On 8 May 2018, the United States withdrew from the Joint Comprehensive Plan of Action (“JCPOA”), as discussed in our May 2018 Client Alert. On 6 August 2018, President Trump issued a new Executive Order (the “New Iran E.O.”) that re-imposed certain sanctions with respect to Iran as part of the United States’ withdrawal from the JCPOA.[1] While most of the sanctions had been in place prior to the United States’ implementation of the JCPOA, the New Iran E.O. expands certain sanctions and allows for penalties that were not previously authorised.[2] Most of the provisions of the New Iran E.O. became effective on 7 August 2018; the remaining provisions will become effective on 5 November 2018, at the end of a 180-day wind-down period that began on 8 May 2018.
The European signatories have been vocal supporters of the JCPOA deal and vocal critics of the threats to re-impose U.S. sanctions.
The New Iran E.O.[3]
Provisions re-imposed by the New Iran E.O.
The majority of the sanctions that the New Iran E.O. imposes were in place prior to the implementation of the JCPOA. For those unfamiliar with the Iranian sanctions regime in place prior to 2016, what follows is a brief description of the sanctions restored under the New Iran E.O.
Section 1 of the New Iran E.O. authorises blocking sanctions against non-U.S. parties, both Iranian and non-Iranian (Specially Designated Nationals or
“SDN”). The United States may block the property of any person that is part of the energy, shipping, or shipbuilding sector of Iran, as well as any person that operates a port in Iran.
[4] A non-U.S. person that provides material support to, or goods or services in support of, any such person may also be sanctioned.
[5] A non-U.S. person may also be sanctioned for providing material support for, or goods or services in support of, an acquisition of U.S. bank notes or precious metals by the government of Iran.
[6]
Section 2 authorises the Secretary of the Treasury to prohibit Foreign Financial Institutions (
“FFIs”) from establishing or maintaining a “correspondent account or payable-through account” in the United States if they are found to have conducted or facilitated certain transactions. These include transactions “for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.”
[7] Section 2 also authorises additional sanctions against FFIs that will come into effect after the end of the 180-day wind-down period on 5 November 2018. These include sanctions for the facilitation of transactions on behalf of or in connection with SDNs, the National Iranian Oil Company (
“NIOC”) or the Naftiran Intertrade Company (
“NICO”), as well as transactions involving petroleum, petroleum products, or petrochemical products from Iran.
[8]
The New Iran E.O. also authorises “menu-based” sanctions, which the Department of the Treasury’s Office of Foreign Assets Control (
“OFAC”) utilises in various sanctions programs. As an example of how menu-based sanctions typically operate, the Iran Freedom and Counter-Proliferation Act of 2012 (
“IFCA”) requires the President to impose five or more of the sanctions listed in the Iran Sanctions Act of 1996 (
“ISA”) if it is determined that a person has engaged in certain sanctionable activities.
[9]
Section 3 of the New Iran E.O., by contrast, authorises but does not require the United States government to impose any of the fourteen possible sanctions listed in Sections 4 and 5, which include measures as severe as blocking sanctions.
[10]
Under Section 3, as of 7 August 2018, a person may be penalised under these menu-based sanctions for knowingly engaging in a significant transaction in connection with the automotive sector of Iran.
[11] Additionally, after 5 November 2018, a person may be sanctioned for knowingly purchasing petroleum, petroleum products, or petrochemical products from Iran.
[12] These sanctions also extend to affiliates of a sanctioned entity, including an entity that (i) is the successor to a sanctioned entity, (ii) owns or controls such an entity, or (iii) is owned or controlled by such an entity.
[13]
Section 6 includes sanctions against FFIs engaging in transactions denominated in the Iranian rial or maintaining funds denominated in Iranian rials.
Section 7 authorises blocking sanctions against persons determined to have either (i) diverted goods intended for the people of Iran — including food, medicine, and medical devices — or (ii) transferred goods or technology to Iran “that are likely to be used by the” government of Iran to commit “serious human rights abuses.”
[14] These sanctions are also extended to persons owned or controlled by any person blocked under this section.
[15]
Finally, Section 8 prohibits foreign subsidiaries of a U.S. person from engaging in transactions with the government of Iran or with any person subject to the jurisdiction of Iran. General License H (
“GL H”) had authorised foreign subsidiaries of U.S. companies to engage in certain activities with the government of Iran or Iranian companies. To the extent transactions had been authorised by GL H, they have been provided a 180-day wind-down period under section 560.537 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (
“ITSR”), which expires after 4 November 2018.
The Significant Reduction Exemption
Under the New Iran E.O., sanctions against purchasers of petroleum and petroleum products, as well as sanctions against FFIs engaging in significant financial transactions related thereto, will only apply if the President makes two determinations.
[16] First, that “there is a sufficient supply of petroleum and petroleum products produced from countries other than Iran to permit a significant reduction in the volume” of these products from Iran.
