Iran sanctions update: Guidance for financial institutions

Publication July 2016


Introduction

On 16 January 2016, the European Union and United States lifted a wide range of sanctions against Iran in accordance with the Joint Comprehensive Plan of Action (“JCPoA”). Importantly, “Implementation Day” under the JCPoA did not extend to all sanctions against Iran and there remains a mechanism for the reintroduction or “snapback” of the lifted sanctions in the event of Iran not meeting its ongoing commitments to comply with specific nuclear-related measures.

While this first round of sanctions relief may open significant commercial opportunities for EU banks, a number of important sanctions remain in force and US sanctions still generally prohibit “US persons” from engaging in Iranian-related transactions. In practice, the lifting of sanctions will increase the need for robust compliance procedures as global financial institutions navigate the revised EU and US sanctions framework.

EU Sanctions

The sanctions relief discontinued asset freezes on 34 individuals and 298 entities and has permitted a wide range of trade and associated services in respect of Iran and Iranian persons. Those of particular relevance to financial institutions include relief on precious metals and currency, financial transfers and banking activities and financial services. More information.

However, a range of restrictions remain in place post-Implementation Day, including asset freezes on various Iranian persons and various prohibitions relating to nuclear or military material.
Further detailed guidance has been published in respect of the EU sanctions.

US Sanctions

The United States historically has maintained both primary sanctions, prohibiting US persons from engaging in transactions relating to Iran or involving parties on the List of Specially Designated Nationals and Blocked Persons (SDN List) maintained by the US Treasury Department’s Office of Foreign Assets Control (OFAC), and secondary sanctions, which target the activities of non-US persons. Most of the relief under the JCPoA relates to nuclear-related secondary sanctions. The primary sanctions remain largely in place.

Under the JCPoA, the United States has removed sanctions directed at non-US persons with respect to certain activities. Those with particular relevance to financial institutions include financial and banking measures, insurance measures and gold and other precious metals. More information.

The US commitments to lift secondary sanctions do not apply to transactions or activities involving individuals and entities who remain or are placed on OFAC’s SDN List after Implementation Day or to any other US sanctions that may apply under legal provisions other than those cited in the JCPoA.

The United States removed over 400 individuals and entities from sanctions lists maintained by OFAC. Secondary sanctions continue to apply to non-US persons for conducting transactions with any of the more than 200 Iranian or Iran-related individuals and entities who remain or are placed on the SDN List, notwithstanding the lifting of certain secondary sanctions.

In addition, the United States implemented certain limited relief related to the primary sanctions directed at the activities of US persons, including a general license (General License H), authorizing non-US entities that are US-owned or US-controlled, with certain limitations, to engage in transactions involving Iran.

Importantly, many restrictions and/or limitations still apply post-Implementation Day. Those of particular relevance to financial institutions include primary US sanctions on Iran and limitations for non-US subsidiaries in engaging in Iran-related activities. Further information.

Further detailed guidance and FAQs have been published by OFAC.

New business opportunities and compliance challenges

The extent of the sanctions relief is substantial and may pave the way for significant commercial opportunities for non-US financial institutions. From a compliance perspective, banks will need to carefully manage their transition into the new business environment, given that a number of important sanctions remain in force. For most sectors, the key sanctions to consider will be the asset freeze restrictions, meaning that companies going into Iran will need to carefully screen their proposed counterparties and include appropriate provisions in their contracts. This is important not only in connection with the EU asset freezes, but also the US secondary sanctions, since the relief of these sanctions does not generally extend to transactions involving targets of US asset freezes (Specially Designated Nationals). In the UK, this could perhaps be an area of focus for the new Office for Financial Sanctions Implementation (OFSI), which will be tasked with ensuring that financial sanctions are properly implemented and enforced.

Financial institutions will therefore need to review and update their operating procedures for doing business with Iran to focus on the sanctions still in force. For non-US subsidiaries of US banks proposing to engage in such business under General License H, this task could prove to be somewhat complex, as the provisions and conditions of that Licence will need to carefully interpreted.

Banking and financial services have been targeted for sanctions relief in the EU and secondary sanctions in the US. While this is welcome to financial institutions, any expansion by them into Iran-related business will require robust and precise procedures to ensure compliance with the remaining elements of the sanctions regime.

