On January 16, 2016, the U.S. Department of State and the U.S.
Department of Treasury’s Office of Foreign Assets Control (OFAC) lifted
certain nuclear-related “secondary sanctions” (sanctions targeting
non-U.S. persons for certain Iran-related activities undertaken outside of the
U.S.) against Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA).
This long awaited action took place in exchange for Iran’s commitment to
limit its nuclear program and after the International Atomic Energy Agency
verified that Iran carried out its nuclear commitments under the JCPOA.
Notwithstanding the sanctions relief, U.S.
companies and persons continue to be barred from most transactions involving
Iran and many secondary sanctions continue to stay in place.
WHO DOES THIS MOSTLY AFFECT?
The sanctions relief will be particularly
important for global companies headquartered in the United States, U.S.
private equity firms with foreign investments, and other United States entities
with foreign subsidiaries.
WHAT CAN FOREIGN
SUBSIDIARIES OF U.S. COMPANIES NOW DO?
On January 16, 2016, OFAC issued General License H (GL H) “Authorizing
Certain Transactions Relating to Foreign Entities Owned or Controlled by a
United States Person”.
The sanctions relief offered by GL H allows foreign
entities “owned or controlled” by a U.S. person or entity to engage in most
transactions with the Government of Iran or any person subject to the
jurisdiction of the Government of Iran that were previously prohibited by Section 215 of the Iranian Transactions and Sanctions
Regulations (ITSR) with certain important exceptions outlined
below.
An entity is “owned or controlled” by a U.S. person if the U.S.
person: (1) holds a 50% 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.
This does NOT include foreign branches of US persons as these are
considered “U.S. persons” and, therefore, do not qualify for the sanctions
relief.
WHAT CAN’T FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?
Foreign subsidiaries of U.S. companies cannot engage
in transactions involving:
Exportation or
reexportation of U.S. origin goods – the direct or indirect exportation,
reexportation, sale or supply of goods, technology, or services from the United
States or a U.S. person with knowledge or reason to know that these items are
intended for Iran or the Government of Iran;
Reexportation
from a third country of items containing 10% or more U.S.-controlled content
with knowledge or reason to know that these items are intended for Iran or the
Government of Iran; and reexport from a third country of foreign produced
direct product of U.S. technology and software;
Any activity
involving any item (including information) subject to the Export Administration
Regulations (EAR), that is prohibited by the EAR, or requires a license, based
on its end-user or end-use;
Any transfer
of funds to, from, or through the U.S. financial system (foreign subsidiaries cannot
use U.S. banks to process Iran-related transactions, including as correspondent
banks for U.S. dollar-denominated transactions);
Any military,
paramilitary, intelligence, or law enforcement entity of the Government of
Iran, or any official, agent, or affiliate thereof;
Any person,
entity, aircraft or vessel on OFAC’s list of Specially Designated Nationals
(SDN) (or entities owned 50% or more individually, or in the aggregate, by one
or more SDNs), or Foreign Sanctions Evaders, or who has been denied export
privileges by Executive Order or otherwise;
Any activity
related to the proliferation of weapons of mass destruction or ballistic
missiles, support for international terrorism, Iran’s support for the Syrian
regime, Iran’s destabilizing activities in Yemen, or Iran’s commission of human
rights abuses against its citizens; and
Any covered
nuclear activity involving Iran outside of the official procurement channel
established by the JCPOA.
Additionally, trade with Iran in defense articles and
defense services subject to the U.S. International Traffic in Arms Regulations
(ITAR) is still broadly prohibited.
WHAT CAN AND CAN’T U.S. PARENT COMPANIES (AND US EMPLOYEES
WORKING ABROAD) DO?
As a general rule, U.S. persons are still prohibited
from ALL actions “facilitating” Iran-related activities of foreign entities
(including subsidiaries). As such, virtually any involvement in Iran-related
business by U.S. parent companies of foreign subsidiaries or their U.S. person
employees, officers, or directors is prohibited.
U.S. persons cannot
facilitate, assist, guarantee, or otherwise participate directly or indirectly
in any Iran-related business (without OFAC’s authorization).
The exception to the rule, is that U.S.-persons are authorized to be directly involved in the
following:
Establishing
operating policies and procedures under which its non-U.S. subsidiary can
achieve the operational separation necessary for it to transact with Iran; and
Providing its
non-U.S. subsidiary with business support, including common email, enterprise
resource planning, and other services in connection with the foreign
subsidiary’s Iran trade, provided the services are fully “automated” (they must
operate passively and without human intervention, other than maintenance of the
systems) and are “globally integrated”.
BOTTOM LINE
With the two narrow exceptions above, the prohibitions
on U.S. persons with respect to Iran remain in place. This includes
prohibitions against all actions facilitating Iran-related activities of
foreign subsidiaries.
GL H, which lifts certain sanctions against
transactions with Iran for foreign subsidiaries of U.S. parent
companies, has important restrictions and U.S. parent companies remain
liable for their foreign subsidiaries’ transactions that are not covered by GL
H.
As such, U.S. parent companies need to carefully
consider the risks in determining whether to allow their foreign subsidiaries
to do business with Iran.
For those who choose to use GL H, it
will be very important to conduct careful due diligence
regarding the identity, ownership and sanctions status of the parties that
they do business with involving Iran and to strictly comply with GL H in
order to avoid slipping over the fine line of permitted transactions.
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