Worldwide: Additional Guidance Regarding U.S. Sanctions Relief On Transactions With Iran

Last Updated: 18 July 2017
Article by Alexander Brexendorff and Anthony V. Raftopol

1. Background

International sanctions against Iran refer to economic, trade, scientific and military sanctions that are imposed against parties seeking to transact or facilitate business involving Iran. The 2015 Joint Comprehensive Plan of Action (the "JCPOA"), signed between Iran and the international community, marked a turning point in this process. Under that arrangement, a substantial portion of restrictions against trade with and to Iran was lifted for non-US persons, including the so-called "secondary sanctions" imposed by the United States. Accordingly, non-US businesses, even those with substantial ties to US persons, are now given sufficient latitude to conduct trade and/or invest in Iran. Conversely, US persons remain subject to "primary sanctions" imposed by the United States Treasury's Office of Foreign Asset Control ("OFAC"), which means that US individuals, businesses and financial institutions continue to be broadly prohibited from engaging in or otherwise facilitating transactions involving Iran.

With respect to continuing sanctions imposed by the US, a primary source of compliance-related information has been provided under OFAC's "Guidance" memorandum and an accompanying set of Frequently Asked Questions ("FAQs"), which were issued originally on January 16, 2016 (known under the terms of the JCPOA as the ("Implementation Day"). For more details, please see our newsletter here.

Understanding these guidelines is important even for non-US businesses to the degree they employ management or other decision-making individuals who are considered "US persons" under existing regulations, and/or rely on the US financial system to clear transactions involving Iran. So, we will provide updates on OFAC guidance matters on a continuing basis.

2. Recent Clarifications

On June 8, 2016, OFAC updated its FAQs by adding two sets of additional replies related to Financial and Banking Measures (C.15 and C.16) and to Foreign Entities Owned or Controlled by U.S. Persons (K.14 – K.22). OFAC added these FAQs to provide further guidance regarding activities authorized by General License H ("GLH").], which was issued on the Implementation Day and provides the clearest and broadest statement yet on activities which may be conducted by non-US companies doing business in Iran. The updated guidance may be found here, and the more salient points are summarized as follows:

A. Financial and Banking Measures

Under the updated FAQs, US financial institutions may specifically transact with (including by opening or maintaining correspondent accounts for) non-US, non-Iranian financial institutions that maintain correspondent banking relationships or otherwise transact with Iranian financial institutions that are not otherwise on OFAC's list of "Specifically Designated Nationals". However, with-out specific authority from OFAC, along with "appropriate systems and controls in place to ensure compliance", non-US entities, including financial institutions, remain prohibited from: (i) routing Iran-related transactions through US financial institutions; or, (ii) involving US persons in such transactions. As of the current date, OFAC continues to remain silent on the definition of transactions that would be considered as routed "through a US financial institution". This, in turn, continues to place uncertainty upon the scope of the remaining prohibitions upon non-US financial institutions seeking to clear non-USD-denominated transactions for Iran-related business.

B. Blanket Recusal Requirement for US Persons

The June 8, 2016 clarifications issued by OFAC also provide guidance related to US persons holding a board, senior management or other position with a non-US entity engaged in Iran-related transactions. Importantly, the presence of one or more US persons serving as a director or senior manager for a non-US entity does not necessarily preclude that entity from transacting with Iranian persons not on the SDN list. However, to remain compliant of OFAC's guidelines, the non-US entity must create "blanket" policies and procedures to wall off US persons from its Iran-related business. A blanket policy, unlike case-by-case recusal, would not be considered a prohibited facilitation and/or export of services under OFAC's Iranian Transactions and Sanctions Regulations ("ITSR").

C. Application to Non-US Companies Owned by US Persons

For purposes of the ITSR and GLH, an entity is "owned or controlled" by a United States person if that person: (1) holds a 50 percent 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. OFAC clarified in the FAQs that for purposes of assessing ownership or control, with certain exceptions, it would consider ownership interests by multiple US persons on an aggregated basis (although a different approach governs where the "owned or con-trolled" entity is publicly listed).

Under new guidelines, GLH specifically authorizes US persons (whether entities or individuals) that own or control a foreign entity doing business with or in Iran to receive reports about that business, as well as to enact, amend or otherwise participate in training regarding the policies and procedures governing its non-US subsidiary's Iran-related business. This is true at the start-up phase of such business, as well as on an on-going basis. Nevertheless, the US entity, itself, cannot partici-pate directly in or otherwise facilitate the Iran-related transactions of its non-US subsidiary.

Where a US parent company's owned or controlled foreign subsidiary engages in transactions with Iran and non-sanctioned countries, the US parent and its board members, senior management and employees may continue to be involved in the foreign entity's business in the non-sanctioned jurisdictions.

3. Conclusion

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.

Unfortunately, OFAC's FAQs continue to leave numerous issues unresolved. Most notably, by remaining silent on the definition of transactions that would be considered as routed "through a US financial institution", these most recent clarifications fall short of relieving non-US financial institutions of existing uncertainty with respect to their ability, under GLH, to clear non-USD-denominated transactions for their Iran-related business. Accordingly, banks, as well as the businesses reliant on those banks for their Iran-related transactions, will need to continue to follow future clarifications issued by OFAC and/or seek, on a case-by-case basis, a separate OFAC license.

Originally published on 14 June 2016

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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