Iran Sanctions – A Few Basic Principles to Consider

By: John E. Parkerson, Jr., Esq.

International businesses are inquiring about recent developments with respect to sanctions imposed on the Islamic Republic of Iran.  Most recognize from media reports, televised Presidential debates, political pundits, and from other sources that the U.S. recently was party to some kind of agreement with Iran that purported to ease sanctions on Iran in exchange for limitations on its nuclear program.   That “agreement” is the so-called Joint Comprehensive Plan of Action (“JCPOA”) between the E3/EU+3 (China, France, Germany, the Russian Federation, the United Kingdom, and the United States) and Iran; and it was concluded on July 14 this year.

The debate in the U.S. over whether the agreement actually will be effective in curbing Iran’s nuclear program likely will continue for quite some time.  While nuclear program issues continue to be hotly discussed and highly publicized, I surmise that most U.S. companies are at a loss to understand how the deal changes current sanctions – the legal restraints on business with Iran.  Some specifics remain missing, as U.S. and other JCPOA parties continue to sort out implementation in this evolving area.  The subject is complex, and the paragraphs below point out just some of the basic principles that U.S. persons who might be interested in doing business in Iran should consider.

Presently, U.S. sanctions prohibit virtually any transaction by U.S. persons involving Iran.  The Iranian Transactions and Sanctions Regulations (“ITSR”) prohibit the export, sale, or supply, directly or indirectly, of any goods, technology, or services to Iran (a) from the United States by any person, whether U.S. or foreign; or (b) by a U.S. person, wherever located (including foreign entities owned or controlled by a U.S. person).  ITSR also generally prohibits the import of goods and services into the U.S. from Iran.   Only pursuant to a specific license from the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) may these persons subject to U.S. jurisdiction engage in most exports to, or imports from, Iran.  A few OFAC general authorizations exist that do not require a specific license from OFAC; but those permit trade with Iran in certain narrowly defined (under ITSR regulations) categories related to medical, food, internet software and hardware, education, support of NGOs, sports activities, personal remittances, certain telecommunications and mail transactions, journalism, travel, and informational materials.

So what has changed recently?  A couple of key dates have entered the picture:  “Adoption Day” (October 18, 2015) and “Implementation Day”.  On Adoption Day, the JCPOA became effective and the clock started for agreement parties to begin preparations to implement their respective JCPOA commitments.  President Obama explained the process that Adoption Day triggered in an official statement issued that day.  Separately, in a Presidential Memorandum, the President directed the Secretaries of State, Treasury, Commerce, and Energy “to take all necessary steps to give effect to the U.S. commitments with respect to sanctions described . . . in the JCPOA . . ..”

Immediately following the President’s actions, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) cautioned in an on-line Statement that “[u]ntil Implementation Day is reached, the only changes to the Iran-related sanctions are those provided for in the Joint Plan of Action (JPOA) of November 24, 2013, as extended.”  OFAC’s Statement and accompanying Frequently Asked Questions are especially important for grasping the complexities of the sanctions regime:  OFAC explains in its FAQs that Implementation Day occurs only upon the International Atomic Energy Agency (“IAEA”) verifying that Iran has met its initial nuclear-related obligations under the JCPOA. The timing with regard to Implementation Day is uncertain, given the series of steps that first have to occur; and it most likely will take several months (various opinions indicate likely not before late spring/early summer 2016 at earliest) to reach that point.  OFAC’s FAQs further caution that “[e]ven after Implementation Day, U.S. persons will continue to be broadly prohibited from engaging in transactions or dealings involving Iran, including the Government of Iran, with the exception of a few additional categories of transactions that . . . [OFAC] will license pursuant to the JCPOA.”  As a consequence, even though sanctions will be “eased” following Implementation Day, U.S. companies still must be extremely cautious in navigating through the complex ambiguities with respect to prohibited business activities involving Iranian persons or entities.

Generally, to the extent that any sanctions are “eased” following Implementation Day (whenever that happens), it is with respect to non-U.S. persons – and those parties (and, consequently, Iran as well) should see some significant benefits, although those benefits as yet are not fully defined.  Annex II to the JCPOA specifically states that “[t]he sanctions that the United States will cease to apply, and subsequently terminate . . . are those directed towards non-U.S. persons . . ..  U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to this JCPOA, unless authorised to do so by [OFAC].”  In other words, the U.S. embargo on Iran will remain in place and U.S. authorities will continue to enforce pre-existing controls on Iran-related transactions by persons subject to U.S. jurisdiction.  An OFAC special license, therefore, will continue to be required before those same persons can engage in most exports or imports to or from Iran.  After Implementation Day, sanctions will ease with respect to U.S. persons only for the following very limited additional categories of activities and only once the IAEA verifies that Iran has fulfilled its nuclear commitments under the JCPOA:  (a) export of commercial passenger aircraft and related spare parts and associated services to Iran; and (b) import from Iran of certain specified foods and carpets.

The implications are not yet fully understood.  A U.S. company that wishes to conduct business with an Iranian entity under one of the categories of permitted activities still faces huge hurdles, legal and practical:  for example, financial transactions will remain extremely difficult to process, whether for U.S. or non-U.S. parties, as U.S. dollar transactions that pass through the U.S. banking system risk being blocked unless OFAC specifically authorizes them.  Further, nothing changes, both with respect to U.S. and non-U.S. persons, with regard to the prohibitions on otherwise-permitted transactions involving Iranian parties that are on a Specially Designated Nations (“SDN”) list of sanctioned individuals or entities (for example, the Revolutionary Guard) or where the transaction involves elements that may be used for prohibited purposes (for example, missile proliferation, human rights abuses or support for terrorism).  A final risk that U.S. companies should consider, which has been widely noted, is the possibility that sanctions at some point could be reinstated (so-called “snap back”) if Iran failed to comply with its nuclear program commitments under the JCPOA.