Despite the European Union and United States agreeing to ease economic sanctions placed on Iran in 2009, multinational companies must still ensure rigorous compliance with “secondary” U.S.-Iranian sanctions.
Iran’s capital Tehran
With Iran backing down on its earlier threats to develop nuclear weapons, opportunities are reawakening for multinational corporations to reestablish commercial ties with the Middle Eastern country.
The European Union and the United States, in particular, responded to Iran’s latest non-nuclear weapon proliferation overtures by agreeing to ease economic sanctions put in place against it in 2009, but to significantly different degrees. Under the so-called Joint Comprehensive Plan of Action (JCPOA), the European Union on Jan. 16, 2016 lifted nearly all its economic and financial sanctions against Iran, while the United States agreed to suspend only a few and leave much of its long-standing trade embargo in place with the country, although agreeing to suspend most secondary sanctions on parties doing business with Iran.
Secondary sanctions are restrictions on foreign companies controlled by U.S. firms, i.e. foreign subsidiaries, and apply to foreign-origin items without the benefit of the de minimis exclusion from the scope of the prohibition. Secondary sanctions do not apply to all foreign companies. For all foreign companies, the item list-based re-export controls on U.S. items remain. Companies must be aware of the two distinct prohibitions and the two available general licenses to overcome those prohibitions for certain shipments to Iran.
For many global companies with operations in both Europe and the United States, this mix-and-match approach of eased sanctions against Iran poses a significant regulatory compliance challenge when it comes to exporting to Iran.
“The JCPOA’s different outcomes for U.S. and EU companies mean that a multinational company operating in both jurisdictions will have to manage compliance with two differing sets of rules,” said Paul DiVecchio, president of DiVecchio & Associates, a 35-year-old consulting firm specializing in export regulatory compliance. “This is challenging for companies with operations that are organized and managed globally, often without regard for geographical boundaries.”
“We live in a world of interconnected supply chains,” said Douglas N. Jacobson, a partner at Washington law firm Jacobson Burton Kelley PLLC. “U.S. products and U.S. persons are now everywhere.
“While there is significant interest among companies to conduct business in Iran, limitations within those parent/subsidiary relationships both in the United States and Europe do not necessarily make it practical to conduct business with the country,” he added.
Since the JCPOA took effect early this year, Jacobson said his law firm has fielded inquiries on a near daily basis from companies interested in possibly doing business with Iran. He said there’s persistent confusion among companies with footprints in both the United States and Europe, and how they can operate within two different sanctions structures.
On top of that, he said Iran is a “classic emerging market… It’s not an easy place to do business.”
Larry Christensen, an attorney at law practice Miller & Chevalier, said his firm also processes numerous inquiries from U.S. firms seeking to better understand how the changes in the U.S. and EU sanctions impact their business prospects with Iran.
“We find that it’s different for different companies,” he said. “How much management control U.S. executives prefer to have over foreign subsidiaries, where components and products are manufactured, and the compliance apparatus in place, all play a factor.”
Lifting EU Sanctions. Prior to the JCPOA’s implementation, the European Union’s sanctions against Iran, which were put in place in 2009, were significant, but not as broad as those in the United States.
The European Union’s Iran sanctions consisted of prohibitions on supplying “dual-use” goods, or items with both civil and military applications; restrictions on banking transactions; and severe curtailment on trade involving persons and entities in Iran’s energy sector. The EU sanctions against Iran applied to conduct by EU-incorporated entities and EU nationals worldwide; conduct by any person, irrespective of nationality, in connection with activities occurring in the EU territory; and conduct on board any aircraft or vessel under the jurisdiction of a EU member state.
Once the JCPOA took effect, the European Union immediately lifted most of its sanctions against Iran, sparking interest among many European companies to reenter the country.
The European Union removed previous restrictions placed on transfers of funds to or from Iranian banks or persons. EU financial institutions are now able to open new accounts or correspondent banking relationships with Iranian banks; establish branches or representative offices in Iran; and set up joint ventures with Iranian banks.
The European Union’s restrictions that had applied to financing activities related to the energy sector and certain military or dual-use goods have been eased.
The European Union removed more than 300 individuals and entities from its list of “designated persons” who were subject to an asset freeze. Among those removed from the list include a large number of Iranian entities such as the National Iranian Oil Co., and certain Iranian banks such as the Central Bank of Iran, Bank Melli and Bank Tejarat.
A number of European industries are expected to benefit from the lifting of EU sanctions against Iran.
Europe’s oil and gas sector is now able to resume the sale, supply, transfer and export of equipment and technology to Iran, as well as import, purchase and transport Iranian-produced petro-chemicals, crude oil and natural gas.
Sanctions restrictions have also been lifted against EU-Iran trade related to insurance, currency and precious metals.
European freight forwarders and transportation providers have started returning to Iran with offices and cargo services during the first half of 2016.
A number of major container carriers have resumed service to Iran with the lifting of sanctions, but mostly starting out with those trade lanes linking the Middle East country with Asia and gradually European ports, leaving out calls to U.S. ports.
