OFAC Issues Additional Guidance on the Scope of Iran Sanctions Easement under JCPOA – Emphasizing the Limited Nature of the Present Relief

June 16, 2016

On June 8, 2016, the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury further clarified the scope of sanctions relief granted on "Implementation Day" (January 16, 2016) under the Joint Comprehensive Plan of Action ("JCPOA"), the landmark Iran nuclear deal that was finalized in July 2015.[1]  Through publication of several new Frequently Asked Questions ("FAQs"), OFAC offered additional guidance on the application of General License H ("GL H"), which authorizes foreign entities owned or controlled by U.S. persons to engage in certain activities involving Iran, as well as additional guidance relating to the scope of the financial and banking relief measures.[2]    

Background on Recent U.S. Sanctions Relief

As highlighted in our previous client alert discussing the parameters and impact of sanctions relief ushered in on Implementation Day, the principal forms of relief granted to date by the U.S. under the JCPOA have been directed toward easing various "secondary sanctions" measures directed at non-U.S. entities that could be sanctioned by U.S. authorities for engaging in certain activities involving Iran.  As of the date of this memorandum, the Obama Administration has provided very limited relief in the "primary sanctions" that address the activities of U.S. persons.  In short, the U.S. embargo against Iran remains very much in force, even if the Administration has eased some of the broader, extra-territorial measures the U.S. implemented over the past several years as sanctions on Iran strengthened.   

One area of relief affecting U.S. persons directly–or more precisely, foreign subsidiaries of U.S. persons–is set forth pursuant to OFAC GL H, which authorizes "U.S.-owned or -controlled foreign entities" to engage in certain "transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by 31 C.F.R. § 560.215."[3]   A foreign entity is "owned or controlled" by a U.S. person if the U.S. person: (1) holds 50 percent or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity.[4]   Under the Iran Threat Reduction and Syria Human Rights Act of 2012, Public Law 112-158 ("TRA"), such entities were prohibited from engaging in almost any Iran business.  However, pursuant to GL H, foreign-domiciled subsidiaries of U.S. companies have been authorized to engage in activities with Iran consistent with the JCPOA.  In one of the few aspects of primary sanctions relief, section (b) of GL H authorizes limited activities by U.S. persons to enable foreign-domiciled U.S. subsidiaries to engage in transactions pursuant to the general license. 

Since its publication in January 2016, the scope and practical import of GL H has remained an area of debate and uncertainty for U.S. companies seeking to take advantage of the relief provided.  Many companies have been unsure how to remain compliant with the general broad-based restrictions of the Iran embargo, while having their subsidiaries take full advantage of GL H.  Several of the FAQs published by OFAC on June 8, 2016 are clearly directed at addressing this uncertainty, and are designed to offer further clarification on the specific contours and procedures of this general license.

Guidance on Foreign-Domiciled Entities Owned or Controlled by U.S. Persons

The new FAQs provide the following guidance concerning GL H, in many cases in direct response for inquiries concerns raised by U.S. companies and/or the OFAC bar: 

