Bourse and Bazaar | Dr. Julia Pfeil: This client note was prepared by the German trade compliance team at Dentons Europe. It is republished here with permission.
On 8 May 2018, U.S. President Trump announced that the United States “will withdraw from the Iran nuclear deal” and that the United States “will be instituting the highest level of economic sanctions”. At the same time, U.S. authorities announced that U.S. sanctions would be re-instated, at the latest by 4 November 2018. What does this mean for companies who have ties to Iran or who do business in Iran?
In January 2016, the U.S. and the EU lifted some of the sanctions that they had imposed on Iran. This was based on an international agreement, the so-called Joint Comprehensive Plan of Action (“JCPOA”). Since 2016, many European companies engaged in business activities in Iran or extended their activities. Transactions with Iran will now meet with severe difficulties, and many companies will be forced to cease and wind down their operations.
In the following, we summarize the most important developments and applicable rules.
U.S. Companies and Their Subsidiaries
Applicable U.S. laws generally prohibit U.S. companies from engaging in any business activities with a relation to Iran. This prohibition also applies to non-U.S. subsidiaries of U.S. companies. Based on the JCPOA, the U.S. had issued General License H. This General License broadly allowed non-U.S. subsidiaries of U.S. companies to engage in business activities with Iran.
General License H will be revoked “as soon as feasible”. It will then be replaced with a “new” General License H; this new General License will, however, only authorize the wind down of existing transactions and operations that had been made possible by the “old” General License H. Wind-down operations must be completed by 4 November 2018.
Adding Parties to the U.S. List of Blocked Parties
The U.S. Government has imposed prohibitions a number of individuals, entities and groups (“Specially Designated Nationals” – “SDN”). Any dealings with SDN are prohibited. In addition, all dealings with a company in which an SDN owns at least 50% of the interest are also prohibited.
Not only U.S. nationals and U.S. companies (amongst others) must comply with this prohibition. Any party must comply with these prohibitions when that party is involved in a transaction that is made in US Dollars or when a U.S. bank or U.S. company is also involved in that transaction.
In 2016, a large number of companies and individuals were removed from the SDN List of the U.S. These parties will be added to the SDN List again. It is currently unclear when that will happen, but at the latest on 5 November 2018. Amongst these parties are Iranian banks as well as the National Iranian Oil Company, and also companies and banks established outside of Iran, e.g. in the EU.
U.S. Measures Targeting Specific Industry Sectors
Before 2016, the U.S. had adopted numerous regulations to deter also non-U.S. companies from doing business with Iran. These regulations, so-called Secondary Sanctions, threaten that the U.S. Government can impose severe measures on non-U.S. companies who enter into transactions with certain industry sectors and with certain entities and individuals in Iran.
These measures can amount to a complete exclusion of the non-U.S. company from the U.S. market and from transactions with all U.S. companies worldwide. This can also mean that companies are designated as SDN. Companies which are faced with the risk of Secondary Sanctions should carefully analyze the risks for continuing their activities. U.S. authorities have stated that they want to enforce Secondary Sanctions in the future.
These measures had been waived or lifted under the JCPOA. They will now be re-instated by 6 August 2018 and by 4 November 2018. Until then, companies engaged in the industry sectors concerned must wind down their operations if they want to avoid Secondary Sanctions.
The most important Secondary Sanctions concern the following activities:
- Wind-down by 6 August 2018
- Transactions with the automotive sector;
- Sale or purchase of graphite, raw or semi-finished metals such as aluminum and steel, and coal;
- Provision of software for integrating industrial processes.
- Wind-down by 4 November 2018
- Transactions involving ports, shipping and shipbuilding, including Iranian shipping lines;
- Petroleum-related transactions;
- Transactions with the petrochemical sector;
- Investments in the development of oil resources;
- Transactions by non-U.S. banks with certain Iranian banks, including the Iranian Central Bank;
- Forwarding of “SWIFT” messages to Iranian banks.
Commercial Aircraft and Related Services
As a result of the close global cooperation in the aircraft industry, any commercial aircraft will include material parts with U.S. origin. As a consequence, commercial aircraft and most spare parts for commercial aircraft can only be supplied to Iran with a license from U.S. authorities. Similarly, even non-U.S. companies require licenses from U.S. authorities for maintenance and other services for commercial aircraft.
