August 20, 2015

Surprise in the Package Deal with Iran

Roland L. Trope

On July 14, 2015, China, France, Germany, the Russian Federation, the United Kingdom, the United States, with the High Representative of the European Union for Foreign Affairs and Security Policy and the Islamic Republic of Iran concluded an agreement on the Joint Comprehensive Plan of Action (JCPOA). (The JCPOA refers to those parties as the “E3/EU+3”; the U.S. government refers to them as the “P5+1.”) 

Subsequently, the U.S. Office of Foreign Assets Control (OFAC) issued two guidance documents – Initial Guidance in mid-July and Revised Guidance in early August. As the two OFAC documents emphasize, the JCPOA carries an unwelcome surprise for U.S. persons. 

In the event that sanctions lift (on what the JCPOA calls “Implementation Day”), U.S. persons will not receive relief from the prohibitions of the Iranian Transaction and Sanctions Regulations (ITSR). Only “non-U.S. persons” will. 

Lawyers who have closely analyzed the JCPOA reacted, in many instances, with incredulity on seeing this distinction and understanding its impact on U.S. businesses. Clients informed by counsel of the distinction have responded, “You can’t be serious.” 

Their reactions are understandable, because the ITSR poses acute risks at the threshold of commencing negotiations for a proposed deal. The ITSR prohibits not only “transactions” with Iran and Iranian entities, but even “dealings” with such parties such as “facilitating” or “approving,” even if such “dealings” might not result in an executed contract: 

[N]o United States person, wherever located, may engage in any transaction or dealing in or related to . . . [g]oods or services of Iranian origin . . . or . . . [g]oods, technology, or services for exportation, reexportation, sale or supply, directly or indirectly, to Iran or the Government of Iran. . . .

For the purposes [of the above quoted provision] . . . , the term transaction or dealing includes but is not limited to purchasing, selling, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing.” [ITSR §560.206 (a) and (b) (emphases added).] 

Not all U.S. businesses, however, will find the distinction (or discrimination) between “U.S.” and “non-U.S.” persons an impediment to doing business with Iran. Deep in Annex II, the JCPOA carves out a single significant exception from the application of the ITSR for one segment of the U.S. business community. A “U.S. person” that owns or controls a “non-U.S. person” will apparently be allowed on Implementation Day to have its non-U.S. affiliate enter into dealings and transactions that the ITSR prohibits to “U.S. persons.” 

The “U.S.” and “non-U.S.” distinction prompted questions from counsel during a telephone conference hosted by OFAC and the U.S. Department of State on July 31 “to brief interested members of the private sector” on the JCPOA. [E-mail from George P. Cajati, Dept. of State, July 29, 2015.] OFAC, however, has yet to give guidance on the curious exception under the JCPOA for “U.S.” companies that own or control a “non-U.S.” affiliate. 

This essay explains what we know so far. 

What the JCPOA Provides 

The New York Times columnist David Brooks, citing an analysis of the JCPOA by the Foreign Policy Institute, wrote a column on August 7, 2015, assessing the agreement with Iran. However one views the negotiated result, set forth in the JCPOA, many U.S. businesses will have their legal counsel scrutinize the JCPOA’s text to identify the potential commercial benefits that may become available if Iran meets the conditions for “Implementation Day” and the ensuing sanctions relief. Some may even review the Foreign Policy Institute analysis and be encouraged by its observation that:

Once Iran completes the initial actions required by the JCPOA, all U.N. and EU sanctions are lifted, while U.S. sanctions are waived. [Accessed at http://www.foreignpolicyi.org/content/fpi-analysis-what-us-officials-required-what-iran-deal-concedes (emphasis added).] 

If indeed, the JCPOA upon Implementation Day triggered a waiver of all U.S. sanctions that target Iran, U.S. businesses might expect that the JCPOA would provide them the same release from legal prohibitions that European businesses will receive. U.S. businesses could venture to find out whether and to what extent Iranian commercial entities were willing to transact with them. 

However, if the conditions have been met for Implementation Day to be reached, the waivers of U.S. sanctions as set forth in commitments expressed in the JCPOA will apply solely to non-U.S. persons

Pause and consider what that means. U.S. businesses will not have the sanctions relief available on Implementation Day to European and other “non-U.S. person” enterprises. For “U.S. persons,” the ITSR will continue to prohibit all business transactions and dealings with Iran and Iranian entities. The ITSR will remain unaffected by any waiver and will continue to be enforced by OFAC (unless OFAC issues guidance to the contrary). 

