United States: US Reimposes First Tranche Of Iran-Related Sanctions

President Donald Trump issued an Executive Order "Reimposing Certain Sanctions with Respect to Iran" ("New Iran E.O.") on August 6, 2018,1 authorizing the re-imposition – or "snap-back" – of various sanctions against dealings with Iran. These actions give effect to President Trump's May 8, 2018 announcement that the United States was withdrawing from the Joint Comprehensive Plan of Action ("JCPOA") that was agreed to by the five permanent members of the United Nations Security Council plus Germany ("P5+1") and Iran in July 2015 (see our previous report).2 Some of the "snap-back" sanctions became effective on August 7; others are due to take effect three months from now, on November 5. The Department of Treasury Office of Foreign Assets Control ("OFAC") concurrently published Frequently Asked Questions ("FAQs") further describing the sanctions to be re-imposed now and in three months.3

Although President Trump characterized the actions taken as "...the most biting sanctions ever imposed," the New Iran E.O. mainly restores the sanctions that were in effect before the adoption of the JCPOA and neither expanded the scope of applicable sanctions nor added new sanctions against dealings with Iran.4

Consistent with the President's May 8 announcement, the New Iran E.O. authorizes the re-imposition of several Iran-related sanctions that were suspended or waived under the JCPOA and sets forth their respective effective dates. Under Sections 1-3 of the New Iran E.O., the following sanctions came into effect on August 7:

  • Sanctions on the purchase or acquisition of US dollar banknotes by the Government of Iran;
  • Sanctions on Iran's trade in gold or precious metals;
  • Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
  • Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  • Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt;
  • Sanctions on Iran's automotive sector.5

Other sanctions authorized to be re-imposed under Sections 1-3 of the New Iran E.O. take effect on November 5:

  • Sanctions on Iran's port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines, South Shipping Line Iran, or their affiliates;
  • Sanctions on petroleum-related transactions with, among others, National Iranian Oil Company ("NIOC"), the Naftiran Intertrade Company ("NICO"), and the National Iranian Tanker Company, including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • Sanctions on transactions by foreign financial institutions with the Central Bank of Iran ("CBI") and designated Iranian financial institutions;
  • Sanctions on the provision of specialized financial messaging services to the CBI and certain other Iranian financial institutions;
  • Sanctions on the provision of underwriting services, insurance, or reinsurance;
  • Sanctions on Iran's energy sector.

In addition, Section 7 of the New Iran E.O. sets out blocking sanctions on persons determined to have: (a) been involved in various corruption-related activities; (b) transferred or facilitated the transfer to Iran of goods or technologies that the Iranian government would likely use to commit serious human rights abuses against its people; or (c) engaged in censorship or related activities with respect to Iran after 2009.6

Section 8 of the New Iran E.O. codified the traditional prohibition on "facilitation" by forbidding US-owned or -controlled foreign entities from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to its jurisdiction, if that transaction would be prohibited by specified authorities if engaged in by a US person or in the United States.

The New Iran E.O. authorizes three types of sanctions depending on the conduct at issue: blocking sanctions; prohibitions on maintaining correspondent and payable-through accounts; and menu-based sanctions. The latter authorizes the imposition of a range of secondary sanctions against non-US persons for transactions that do not have a US nexus but involve conduct targeted by other sanctions authorities, including: limitations on financing from the Export-Import Bank of the United States; restrictions on US export privileges; prohibitions on US financial institutions from providing credit to sanctioned persons; prohibitions on the sanctioned person's ability to receive a US Federal Reserve designation as a primary dealer or act as a repository of US government funds; prohibitions on US procurement; denial of visas to enter the US; prohibitions on foreign exchange; prohibitions on banking transactions; prohibitions on acquiring or transferring property subject to US jurisdiction; exclusion of corporate officers from the United States; and application of any of these sanctions measures on principal executive officers.

Under the New Iran E.O., Section 3 authorizes the use of these menu-based sanctions to dissuade significant transaction for the sale, supply, or transfer to Iran of significant goods or services involving Iran's automotive sector, as well as significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum and petrochemical sectors, and Section 5 provides authority for OFAC to implement menu-based sanctions under various statutory authorities targeting a broad range of conduct.7

The FAQs provide some description and guidance for the re-imposed sanctions authorized under the New Iran E.O., but there remain other matters and terms that still need further clarification.8 The FAQs have particular focus on sanctions involving dealings with Iran's automotive and petroleum sectors. For example, with respect to the sale, supply, or transfer to Iran of "significant"9 goods or services used in connection with the automotive sector of Iran,10 the FAQs explain that significant transactions for the export of "auto kits" (also termed "knock-down kits") to Iran for assembly in Iran would be sanctionable, but the export of finished vehicles to Iran would not.11 Similarly, goods or services for the maintenance of finished vehicles exported to Iran generally would not be sanctionable. In contrast, the export, sale, or distribution of goods (e.g., auto parts and accessories) or services that would contribute to Iran's ability to manufacture or assemble vehicles would be sanctionable both for the exporters and the foreign financial institutions facilitating such exports.12

With respect to Iran's petroleum sector, subsections 3(a)(ii)-(a)(iii) of the New Iran E.O. authorize the imposition of sanctions from the menu described above on persons determined to have engaged, after November 4, in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran. Under the "significant reduction exception," however, countries that the Secretary of State determines have significantly reduced their oil imports from Iran can continue to buy petroleum and petroleum products from Iran without risking sanctions under the New Iran E.O. Likewise, the New Iran E.O. provides authority to sanction, on or after November 5, 2018, the purchase of petroleum or petroleum products, as well as other significant dealings, with NIOC or NICO unless the purchase is by an entity in a jurisdiction that has a significant reduction exception.13 Notably, financial institutions facilitating transactions involving Iranian petroleum or petroleum products, or with NIOC and NICO, are subject to secondary sanctions unless they are facilitating transactions for an entity in a jurisdiction with a significant reduction exception.14 The granting of this exception remains subject to the Secretary of State's discretionary authority, and there have been conflicting reports whether the Trump Administration's position is that foreign governments should reduce to "zero" their Iranian oil imports by November 4.