Under the JCPOA, U.S. authorities granted such licenses to both U.S. and non-U.S. companies. All these licenses will be revoked. U.S. and non-U.S. companies must wind down their activities under these licenses by 6 August 2018.
The Meaning of Wind-Down
Where a wind-down of operations or business relations is required, deliveries and supplies can be made, and services can be provided, until the wind-down date, but only if the contract has been concluded before 8 May 2018.
Business activities and operations must end by the applicable wind-down date. In order to end business operations, companies are allowed to “engage in all transactions ordinarily incident and necessary to wind down” the activities. This may be necessary, for example, where contracts specify delivery dates that are later than the wind-down date.
Non-Iranian companies can receive payments even after the wind-down date, if the following two conditions are fulfilled: The contract has been concluded before 8 May 2018, and all deliveries have been made by the wind-down date. This also applies to loans or credits granted by non-Iranian banks. By contrast, Iranian banks and companies may not receive any payments after the wind-down date.
Activities that Remain Permitted
Even before 2016, U.S. authorities had issued General Licenses which permit certain business activities in Iran. The most important General Licenses are a General License that permits the export to Iran of food, foodstuffs, agricultural items, pharmaceutical products (drugs) and medical devices (often referred to as the “AgriMed” General License). In addition, U.S. authorities had issued a General License that permits the export to Iran of many standard IT items and software, if these products could be acquired without restrictions on the general market (General License D-1).
Based on information that is currently available, these General Licenses will not be revoked, and exports under these General Licenses remain permitted. These General Licenses cannot only be used by U.S. companies, but by companies from other countries as well.
EU Companies: Existing EU Sanctions Still Apply
The EU has not changed or amended the respective EU sanctions. For EU companies who have business operations in or with Iran, the EU sanctions and embargo apply in addition to the U.S. measures. The most important restrictions under EU sanctions and embargos are the following.
Sanctioned Parties and “Financial” Sanctions
The EU has imposed prohibitions to enter into business transactions with a number of individuals, entities and groups in Iran (so-called “Designated Parties”). EU companies may not make any payments and any deliveries to Designated Parties. There are also restrictions for dealing with companies which are owned or controlled by Designated Parties. These range from increased due diligence requirements to prohibitions on dealing with such subsidiary.
The EU has adopted several lists of items which may not be supplied to Iran. It is also prohibited to conclude sales contracts for these items, to provide technical support services or the provision of export financing for these products. These prohibitions apply, e.g., for military items (arms embargo) and for certain items that could be used in a nuclear program.
Export Licensing Requirements
In addition, licenses are required to supply certain items to Iran. The items concerned are also included in several lists adopted by the EU. As with the export prohibitions, licensing requirements do not only apply for the actual export of these items, but in addition for the conclusion of the respective sales contract, the provision of technical support services for these items or for the provision of export financing of these products. Licensing requirements apply, for example, for the supply of items for the interception of telecommunication, of less important items that could be used in a nuclear program or for graphite, raw or semi-finished metals such as aluminum and steel. Depending on the product in question, licensing procedures may be quite complex, because some licenses must be reviewed by a special committee established under the JCPOA before they are granted.
Restrictions for Investments in Iran
In accordance with the EU sanctions and embargo, establishing companies in Iran or investing in companies in Iran may be prohibited or may require a license. These restrictions apply to companies which engage in certain business activities in Iran (e.g. in activities linked to the nuclear sector). The same restrictions apply for providing financing to companies in Iran.
Trading With Iran in the Future
These new unilateral U.S. measures will severely impact doing business with Iran and doing business in Iran. In addition to the prohibitions and other restrictions that apply to certain business activities directly, the U.S. measures will have a severe “chilling” effect. Companies will refrain from business activities involving Iran, and banks will refuse to provide financing for business activities in Iran.
As a result of the Secondary Sanctions threatened for sending SWIFT messages to Iranian banks, there is a risk that it will become impossible (again) to make electronic transfers of funds to and from Iranian banks. In addition, banks will now be even more reluctant with processing payments to and from Iran. EU companies will face the problem again that they may have perfectly legal business activities in Iran but will not be able to find a bank where they can receive payments.
It remains to be seen if European leaders manage to find a unified response to the new measures adopted unilaterally by the U.S.