On January 16, 2016, the U.S. Department of State and the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) lifted certain nuclear-related “secondary sanctions” (sanctions targeting non-U.S. persons for certain Iran-related activities undertaken outside of the U.S.) against Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA). This long awaited action took place in exchange for Iran’s commitment to limit its nuclear program and after the International Atomic Energy Agency verified that Iran carried out its nuclear commitments under the JCPOA. Notwithstanding the sanctions relief, U.S. companies and persons continue to be barred from most transactions involving Iran and many secondary sanctions continue to stay in place.
WHO DOES THIS MOSTLY AFFECT?
The sanctions relief will be particularly important for global companies headquartered in the United States, U.S. private equity firms with foreign investments, and other United States entities with foreign subsidiaries.
WHAT CAN FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?
On January 16, 2016, OFAC issued General License H (GL H) “Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person”.
The sanctions relief offered by GL H allows foreign entities “owned or controlled” by a U.S. person or entity to engage in most transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that were previously prohibited by Section 215 of the Iranian Transactions and Sanctions Regulations (ITSR) with certain important exceptions outlined below. An entity is “owned or controlled” by a U.S. person if the U.S. person: (1) holds a 50% or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity. This does NOT include foreign branches of US persons as these are considered “U.S. persons” and, therefore, do not qualify for the sanctions relief.
WHAT CAN’T FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?
Foreign subsidiaries of U.S. companies cannot engage in transactions involving:
- Exportation or reexportation of U.S. origin goods – the direct or indirect exportation, reexportation, sale or supply of goods, technology, or services from the United States or a U.S. person with knowledge or reason to know that these items are intended for Iran or the Government of Iran;
- Reexportation from a third country of items containing 10% or more U.S.-controlled content with knowledge or reason to know that these items are intended for Iran or the Government of Iran; and reexport from a third country of foreign produced direct product of U.S. technology and software;
- Any activity involving any item (including information) subject to the Export Administration Regulations (EAR), that is prohibited by the EAR, or requires a license, based on its end-user or end-use;
- Any transfer of funds to, from, or through the U.S. financial system (foreign subsidiaries cannot use U.S. banks to process Iran-related transactions, including as correspondent banks for U.S. dollar-denominated transactions);
- Any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;
- Any person, entity, aircraft or vessel on OFAC’s list of Specially Designated Nationals (SDN) (or entities owned 50% or more individually, or in the aggregate, by one or more SDNs), or Foreign Sanctions Evaders, or who has been denied export privileges by Executive Order or otherwise;
- Any activity related to the proliferation of weapons of mass destruction or ballistic missiles, support for international terrorism, Iran’s support for the Syrian regime, Iran’s destabilizing activities in Yemen, or Iran’s commission of human rights abuses against its citizens; and
- Any covered nuclear activity involving Iran outside of the official procurement channel established by the JCPOA.
Additionally, trade with Iran in defense articles and defense services subject to the U.S. International Traffic in Arms Regulations (ITAR) is still broadly prohibited.
WHAT CAN AND CAN’T U.S. PARENT COMPANIES (AND US EMPLOYEES WORKING ABROAD) DO?
As a general rule, U.S. persons are still prohibited from ALL actions “facilitating” Iran-related activities of foreign entities (including subsidiaries). As such, virtually any involvement in Iran-related business by U.S. parent companies of foreign subsidiaries or their U.S. person employees, officers, or directors is prohibited. U.S. persons cannot facilitate, assist, guarantee, or otherwise participate directly or indirectly in any Iran-related business (without OFAC’s authorization).
The exception to the rule, is that U.S.-persons are authorized to be directly involved in the following:
- Establishing operating policies and procedures under which its non-U.S. subsidiary can achieve the operational separation necessary for it to transact with Iran; and
- Providing its non-U.S. subsidiary with business support, including common email, enterprise resource planning, and other services in connection with the foreign subsidiary’s Iran trade, provided the services are fully “automated” (they must operate passively and without human intervention, other than maintenance of the systems) and are “globally integrated”.
With the two narrow exceptions above, the prohibitions on U.S. persons with respect to Iran remain in place. This includes prohibitions against all actions facilitating Iran-related activities of foreign subsidiaries. GL H, which lifts certain sanctions against transactions with Iran for foreign subsidiaries of U.S. parent companies, has important restrictions and U.S. parent companies remain liable for their foreign subsidiaries’ transactions that are not covered by GL H.
As such, U.S. parent companies need to carefully consider the risks in determining whether to allow their foreign subsidiaries to do business with Iran. For those who choose to use GL H, it will be very important to conduct careful due diligence regarding the identity, ownership and sanctions status of the parties that they do business with involving Iran and to strictly comply with GL H in order to avoid slipping over the fine line of permitted transactions.