United States: Implementation Day: Iran Sanctions Relief Officially Takes Effect

Ronald Oleynik and Jonathan Epstein are Partners and Farid Hekmat is an Associate in Holland & Knight's Washington D.C. office

IAEA Verifies That Iran Fulfilled Nuclear-Related Obligations Under the Joint Comprehensive Plan of Action

HIGHLIGHTS:

  • Pursuant to the accord reached between Iran and the P5+1 in July 2015 regarding Iran's nuclear program, the International Atomic Energy Agency (IAEA) has verified that Iran has fulfilled its nuclear obligations, and the United States and the European Union (EU) implemented wide-ranging sanctions relief for Iran effective Jan. 16, 2016.
  • While the core U.S. sanctions prohibiting U.S. persons from engaging in most transactions with Iran remain in place, most extraterritorial sanctions involving non-U.S. persons engaged in Iran-related activity have been lifted. Non-U.S. entities owned and controlled by U.S. entities will be permitted to engage in most Iran-related activities
  • A new favorable licensing policy will allow the sale/lease of civil passenger aircraft to most Iranian airlines
  • Iranian foodstuffs and carpets can now be imported into the United States.

Jan. 16, 2016, marked a significant milestone ("Implementation Day") as the International Atomic Energy Agency (IAEA) verified that Iran had fulfilled its nuclear-related obligations under the landmark Joint Comprehensive Plan of Action (JCPOA) entered into by Iran, the P5+1 (United States, Russia, China, United Kingdom, France and Germany) and the European Union (EU) in July 2015. Simultaneously with the IAEA's pronouncement, the United States and the EU implemented limited but significant sanctions relief as set forth in the JCPOA.

In general, the United States is lifting most secondary (sometimes referred to as "extraterritorial") sanctions on Iran. These measures – which targeted non-U.S. persons engaged in activity without a U.S. nexus – affected Iran's energy, maritime, automotive and financial sectors, and resulted in significant pressure on the Iranian economy as many non-U.S. companies and firms ceased, or significantly curtailed, commercial activities with Iran and Iranian persons. However, the core U.S. trade sanctions that prohibit U.S. persons from engaging in most commercial transactions with Iran remain in place, though with important exceptions discussed below.

The changes to U.S. sanctions regarding Iran involve a very complex set of executive orders, waivers, general licenses and other actions by President Obama, the U.S. Department of State and the U.S. Treasury Department Office of Foreign Assets Control (OFAC). We provide a summary of these changes below.

U.S. Secondary Sanctions Relief

The most significant aspect of Implementation Day is the removal of most U.S. secondary sanctions on Iran. Non-U.S. persons (not owned or controlled by U.S. persons) will no longer be subject to U.S. sanctions for engaging in a wide range of activities with Iran. In particular, the United States will lift sanctions on the following activities and sectors:

  • Iran's oil and gas industry (including purchases of Iranian oil and liquefied natural gas; investments in oil exploration and production; and expansion of Iran's petrochemical sector)
  • Iran's shipping and shipbuilding industry (including provision of insurance, bunkering, and classification services to Iranian vessels)
  • purchase, subscription or facilitation of the issuance of Iranian sovereign debt
  • provision of U.S. banknotes to the government of Iran
  • trade in gold and other precious metals with Iran
  • trade in graphite and raw or semi-finished metals such as aluminum, steel, and coal with Iran
  • provision of software for integrating industrial processes to Iran
  • Iran's automotive industry

Removal of SDN Designations

The United States also is removing more than 400 individuals and entities from the OFAC's Specially Designated Nationals (SDN) list. This includes prominent Iranian firms and financial institutions such as Iran Air, the Islamic Republic of Iran Shipping Lines (IRISL), the National Iranian Oil Company and the National Iranian Tanker Company.