The Islamic Republic of Iran Shipping Lines (IRISL), ranked No. 22 among the world’s top 100 container carriers by information service Alphaliner, was recently allowed to resume port calls in Europe. On May 17, IRISL’s Sevgi became the first Iranian-flagged general cargo vessel to clear a European port since May 2010. In recent years, international trade sanctions limited Iran to importing goods not affected by export restrictions. However, calls to European ports by the Iranian state shipping company’s vessels were prohibited during the period of heightened EU sanctions.
“Germany is traditionally Iran’s largest Western trading partner. Hamburg, where many Iranians have settled, enjoys excellent and friendly relations with companies and state organizations in Iran,” said the Port of Hamburg in a press release. “Before sanctions, Iran’s imports via Hamburg were mainly of grain, potash fertilizers, feedstuffs and machinery. Exports arriving in the Port of Hamburg from Iran were mainly fresh and tinned fruit, cotton and other threads, rubber and vegetables.”
According to the Hamburg port authority, IRISL operates regular container and conventional liner services with 170 of its own ships. In its East Asia service, for example, IRISL deploys vessels with capacities of about 6,500 TEUs and its liner services to Southeast Asia use 2,200-2,500 TEU ships. IRISL also offers container services from the Persian Gulf to the Mediterranean and East Africa.
Yet some EU sanctions remain in place for Iranian-based trade. Namely, asset-freezing controls continue to apply to a few hundred Iranian entities and persons. The European Union also maintains prohibitions regarding the supply to Iran of items on its Common Military List and those items which are deemed contributors to nuclear weapons development.
Heavy Regulatory Hand. Since 1995, the United States has maintained a set of “primary” sanctions against Iran, as part of the Iranian Transactions and Sanctions Regulations. These regulations have been rigorously enforced over the past 20 years by the Treasury Department’s Office of Foreign Assets Control (OFAC). The Commerce Department’s Bureau of Industry and Security (BIS) also plays an important role in implementing and enforcing export and re-export controls on the movement of U.S-origin goods to Iran.
These regulations apply to “U.S. persons” and include any entity created under U.S. law (including foreign branches), U.S. citizens and permanent residents, wherever located, and anyone in the United States (including, for example, a U.K. citizen acting on behalf of a non-U.S. company while that person is in the United States), DiVecchio said. The primary sanctions include export and re-export controls of items from the United States and foreign-made items with 10 percent or more U.S.-controlled content.
Christensen indicated the primary sanctions are longstanding export and re-export controls and end-use restrictions on U.S.-origin items. Those re-export controls apply to U.S. and non-U.S. companies. There are two Treasury Department general licenses that overcome the secondary or primary sanctions or both, and allow shipments to Iran and payment from Iran initially into a European or other non-U.S. bank. The long-standing general license for food, agricultural products, medicine, and medical devices continues to authorize certain shipments to Iran. A new and broader general license authorizes foreign entities controlled by U.S. firms to deal with Iran under a company’s revised policies and procedures, if doing so independently.
As of January, certain types of U.S. support of foreign subsidiaries are authorized by the new general license. This includes accounting, communications, and other general business support. The main benefit is that mere knowledge a subsidiary is dealing with Iran does not run afoul of continuing restrictions on facilitation by the parent company of transactions that would not be lawful if done in the United States or by a U.S. person, Christensen explained.
Starting in 2010, the U.S. Congress stepped up the trade embargo on Iran by passing a number of laws imposing “secondary” sanctions on Iran. These laws were intended to deny non-U.S. entities access to U.S. financial and commercial markets if they engaged in certain activities in Iran, most notably energy, transportation and financial services transactions.
The JCPOA, however, provides limited relief from U.S. sanctions, particularly those of the secondary category. This includes lifting secondary sanctions against certain Iranian banks and other entities and issuing a general license (General License H) that allows foreign subsidiaries of U.S. companies to conduct business with Iran, as long as the primary sanctions are complied with. General License H also allows re-exports under the traditional primary sanctions, or item-based re-export controls. The U.S. also agreed to issue licenses under a favorable review policy for the export and re-export of commercial aircraft and related parts to Iran and resume the import of certain Iranian products, such as food and carpets, into the United States.
Christensen said foreign subsidiaries of U.S. companies may re-export U.S.-origin oil and gas equipment to Iran under General License H of OFAC, so long as the U.S. parent makes the initial decision to allow its subsidiaries to conduct trade with Iran and those subsidiaries make sales decisions without further approval from the parent company. For some companies the compliance steps under the new General License H will be worth the effort, while other companies will choose not to expand lawful trade with Iran, he said.
All other U.S. sanctions for Iran remain firmly in place, although the U.S. allows the export of medicines, medical devices and agricultural commodities to Iran, either by specific or general license.
However, Christensen noted that the primary sanctions still prohibit U.S. persons from “facilitating” or approving transactions by non-U.S. persons with Iran, including the new exception that authorizes specified types of facilitation under a new safe harbor authorized by General License H.
