On January 16, 2016, the International Atomic Energy Agency
(IAEA) declared that Iran had implemented its commitments to ensure
that its nuclear program will be limited to peaceful purposes. With
that, the United States announced that it was lifting its
nuclear-related sanctions on Iran. But what does that mean for the
U.S. auto industry? The short answer is “not much”.
Here’s why.
First, a bit of history
For decades, the United States has maintained a broad embargo on
nearly all trade and investment involving Iran. This has its basis
in a number of laws enacted by the U.S. Congress and many related
regulations and executive orders of the President. The U.S.
Treasury Department’s Iranian Transactions and Sanctions
Regulations (ITSR) are the primary regulation governing commercial
transactions involving Iran. But dealings with Iran are also
subject to the Iranian Assets Control Regulations, the Iranian
Financial Sanctions Regulations and the Iranian Human Rights Abuses
Sanctions Regulations, as well as other recordkeeping, reporting
and licensing requirements. Broadly applicable rules also play a
role, such as the U.S. Commerce Department’s Export Control
Regulations and the State Department’s International Traffic
in Arms Regulations. Differing foreign policy and national security
considerations may result in differing interpretations of similar
language in the applicable laws and regulations and a license or
authorization granted under one law or regulation will not relieve
the involved parties from complying with any other applicable laws
and regulations.
With very few exceptions, the ITSR prohibit U.S. persons from
investing in Iran, importing Iranian goods or services, and
exporting, reexporting, selling or supplying, directly or
indirectly, any goods, technology or services to Iran or its
government. The term “U.S. person” includes not only
U.S. citizens, but also permanent resident aliens, U.S. entities
and their foreign branches, and even foreign persons while in the
United States.
Other provisions of the ITSR close potential loopholes by
prohibiting any transaction or conspiracy to evade or avoid any of
the ITSR’s prohibitions. For example, the ITSR bar U.S.
persons from approving, financing, facilitating, or guaranteeing
any transaction by a foreign person that would be prohibited if
performed in the United States or by a U.S. person. Among other
things, prohibited facilitation or approval of a foreign
person’s transaction occurs when a U.S. person, in order to
permit or facilitate a transaction that would be prohibited if
performed by a U.S. person or from the United States, alters its
operating policies or procedures or those of a foreign affiliate or
when it refers Iranian purchase orders, bids and similar business
opportunities to a foreign person.
Previous versions of the ITSR included a de minimis
exception that allowed the export of goods or technology for
transformation or incorporation into a foreign made end product if,
among other things, the value of U.S. origin goods, software and
technology was less than 10 percent of the total value of the end
product. But this exception was removed from the ITSR in 2012. In
addition, revisions of the ITSR in 2012 prohibited foreign entities
owned or controlled by U.S. persons from engaging in any
transaction that would be prohibited if engaged in by a U.S. person
or in the United States. Sanctions in the automotive sector were
further tightened in June 2013 by Executive Order 13645 that
authorized the imposition of sanctions on any person that knowingly
engaged in the sale, supply or transfer of goods or services used
in the Iranian automotive sector, including all persons in a
corporate group that knowingly participated in those
transactions.
Joint Comprehensive Plan of Action
Several years of negotiations among Iran, Germany and the five UN
Security Council members ( P5+1) led to the Joint Plan of Action
(JPOA) among those parties in November 2013. Under the JPOA, the
United States agreed, among other things, to a temporary suspension
of some so-called “secondary” sanctions, including
those targeting the Iranian automotive sector under Executive Order
13645. “Secondary’ sanctions are generally those
directed toward non-U.S. persons for specified conduct involving
Iran that occurs entirely outside the United States and does not
involve any U.S. person.
The temporary suspension of secondary sanctions was continued under
the Joint Comprehensive Plan of Action (JCPOA) reached on July 14,
2015 between Iran and the P5+1. The JCPOA became effective on
October 18, 2015, which is referred to as “Adoption
Day” in the agreement. After Adoption Day, the parties began
to take steps to implement their commitments under the JCPOA.
“Implementation Day” occurred on January 16, 2016, when
the IAEA confirmed that Iran’s commitments had been
met.
What Does Implementation Day Mean for the U.S. Auto
Industry?
The focus of the JCPOA is Iran’s nuclear program. Under the
JCPOA, the United States agreed that, upon Iran’s compliance
with its obligations, it would lift nuclear-related sanctions. The
U.S. commitments were generally limited to secondary sanctions,
with “primary” sanctions affecting U.S. persons
remaining in place.