What OFAC’s Initial Guidance on the JCPOA Explains 

OFAC’s Initial Guidance deserves close scrutiny. For convenient reference, here is the complete text: 

  • On July 14, 2015, the P5+1 and Iran reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program will be exclusively peaceful. Building on the key parameters for a JCPOA announced on April 2, 2015, the JCPOA will provide Iran with phased sanctions relief upon verification that Iran has implemented key nuclear commitments.
  • U.S. sanctions relief will be provided through the suspension and eventual termination of nuclear-related secondary sanctions, beginning once the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures described in the JCPOA (Implementation Day). The U.S. government will publish detailed guidance related to the JCPOA prior to Implementation Day.
  • The P5+1 and Iran also decided on July 14, 2015 to further extend through Implementation Day the sanctions relief provided for in the Joint Plan of Action (JPOA) of November 24, 2013, as extended. This JPOA sanctions relief is the only Iran-related sanctions relief in effect until further notice. The U.S. government will issue revised guidance on the continued JPOA relief shortly.
  • Effective July 14, 2015, all specific licenses that: (1) were issued pursuant to OFAC’s Second Amended Statement of Licensing Policy on Activities Related to the Safety of Iran’s Civil Aviation Industry, and (2) have an expiration date on or before July 14, 2015, are hereby authorized to remain in effect according to their terms until Implementation Day.

    [Initial Guidance, http://www.treasury.gov/resourcecenter/sanctions/Programs/Pages/iran.aspx (emphases added).] 

OFAC's Initial Guidance is significant for what it disclosed, what it did not disclose, and what it expressly postponed or deferred disclosing. 

What OFAC Disclosed: 

  • Although the JCPOA has been agreed upon, from July 14, 2015 through the yet to be determined Implementation Day, the "JPOA sanctions relief" provided back on November 24, 2013 "is the only Iran-related sanctions relief in effect" for U.S. persons "until further notice."

    Significance: Notwithstanding any media reports to the contrary or pronouncements by any of the parties to the JCPOA, until Implementation Day there is no sanctions relief that applies to any "U.S. person" other than the severely limited relief set forth in the JPOA, and U.S. persons should not infer otherwise until OFAC provides further "notice" in the form of published guidance (e.g., in website notices, FAQs, General Licenses, etc.). 

What OFAC Did Not Disclose: 

  • Although the JCPOA refers extensively to sanctions relief to be implemented by the United States, the only sanctions relief that will be effected by the United States will be "nuclear-related sanctions" and then only as specified in JCPOA, Sections 4, 5, and 7.

  • JCPOA, Section 4 identifies the specific “nuclear-related sanctions” that, on Implementation Day, will be lifted:

The United States commits to cease the application of, and to seek such legislative action as may be appropriate to terminate, or modify to effectuate the termination of, all nuclear-related sanctions6 as specified in Sections 4.1 – 4.9 below . . . [JCPOA, Annex II, § B(4). The text of footnote 6 appears later in this article.] 

  • JCPOA, Section 5 sets out the U.S. government’s commitments to grant licenses to permit certain activities, such as the “sale of commercial passenger aircraft and related parts and services.” [JCPOA, Annex II, § B(5.1.1).]

  • And, JCPOA, Section 7 details the activities that “non-U.S. persons” will be permitted to engage in, if Implementation Day is reached:

As a result of the lifting of sanctions specified in Section 4 above, beginning on implementation day such sanctions, including associated services, would not apply to non-U.S. persons . . . that . . . [engage in specified activities such as]

Provide underwriting services, insurance, or re-insurance in connection with activities consistent with this JCPOA . . . [or]

own, operate, control or insure a vessel used to transport crude oil . . . or natural gas . . . to or from Iran . . . [or]

operate a port in Iran, engage in activities with . . . the shipping and shipbuilding sectors of Iran or a port operator in Iran . . . [JCPOA, Annex II, § (B)(7.1, 7.3, and 7.4) (emphasis added).] 

  • Even then, it would be incorrect to infer from the quoted text that the United States has agreed to "cease application of" and to "terminate, or modify to effectuate the termination of" all of the "nuclear-related sanctions," because there is an extraordinary carve-out set forth in JCPOA, Annex II, footnote 6, which states in pertinent part:

The sanctions that the United States will cease to apply, and subsequently terminate, or modify to effectuate the termination of, pursuant to its commitment under Section 4 are those directed towards non-U.S. persons. [JCPOA, Annex II, § B(4), note 6 (emphasis added).] 

  • Moreover, the JCPOA in Annex II, footnote 14, expands upon the sanctions relief that will not be implemented by the United States:

Unless specifically provided otherwise, the sanctions lifting described in this Section [5] does not apply to transactions that involve persons on the SDN List and is without prejudice to sanctions that may apply under legal provisions other than those cited in Section 4. . . . [JCPOA, Annex II, § B(5), footnote 14.]

(The ITSR prohibit any transactions or dealings with persons identified on the SDN or “Specially Designated Nationals” List.)

