Implementation day for the Joint Comprehensive Plan of Action (JCPOA) caused significant confusion regarding authorized business dealings with Iran by a United States person. The JCPOA lifted most U.S. secondary sanctions on non-U.S. entities dealing with Iran. However, the agreement had little effect on the U.S. primary sanctions on trade with Iran, the Iranian Transactions and Sanctions Regulations (ITSR). Both U.S. persons and non-U.S. entities remain prohibited from dealing with persons on the Treasury Department’s Office of Foreign Asset Control’s (OFAC) Specifically Designated Nationals List (“SDN List”). See 31 C.F.R. § 562.201 (2016). Despite the ITSR’s prohibition on U.S. trade with Iran, certain exceptions to the ITSR do exist. See, e.g., 31 C.F.R. § 560.530.
How do U.S. sanctions define a U.S. national?
The ITSR defines a “United States person” as a U.S. citizen, permanent resident alien, any person within American borders, or entity organized under U.S. law. See 31 C.F.R. § 560.314 (2016). Entities organized under U.S. law include partnerships, associations, corporations, or any other organization, group, or subgroup. See 31 C.F.R. § 560.305. Foreign branches of entities organized under U.S. law still qualify as a “United States person.” 31 C.F.R. § 560.314.
How do U.S. sanctions define facilitating trade or a transaction with Iran?
A United States person cannot “approve, finance, facilitate, or guarantee” a non-U.S. person’s transaction if the Iranian Transactions and Sanctions Regulations would prohibit the transaction within the United States or a United States person from performing the transaction. See 31 C.F.R. § 560.208 (2016). Non-U.S. entities with United States persons as employees should establish policies to exclude U.S. employees from participating in transactions with Iran. A United States person’s involvement in a transaction with Iran would violate 31 C.F.R. § 560.208 by facilitating a transaction with Iran.
Can a United States person without an OFAC license still trade with Iran?
A United States person without an OFAC license cannot export or import goods, services, or technology to or from Iran. See 31 C.F.R. § 560.201-204 (2016). Furthermore, a U.S. person cannot export U.S. goods to a third country with knowledge or reason to know that the goods are ultimately destined for Iran. Id. § 560.205. However, OFAC issues two types of licenses for trade with Iran: specific licenses and general licenses. See 31 C.F.R. § 501.801. OFAC only issues specific licenses to particular persons or entities after an application process. Id. General licenses are broader and authorize a United States person to engage in a particular type of transaction without the need to apply for a license. Id.
OFAC has issued general licenses for the exportation of agricultural commodities, medicine, and medical supplies to Iran. See 31 C.F.R. § 560.530 (2016). Agricultural commodities mean products subject to, or would be subject to if located within the U.S., the EAR. Id. These products also must be meant for use in Iran as food, seeds for crops, fertilizers, and reproductive materials for food production. Id. Medicine must fit the definition of “drug” found in 21 U.S.C. 321(g).[i] Id. Medical device falls under the definition of “device” found in 21 U.S.C. 321(h).[ii] Id. All three general licenses prohibit exporting any of these goods to military or law enforcement entities. See § 560.530(a). OFAC authorizes a number of payment options for these exports: payment in advance, sales on an open account, letter of credit, or financing by a non-U.S., non-Iranian financial institution. See 31 C.F.R. § 560.532. United States persons are also authorized to provide brokerage services on behalf of U.S. persons engaging in business involving these general licenses. See 31 C.F.R. § 560.533.
Pursuant to JCPOA commitments, OFAC recently issued general licenses allowing imports of Iranian-origin carpets and foodstuffs by U.S. persons. See 31 C.F.R. § 560.534(a) (2016). Authorized carpets are classified under chapter 57 or heading 9706.00.0060 of the Harmonized Tariff Schedule of the United States. See 19 U.S.C.S. § 1202 (LexisNexis 2016). Authorized foodstuffs are classified under chapters 2-23 of the Harmonized Tariff Schedule of the United States. Id. United States depository institutions can transfer funds to the benefit of Iran for transactions underlying this general license. See 31 C.F.R. § 560.516. Payment for these imports cannot involve the debit or credit of an Iranian account. Id. U.S. depository institutions cannot directly advise, negotiate, issue, or confirm a letter of credit with an Iranian financial institution or the Government of Iran. See 31 C.F.R. § 560.535(a). The general license authorizes U.S. depository institutions to issue, advise, negotiate, or confirm letters of credit to pay for Iranian-origin goods with a third-country bank. Id. § 560.535(b).
