Vedder Thinking | Articles U.S. Iranian Sanctions Relief Creates Potential Opportunities and Significant Compliance Challenges
On January 16, 2016 (Implementation Day), the United States lifted nuclear-related secondary sanctions found in the Iranian Transactions and Sanctions Regulations (ITSR). The U.S.'s actions, along with that of the other P5+1 parties (China, France, Germany, Russia, and the United Kingdom, coordinated by the European Union's High Representative), implemented the commitments these parties agreed to with Iran in the July 14, 2015 Joint Comprehensive Plan of Action (JCPOA). Specifically, the JCPOA stipulated that upon verification by the International Atomic Energy Agency that Iran had implemented measures demonstrating the peacefulness of its nuclear program, the U.S. (and the other P5+1 parties) would implement sanctions relief outlined in the JCPOA.
Although the sanctions relief is historic for bringing Iran, at least partially, back into the global economy (in certain industries), its impact for U.S. persons1 is minimal. The majority of the sanctions relief implemented by the U.S. relates to secondary sanctions, which are sanctions generally directed toward non-U.S. persons for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction and does not involve U.S. persons.2 As implemented, the sanctions relief now allows non-U.S. persons3 to engage in activities with certain sectors and industries in Iran, including: (1) financial and banking sectors; (2) energy and petrochemical sectors; (3) shipping, shipbuilding and port operators; and (4) insurance, re-insurance and underwriting sectors. In addition, as part of its JCPOA commitments, the U.S. has removed over 400 individuals and entities from its various sanctions lists, thereby paving the way for non-U.S. persons to conduct various transactions that were previously subject to secondary sanctions under U.S. law.
U.S. persons and companies are not the primary beneficiaries of the lifting of nuclear-related secondary sanctions. Moreover, the implementation of the JCPOA by the U.S. does not affect the broader trade embargo currently in place against Iran or the various other targeted sanctions programs that involve Iran. For example, the existing sanctions programs targeting Iranian human rights abuses, the proliferation of weapons of mass destruction, and Iranian support of global terrorism will all remain intact. As made clear by the Office of Foreign Assets Control (OFAC) in its guidance materials and FAQs, U.S. persons will "continue to be broadly prohibited from exporting any goods, services, or technology directly or indirectly to Iran,"4 unless otherwise authorized to engage in such transactions by existing regulations or license. In other words, U.S. persons and companies will find little opportunity resulting from the much-ballyhooed implementation of the JCPOA.
While JCPOA goody bags are mostly being handed out to non-U.S. persons, U.S. persons and companies and their controlled foreign companies are not walking away empty-handed. For example, as part of its various trade commitments made under the JCPOA, the U.S. committed to allow, through the issuance of specific licenses, the sale and lease of commercial passenger aircraft and related parts and services to airlines and other parties in Iran. Accordingly, on Implementation Day, OFAC issued a broad statement of licensing policy indicating that specific licenses would be issued on a case-by-case basis to authorize U.S. persons and, in the appropriate jurisdictional context, non-U.S. persons to:
(1) export, re-export, sell, lease, or transfer to Iran commercial passenger aircraft for exclusively civil aviation end-use, (2) export, re-export, sell, lease, or transfer to Iran spare parts and components for commercial passenger aircraft, and (3) provide associated services, including warranty, maintenance, and repair services and safety-related inspections, for all the foregoing, provided that licensed items and services are used exclusively for commercial passenger aviation.5
In its FAQs on the subject, OFAC states that this licensing policy applies to commercial passenger aircraft "that contain 10 percent or more U.S.-controlled content."6 OFAC has also broadly indicated the types of aircraft that may be approved under the new licensing policy. They include: "wide-body, narrow-body, regional and commuter aircraft used for commercial passenger aviation."7 Excluded from this list, and therefore ineligible for licensing, are "cargo aircraft, state aircraft, unmanned aerial vehicles, military aircraft, and aircraft used for general aviation or aerial work."8
Although the new statement of licensing policy will undoubtedly present potentially lucrative opportunities for the commercial aviation industry, it also presents a myriad of complex compliance challenges. One such challenge is determining the meaning of "commercial passenger aircraft for exclusively civil aviation end use." For example, are business aircraft that are used privately by high-net-worth Iranians or Iranian businesses to be considered "commercial passenger aircraft?" To the extent that such aircraft are used for general aviation purposes, the answer would appear to be no, but the answer may hinge upon whether a particular transaction is structured using a management company where the aircraft is also held out-for-hire (i.e., for a commercial purpose).