To fulfill its commitments under the JCPOA, the United States,
among other things, lifted nuclear-related secondary sanctions
affecting Iran’s trade in precious metals and some materials
and software, and on Iran’s ports operators and on its
energy, petrochemical, shipping and shipbuilding sectors, as well
as on related trade in financial, insurance and other associated
services. The United States also revoked Executive Order 13645,
lifting the secondary sanctions applicable to non-U.S. persons on
the direct or indirect sale, supply, or transfer to Iran of goods
or services used in connection with Iran’s automotive sector.
The lifted sanctions are however subject to “snap-back”
if Iran fails to comply with the terms of the JCPOA, with the
effect that the sanctions would again restrict previously permitted
dealings with Iran. The U.S. government has indicated that actions
permitted before “snap-back” would not be subject to
sanctions. But transactions after “snap-back” will not
be “grandfathered” if they implicate activity for which
sanctions have been re-imposed, notwithstanding any contractual
commitment made before “snap-back”.
Primary sanctions relief is limited to three narrow categories. The
United States took steps to allow exports and reexports to Iran for
its commercial passenger aviation sector, as well as imports of
Iranian-origin carpets and foodstuffs, including pistachios and
caviar. And non-U.S. entities owned or controlled by a U.S. person
were granted limited ability to engage in some transactions
involving Iran that are consistent with the JCPOA and U.S. laws and
regulations, notwithstanding the general prohibition in the ITSR.
With the exception of these three categories, U.S. persons will
continue to be broadly prohibited from engaging in transactions or
dealings involving Iran or the Government of Iran.
OFAC’s General License H
The measures taken to grant limited authorization for U.S. owned or
controlled foreign entities to engage in some transactions with
Iran are outlined in General License H, issued by the Treasury
Department’s Office of Foreign Assets Control (OFAC). General
License H permits a U.S. person to alter operating policies and
procedures to accommodate permitted transactions and to make its
automated, globally integrated communication and support systems
available to foreign entities involved in permitted transactions,
provided that the systems operate passively and without human
intervention and are not used for any transfer of funds involving
the U.S. financial system. Notably, the direct or indirect export,
reexport, sale or supply of any goods, technology or services from
the United States or by any U.S. person, wherever located, in
connection with these transactions remains prohibited, effectively
barring the supply of U.S. origin automotive goods, technology or
services directly to Iran or to third countries for incorporation
into other items destined for Iran. General License H also
expressly confirms that the prohibitions on facilitation by U.S.
persons remain in effect except for the narrow exceptions under the
license. This means that U.S. persons may not be involved in the
ongoing Iran-related operations or decision making of a U.S. owned
or controlled foreign entity.
The license enumerates several categories of transactions that are
not authorized for non-U.S. persons, such as those subject to
sanctions regulations other than the ITSR, transactions subject to
U.S. export control regulation, funds transfers involving the U.S.
financial system, transactions involving designated entities or
persons or any Iranian military, paramilitary, intelligence or law
enforcement entity, any sanctionable activity related to terrorism,
Syria, Yemen, human rights abuse or weapons of mass destruction or
their means of delivery, and any activity involving unapproved
nuclear procurement channels.
Nor have all other secondary sanctions been lifted. For example,
non-U.S. persons remain subject to sanctions for transactions or
support involving persons or entities on OFAC’s List of
Specially Designated Nationals and Blocked Persons. General License
H also confirms that non-U.S. persons remain subject to the
prohibition on the direct or indirect reexport to Iran from a third
country of goods, technology or services of U.S. origin that are
subject to export control license requirements if the non-U.S.
person knows or has reason to know that the reexportation is
intended specifically for Iran or the Government of Iran and the
goods or technology constitute ten percent or more of the end
product’s total value.
Where are we now?
Despite the publicity surrounding the implementation of the JCPOA,
very little has changed for the U.S. automotive sector. Existing
sanctions will continue to impose broad prohibitions on Iranian
transactions and the approval, facilitation and evasion provisions
of the ITSR will continue to carry substantial risk for corporate
groups that include U.S. persons. The possibility that sanctions
may “snap back” further limits long term planning.
Considering the broad scope of the Iran sanctions regulations and
the limited relief provided, opportunities for U.S. persons will
remain severely limited and any proposed transactions involving
U.S.-owned or controlled entities must be evaluated with caution
and appropriate due diligence and with awareness that strict
compliance procedures will be required to avoid violations by U.S.
persons.
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.