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U.S. Re-imposes Sanctions on Iran Following the U.S. Withdrawal from the JCPOA and the End of the Wind-Down Period

Client Alert

Effective at 12:00 a.m. Eastern Standard Time, November 5, 2018, the U.S. fully re-imposed the primary and secondary sanctions on Iran that were in place prior to the Joint Comprehensive Plan of Action (“JCPOA,” or the “Iran Nuclear Agreement”).  In addition, the U.S. government has designated numerous additional entities in the financial, shipping, and energy sectors of Iran’s economy as Specially Designated Nationals and Blocked Persons (“SDNs”) subject to secondary sanctions.  Any non-U.S. companies that contemplate possible transactions with Iran in the future should ensure that their compliance strategies account for the re-imposition of secondary sanctions and the designation of new Iranian banks and shipping companies.  All told, the U.S. Department of the Treasury’s action includes the designation of more than 700 entities, including almost 250 parties that had been placed on the “EO 13599” or “Non-SDN” list after JCPOA implementation; 50 new Iranian banks and affiliates; and over 400 additional targets, including over 200 targets in Iran’s energy and shipping sectors.  It also includes the re-imposition of broad secondary sanctions on a number of SDNs in Iran as well as certain sectors of Iran’s economy.

As you may recall, on May 8, 2018, President Trump announced the U.S. withdrawal from the Joint Comprehensive Plan of Action (“JCPOA,” or the “Iran Nuclear Deal”).  The U.S. government granted a 180-day wind-down period for U.S. and non-U.S. companies to complete the provision of services contracted for before May 8, 2018, receive any required payments from Iranian parties, and otherwise divest themselves of most activity in Iran.  Certain activities related to sovereign debt, metals, Iran’s automotive sector, and U.S. imports of Iranian-origin foodstuffs and textiles were given a shorter 90-day wind-down period that expired on August 6, 2018.

1) The End of General License H

Beginning on January 16, 2016, U.S. owned or controlled foreign companies were authorized to engage in certain transactions with Iran that would be prohibited for U.S. companies under General License H.  As of November 5, 2018, General License H and its corresponding wind-down authorization have been revoked.  As a result, U.S.-owned or controlled foreign affiliates are now subject to the full range of Iran-related prohibitions applicable to U.S. companies and should adjust their compliance policies accordingly.

2) Sanctions on Iran’s Financial Institutions

With the imposition of sanctions on Iran, virtually all Iranian financial institutions have been re-added to the SDN List.  In addition, the vast majority of large banks in Iran are now subject to secondary sanctions.  Importantly, Parsian Bank, which has historically been a preferred Iranian financial institution for U.S. and non-U.S. companies because it was free from secondary sanctions, was designated with secondary sanctions on October 16, 2018. 

U.S. and non-U.S. companies are both prohibited from engaging in transactions with Iranian banks subject to secondary sanctions.  Additionally, if an Iranian bank is subject to secondary sanctions, that means that the bank is ineligible for participation in licensed transactions unless OFAC provides specific approval otherwise.  If an Iranian bank is listed as an SDN but is not subject to secondary sanctions, then non-U.S. companies would be authorized to transact with that bank provided that the underlying transactions are not otherwise prohibited.  Similarly, U.S. companies would be authorized to engage in licensed transactions with Iranian banks not subject to secondary sanctions.

OFAC also released guidance emphasizing that OFAC may impose secondary sanctions on the remaining Iranian banks in the near future.  See OFAC FAQ #645.  Accordingly, we recommend that U.S. and non-U.S. companies engaged in business with Iran screen any involved Iranian banks against the SDN List before each financial transaction, even where the underlying activity is authorized by general or specific license.

3) Sanctions on Iran’s Shipping Sector

A major component of the pre-2015 U.S. sanctions strategy for Iran involved targeting Iran’s shipping sector.  Those sanctions snapped back into place on Monday, and OFAC has taken additional steps to target Iran’s shipping lines and ports.  The new sanctions on Iran’s shipping sector include:

• SDN designations subject to secondary sanctions on Iranian port operators, shipping lines, vessels, and other actors in Iran’s shipping sector;
• General secondary sanctions on “significant"¹ transactions with Iran’s shipping sector and ports; and
• The risk of SDN designation for anyone knowingly providing “significant” support to activity on behalf of SDN port operators and other actors in Iran’s shipping sector.

