OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
On May 8, 2018, President Donald J. Trump announced his decision to cease the United States’ participation in the Joint Comprehensive Plan of Action (“JCPOA”) and begin reinstating, following a wind-down period, the US nuclear-related sanctions that were lifted to effectuate the JCPOA sanctions relief. In conjunction with this announcement, the President issued a National Security Presidential Memorandum (“NSPM”) directing the Secretary of State and the Secretary of the Treasury to prepare immediately for the reimposition of the US sanctions lifted or waived as part of the JCPOA (the so-called “snapback”).
To implement the President’s direction, the Treasury and State Departments have taken steps to establish a 90-day and a 180-day wind-down period for activities involving Iran that were consistent with the JCPOA sanctions relief. All the US nuclear-related sanctions that had been lifted under the JCPOA are expected to be reimposed and in full effect by November 5, 2018. Both US and non-US companies are impacted by the United States’ withdrawal, and the impact could be significant for EU companies in particular, who could face the legal quandary of having to “choose” between complying with EU law or the reimposed US sanctions if EU blocking statutes are implemented. Accordingly, companies that do business in or with Iran pursuant to the JCPOA sanctions relief should take the steps necessary to wind down those activities by either August 6, 2018 or November 4, 2018, as applicable, in order to avoid exposure to US sanctions or a US enforcement action. The Treasury Department’s Office of Foreign Assets Control (“OFAC”) posted frequently asked questions (“FAQs”) that provide guidance on the sanctions that are to be reimposed and the relevant wind-down periods.
The JCPOA was reached among the P5+1 (the US, China, France, Germany, Russia, and the United Kingdom), the European Union, and Iran. On Implementation Day (January 16, 2016), the Secretary of State confirmed that the International Atomic Energy Agency (“IAEA”) had verified Iran’s completion of specified nuclear-related commitments designed to cut off pathways for Iran to acquire weapons-grade nuclear material. In exchange for those commitments, the US lifted certain nuclear-related, secondary sanctions, which are applicable to non-US persons irrespective of a US nexus, related to the following: (1) Iran’s financial, banking, energy, petrochemical, shipping, shipbuilding, and automotive sectors; (2) Iran’s port operators; (3) the provision of insurance, reinsurance, and underwriting services in connection with activities that are consistent with the JCPOA; (4) Iran’s trade in gold and other precious metals; (5) trade with Iran in graphite, raw, or semi-finished metals (e.g., aluminum and steel), coal, and certain software in connection with activities that are consistent with the JCPOA; and (6) the provision of associated services for each of the categories above.
In addition, the US implemented more limited relief from the primary sanctions applicable to US persons and transactions within the US. “US person” is defined to include entities organized under US law, US citizens and permanent residents worldwide, and any person physically located in the US regardless of nationality. In particular, the US issued: (1) a Statement of Licensing Policy allowing for the case-by-case licensing of individuals and entities seeking to export, reexport, sell, lease, or transfer to Iran commercial passenger aircraft and related parts and services for exclusively civil, commercial passenger aviation end-use; (2) a general license authorizing US-owned or -controlled foreign entities[i] to engage in certain activities involving Iran (“General License H”); and (3) a general license authorizing the importation into the US of Iranian-origin carpets and foodstuffs, including pistachios and caviar. The US also removed over 400 individuals and entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), the Foreign Sanctions Evaders List (“FSE List”), and/or the Non-SDN Iran Sanctions Act List (“NS-ISA List”).
Following Implementation Day, the US trade embargo and export controls on Iran broadly remained in place. US sanctions targeting Iran’s non-nuclear-related activities also remained in place, as well as secondary sanctions targeting significant transactions by non-US persons involving Iran-related persons on the SDN List or trade in certain materials. The JCPOA, however, marked an important shift in the US policy toward Iran.
The US policy toward Iran has, since, taken a dramatic turn in the other direction. On October 13, 2017, President Trump declined to certify Iran’s compliance with the JCPOA. This opened a 60-day window for Congress to reimpose sanctions, which it did not do. On January 12, 2018, President Trump announced that he would waive sanctions against Iran one final time. He outlined two possible paths forward within the next 120 days: modifying the JCPOA to address certain concerns or, absent such an understanding, ceasing the participation of the US in the JCPOA. On May 8, 2018, President Trump announced that the US’ withdrawal from the JCPOA would be in the national interest of the US. He directed the Secretary of State and Secretary of the Treasury to immediately begin taking steps to reimpose, within 180 days, all US sanctions lifted or waived in connection with the JCPOA.[ii] Pursuant to the NSPM, the State Department revoked certain statutory waivers issued to implement the JCPOA sanctions relief, issued the necessary statutory waivers to provide for a wind-down period, and plans to take appropriate action to keep such waivers in place for the duration of the relevant 90-day and 180-day wind-down periods.
Following the 90-day wind-down period, ending on August 6, 2018, the US will revoke authorizations for the following activities implicating the primary sanctions regarding Iran:
The importation into the US of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (“ITSR”);
Activities undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (“JCPOA SLP”); and,
Activities undertaken pursuant to General License I relating to the negotiation of, and entry into, contingent contracts for activities eligible for authorization under the JCPOA SLP.