General License I authorizes United States persons to engage in negotiations and transactions incident the negotiations for the export of commercial aircraft, related parts, and services to Iran. See U.S. Dep’t of Treasury, Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day 30 (2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf. The negotiated contract remains contingent on whether the United States person obtains a specific license from OFAC. General License I authorizes the negotiating parties to employ a Nondisclosure Agreement in regards to the contract. Id. at 31. However, a breach by an Iranian party would require specific licenses for legal fees.
OFAC General License H now allows non-U.S. entities owned or controlled by U.S. persons to engage in Iran-related business. See U.S. Dep’t of Treasury, General License H: Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person, 1 (2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_glh.pdf. A United States person owns or controls a non-U.S. entity if a United States person owns an equity share greater than or equal to 50 percent, hold a majority of seats on the board of directors, or controls the entity’s actions, personnel or policies. Id. U.S. employees of non-U.S. entities cannot participate in Iran-related operations. See 31 C.F.R. § 560.208. A non-U.S. entity owned or controlled by a United States person differs from a United States person’s foreign branch. See 31 C.F.R. § 560.314. A non-U.S. entity is organized under the laws of a different country. Id.
General License H allows a United States person that owns or controls a non-U.S. entity to engage in activities prohibited by the ITSR to establish or alter operating policies related to the non-U.S. entity doing business in Iran. See U.S. Dep’t of Treasury, Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day 31 (2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf. This provision allows U.S. persons that are board members or senior management of the U.S. principal or the non-U.S. subsidiary to participate in the policy alterations. Id. at 33. The license also allows U.S. persons, including outside counsel and consultants, to provide training on the new operating policies. Id. However, these employees cannot participate in the ongoing Iran-related operations or decision making. The United States person can also use an automated business support system that passively transfers data between the U.S. principal and all of its non-U.S. subsidiaries. Id. at 34.
At first glance, the ITSR and the exceptions to the ITSR prevent a United States person from engaging in any dealings with Iran without a license. However, a general license allows all U.S. persons to engage in a particular business in Iran without applying for an OFAC-issued license. Current OFAC general licenses allow U.S. persons to export agricultural commodities, medicine, and medical supplies to Iran. Current OFAC general licenses now authorize U.S. persons to import carpets and foodstuff of Iranian-origin. OFAC also has general licenses authorizing U.S. persons to negotiate contingent contracts for commercial airplanes, and the foreign subsidiaries of U.S. persons to engage in business with Iran. Trade with persons on the SDN List remains strictly prohibited for U.S. and foreign entities.
[i] 21 U.S.C. 321(g)(1): (1) The term “drug” means (A) articles recognized in the official United States Pharmacopoeia, official Homoeopathic Pharmacopoeia of the United States, or official National Formulary, or any supplement to any of them; and (B) articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals; and (C) articles (other than food) intended to affect the structure or any function of the body of man or other animals; and (D) articles intended for use as a component of any article specified in clause (A), (B), or (C). A food or dietary supplement for which a claim, subject to sections 343(r)(1)(B) and 343(r)(3) of this title or sections 343(r)(1)(B) and 343(r)(5)(D) of this title, is made in accordance with the requirements of section 343(r) of this title is not a drug solely because the label or the labeling contains such a claim. A food, dietary ingredient, or dietary supplement for which a truthful and not misleading statement is made in accordance with section 343(r)(6) of this title is not a drug under clause (C) solely because the label or the labeling contains such a statement.
[ii] 21 U.S.C. 321(h): The term “device” (except when used in paragraph (n) of this section and in sections 331(i), 343(f), 352(c), and 362(c) of this title) means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is:
(1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them,
(2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or
(3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.
By: Jon Gronbeck