First, Monday’s action included the re-designation of numerous actors in Iran’s shipping sector, including the Islamic Republic of Iran Shipping Lines (“IRISL”), 65 IRISL subsidiaries and associated individuals, and 122 IRISL vessels.  Additionally, OFAC re-designated National Iranian Tanker Company (“NITC”), 37 of its affiliates and vessels, and 52 other vessels in which NITC has an interest.  OFAC also designated a number of Iranian port operators on Monday, and the remaining non-SDN Iranian port operators are subject to designation at any time.  All of these SDN parties are subject to secondary sanctions, and both U.S. and non-U.S. companies would be prohibited from engaging in business with them.

Second, OFAC has re-imposed sector-wide secondary sanctions on Iran’s shipping industry.  Any company that knowingly sells, supplies, or transfers “significant” goods or services to Iran in connection with Iran’s shipping sector may be subject to secondary sanctions penalties.  These penalties can range from restrictions on the ability for companies to obtain loans involving the U.S. financial system, to being denied any exports from the U.S., to the full range of blocking measures applicable to SDNs.  As OFAC has not provided any guidance on whether routine transactions with Iranian shipping lines and ports would be “significant,” we believe any unlicensed shipments to Iran would be problematic for U.S. and non-U.S. companies.

In addition, foreign financial institutions are also prohibited from facilitating any significant transactions in connection with Iran’s shipping sector.  As a result, we expect many foreign financial institutions will impose strict risk management policies that will prohibit Iran-related transactions by its customers.  In the past, foreign financial institutions have often applied internal policies that are stricter than the sanctions rules themselves.  If companies intend on continuing to do business with Iran, then those companies should coordinate with their banks to ensure that such business will not impact the banking relationship. 

Third, we expect that OFAC will continue to designate Iranian parties in the near future in order to demonstrate the U.S. government’s strict stance on Iran.  As OFAC identifies additional Iranian port operators and actors in Iran’s shipping sector, OFAC will likely also be seeking to identify parties that are knowingly providing significant support to the shipping industry.  Accordingly, there is a serious risk of designation for non-U.S. companies that maintain long-standing relationships with Iran’s shipping sector.

Under the primary sanctions, U.S. companies and foreign companies owned or controlled by U.S. persons are prohibited from engaging in any unlicensed shipments to Iran.  See § 560.206.  With the new secondary sanctions, non-U.S. companies now also face significant risk when engaging in transactions with Iran’s shipping sector.  Arrangements for transshipments through Iran would be problematic for the same reasons.  Even where no SDNs are involved, non-U.S. companies could be the target of OFAC’s secondary sanctions.  In particular, if the EU, Russian, and Chinese government continue to support major business with Iran, it is possible that the U.S. may enforce secondary sanctions to deter the private sector. 

Please also note that as a general rule, parties subject to secondary sanctions for operating in the shipping sector are not eligible to participate in licensed transactions unless OFAC specifically approves of the involvement of that sanctioned party.  This rule does not apply to humanitarian shipments of agricultural commodities, food, medicine, and medical devices, which are exempt from the secondary sanctions on Iran’s shipping sector, as explained more fully in the next section.  See § 1244(e), IFCA.

4) Humanitarian Shipments to Iran Still Authorized

Humanitarian shipments of medicine, medical devices, and agricultural commodities (e.g., food; animal feed) to Iran by U.S. parties are still eligible for general and specific licenses under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”).  The U.S. government has been exceedingly clear that these types of licensed humanitarian exports will not be prohibited under the post-JCPOA sanctions.

In addition, OFAC has provided guidance to non-U.S. companies that may be involved in humanitarian exports to Iran that have no nexus with the U.S.  Non-U.S. companies are generally authorized to export non-U.S. origin agricultural commodities, food, medicine, and medical devices to Iran as long as the transactions do not involve any SDNs designated for terrorism, proliferation of weapons of mass destruction, or connection with the Islamic Revolutionary Guard Corps (“IRGC”).  If the goods are U.S. origin, then the shipments would need to abide by the terms of the TSRA general licenses or move under a specific license.

