Tread carefully

Boeing cements deal with second Iran airline, but political winds can shift quickly    What the Treasury Department’s Office of Foreign Assets Control can giveth, it can easily taketh away.
   This could be said about the permission granted earlier this year by the federal agency with export control authority to Boeing to sell $16.6 billion worth of new aircraft to Iran Air.
Boeing entered a memorandum of agreement April 4 with a second Iranian carrier, Iran Aseman Airlines, to sell 30 737 MAX aircraft valued at $3 billion, with rights to purchase another 30 planes.    This deal is still pending OFAC approval.
   Boeing and its archrival, Europe’s Airbus, have been itching to sell new aircraft to Iran, considered one of the last major markets in need of modern planes. Since the late 1970s, Boeing has been effectively blocked from doing business with Iran due to stringent U.S. trade prohibitions against the Middle East country.
   The U.S. attitude toward Iran began to soften somewhat early last year when Iran agreed to cease nuclear weapons development in hopes of lifting severe economic sanctions imposed against it by the United States and European Union in 2009.
   Under the Joint Comprehensive Plan of Action (JCPOA), the European Union lifted nearly all its economic and financial sanctions against Jan. 16, 2016, while the United States agreed to suspend only a few and leave much of its long-standing trade embargo in place, although suspending most secondary sanctions on parties doing business with Iran.
   Secondary sanctions are restrictions on foreign companies controlled by U.S. firms, or foreign subsidiaries, and apply to foreign-origin items without the benefit of the de minimus exclusion for the scope of the prohibition. However, the controls for re-exports on U.S. items remains.
   Since 1995, the United States has maintained a set of “primary” sanctions against Iran, as part of the Iranian Transactions and Sanctions Regulations, which have been rigorously enforced by OFAC over the past 20 years. The Commerce Department’s Bureau of Industry and Security (BIS) also has an important role in implementing and enforcing export and re-export controls on the movement of U.S.-origin goods to Iran.
   In 2010, Congress enhanced the trade embargo with Iran by passing a number of laws imposing secondary sanction on Iran. These laws were intended to deny non-U.S. entities to U.S. financial and commercial markets if they engaged in certain activities in Iran, most notably energy, transportation and financial services transactions.
   The lifting of these secondary sanctions in January 2016 offered that crack in the U.S. trade embargo wall large enough for Boeing to re-enter Iran, albeit with stringent U.S. regulatory oversight.

Iran desperately needs to upgrade its decrepit fleet of passenger aircraft. However, Boeing’s promising deals with Iran Air and Iran Aseman Airlines could easily come undone if Iran violates its obligations.

   In mid-December 2016, Boeing finalized a $16.6 billion deal to supply Iran Air 50 737s and 30 777s, the first of which will be delivered in 2018. This was the first U.S. aircraft deal with Iran since 1979. The deal received OFAC’s blessing.
   For its latest agreement with Iran Aseman Airlines, Boeing said it will “look to the Office of Foreign Assets Control for approval to perform under this transaction” and affirmed it “continues to follow the lead of the U.S. government with regards to working with Iran’s airlines, and any and all contracts with Iran’s airlines are contingent upon U.S. government approval.”
   Boeing hopes to start delivery of the 737s to Iran Aseman Airlines by early 2022.
   Iran desperately needs to upgrade its decrepit fleet of passenger aircraft. However, Boeing’s promising deals with Iran Air and Iran Aseman Airlines could easily come undone if Iran violates its obligations under the JCPOA. President Trump and Iran’s leadership have already sparred with each other on Middle East policy.
   As one export compliance expert put it to the Adam Smith Project, “Opportunities can abound, but you have to be careful. Foreign policy changes all the time, and tomorrow it might change and the business is stopped.”
   Even if the aircraft deals with the two Iranian airlines continue, Boeing will need to ensure utmost export compliance oversight over this business.
   The more complex the U.S. license approval process the more onerous the conditions will be to comply with that license. Boeing will need to be able to follow through on the conditions of the OFAC license and report to the agency to show those conditions are being met.
   It’s assumed that Boeing will oversee the majority of maintenance on those Iranian passenger aircraft and monitor their use. All parts will need to be accounted for, with defective and worn out parts immediately returned to the United States or other western countries to ensure that none of these parts are copied by Iran or used on Iranian military aircraft.
   A lack of oversight and follow-through with OFAC licenses can result in the termination of those licenses, in addition to hefty fines and penalties and negative publicity, particularly for large companies, from the U.S. export control agency.
   Coca-Cola in early February 2009 learned this the hard way when it allegedly exported to its bottler in Sudan services not authorized by its OFAC license. The company paid a $136,500 civil penalty to settle the allegations and was ordered to upgrade its OFAC and Commerce compliance programs. OFAC license violations today may result in even hefty fines and more damaging repercussions for U.S. companies.