Significance: With the few exceptions set forth in the JPOA, all of the comprehensive prohibitions contained in sanctions such as the ITSR will remain intact, enforced by the U.S. government, and may trigger significant penalties if violated by "U.S. persons" – even after Implementation Day.

What OFAC Expressly Postponed Disclosing: 

  • "The U.S. government will publish detailed guidance related to the JCPOA prior to Implementation Day."

    Significance: If all sanctions were simply to be lifted on Implementation Day, there would probably be need for little, if any, published detailed guidance by the U. S. government. However, the more one re-reads the JCPOA (and multiple re-readings are a necessity), the more one realizes that implementation of sanctions relief by the United States will be difficult to map out and challenging to explain. The chief reason lies in the distinction drawn in the JCPOA between sanctions relief for "non-U.S. persons" (defined in Annex II, footnote 6) and the non-application of such relief for "U.S. persons."

  • The JCPOA, Annex II defines “non-U.S. person” to mean:

any individual or entity, excluding (i) any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States, and (ii) any entity owned or controlled by a U.S. person. [JCPOA, Annex II, note 6.]

  • A brief example illustrates the nuances that will need to be fleshed out as OFAC attempts to translate the high level general statements of the JCPOA into guidance that "U.S. persons" and their counsel will need in order to avoid violations of the still-enforceable sanctions.

  • On one hand, to implement the JCPOA the United States must lift certain sanctions on non-U.S. entities even though they are owned or controlled by "U.S. persons":

5.1       The United States commits to: . . .
5.1.2    License non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA. [JCPOA, Annex II, § B(5.1.2).] 

  • On the other hand, the ITSR contain a potential conflicting provision that applies to U.S. persons:

[N]o United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States. [ITSR §560.208.] 

  • Thus, in the JCPOA, the U.S. government appears to commit to grant relief from that provision in the ITSR. If that interpretation is confirmed in subsequent guidance by OFAC, the JCPOA would thereby allow U.S. persons, that own or control a non-U.S. entity, to have that entity transact with Iran and Iranian entities after Implementation Day.

  • U.S. persons, however, who do not own or control a non-U.S. entity will not be allowed to enter into such transactions.

  • The negotiated JCPOA thus appears to favor U.S. persons that own or control non-U.S. entities and to discriminate against U.S. persons that do not have such overseas affiliates. This should be of significant benefit to European or Southeast Asian companies that might qualify as such (if owned or controlled by a U.S. person), although it would not appear to allow a non-U.S. person (not so owned or controlled) to act as an agent for a U.S. person.

  • OFAC will need to publish guidance to disambiguate the potential conflict between provisions in the JCPOA and provisions in the ITSR. Generic guidance, as often appears in FAQs on the OFAC website, may be insufficient. General licenses may still leave certain issues too opaque to fathom or reliably interpret to avoid the appearance of an apparent violation (especially as viewed by OFAC). Specific licenses may prove in many instances to be necessary, since "inquiries for clarification" may not elicit more than OFAC is willing to publish publicly on its websites.

  • OFAC’s task will be formidable, something requiring the mental agility and nimble skills needed for cat's cradle, Rubik's cube, or a video game like Portal 2. Counsel’s task will require commensurate agility and skills – and good judgment in advising clients. Perhaps most challenging will be advising clients who may want to explore transactional opportunities as early as possible, but who may also want to proceed without stumbling over the multiple trip-wires created by the remaining sanctions. 

What OFAC’s Revised Guidance on the JCPOA Explains 

On August 7, 2015, OFAC released a longer Revised Guidance and eight pages of FAQs. Both documents emphasize that the JCPOA and the extension of the JPOA relief leave intact and still enforceable the ITSR:

Except for the limited relief provided pursuant to the JPOA, all U.S. sanctions with respect to Iran, including financial sanctions, sanctions pertaining to the purchase of Iranian crude oil, and sanctions on investment in Iran’s energy and petrochemical sectors, remain in effect with respect to U.S. and non-U.S. persons until Implementation Day. [FAQs, No. 3, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/jpoa_ext_faq_20150807.pdf (emphasis added).]

[With certain exceptions] none of the sanctions relief outlined in this guidance may involve a U.S. person, or, as applicable, a foreign entity owned or controlled by a U.S. person [footnote omitted], if otherwise prohibited under any sanctions program administered by the USG. [Revised Guidance, at 1 – 2, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/guidance_ext_20150807.pdf.]

[F]oreign entities that are owned or controlled by U.S. persons (“U.S.-owned or –controlled foreign entities”) are subject to the ITSR. [Revised Guidance, n. 2.] 

Thus, even the referenced "sanction relief provided under the JPOA," with a few limited exceptions, did not open a door for commercial opportunities for U.S. persons prior to Implementation Day. Moreover, subject to further guidance from OFAC (which OFAC may issue in a General License), it would appear that only U.S. persons that own or control “non-U.S.” entities may have those overseas affiliates pursue such opportunities, and then only after Implementation Day. (Annex II, Section 7 specifies the effects of the sanctions relief that will occur on Implementation Day, but Section 7 is not self-executing and will need to be put into effect by U.S. government action.) 