  • U.S. Persons:  Given the continued application of primary sanctions, the definition of "U.S. person" had potential to contradict the provisions of GL H, if "U.S.-owned or -controlled foreign entities" were to be considered "U.S. persons."  OFAC specified that U.S.-owned or -controlled foreign entities are not considered "U.S. persons" and are consequently eligible for the authorizations of GL H.  The term "United States person," or "U.S. person," as defined in Section 560.314 of the Iranian Transactions and Sanctions Regulations ("ITSR"), means "any United States 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." [Question K. 15].
  • Aggregation of interests of multiple U.S. persons to determine whether foreign-domiciled entities are U.S.-owned or -controlled foreign entities:  Responding to the use of the "singular" (U.S. person rather than U.S. persons) in the regulations and underlying sanctions statutes, OFAC specified that an entity established or maintained outside the United States is considered owned or controlled by a U.S. person if, in the aggregate, one or more U.S. persons hold(s) a 50 percent or greater equity interest by vote or value in the entity or if one or more U.S. persons hold(s) a majority of seats on the board of directors of the entity.  Pursuant to OFAC guidance, a "determination as to whether one or more U.S. persons otherwise control(s) the actions, policies, or personnel decisions of a foreign entity is a fact-specific, case-by-case determination, but in making such a determination, OFAC would look to the aggregated ownership interests held, and indicia of control exercised, by all relevant U.S. persons."  Importantly, OFAC provided an exception to such a determination in the specific case of companies organized under non-U.S. laws that are publicly traded or where ownership interests are widely dispersed.  In the case of such companies, "OFAC would not regard such an entity to be owned or controlled by a U.S. person if U.S. persons, in the aggregate, passively hold more than 50 percent of the shares of such entity but no one U.S. person holds a controlling share in the company."  Such a company could still be considered a U.S.-owned or -controlled foreign entity, however, to the extent one or more of the other criteria for ownership or control are met. [Question K. 17].
  • Transactions with E.O. 13599-listed Entities: OFAC specified that GL H authorizes U.S.-owned or -controlled foreign entities to engage in transactions with individuals and entities on the E.O. 13599 List, as long as they are otherwise within the scope of the general license.  E.O. 13599 is the list of entities OFAC has identified as being either the "Government of Iran" or "Iranian financial institutions."  These entities are blocked pursuant to E.O. 13599, but are not sanctioned.  As such, a foreign subsidiary can deal with them consistent with the JCPOA whereas a foreign subsidiary engaging with an entity that is listed as a Specially Designated National or Foreign Sanctions Evader would likely not be consistent with the JCPOA.  [Question K. 16].
  • Policies and Procedures:  According to Question K. 14, GL H authorizes a U.S. person to alter its policies and procedures or the policies or procedures of its owned or controlled foreign entity to allow the U.S.-owned or -controlled foreign entity to establish a physical presence in Iran.  U.S.-owned or -controlled foreign entities, however, continue to be prohibited from exporting or re-exporting U.S.-origin goods, technology, or services to Iran without a license.  According to Question K. 19, U.S. persons can establish or alter the operating policies and procedures of a U.S. entity or a U.S.-owned or -controlled foreign entity more than once "so long as the changes are not with respect to, or for the purpose of facilitating, any particular Iran-related transaction(s) by the U.S.-owned or -controlled foreign entity."  Pursuant to Question K. 18, in cases where multiple U.S. persons, in the aggregate, own or control  a foreign entity, U.S. persons are permitted to amend the policies and procedures of U.S. entities that own a portion of the U.S.-owned or -controlled foreign entity, as well as the policies and procedures of the U.S.-owned or -controlled foreign entity, to the extent necessary to allow the U.S.-owned or -controlled foreign entity to engage in transactions with Iran that are authorized under GL H.  [Question K. 14; Question K. 19; Question K. 18]
  • Guidance on Proper Firewall/Insulation Procedures for U.S. Persons
    • According to Question K. 20, U.S. persons employed or serving on the Boards of Directors of a U.S.-owned or –controlled foreign entity or any other foreign entity must in general be "walled off" or recused from "all Iran-related business of that entity, except for certain limited activities authorized under section (a) of GL H."  U.S. persons are allowed to establish proper procedures and policies to allow for such recusal. Importantly, OFAC advises that "U.S.-owned or -controlled foreign entities (and other foreign entities) should consider instituting a blanket recusal policy (as opposed to case-by-case abstentions, which, depending on the facts and circumstances, could be considered a prohibited facilitation and/or export of services under the ITSR) for U.S. person directors, managers, and other employees with respect to Iran-related matters."  [Question K. 20].
    • Question K. 21 clarifies that if a foreign entity owned or controlled by a U.S. person engages in transactions pursuant to GL H and also engages in transactions with other non-sanctioned jurisdictions, U.S. parent company and its board members, senior management, and employees do not have to remove themselves from all day-to-day operations of its owned or controlled foreign entity and may continue to be involved in the U.S.-owned or -controlled foreign entity’s day-to-day operations with non-sanctioned  jurisdictions. [Question K. 21].
    • Question K. 22 specifies that a U.S. person may receive reports from its owned or controlled foreign entity that include details on GL H authorized transactions the foreign entity conducted with Iran. However, U.S. persons remain prohibited from engaging in Iran-related activities of U.S.-owned or -controlled foreign entities and cannot attempt to influence Iran-related business decisions of such entities based on such reports.  [Question K. 22].