Another compliance issue will involve the determination of all associated and incidental services that will be authorized in connection with or as a separate component of a special license. The ITSR currently authorizes "transactions ordinarily incident" to a licensed transaction and "necessary to give effect" thereto.9 In the context of a licensed export, re-export, sale, lease or transfer of a commercial passenger aircraft (or its related parts), OFAC has stated that such incidental transactions "include transportation, legal, insurance, shipping, delivery, and financial payment services provided in connection" therewith.10
In addition to authorized transactions that are ordinarily incident to licensed transactions, the new policy contemplates the licensing of "associated services" related to a permitted commercial passenger aircraft transaction (and related parts and services) to Iran. OFAC gives as examples "the provision of warranty, maintenance, repair services, safety-related inspections, and training related to commercial passenger aircraft and spare parts and components for such aircraft exported to Iran pursuant to a specific license." Moreover, U.S. persons may now seek a specific license to provide associated services that are not within the scope of an existing license for a commercial passenger aircraft transaction. For example, OFAC states that it will consider applications under the new licensing policy for a U.S. financial institution to finance the sale of a particular commercial passenger aircraft, "but not an application to provide financing services in general."
As matters currently stand, the universe of "transactions ordinarily incident and necessary" to licensed transactions under the new licensing policy –and "associated service" transactions eligible for independent licensing – has not been fully explored, and will create challenges requiring careful structuring by deal participants in the near term. In the meantime, the standard rules of engagement will continue to apply. For example, all newly issued licenses will prohibit recipients from re-selling or re-transferring the licensed aircraft, goods or services to any person on the Specially Designated Nationals and Blocked Persons List (SDN List).11 Since Iran Air is the only Iranian airline removed from existing SDN Lists, the net impact on Iran's current commercial airlines industry may be limited.12
Besides the challenges above, U.S. persons and companies must continue to ensure that any sale of U.S. aircraft or related parts to Iran comports with U.S. export control laws and end-use restrictions. In particular, exports or re-exports to individuals and entities listed on the U.S. Department of Commerce's (Commerce) Denied Persons List and, in some cases, the Entity List will require separate authorization from Commerce. Further, U.S. companies will continue to be restricted by the facilitation prohibition applicable to transactions with Iran. Thus, U.S. persons, wherever located, cannot "approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by [the Iranian Transactions Regulations] if performed by a United States person or within the United States."13
These nuances will increase the compliance challenges for U.S. persons, and many of the related issues will likely be clarified when various license applications begin arriving on OFAC's doorstep. To summarize, the sanctions relief provides for a potentially lucrative market for U.S. commercial aviation industry participants, including manufacturers, lessors and other debt and equity financing participants, while simultaneously increasing the compliance challenges for these participants. In light of OFAC's extremely vigilant monitoring of sanctions compliance, we are very confident that the U.S. government will aggressively enforce compliance with the JCPOA-related licenses and pursue enforcement actions when applicable. As such, careful analysis and robust due diligence will be paramount for any transaction involving Iran, and all transaction agreements should include comprehensive terms and conditions intended to protect unsuspecting participants from the actions of those seeking to circumvent U.S. export control laws.
Should you have any questions about your operations please contact John E. Bradley at +1 (212) 407 6940, Marques O. Peterson at +1 (202) 312 3038 or David M. Hernandez at +1 (202) 312 3340.
1 The term "U.S. person" 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.
2 See JCPOA FAQs, p. 1.
3 The term "non-U.S. person" means any individual or entity excluding 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.
4 See JCPOA FAQs, at C.7.
5 JCPOA Annex II, Section 5.1.1; OFAC Statement of Policy for Activities Related to the Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services (Jan. 16, 2016).
6 See JCPOA FAQs, at J.2.
8 Id. (emphasis added).
9 31 C.F.R. § 560.405.
10 See JCPOA FAQs, at J.3.
11 Also, if the United States determines that aircraft, goods, or services licensed for export, re-export, sale, lease or transfer to Iran have been used for purposes other than exclusively for commercial passenger aviation, or have been re-sold or re-transferred to persons on the SDN List, the United States would view this as grounds to cease performing its commitments, which means OFAC would likely revoke the licenses and pursue enforcement actions.
12 The following Iranian airlines remain on the SDN List: Mahan Air, Mahan Air Co., Pouya Air, Yas Air, Yas Air Kish, Caspian Air, and Meraj Air.
13 31 C.F.R. § 560.208.