This month the U.S. Treasury Department's Office of Foreign
Assets Control (OFAC) updated its 'Frequently Asked Questions
Relating to the Lifting of Certain U.S. Sanctions Under the Joint
Comprehensive Plan of Action (JCPOA) on Implementation Day'
(FAQs). While the updated FAQs do not contain any new measures that
ease sanctions against Iran, they do provide some much needed
clarity, which is likely to have a positive impact on business
transactions with Iran.
U.S. Dollar Payments
One of the more consequential pieces of guidance OFAC added to
the FAQs is its clarification on the extent to which payments for
authorised transactions can be made in U.S. dollars. OFAC made
clear that foreign financial institutions (FFIs) (including foreign
incorporated subsidiaries, but not branches, of U.S. financial
institutions) are permitted to "process transactions
denominated in U.S. dollars or maintain U.S. dollar-denominated
accounts that involve Iran or persons ordinarily resident in Iran,
or in which there is an interest of a person whose property and
interests in property are blocked solely pursuant to Executive
Order 13599 and section 560.211 of the ITSR, including NIOC, the
CBI, and other individuals and entities that meet the definition of
the Government of Iran or an Iranian financial institution,
provided that such transactions or account activities do not
involve, directly or indirectly, the United States financial system
or any United States person, and do not involve any person on the
SDN List or conduct described in FAQ
Accordingly, non-U.S. persons engaging in transactions with or
involving Iran are permitted to arrange for payment in U.S.
dollars, provided: (1) they use an FFI to process payment outside
the U.S. financial system; and (2) no Specially Designated
Nationals (SDNs) are involved.
In theory, FFIs have the ability to set up U.S.
dollar-denominated vostro accounts for Iranian banks. In this way
the Iranian banks can process dollar payments without clearing them
through the U.S. financial system. The fact that foreign
subsidiaries of U.S. banks can engage in this offshore processing
is a function of General Licence H. (Refer to our
client alert on Iran and GL-H.)
It remains to be seen whether many FFIs will be willing to
engage in this kind of business because there are still risks.
First, FFIs have to ensure they are not inadvertently clearing
payments through U.S. financial institutions. Second, they have to
ensure they are not dealing with SDNs, although the FAQs
state2 that FFIs do not have to duplicate the due
diligence conducted by their customers, unless they have reason to
believe the due diligence was insufficient. From a practical point
of view, however, it is unlikely that an FFI would rely on someone
else's due diligence in these circumstances. Third, engaging in
this kind of business could have adverse effects on an FFI's
relationship with U.S. financial institutions. U.S. banks, for
example, may be hesitant to maintain correspondent banking
relationships with FFIs that process U.S. dollar payments offshore
for Iranian banks.
SDN Due Diligence
OFAC added a new FAQ that addresses due diligence with regard to
SDNs. Specifically, in FAQ M. 10, OFAC explained that non-U.S.
persons will not necessarily be subject to sanctions if they engage
in transactions with entities that are minority owned or controlled
in whole or in part by an Iranian national or Iran-related person
on the SDN list. However, as OFAC has made clear, such dealings
call for special caution to ensure SDNs are not involved and
receiving what might amount to "significant" services or
support contrary to U.S. secondary sanctions. As a practical
matter, minority SDN ownership or control might constitute a
'red flag' and warrant investigation.
In a new FAQ, M. 11, OFAC suggests that the screening of party
names on the SDN List may not be sufficient in this context. OFAC
did not outline specific measures that non-U.S. persons should
undertake except to recommend that due diligence procedures should
be consistent with local legal standards, industry best practices
and company procedures for compliance and risk assessment. For many
companies, the scope of due diligence will be guided by EU
standards, which require companies to ensure they do not provide
funds and economic resources to any person designated by the EU
(directly or indirectly). This typically requires an enquiry into
the details of the relevant transaction and all parties
In short, while OFAC's most recent guidance provides some
clarity on the extent to which secondary sanctions have been eased
for non-U.S. persons, the agency has reaffirmed the need for
caution in transactions that may have a nexus with designated
1 See FAQs, C. 7, p. 14.
2 See FAQs, M. 12, p. 45.
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