[17] Second, that the purchaser or FFI in question is a national of a country that has not been granted a Significant Reduction Exemption. Notably, President Trump has already made the first determination: on 14 May 2018, the Trump administration sent a memo to the State Department confirming that global supply was sufficient.
[18]
Historically, the Significant Reduction Exemption, set forth in Sec. 1245 of the NDAA, allowed the President to lift sanctions on FFIs if the U.S. government determined that “the country with primary jurisdiction” over the FFI had “significantly reduced its purchases of Iranian crude oil during a specific time period.”
[19] OFAC did not define “significantly reduced,” but noted that any “determinations will be preceded by aprocess of rigorous due diligence.”
[20]
Functionally, this meant that if the United States government determined that a country had met this objective, FFIs in that country could facilitate purchases of petroleum and petroleum products from Iran. More than a dozen countries received an exemption under this rule, including Japan, France, Germany, Italy, China, South Korea, Singapore, and South Africa.
[21] As the provisions of the NDAA were waived during the implementation of the JCPOA, these exemptions expired. Countries will have to requalify for the exemption once Sec. 1245 goes back into effect after 4 November 2018.
[22] FFIs will be prohibited from facilitating purchases of petroleum and petroleum products from Iran unless and until the appropriate exemption has been issued.
The 8 May 2018 announcement made no reference to the Significant Reduction Exemption. It remains to be seen which countries, if any, will be granted this exemption by the Trump administration.
The New Iran E.O. expands the scope of the sanctions
The New Iran E.O. not only re-imposes sanctions that were in effect prior to 16 January 2016, but also broadens the scope of the sanctions against Iran.
Section 1 authorises blocking sanctions against any person that provides material support, goods or services to someone that has been blocked under Section 1. For example, if a person is blocked under Section 1 for providing material support to the NIOC or NICO, and a non-U.S. person provides material support, or goods or services, to that blocked person, the non-U.S. person may also be blocked.
[23] FFIs that provide material support or services to a blocked person may also be penalised under the newly expanded sanctions.
[24]
The menu of sanctions has been expanded for persons who have knowingly engaged in certain significant transactions relating to petroleum, petroleum products, or petrochemicals.
[25] The U.S. government may deny visas to corporate officers, principals, or controlling shareholders of a sanctioned person.
[26] All U.S. persons may be prohibited from investing in or “purchasing significant amounts” of debt or equity issued by a sanctioned entity.
[27] Finally, any or all of the sanctions available in Sections 4 and 5 may be applied directly to the “principal executive officer or person performing similar functions and with similar authorities, of a sanctioned person.”
[28]
The New Iran E.O. also expands sanctions on U.S.-owned or -controlled foreign entities by prohibiting transactions with persons blocked for: (1) providing material support for, or goods and services in support of, Iranian persons on the SDN list; (2) being part of the energy, shipping, or shipbuilding sector of Iran, or a port operator in Iran; or (3) knowingly providing significant support to certain other persons blocked under IFCA or to an Iranian person on the SDN list.
[29]
Payments after wind-down periods end
OFAC has advised that non-U.S., non-Iranian persons may receive payment after the end of the applicable wind-down period for “goods or services fully provided or delivered” beforehand.
[30] These payments must be based on written contracts entered into prior to 8 May 2018.
[31] So long as the agreement under which the payment arises existed prior to that date, if moneys are owed for goods or services provided before the end of the wind-down period, non-U.S., non-Iranian persons will be permitted to receive payment after the wind-down period according to the terms of the agreement.
[32]
The payment must not involve any “U.S. persons or the U.S. financial system” unless specifically exempted.
[33]
On the other hand, U.S. persons and U.S.-owned or -controlled persons may not receive such payments after the end of the wind-down period.
[34] Such payments are only authorised through the wind-down period. A U.S. person seeking to receive payment for delivered goods or services must receive a specific licence from OFAC.
[35]
Application of the New Iran E.O. to Iranian sectors
Iran’s automotive sector
Beginning 7 August 2018, the New Iran E.O. authorises menu-based sanctions on persons determined to have knowingly engaged “in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector.”
[36] Iran’s automotive sector constitutes “the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles.”
[37]
OFAC anticipates that forthcoming regulations will define “goods or services used in connection with the automotive sector of Iran” to include goods or services that contribute to “(i) Iran’s ability to research, develop, manufacture, and assemble light and heavy vehicles, and (ii) the manufacturing or assembling of original equipment and after-market parts used in Iran’s automotive industry.”
[38] Finished vehicles exported to Iran that do not require further assembly or manufacturing,
[39] or goods or services for the maintenance of finished vehicles exported to Iran, would generally not fall under this definition.
[40] However, OFAC has indicated that the export, sale or distribution of goods, such as auto parts and accessories, or services that contribute to Iran’s ability to manufacture or assemble vehicles, or manufacture original equipment and after-market parts in Iran, could result in sanctions.