OFAC also intends to revoke, as soon as administratively feasible, General License H, which authorized US-owned or -controlled foreign entities to engage in certain activities with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited under the ITSR. In addition, OFAC expects to issue a revised authorization for the wind-down of activities involving Iran authorized pursuant to General License H. The wind-down of those activities authorized pursuant to General License H must be completed by November 4, 2018.
Furthermore, OFAC expects to revoke, as soon as administratively feasible, General License I, and to issue a revised authorization for the wind-down of activities authorized pursuant to General License I. The wind-down of those activities authorized pursuant to General License I must be completed by August 6, 2018.[iii]
Following the 90-day wind-down period, ending on August 6, 2018, the US will reimpose the following secondary sanctions that were lifted pursuant to the JCPOA, including sanctions on associated services related to these activities:
Sanctions on the purchase or acquisition of US dollar banknotes by the Government of Iran;
Sanctions on Iran’s trade in gold or precious metals;
Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
Sanctions on Iran’s automotive sector.
Following the 180-day wind-down period, ending on November 4, 2018, the US will reimpose the following sanctions that were lifted pursuant to the JCPOA, including sanctions on associated services related to these activities:
Sanctions on Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (“IRISL”), South Shipping Line Iran, or their affiliates;
Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), and National Iranian Tanker Company (“NITC”), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
Sanctions on transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”);
Sanctions on the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (“CISADA”);
Sanctions on the provision of underwriting services, insurance, or reinsurance; and
Sanctions on Iran’s energy sector.[iv]
Within the 90-day or 180-day period, as applicable, companies must take steps necessary to wind down and terminate their activities involving Iran that were consistent with the JCPOA sanctions relief. OFAC will allow certain activities designed to allow non-US, non-Iranian parties to be made whole for debts and obligations owed or due to them for goods or services fully provided or delivered, or loans or credit extended to an Iranian party, prior to the end of the 90-day or 180-day wind-down period, as applicable.
In particular, non-US and non-Iranian persons who are owed payment after August 6, 2018 or November 4, 2018, as applicable, for goods or services that are fully provided or delivered to an Iranian counterparty prior to the applicable wind-down period pursuant to a written contract or written agreement entered into prior to May 8, 2018 will be permitted to receive payment for those goods or services according to the terms of such written contract or written agreement, provided that such activities are consistent with the JCPOA sanctions relief at the time of provision or delivery. Similarly, if a non-US, non-Iranian person is owed repayment after the applicable wind-down period for loans or credits extended to an Iranian counterparty prior to the end of the applicable wind-down period, OFAC will allow the non-US, non-Iranian person to receive repayment of the related debt or obligation according to the terms of the written contract or written agreement provided that such loans or credits were extended pursuant to a written contract or written agreement entered into prior to May 8, 2018, and such activities were consistent with the JCPOA sanctions relief at the time the loans or credits were extended. Payments must otherwise comply with US sanctions; in particular, they cannot involve US persons or the US financial system, unless the transactions are exempt from regulation or authorized by OFAC.
Consistent with the above, OFAC will take steps to allow US persons and US-owned or ‑controlled foreign entities until August 6, 2018, or November 4, 2018, as applicable, to wind down operations in or business involving Iran conducted pursuant to an OFAC authorization, and to receive payments according to the terms of the written contract or written agreement entered into prior to May 8, 2018, for goods or services fully provided or delivered pursuant to an OFAC authorization. As soon as administratively feasible, OFAC intends to replace General License H, General License I, and the general licenses relating to trade in Iranian-origin carpets and foodstuffs[v] with more narrowly scoped authorizations to allow US persons and, as appropriate, US-owned or -controlled foreign entities, to engage in all transactions ordinarily incident and necessary to wind down activities that were previously authorized pursuant to those general licenses and to receive payments according to the terms of the written contract or written agreement entered into prior to May 8, 2018 for goods or services fully provided or delivered pursuant to an OFAC authorization.
New business relating to Iran will not be authorized during the wind-down periods. OFAC advised that when considering a potential enforcement or sanctions action with respect to activities engaged in after August 6, 2018 or November 4, 2018, as applicable, it will evaluate efforts and steps taken to wind down activities, and will assess whether any new business was entered into involving Iran during the applicable wind-down period. OFAC also indicated that the provision or delivery of additional goods or services and/or the extension of additional loans or credits to an Iranian counterparty after the wind-down period, even pursuant to written contracts or written agreements entered into before May 8, 2018, may result in the imposition of US sanctions unless exempt, authorized, or otherwise not sanctionable.
OFAC intends to reimpose sanctions “as appropriate,” by the end of the 180-day wind-down period, that applied to persons removed from the SDN List, FSE List, and NS-ISA List on January 16, 2016. Depending on the applicable underlying authorities for such listings, there may be secondary sanctions exposure for parties that engage in certain activities with these persons after their relisting. OFAC will so specify in the SDN List designation if a party raises secondary sanctions risks. Transactions conducted during the wind-down periods involving persons removed from the SDN List on January 16, 2016 could be sanctionable to the extent they are outside the scope of the wind-down waivers issued by the State Department or involve persons on the SDN List, or involve Iranian malign activity outside of Iran’s nuclear program or trade in certain materials involving Iran.