Executory contracts that precede Implementation Day will risk violating the ITSR. Attempting a “head start” may trigger violations and possibly incur severe penalties. U.S. businesses and their counsel should anticipate such possibilities because OFAC continues to take enforcement action against persons that violate the ITSR, as can be confirmed by visiting OFAC’s Civil Penalties and Enforcement Action webpage. [http://www.treasury.gov/resourcecenter/sanctions/CivPen/Pages/civpen-index2.aspx.] 

Moreover, as OFAC explained in November 2014 guidance on the then-effective JPOA,

During the JPOA Relief Period, the [U. S. government] will continue to vigorously enforce our sanctions against Iran, including by taking action against those who seek to evade or circumvent our sanctions.
[http://www.treasury.gov/resource-center/sanctions/Programs/Documents/guidance_ext_11252004.pdf.] 

OFAC, thus, made clear (for anyone in doubt) that the U. S. government intends to continue enforcement of the remaining sanctions against Iran. 

The risks of violating the U.S. sanctions against Iran can result in a broad spectrum of civil or criminal penalties that, depending on OFAC’s assessment of the facts, can result in fines that dwarf the value of the transaction. For example, in March 2015, in cases apparently driven by egregious facts and perhaps a perceived need to send a strong warning, OFAC settled enforcement actions against PayPal (imposing fines of $7,658,300 for processing 131 prohibited transactions in the amount of $7,091) and against Commerzbank Bank AG (imposing fines of $258,660,796 for 1,596 apparent violations of the ITSR and other economic sanctions regulations).
[http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20150325_paypal.pdf and http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20150312_commerzbank.pdf.] 

Concluding Observations 

Directors and officers of U.S. companies, having been exposed to numerous, conflicting, and opaque media reports of the announcement of the JCPOA (and inconsistent interpretations of that announcement subsequently by the participants) may be tempted to believe that the legal barriers have come down or been relaxed to transactions with Iran, the Iranian government, and Iranian companies. Such directors and officers may conclude that their companies need to "rush" to enter into negotiations, dealings, and transactions with Iranian counterparties in order to avoid finding their companies missed out on commercial opportunities or are at the end of a long queue for such opportunities. Such conclusions would be erroneous, and acting on them would be a serious and costly mistake. As OFAC highlighted in its Initial Guidance:

The "JPOA sanctions relief" provided back on November 24, 2013 "is the only Iran-related sanctions relief in effect" for U.S. persons "until further notice." 

Clients interested in dealing with Iran will need to consult with their lawyers to make appropriate plans. To avert the risks of violating the ITSR, it would be prudent for businesses that own or control “non-U.S. persons” to consider asking their lawyers to submit inquiries to OFAC to confirm that specific contemplated dealings, to be carried out by their “non-U.S. persons” after Implementation Day, will not contravene the ITSR. Such inquiries will need to make clear if any "U.S. person" is an officer or director of the "non-U.S. person" because such involvement may put those individuals at risk of violating the ITSR. 

Such inquiries may help OFAC in crafting additional guidance, which it has disclosed will be released:

Prior to Implementation Day, the U.S. Government . . . will issue guidance related to the implementation of the sanctions relief provided for under the JCPOA. [Revised Guidance, at 1.] 

Before OFAC issues such guidance, businesses and their lawyers should exercise caution so as not to enter into “transactions or dealings” that could trigger OFAC sanctions.

Additional Resources

For other materials on this topic, please refer to the following.

Business Law Section 2015 Annual Meeting

Program: Avoiding Still Sanctionable Dealings with Iran and Cuba: "Look Out for Icebergs!"
Saturday, September 19, 2015: 10:30 AM – 12:30 PM
Hyatt Regency Chicago: Columbus KL, Gold Level, East Tower

Roland L. Trope

Roland L. Trope is a partner in the New York City offices of Trope and Schramm LLP and an adjunct professor in the Department of Law at the U.S. Military Academy. He co-chairs the Cybersecurity Subcommittee of the ABA Business Section’s Cyberspace Law Committee.

Mr. Trope can be contacted at rltrope@tropelaw.com. The views expressed herein are solely those of the author, and have not been approved by, and should not be attributed, to the U.S. Military Academy, the Department of the Army, or the U.S. government. The author wishes to thank Professor Sarah Jane Hughes, University Scholar and Fellow in Commercial Law at Indiana University’s Maurer School of Law for her illuminating editing of the text, and David J. Brummond, Of Counsel at DLA Piper, and Hal Burman for their thoughtful insights that improved the reasoning in this article.