The secondary sanction prohibits U.S. subsidiaries from conduct that would be prohibited if done in the United States. General License H overcomes that prohibition and authorizes foreign subsidiaries to engage in business that the U.S. parent may not conduct. General License H authorizes the U.S. parent and U.S. natural persons to provide the following limited types of facilitation for its subsidiary: support for computer systems, accounting, email, telecommunications, or other business support systems to store, collect, transmit, generate, or otherwise process documents or information related to authorized trade with Iran by its foreign subsidiaries. Other types of facilitation and approvals by the parent company remain prohibited.
DiVecchio indicated that “The first step is to take stock of risks presented by these changes in the law. U.S. companies should consider conducting a risk assessment to determine whether there is facilitation risk arising either from foreign affiliates re-entering Iran or foreign business partners that have re-entered Iran.”
For foreign subsidiaries of U.S. companies conducting business with Iran, the risk of violating U.S. sanctions intensifies when cross-border operations are intermingled, resulting from a management structure that’s organized by product line rather than geography; operational support, such as human resources, logistics, finance, auditing, legal and marketing, is U.S.-based. General License H for the first time authorized certain “passive facilitation” of Iranian transactions to take place in the United States, such as U.S.-based enterprise resource planning systems and email systems, as noted above. However, even those types of authorized activities must be closely monitored from a compliance perspective to make sure they do not cross the line to active facilitation.
For U.S. natural and legal persons communicating with either foreign subsidiaries or unrelated non-U.S. business partners, there are a number of potential transaction-specific facilitation risks, such as business or legal planning relating to the trade in goods, technology and services between Iran and other non-U.S. locations; U.S. persons approving or negotiating agreements involving Iran; U.S. persons helping to manufacture, export or re-export goods and services to Iran; U.S. referrals of purchase orders or requests for bids; and providing financial services that serve to support activities in Iran. U.S. persons are allowed to describe the law and respond to questions from the foreign company; however, U.S. natural and legal persons may not restructure or tweak the foreign proposals.
U.S. companies can take some basic steps to help make sure that these types of transactions are conducted in a compliant manner.
“It is critical for a U.S. company to obtain an end-user statement from their customers stating that they understand the restrictions on doing business with Iran and other U.S. sanctioned countries,” Jacobson said. “Obtaining an end-user statement is a sanctions compliance best practice and can be a significant mitigating factor if a violation is alleged.”
It is permissible, however, for U.S. persons to educate and set up policies and procedures for their overseas operations engaged with Iran, but cannot facilitate business decisions.
“Facts are important whether it’s regarding the company’s structure, services or products,” Christensen said. “You will have to know how to communicate something complex to a broad audience throughout the company and its business partners.
“While the rules are complex, you can find clarity in the answers,” which are contained in the executive orders, statutes, and regulations regarding the U.S. sanctions against Iran, he said.
Forwarders must also be careful not to violate U.S. sanctions against Iran.
“Freight forwarders are very much like the banks when it comes to sanctions compliance risk. They must be concerned that the underlying transaction for the freight that they’re moving is permissible,” Jacobson said.
Snap-Back Risk. Yet, there remains a general apprehensiveness among many U.S. and non-U.S. companies about having anything to do with the Iran for myriad reasons.
“A U.S. company may be very compliant, but its suppliers, service providers and stockholders, because of the potential risks, may not support its pursuit of opportunities in Iran,” DiVecchio said.
One of the toughest parts may be finding a bank willing to manage Iranian-related financial transactions. International trade professionals point to OFAC for instilling a reticence among these institutions whenever Iran is involved in a financial transaction. The Treasury enforcement agency has been tough on the banks in terms of penalties, not to mention the resulting negative publicity, when alleged violations of trade sanctions occur.
“Many U.S. and foreign banks are gun shy in handling directly or indirectly the transfer of funds to the seller since many banks have already been burned by OFAC with substantial penalties in the past,” DiVecchio said.
“Banks hit hardest by OFAC won’t line up early to do business with Iran,” Christensen added. “It will take some time to get over that level of discomfort.” However, he said a few banks outside the United States will provide payment services and in time more banks will do the same.
Christensen said the energy sector and civil aircraft have generated a good deal of activity with Iran, and similarly foresees that the general license activity for food, medicine, and agricultural products will continue.
With the easing of some U.S. sanctions toward Iran, it’s not expected that OFAC and BIS will ease up on their enforcement activities involving Iran.
“Iran remains the No. 1 target of the U.S. export and sanctions enforcement community,” Jacobson said. “It’s difficult to tell if there will be a spike in enforcement cases in the near-term due to the easing of sanctions toward Iran. It can take years for many of the cases to play out.”
Christensen said through the implementation of the JCPOA that “we’ve simply returned to a time five years ago when the U.S. had unilateral sanctions which were tougher than our major trading partners [and put U.S. companies at a competitive disadvantage internationally]. We still don’t seem to get that multinational sanctions work better than unilateral sanctions.”
There is also concern of a “snap-back” if Iran does not meet its obligations under the JCPOA or if increased sanctions result from a change in the White House, no matter which political party secures the presidency.
Asked whether under this scenario the U.S. government will consider lifting additional trade sanctions against Iran in the next few years, Jacobson said, “I’m not very optimistic.”