[41] Exporting “auto kits” to Iran for assembly in Iran would also be sanctionable if the transaction is deemed to be significant.
[42]
Additionally, the New Iran E.O. authorises correspondent and payable-through account sanctions
[43] for FFIs that have “knowingly conducted or facilitated any significant financial transaction” for “the sale, supply, or transfer to Iran of significant goods used in connection with Iran’s automobile sector.”
[44]
Iran’s energy, petroleum, and petrochemical sectors
Beginning 5 November 2018, the New Iran E.O. will re-impose “Executive Orders 13622, 13628, and 13645 with respect to the Iranian energy, petroleum, and petrochemical sectors.”
[45] The New Iran E.O. authorises blocking sanctions and correspondent and payable-through account sanctions on persons providing material support for, or goods and services to, NIOC and NICO.
[46] Additionally, persons that “sell, supply or transfer to or from Iran significant goods or services used in connection with Iran’s energy sector are exposed to menu-based sanctions” under the IFCA and the New Iran E.O.
[47] However, as noted earlier, “countries that are determined by the Secretary of State to have significantly reduced their purchases of Iranian crude oil will be excepted from these measures” under the Significant Reduction Exemption.
[48]
EU response to revived U.S. sanctions against Iran
In response to the New Iran E.O., the EU expanded the scope of its 1996 “blocking regulation.” The blocking regulation had prohibited compliance with certain U.S. sanctions then in force against Cuba, Libya and Iran (EU regulation 2271/1996), but under EU Regulation 2018/1100 the list of U.S. laws now covered by the blocking regulation are:
- National Defense Authorization Act for Fiscal Year 1993, Title XVII Cuban Democracy Act 1992, sections 1704 and 1706
- Cuban Liberty and Democratic Solidarity Act of 1996
- Iran Sanctions Act of 1996
- Iran Freedom and Counter-Proliferation Act of 2012
- National Defense Authorization Act for Fiscal Year 2012
- Iran Threat Reduction and Syria Human Rights Act of 2012
- Iranian Transactions and Sanctions Regulations
Subject to some narrow exceptions, it is now prohibited for those subject to EU regulations (i.e., EU nationals, EU companies, EU-flagged aircraft and ships, and the EU operations of non-EU companies) to comply with the revived U.S. sanctions.
The EU, however, does not have the power to create or impose penalties outside the area of competition law, so it has been delegated to the individual member states to determine the penalty for non-compliance with this prohibition.
There are two other aspects of the blocking regulation which have received less attention than the prohibition. The first is the ability of the European Commission to authorise an EU company to comply with the listed U.S. sanctions where non-compliance would jeopardise the interests of either the EU or the company. The mechanics of making such application have now, for the first time, been published through EU Regulation 2018/1101 on 3 August 2018. The second additional aspect of the blocking regulation is the ability it creates, under article 6, for a company or person to recover damages.
Conclusion
The New Iran E.O. goes beyond reinstating sanctions that pre-date the JCPOA. The European signatories have been vocal supporters of the JCPOA deal and vocal critics of the threats to re-impose U.S. sanctions. Non-U.S. companies engaged in (or planning to engage in) business with Iran or Iranian companies must understand the risks of continuing or entering into such activities.
Endnotes
[23]See New Iran E.O. FAQs, at FAQ 601 (citing New Iran E.O., Sec. 1(a)(iii)(B)).
[24]See id. (citing New Iran E.O., Sec. 2(a)(ii)).
[25]See, e.g., id.
[26]New Iran E.O., Sec. 4(a)-(d); New Iran E.O. FAQs, at FAQ 601.
[27]New Iran E.O., Sec. 5(a)(v).
[28]Id., Sec. 4(f); Sec. 5(a)(vii).
[29]See id., Sec. 8.; New Iran E.O. FAQs, at FAQ 601.
[30]See JCPOA Wind-Down FAQ, at FAQ 2.4.
[31]See id.
[32]See id., at FAQs 2.1, 2.4.
[33] See id., at FAQ 2.4.
[34]See id., at FAQ 2.5.
[35]See id.
[36]New Iran E.O. FAQs, at FAQ 614.
[37]New Iran E.O., Sec. 16(a);
see also E.O. 13645, Sec. 14(a).
[38]New Iran E.O. FAQs, at FAQ 611.
[39]See id., at FAQ 612.
[40]See id., at FAQ 613.
[41]Id.
[42]See id., at FAQ 612.
[43]“[T]he Secretary of the Treasury may 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 such foreign financial institution.” New Iran E.O., Sec. 2(b).
[44] Id., Sec. 2(i); New Iran E.O. FAQs, at FAQs 598, 606, 609.
[45]New Iran E.O. FAQs, at FAQs 607, 614.
[46] See id., at FAQ 614.
[47] New Iran E.O., Sec. 5; New Iran E.O. FAQs, at FAQ 614.
[48] New Iran E.O. FAQs, FAQ 614;
see supra pp. 3-4.
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