More information

EU Sanctions Relief

EU sanctions relief effected by amendments to Council Decision 2010/413/CFSP and Regulation (EU) No 267/2012 includes the following areas of particular relevant to financial institutions:

  • Precious metals and currency: transactions relating to gold, other precious metals and diamonds; supplies of newly-printed or unissued Iranian-denominated banknotes and minted coinage.
  • Financial transfers and banking activities: financial transfers to and from non-listed Iranian entities; the establishment of relationships with Iranian banks and branches, offices or subsidiaries in Iran; the opening of branches, subsidiaries or representative offices of non-listed Iranian banks in EU Member States.
  • Financial services: the provision of insurance and reinsurance to non-listed Iranian entities; the supply of specialised financial messaging services for non-listed Iranian financial institutions; transactions in public or public-guaranteed bonds with Iranian non-listed entities.
US Sanctions Relief

US sanctions relief includes the following areas of particular relevance to financial institutions:

  • Financial and banking measures: Financial and banking transactions related to Iran, including: (i) transactions with individuals and entities set out in Attachment 3 to Annex II of the JCPoA, including, with certain exceptions, opening or maintaining correspondent accounts for the specified Iranian financial institutions; (ii) transactions and other activity involving the Iranian rial; (iii) the provision of US bank notes to the Government of Iran, including providing material support for such transactions; (iv) the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds; (v) the provision of specialized financial messaging services to certain Iranian banks and financial institutions removed from the SDN List on Implementation Day; and (vi) the provision of associated services for each of these categories. The US commitments also include the lifting of bilateral trade limitations on Iranian revenues held abroad, including limitations on their transfer. US persons continue to be generally prohibited under the ITSR from involvement in these activities. In addition, transactions related to these activities are prohibited from transiting the US financial system.
  • Insurance measures: Underwriting services, insurance, or reinsurance in connection with activities consistent with the JCPoA, including activities by non-US persons with individuals and entities set forth in Attachment 3 to Annex II of the JCPoA. The US commitments also include underwriting services, insurance, or reinsurance in connection with activities in the energy, shipping, and shipbuilding sectors of Iran; for certain specified Iranian entities; or for vessels that transport crude oil, natural gas, liquefied natural gas, petroleum, and petrochemical products to or from Iran.
  • Gold and other precious metals: Trade in gold and other precious metals, and the provision of associated services.

Other listed activities relate to sectors such as petrochemical, shipping and automotives.

US Sanctions after Implementation Day

Certain US sanctions still apply after Implementation Day. In particular, focusing again on those applicable to financial institutions:

  • Primary US sanctions on Iran remain in place. Other than certain limited exceptions provided for in the JCPoA, the US trade embargo on Iran broadly remains in place. US persons continue to be prohibited generally from engaging in transactions or dealings with Iran or its government or with SDNs. In addition, the Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked. Absent an exemption or other OFAC authorization, US persons continue to have an obligation to block the property and interests in property of all individuals and entities that meet the definition of the Government of Iran or an Iranian financial institution, regardless of whether or not the individual or entity has been designated by OFAC. Non-US persons also continue to be subject to the US primary sanctions with respect to any action that takes place in the United States (such as US dollar clearing transactions), and there is potential liability for non-US persons engaging in transactions prohibited under primary sanctions if those transactions involve US individuals or entities. US export controls pertaining to Iran also continue to apply to US-origin goods, services and technology, including reexportation by non-US Persons from non-US countries to Iran.
  • Non-US subsidiaries still may face limitations in engaging in Iran-related activities. US-owned or controlled foreign subsidiaries can, with certain limitations, engage in Iran-related business. US persons, however, can have no involvement in the business, except that US persons can be involved in the alteration or establishment of operating policies and procedures of the parent or the foreign entity to the extent necessary to allow the foreign entity to engage in Iran-related transactions and also can engage in activities to make available certain automated and globally integrated systems owned or controlled by the parent. Importantly, General License H does not authorize payment to, from, or through US depositary institutions. Any such payments would need to be blocked by the financial institution. This places an important practical limitation on the ability of foreign subsidiaries to engage in Iran business.

Other limitations include continuing US export controls, sanctions targeting Iran’s support for terrorism, regional destabilization, human rights abuses and missiles, and secondary sanctions targeting non-US person dealings with Iran-related persons on the SDN List or trade in certain materials involving Iran.


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