Impact for U.S. Persons

Although the restrictions for U.S. persons remain largely in place – including restrictions on U.S. banks processing transactions, unless such transactions are licensed by OFAC – there are several important changes that will significantly affect U.S. companies and individuals:

  • Commercial Passenger Aviation. U.S. persons may now seek specific licenses from OFAC (operating under a "favorable licensing policy") to export and re-export commercial passenger aircraft to Iran. This is a significant change to U.S. government policy and is substantially broader than the limited relief previously available under the interim JCPOA, which only authorized specific licenses for parts and repair services necessary for safety of flight of existing Iranian aircraft.
  • Import of Iranian Carpets and Foodstuffs. This new exception utilizes substantially the same language and permits importation from Iran, directly or indirectly, of foodstuffs "intended for human consumption."

General License for U.S.-Owned or Controlled Foreign Entities

Prior to October 2012, foreign subsidiaries of U.S. companies were not generally subject to the U.S. sanctions applicable to U.S. persons. However, in 2012, U.S. sanctions went into effect that subjected entities "owned or controlled" by U.S. persons to the same restrictions as U.S. persons. On Jan. 16, 2016, OFAC issued a general license that rolls back those restrictions and now generally allows foreign subsidiaries of U.S. companies to engage in transactions with Iran. In particular:

  • This general license authorizes a U.S.-owned or controlled foreign entity to engage in most transactions, directly or indirectly, with the Government of Iran or any Iranian entities.
  • U.S. foreign subsidiaries are still prohibited from exporting, directly or indirectly, any goods, technology, or services from the United States to Iran, with limited exceptions such as food, medicine, and medical equipment under general license.
  • Unless otherwise licensed, U.S. foreign subsidiaries may not transfer funds to, from or through a U.S. depository institution in connection with an Iran-related transaction.
  • U.S. foreign subsidiaries cannot engage in transactions with SDNs, the Iranian military or law enforcement agencies.

While a U.S. parent company cannot generally facilitate transactions by the foreign subsidiary with Iran, the general license authorized the U.S. parent to engage in activities related to the "establishment or alteration of operating policies and procedures" of the U.S. parent or foreign subsidiary necessary for the foreign subsidiary to begin Iran-related activity, as well as allowing the U.S. parent to make available to its foreign subsidiary automated and globally integrated computer, accounting, email, telecommunications or other business support systems in connection with the foreign subsidiary's Iran-related activities.

Remaining U.S. Sanctions and Challenges

Despite the generally positive developments of Implementation Day, U.S. and foreign firms and individuals interested in exploring Iran-related opportunities must use caution and remain cognizant of remaining sanctions and other restrictions:

  • The JCPOA is not a treaty or otherwise enforceable international agreement. Both the Iran and the United States have acknowledged that it is a set of "political commitments" not binding under international law. Therefore, the changes brought about by Implementation Day may be subject to sudden and unforeseen political and diplomatic developments, and the U.S. government has made clear that it will reimpose sanctions if Iran violates any of its commitments. In fact the JCPOA itself has "snap-back" provisions that would allow the U.S. to reimpose sanctions if Iran fails to meet its commitments.
  • Sanctions relief does not extend to so-called "U-turn transactions." U.S. financial institutions may not be involved in any non-exempt or non-licensed Iran-related transactions (including U.S.-dollar clearing transactions). This restriction severely restricts U.S.-dollar transactions involving Iran by third-country entities.
  • A number of Iranian firms and individuals remain on the SDN list and subject to U.S. secondary sanctions, including the Islamic Revolutionary Guard Corps (IRGC). Given the IRGC's considerable, but opaque, involvement in the Iranian economy, it is critical for all persons seeking to engage in business in Iran to exercise due diligence.
  • Certain Iranian government-owned entities, while removed from the SDN list, are still subject to "blocking" by U.S. persons.
  • Given that Iran has been more or less off limits for so many years, transactions may be restricted by sanctions clauses imposed under financing or other counter-party agreements.
  • U.S. public companies will likely still be required to report activities related to Iran.

Holland & Knight attorneys have deep experience in counseling both U.S. and foreign firms and individuals on navigating the complex terrain of Iran sanctions. Additionally, they have worked closely with relevant government agencies in both obtaining necessary licenses and assisting clients in enforcement actions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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