Accordingly, SDNs that were designated solely for operating in Iran’s shipping sector would not be considered prohibited parties for non-U.S. shipments of humanitarian goods. These transactions require careful due diligence, given the multi-layered sanctions designations and programs on Iran. 

5) Additional Wind-Down Authorizations for Non-U.S., Non-Iranian Companies

Although the 180-day wind-down period has expired, OFAC has extended the wind-down authorization for non-U.S. companies to receive payment or other compensation from Iran related to certain activities that took place during the 180-day wind-down period or before the U.S. withdrawal from the JCPOA.

Specifically, OFAC authorizes non-U.S. companies to receive payments for previous activity with Iran if:

• The goods or services for which payment is owed were fully provided or delivered to an Iranian counterparty prior to August 6 or November 4, 2018, depending on the applicable wind-down period;
• The goods or services were provided pursuant to a written contract or agreement entered into prior to May 8, 2018;
• The goods, services, and payment were consistent with U.S. sanctions in effect at the time of delivery or provision;
• The post-wind down payment would not involve U.S. persons or the U.S. financial system unless licensed or authorized to do so; and
• The transactions and payments did not and would not involve any party that was re-added to the SDN List following November 4, 2018.

In cases where the parties involved with the transaction were re-designated on November 5, 2018, OFAC requests for parties to seek further guidance from OFAC or the State Department, as appropriate, before moving forward with the payment.  Accordingly, non-U.S. companies continue to have some authorizations to receive outstanding payments subject to the conditions above, but OFAC may suspend this authorization in cases where re-designated parties are involved.

6) Specific Licenses for U.S. Companies to Receive Outstanding Iran-related Payments

U.S. companies are now prohibited from receiving payments related to Iran-related goods and services provided prior to November 5, 2018 without a license from OFAC.  OFAC will review requests for specific licenses on a case-by-case basis, which is a far more favorable standard of review than the presumption of denial afforded most Iran-related specific license applications. 

If a U.S. company wishes to apply for a specific license to receive outstanding payments that could not be obtained prior to November 5, 2018, then U.S. companies can apply to OFAC with the relevant details demonstrating that (1) the underlying activity was authorized at the time of delivery; (2) that the activities were conducted pursuant to a written contract or agreement entered into prior to May 8, 2018; and (3) that the U.S. company was unable to obtain payment during the wind-down period despite undertaking reasonable efforts to do so.

7) Remember the 50 Percent Rule

Please remember that OFAC’s designations do not simply target the SDN party, but also any entities in which SDNs, in the aggregate, own a 50 percent or greater interest.  This imputed blocking also extends down-stream to any entities in which a blocked subsidiary owns a 50 percent or more interest.  This rule also applies to the new secondary sanctions, meaning non-SDN entities would be subject to the same secondary sanctions as their beneficial or intermediate owners.  These blockings and secondary sanctions apply regardless of whether the subsidiaries are identified on the SDN List.  Accordingly, companies should screen for prohibited beneficial ownership of Iranian parties, where feasible.

8) Recommended Steps for Non-U.S. Companies

Following the re-imposition of secondary sanctions, it would be prudent for non-U.S. companies to take the following steps to assess U.S. sanctions applicability to existing business relationships.

First, we recommend that non-U.S. companies identify any contracts or other transactions that involve Iran (directly or indirectly).

Second, non-U.S. companies could review their current and future performance obligations under those contracts (i.e., delivery of cargo, payments, etc.), and the extent to which U.S. sanctions may impact those obligations.

Third, non-U.S. companies may want to analyze the contract terms to determine their legal position in the event that the new sanctions prevent performance.  For example, contracts containing sanctions, force majeure, frustration, or illegality clauses may provide some cover for the company to withdraw from prohibited Iran-related business.

Fourth, non-U.S. companies could notify customers and counterparties of the company’s corporate policy with respect to future Iran-related transactions, where applicable.

9) Conclusion

We will provide an update if OFAC provides any additional guidance regarding sanctionable activity related to Iran’s shipping sector.  Nonetheless, at the present time, shipments to Iran should be considered extremely high risk, even where no SDNs are involved.  Please contact GKG Law with any questions related to this alert.