United States: Sanctions Against Iran Require Skill To Navigate

Intricate regulations will implicate transactions, banking and pharma, as well as supply chains across a range of global industries.

In the press release accompanying President Donald Trump's May 8, 2018, decision to cease participation in the Joint Comprehensive Plan of Action (JCPOA) and reinstate U.S. nuclear sanctions on the Iranian regime, President Trump hinted that additional sanctions would be forthcoming and that those would be the "highest level of economic sanctions." (See our previous Alert.) Two weeks later, U.S. Secretary of State Mike Pompeo appeared to confirm new sanctions when he threatened to impose "the strongest sanctions in history" on Iran.

While the administration contemplates new sanctions, previous sanctions that were suspended by operation of the JCPOA are now set to snapback. Included among these are secondary sanctions under the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA). Section 1244 of the IFCA, entitled "Imposition of Sanctions with Respect to the Energy, Shipping, and Shipbuilding Sectors of Iran," blocked U.S.-based property of any entity (even a non-U.S., non-Iranian entity) that provided goods, services or other support to any Iranian entity designated by the Treasury Department's Office of Foreign Assets Control (OFAC) as a "specially designated national" (SDN). The SDN list included hundreds of Iranian entities.

Specifically, Section 1244(a) provides:

the President shall block and prohibit all transactions in all property and interests in property of any person described in paragraph (2) if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.

A "person described in paragraph (2)" includes any person (as determined by the President) who:

  1. Is part of the energy, shipping or shipbuilding sectors of Iran;
  2. Operates a port in Iran; or
  3. Knowingly provides significant financial, material, technological or other support to, or goods or services in support of any activity or transaction on behalf of or for the benefit of:

    1. A person determined... to be a part of the energy, shipping, or shipbuilding sectors of Iran;
    2. A person determined... to operate a port in Iran; or
    3. An Iranian person included on the list of specially designated nationals and blocked persons maintained by [OFAC].

Likewise, Section 1247 of the IFCA, entitled "Imposition of Sanctions with Respect to Foreign Financial Institutions that Facilitate Financial Transactions on Behalf of Specially Designated Nationals," prohibited any bank that knowingly facilitated a financial transaction on behalf of an Iranian SDN from operating in the United States. Section 1247 states:

the President shall prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable through account by a foreign financial institution that the President determines has, on or after the date that is 180 days after the date of the enactment of this Act, knowingly facilitated a significant financial transaction on behalf of any Iranian person included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury...

Sections 1244 and 1247 will now "snapback" after the expiration of the 180-day wind-down period on November 4, 2018. The entities that were delisted from the SDN list to implement the JCPOA will be relisted on November 5, 2018.

Importantly, President Trump also instructed that General License H, pertaining to U.S. owned and controlled foreign entities, be revoked. This license permitted certain facilitation of Iranian transactions, which in its absence would be a violation of U.S. law. Prior to the issuance of General License H, the implementing regulations for the Iranian Transactions and Sanctions Regulation (ITSR), as codified at 31 C.F.R. § 560.215(a), provided:

an entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States.

Pursuant to 31 C.F.R. § 560.215(b), an entity is "owned or controlled" by a United States person if the United States 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.

It is important to note that the broad language of 31 C.F.R. § 560.215(b)(iii) ultimately renders subjective the determination as to whether an entity is owned or controlled by a U.S. person.

With the revocation of General License H, these prohibitions on the activities of U.S.-owned or controlled entities will also snapback. OFAC has advised that "[a]ny activities by U.S.-owned or -controlled foreign entities that continue after the wind-down period concludes on November 4, 2018, in violation of the ITSR may be subject to enforcement actions by OFAC."

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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