Iran Sanctions Update – OFAC Issues Guidance Relating to Compliance and the Scope of Due Diligence for Non-U.S. Persons Engaging in Iran Transactions

October 24, 2016

On October 7, 2016, the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury issued additional guidance for non-U.S. persons engaging in transactions with Iranian counterparties pursuant to sanctions relief granted on "Implementation Day," January 16, 2016, under the Joint Comprehensive Plan of Action ("JCPOA"), the Iran nuclear deal finalized in July 2015.[1]  Through publication of several new Frequently Asked Questions ("FAQs"), OFAC clarified the compliance and due diligence steps non-U.S. persons should take for possible dealings with Iran or Iranian counterparties.[2]

Background on Recent U.S. Sanctions Relief

The principal forms of relief granted to date by the United States under the JCPOA have been directed toward easing various "secondary sanctions" measures directed at non-U.S. entities[3] that could be sanctioned by U.S. authorities for engaging in certain activities involving Iran, and relief offered to U.S.-owned or –controlled foreign entities pursuant to General License H, authorizing such entities to engage in certain transactions with Iran.[4]

Prior to Implementation Day, non-U.S. persons faced U.S. sanctions exposure if they engaged with certain Iranian persons or in transactions with specified Iranian sectors.  On Implementation Day, the U.S. has lifted secondary sanctions with respect to non-U.S. persons and removed over 400 individuals and entities from OFAC’s Specially Designated Nationals List ("SDN List"), including most of Iran’s major financial institutions and oil and energy firms.  Secondary sanctions continue to attach to non-U.S. persons, however, in transactions or activities with (1) Iranian persons who remain or are placed on the SDN List, (2) the Islamic Revolutionary Guard Corps ("IRGC") and its designated agents or affiliates, or (3) any other person on the SDN List designated in connection with Iran’s proliferation of weapons of mass destruction or their means of delivery or Iran’s support for international terrorism.[5]

Despite the lifting of secondary sanctions, many non-U.S. persons, including non-U.S. financial institutions, have been unsure how to take advantage of the new relief and still maintain compliance with the remaining U.S. sanctions restrictions on Iran.  The October 7, 2016 OFAC guidance seeks to address these concerns.

Guidance on Iran Compliance Measures for Non-U.S. Persons

The new FAQs provide the following guidance concerning the scope of secondary sanctions relief for non-U.S. persons:

• Dealings with entities not on the SDN List, but minority owned, or controlled in whole or in part, by an Iranian or Iran-related person on the SDN List:  OFAC clarified it is not necessarily sanctionable for a non-U.S. person to engage in transactions with an entity that is not on the SDN List but that is minority owned, or that is controlled in whole or in part, by an Iranian or Iran-related person on the SDN List.  However, OFAC recommends exercising caution when engaging in transactions with such entities to ensure that such transactions do not involve Iranian or Iran-related persons on the SDN List [Question M. 10]. 
• Due diligence on potential Iranian counterparties:  With respect to the necessary compliance and due diligence steps non-U.S. persons should undertake on potential Iranian counterparties, OFAC stated that screening the names of Iranian counterparties against the SDN List is a "step that would generally be expected, but that is not necessarily sufficient."  OFAC stated that in addition to checking the SDN List, a non-U.S. person should ensure that its due diligence procedures conform to its internal risk-assessment and overall compliance policies, which – in addition to other business considerations – should be based on best practices of the particular industry at issue and conform to guidance and expectations of the non-U.S. person’s home country regulators.  Non-U.S. persons should also consult with their local regulators regarding due diligence expectations in their domestic jurisdictions.  OFAC also suggested maintaining records documenting those due diligence efforts.  [Question M. 11]. 
• Due diligence by non-U.S. financial institutions on their customers’ Iranian customers:  On the question of whether OFAC expects non-U.S. financial institutions to conduct due diligence on their customers’ Iranian customers, OFAC responded that it considers the appropriate level of due diligence to depend on the financial institution’s role in a transaction, referencing its guidance on entities owned 50% or more by persons whose property and interests in property are blocked and the related FAQ 116.[6]  While OFAC would consider it a best practice for a non-U.S. financial institution to perform due diligence on its own customers, OFAC stated that it does not expect a non-U.S. financial institution to repeat the due diligence its customers have performed on an Iranian customer, unless the non-U.S. financial institution has reason to believe that those processes are insufficient.  Nonetheless, OFAC noted that non-U.S. financial institutions should consult with their local regulators regarding due diligence expectations in their domestic jurisdictions. [Question M. 12].

Conclusion and Implications

The newly published FAQs provide additional guidance to non-U.S. persons, including non-U.S. financial institutions, contemplating activities or business in Iran.  However, the latest round of FAQs do not provide further flexibility of action to non-U.S. businesses in potential Iran-related undertakings, and non-U.S. persons should continue to engage in necessary due diligence as they evaluate potential Iranian counterparties.

[1]  For a detailed summary of this development, please see Gibson Dunn Client Alert: "Implementation Day" Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks (Jan. 18, 2016), available at http://www.gibsondunn.com/publications/Pages/Implementation-Day-Arrives-Substantial-Easing-of-Iran-Sanctions–Continued-Limitations-and-Risk.aspx and Client Alert: 2015 Year-End Sanctions Update (Feb. 2, 2016), available at http://www.gibsondunn.com/publications/Pages/2015-Year-End-Sanctions-Update.aspx.

[2]  Office of Foreign Assets Control, Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf (last updated October 7, 2016) [hereinafter "OFAC JCPOA FAQs"].    

[3]  The term "non-U.S. person" means any individual or entity excluding any U. S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.  See 31 C.F.R. § 560.314.

[4]  General License H: Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_glh.pdf.  For a detailed summary of OFAC Guidance with respect to General License H, please see Gibson Dunn Client Alert: OFAC Issues Additional Guidance on the Scope of Iran Sanctions Easement under JCPOA – Emphasizing the Limited Nature of the Present Relief (June 16, 2016), available at http://www.gibsondunn.com/publications/Pages/OFAC-Issues-Additional-Guidance-on-Scope-of-Iran-Sanctions-Easement-under-JCPOA.aspx.

[5]  OFAC JCPOA FAQs, Question A. 6.

[6]  Office of Foreign Assets Control, Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property Are Blocked (August 13, 2014), available at  https://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf.  Office of Foreign Assets Control, Frequently Asked Questions, Question 116, available at  https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_compliance.aspx#116.