capital investments, dividend and royalty flows to/from Iran out of fear of losing their US corresponding banking relationships and falling foul of US enforcers. This may impact the ability for non-US companies to engage in lawful Iran-related business, even if such business is wholly outside US jurisdiction and does not trigger potential US secondary sanctions.
Impact on Non-US Persons Relying on General License H
Effective May 8, US-owned or -controlled non-US entities are to begin winding down any activities in Iran that are being undertaken pursuant to General License H with a view to completing such wind-down activities by November 5 (i.e., the end of the wind-down period for activities under General License H). Entering into “new” business (e.g., accepting new orders), even if consistent with General License H during the wind-down period could be viewed by OFAC as sanctionable following the end of the wind-down period.
Impact on General Licenses Issued Under Primary US Sanctions
General licenses issued under primary US sanctions, such as the Ag/Med General Licenses described here and General License D-1 related to the provision of certain services, software, and hardware incident to personal communications to Iran are not impacted by the United States’ withdrawal from the JCPOA as a legal matter and should remain in force.
No Impact on US Export and Reexport Controls
The US action has no impact on existing US export and reexport controls applicable to Iran, which apply independent of primary or secondary US sanctions, and with which both US and non-US persons must comply, to the extent they engage in exports or reexports involving items (commodities, software, or technology) subject to US jurisdiction.
Initial Reactions of Other P5+1 Countries
The UK, France, and Germany issued a joint statement, available here reaffirming their commitment to the JCPOA and confirming that they will remain parties to the JCPOA. Russia and China, have made similar statements, expressing disappointment with the US withdrawal and reaffirming their commitment and continued support for the JCPOA.
Iran, for its part, expressed continued commitment to the JCPOA, and, as of this writing, was engaged in talks with Russia, and planning to engage in talks with China, on the future of the JCPOA.
Despite such expressed commitment to the JCPOA, it remains to be seen whether the JCPOA will remain viable, especially to the extent that, as a practical matter, EU financial institutions are not willing to process transactions implicating Iran given the increased secondary sanctions risks.
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