Guidance on Financial and Banking Measures

OFAC also published additional guidance on the scope of some of the financial and banking relief measures under the JCPOA.  Specifically, Question C. 15 specifies that U.S. financial institutions can transact with, including by opening or maintaining correspondent accounts for, non-U.S., non-Iranian financial institutions that maintain correspondent banking relationships or otherwise transact with Iranian financial institutions that are not on the SDN List.  However, unless otherwise exempt or authorized by OFAC, non-U.S. financial institutions continue to be prohibited from routing Iran-related transactions through U.S. financial institutions or involve U.S. persons in such transactions.  OFAC clarified that non-U.S., non-Iranian financial institutions should have appropriate systems and controls to ensure that they do not route Iran-related transactions through U.S. financial institutions. [Question C. 15].

OFAC also issued guidance on recusal and insulation policy in Question C. 16.  OFAC clarified that a non-U.S., non-Iranian entity (including a non-U.S., non-Iranian financial institutions) can engage in transactions with Iranian persons not on the SDN List in situations where one or more U.S. persons serve on the Board of Directors or serve as a senior manager of a non-U.S., non-Iranian entity, as long as such U.S. persons are walled-off from the Iran-related business.  As in Question K. 20, OFAC recommends that entities considering how to wall off U.S. persons from the institution’s Iran-related business should consider instituting a blanket recusal policy, as opposed to case-by-case abstentions, which run the danger of being viewed as prohibited facilitation.  OFAC notes that in "instances where national laws prohibit the recusal of a U.S. person executive from the decision-making processes of his or her non-U.S. employer, including those involving Iran-related business, the executive or employer should consult with their counsel and/or approach OFAC for additional guidance." [Question C. 16]

Conclusion and Implications

One of the key takeaways from the newly-published FAQs is that U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with Iran, including any transactions that may be construed as facilitation.  Importantly, while the FAQs clarify that U.S. persons may establish and amend policies and procedures with respect to operations of U.S.-owned or -controlled foreign entities engaging in authorized transactions in Iran, OFAC recommends adopting blanket recusal policies for U.S. persons to be isolated from Iran-related business, because case-by-case abstention could be viewed as facilitation or prohibited export of services under the sanctions regime.

This latest round of FAQs underlines that many of the restrictions on U.S. businesses with respect to Iran dealings remain unchanged.  We believe it likely that another round of FAQs will be released over the summer, but think it unlikely that any subsequent round of FAQs will provide further flexibility of action for U.S. or non-U.S. businesses in any potential Iran-related undertakings.

   [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.

   [3]   Section (a), 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.   Under Section 560.215 of the Iranian Transactions and Sanctions Regulations ("ITSR"), an entity "owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran."  31 C.F.R. § 560.

   [4]   31 C.F.R. § 560.215(b).

The following Gibson Dunn lawyers assisted in the preparation of this client alert Judith Alison Lee, Adam M. Smith, David A. Wolber and Kamola Kobildjanova.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group:

United States:
Judith A. Lee – Co-Chair, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Daniel P. Chung – Washington, D.C. (+1 202-887-3729, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Mehrnoosh Aryanpour – Washington, D.C. (+1 202-955-8619, [email protected])
David A. Wolber – Washington, D.C. (+1 202-887-3727, [email protected])
Nicholas A. Klein – Denver (+1 303-298-5795, [email protected])
Kamola Kobildjanova – Palo Alto (+1 650-849-5291, [email protected])
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, [email protected])

Robert S. Pé – Hong Kong (+852 2214 3768, [email protected])

Peter Alexiadis – Brussels (+32 2 554 72 00, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Mark Handley – London (+44 (0)207 071 4277, [email protected])  

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