In addition, no later than November 5, 2018, OFAC expects to move persons identified as meeting the definition of the terms “Government of Iran” or “Iranian financial institution” from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”) to the SDN List. As OFAC explained in guidance, it did not add these persons to the SDN List on May 8, 2018 in order to allow for the orderly wind-down by non-US, non-Iranian persons of activities that had been undertaken prior to May 8, 2018, consistent with the JCPOA sanctions relief involving persons on the E.O. 13599 List. The Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked pursuant to E.O. 13599 and the ITSR, and US persons continue to be broadly prohibited from engaging in transactions or dealings with the Government of Iran and Iranian financial institutions. Beginning on November 5, 2018, activities with most persons moved from the E.O. 13599 List to the SDN List will be subject to secondary sanctions and OFAC will so specify in the SDN List designation if a party raises secondary sanctions risks.
Need to wind down Iran business and make appropriate updates to policies. Both US and non-US companies need to reevaluate their business activities and compliance programs to determine the changes that need to be made in order to comply with the reinstituted sanctions. Companies that engage in activities with Iran pursuant to the JCPOA sanctions relief need to take steps immediately to wind down such activities by August 6, 2018 or November 4, 2018, as applicable, in order to avoid exposure to sanctions or an enforcement action under US law. They should review existing agreements involving Iranian counterparties or Iran-related activities, and assess the steps that may be required to terminate such dealings. In addition, they should make any necessary amendments to their compliance policies and procedures, including due diligence efforts, to reflect the reinstated sanctions, and promptly begin to implement those amendments. Per OFAC’s recommendation, companies conducting activities in Iran or with Iranian persons during the wind-down periods should exercise due diligence sufficient to ensure that they are not knowingly engaging in transactions with persons on the SDN List, or in activities that would be sanctionable under authorities targeting Iran’s malign activities. They also need to be careful to avoid engaging in any new Iran-related activities during the wind-down period, as such activities could give rise to sanctions or an enforcement action under US law.
Conflict between US and EU sanctions can present compliance challenges. President Trump’s decision to reinstate sanctions appears to be in conflict with public statements from European leaders who have maintained their support for the JCPOA and appear unlikely to exit the nuclear accord. In fact, the EU has launched the formal process of activating a blocking statute to “protect European companies” from the extraterritorial effects of US sanctions. The blocking statute “forbids EU companies from complying with the extraterritorial effects of US sanctions, allows companies to recover damages arising from such sanctions from the person causing them, and nullifies the effect in the EU of any foreign court judgements based on them.” The aim is for the blocking measure to come into force before August 6, 2018. President Trump stated in the NSPM that he is open to consultations with allies and partners on future international agreements to counter the full range of Iran’s threats. The State Department also indicated that it is working to build a global coalition to apply renewed and strengthened pressure on Iran. However, unless and until the apparent conflict is resolved, there will likely be some confusion, and non-EU businesses may face a difficult decision between complying with EU law or complying with the re-imposed US secondary sanctions.
Potential for additional, new sanctions. It is not clear whether the US, in addition to reimposing the preexisting sanctions, intends to impose new sanctions relating to Iran after the wind-down periods. Given the continually evolving nature of US sanctions, evidenced by the JCPOA sanctions relief which lasted less than 30 months, companies should be prepared for the risk that activities that are permissible one day can become impermissible the next, and ensure that appropriate protections are built into their contracts allowing them to wind down and terminate their Iran-related business operations and contracts in a timely manner with minimal commercial disruption and legal consequences.
We will continue to monitor the developments and issue additional briefings as warranted.
[i] An entity established or maintained outside the United States is “owned or controlled” by a US person if the US 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. See 31 C.F.R. § 560.215 and FAQ K.17.
[ii] This includes sanctions under the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”), the Iran Sanctions Act of 1996, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iran Freedom and Counter-proliferation Act of 2012.
[iii] OFAC advised that it will no longer evaluate applications under the JCPOA SLP. It will still consider applications, however, under the safety of flight statement of licensing policy found in 31 C.F.R. § 560.528. To the extent they have not yet expired, OFAC expects to revoke the specific licenses issued pursuant to the JCPOA SLP and issue authorizations to provide for a wind-down period that will end on August 6, 2018. License applications that were submitted to OFAC pursuant to the JCPOA SLP but for which no license has been issued will be returned without action, and may be resubmitted under the safety of flight statement of licensing policy found in 31 C.F.R. § 560.528.
[iv] The United States also will resume efforts to reduce Iran’s sales of crude oil under the NDAA (including limitations on the quantity of crude sold and the jurisdictions that can purchase Iranian crude oil) during and following the 180-day wind-down period. The State Department will evaluate and make determinations with respect to significant reduction exceptions provided for in section 1245(d)(4)(D) of the NDAA at the end of the 180-day wind-down period. See FAQs 5.1 and 5.2.
[v] These are set forth at 31 C.F.R. §§ 560.534 and 560.535.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
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