United States: OFAC Issues Clarifying FAQs for Iran Sanctions Regulation

On June 8, 2016, US the Office of Foreign Assets Control (OFAC) issued several new frequently asked questions (FAQs) that provide further guidance regarding activities authorized by General License H (GLH), and address how to handle US personnel participating as board or management members of a foreign-owned or -controlled entity that is conducting business with or in Iran. Most of the FAQs confirm the commonly understood scope of activities under GLH, which issued on January 16, 2016, but OFAC addressed a few significant aspects in this new guidance. Some of the highlights of these new FAQs include:

  1. Confirmation that General License H authorizes the US entity that owns or controls a foreign entity to enact and amend the policies of both the US entity and the foreign entity to address the foreign entity's business with Iran. (K.18-19). Significantly, the FAQs state both that the foreign entity may establish a presence in Iran, and that the establishment of policies and procedures for both the US and foreign entities can address that presence in Iran. This FAQ interprets GLH more broadly than may have originally been apparent, while re-confirming that the US entity cannot participate directly or indirectly with business in and with Iran.
  2. Confirmation that U.S. person board members and employees of the foreign entity doing business with Iran may continue to serve as such, but that they must be excluded from any role in Iranian transactions. A fundamental principal of sanctions compliance and of Iran sanctions, in particular, includes the need to ensure that US persons do not engage in transactions with Iran, even when they are acting for or on behalf of a non-US entity. As a result, sanctions compliance has always required that companies take measures to keep US personnel working at foreign-owned or -controlled entities from participating in transactions that may be permitted for the foreign entity and non-US persons. One tool for accomplishing this task is adopting policies and procedures that prohibit the involvement of US persons in any aspect of such decisions and actions, including decision making, monitoring and any other overt act. However, some companies and individuals have crossed the line into facilitation by pushing the envelope of permissible actions or by using an abstention policy. The difficulty with abstention policies is that they require the business person, rather than experienced counsel, to make immediate judgments regarding what actions comply with these complex regulations. The FAQs therefore actively discourage the abstention approach, and instead recommend that companies enact policies that require US personnel working at foreign owned or controlled entities to be  "recused" or "walled off" from the Iranian business activity, while confirming that GLH allows the enactment of policies and procedures to address the exclusion of US person board members and employees from Iran activities. The FAQ's recommend a "blanket policy" because case-by-case abstentions have resulted in charges of facilitation or exports of services, among other problems. (K.20-22).
  3. Confirmation of the unremarkable proposition that board, management and employees of the foreign entity can be involved in non-Iranian transactions and decisions, including receiving reports related to Iranian activities, so long as those reports are not used as a means to influence Iran-related business decisions. (K.22)
  4. Confirmation of the well-settled understanding that US ownership of the foreign entity exists where the US entity, individually or in the aggregate, owns 50% or more of the foreign entity "by vote or value." They reiterate OFAC policy regarding "control"—which requires "a fact-specific, case-by-case determination"—and look at both ownership levels and "indicia of control exercised, by all relevant U.S. persons." (K.17) OFAC also felt the need to restate the generally-understood definition of US person, which does not include the owned or controlled foreign entities, writing that "[a]lthough U.S.-owned or -controlled entities are subject to the prohibitions of the [Iran sanctions regulations] pursuant to section 560.215 . . . they are not considered U.S. persons under" those regulations. (K.15)
  5. Since supplemental FAQs are often the result of questions OFAC receives, it appears that concerns existed that GLH limited involvement in policies and procedures to the initial implementation. By specifically addressing the ability of US persons and entities to be involved in amending and/or altering existing policies that address foreign owned or controlled entities' business with Iran, these FAQs clarify the scope of GLH in this context. (K.18-19). The FAQ's express that US persons may amend (or participate in amending) policies and procedures more than once (i.e., in addition to a start up phase), and may be involved in training regarding those policies.
  6. Clarification that a foreign-owned or -controlled entity can do business with persons and entities designated under Executive Order 13599, to the extent those persons or entities are within the scope of General License H, which is consistent with the overall policy of lifting sanctions that GLH implemented.
  7. The FAQ's seek to clarify the permissible role of non-US financial institutions in processing payments related to transactions in Iran. (C.15-16). The FAQ's remain silent on the definition of transactions that would be considered as routed "through a US financial institution," but warn that "non-US, non-Iranian financial institutions should have appropriate systems and controls to ensure that they do not route Iran-related transactions through U.S. financial institutions, unless the transactions are exempt from regulation or authorized by OFAC" thereby leaving uncertainty regarding the scope of the remaining prohibitions.

By providing what is, for the most part, confirmation of the widely understood scope of GLH, these FAQs should give companies some comfort that their current practices are within the existing range of permissible behavior under the regulations. In addition, the FAQ's signal that GLH was intended to be even broader than suggested by the wording of that license by allowing foreign subsidiaries to establish operations in Iran. The FAQ's continue to emphasize, however, that the regulations prohibit certain actions by US persons and US entities, but not by their foreign-owned or -controlled entities.

OFAC continues to remain silent on the relaxation of existing facilitation restrictions that remain in place for US persons employed by non-US foreign companies, including with respect to the applicability of GLH.

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