The New Iran E.O. and FAQs do not change or add further clarification to another realm of "snap-back": the revocation of General Licenses H and I. Under General License H, foreign subsidiaries of US companies were permitted to engage in certain activities in or with Iran, while General License I authorized certain transactions involving commercial aircraft and aviation. As announced on May 8, those revocations included wind-down periods for transactions previously authorized under General License I (ending August 7) and General License H (ending November 4). These actions do not alter or provide relief from those revocations, and companies that had undertaken transactions or put into place operations that relied on these prior general licenses now need to ensure compliance with this aspect of "snap-back."

In addition, certain general licenses relating to authorized transactions involving the sale of agricultural and medical products to Iran or the provision of certain services, software and hardware incident to personal communications remain in effect and are not impacted by this executive order.

The US withdrawal from the JCPOA has had and will continue to have significant implications for many global companies that had engaged or were seeking to engage in business with Iran. The recent actions re-impose many of the same US sanctions risks and compliance challenges that pre-dated the JCPOA. However, global companies face further complications due to the need to manage transactions subject to the remaining wind-down period and to navigate the growing divergence on Iran sanctions that exists between the United States and its major trading partners in Europe and Asia. For example, following President Trump's announced withdrawal from the JCPOA, the EU Commission launched the formal process to reactivate a 1996 trade defense law (the EU Blocking Regulation) that seeks to prevent European companies from complying with US sanctions against Iran (see our client alert). In response to the New Iran E.O., the EU, German, French, and UK foreign ministers issued a joint statement expressing their regret over the re-imposition of sanctions and stating that the EU Blocking Regulation would come into force on August 7.15

In the wake of these actions, many international financial institutions and companies are likely to remain very cautious about undertaking any transactions that present a US sanctions risk. Others, however, may be more willing to tolerate the threat of US secondary sanctions and look for new business opportunities in the Iranian market. Managing sanctions risks and compliance requirements in this environment, including dealings with commercial partners that have different views and practices relating to continuing business with Iran, presents a significant challenge for many international financial institutions and global companies.

Footnotes

1. The White House, Executive Order "Reimposing Certain Sanctions with Respect to Iran" (August 6, 2018).

2. The President also issued a National Security Presidential Memorandum ("NSPM") directing the Secretaries of State and the Treasury to "immediately begin taking steps" to reimpose all of the US sanctions lifted or waived in response to Iran's nuclear concessions under the JCPOA. The Department of Treasury concurrently published FAQs that described the sanctions that would "snap-back", first on August 7 and, subsequently, on November 5, 2018, subject to applicable wind-down periods

3. OFAC FAQs 597 – 624; see Office Of Foreign Asset Controls, Department of the Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan Of Action (JCPOA).

4. The New Iran E.O. does, in some instances, expand the scope of sanctions that were in effect prior to the JCPOA, but these changes largely involve the expansion of the menu of available sanctions and the provision of new authority for existing sanctions. Other changes relate to the consolidation of existing authorities and providing for greater consistency. See FAQ#601.

5. For example, Section 2 of the New Iran E.O. authorizes correspondent and payable-through account sanctions on foreign financial institutions determined to have knowingly conducted or facilitated any significant financial transaction related to Iran's automotive sector. Section 3, in turn, authorizes 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.

6. To consolidate authorities, the New Iran E.O. revokes E.O 13716 and E.O. 13628 but carries forward prohibitions set out in the two executive orders. Section 7 of the New Iran E.O., for example, includes prohibitions described in subsection 3(c) of E.O. 13716. Section 7 also contains the typical derivative sanctions authority, i.e., authorizing sanctions against those persons who materially assisted or provided other support for activities sanctioned under the New Iran E.O., as well as on persons who are owned or controlled, or act on behalf of, persons sanctioned under Section 7.

7. Section 5 references the Iran Sanctions Act of 1996, as amended; the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, as amended; the Iran Threat Reduction and Syria Human Rights Act of 2012; and the Iran Freedom Counter-Proliferation Act of 2012 ("IFCA").

8. As an example, there still is the need for OFAC to provide further guidance on the scope of Section 1245(d) of IFCA.

9. In assessing whether a particular transaction is "significant," OFAC may consider the totality of the facts and circumstances, including: "(a) the size, number, and frequency of the transactions, financial services, or financial transactions; (b) the nature of the transactions, financial services, or financial transactions, including their type, complexity, and commercial purpose; (c) the level of awareness of management and whether the transactions are part of a pattern of conduct; (d) the nexus of the transactions, financial services, and financial transactions and blocked persons; (e) the impact of the transactions, financial services, and financial transactions on statutory objectives; (f) whether the transactions, financial services, and financial transactions involve deceptive practices; (g) whether the transactions solely involve the passive holdings of Central Bank of Iran reserves or repayment by the CBI of official development assistance or the transfer of funds required as a condition of Iran's membership in an international financial institution; and (h) other relevant factors that the Secretary of the Treasury deems relevant." FAQ#289.

10. OFAC FAQs explains that forthcoming regulations will define what constitutes "goods or services used in connection with the automotive sector of Iran." FAQ#611.

11. FAQ#612.

12. FAQ#613.

13. FAQ#615.

14. FAQ#616.

15. Press Release, Joint Statement on the Re-Imposition of US Sanctions on Iran (August 6, 2018).

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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