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Doing Business in Iran Amid Evolving Sanctions: Leveraging New Opportunities While Ensuring Compliance

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, MARCH 30, 2016

Barbara D. Linney, Member, Miller & Chevalier Chartered, Washington, D.C. Nichola Peters, Partner, Addleshaw Goddard, London

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5

Strafford Live CLE Webinar March 30, 2016*

Doing Business in Iran Amid Evolving Sanctions: Leveraging New Opportunities While Ensuring Compliance

presented by

Barbara D. Linney

Member Miller & Chevalier Chartered

Nichola Peters

Partner Addleshaw Goddard LLP

* This PowerPoint presentation covers developments through March 24, 2016, the cut-off date for submission to Strafford for distribution. Any subsequent developments

will be covered during the live webinar.

6

Agenda

• 1. Sanctions: What’s Been Lifted And What Remains
• a. U.S. Sanctions
• b. E.U. sanctions
• 2. Licenses
• a. U.S. License Requirements & Procedures
• b. E.U./U.K. Licence Requirements & Procedures
• 3. Export Controls and Related Issues
• a. U.S. Export Control Regimes
• b. E.U./U.K. Export Control Regimes
• 4. Challenges Going Forward

7

U.S. Sanctions

8

U.S. Sanctions Prior to the Iran Nuclear Deal

• Primary and secondary sanctions regimes
• Primary sanctions = comprehensive embargo
• U.S. persons prohibited from engaging in most transactions with or for the benefit of

Iran or persons in Iran ‒ Limited exemptions (e.g., personal communications, travel, information and informational materials) and exceptions authorized by general or specific licenses (e.g., exports of agricultural commodities, food, medicine and medical devices)

• Assets of Government of Iran and various specially designated nationals blocked under

various programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC)

• Secondary sanctions = actions against foreign persons who engage in sanctionable conduct
• Most secondary sanctions authorized by legislation (e.g., Iran Sanctions Act, CISADA,

NDAAs, etc.)

• Some authorized by Executive Order (e.g., E.O. 13590)
• Administered by the U.S. Department of State and/or OFAC

9

U.S. Sanctions Relief Under the Deal

• Joint Comprehensive Plan of Action (JCPOA)
• Decided upon by United States, European Union, 3 E.U. Member States (France,

Germany, United Kingdom), Russia, China and Iran

• Aims to ensure peaceful nuclear program in Iran
• Became effective on October 18, 2015 (Adoption Day)
• Was implemented on January 16, 2016 (Implementation Day)
• IAEA verified that Iran had met its nuclear-related commitments
• UN Security Council terminated UN sanctions, subject to “snap back” until 10 years

after Adoption Day in event of “significant non-performance” of Iran’s JCPOA commitments ‒ United States will not apply snap back retroactively but contracts entered into after Implementation Day but prior to snap back will not be grandfathered

• United States implemented primary and secondary sanctions relief consistent with

its JCPOA obligations

10

U.S. Sanctions Relief Under the Deal (cont’d)

• Secondary sanctions relief was implemented through the following actions

effective as of Implementation Day:

• Contingent waivers issued on Adoption Day took effect on Implementation

Day upon confirmation by the Secretary of State that Iran had implemented certain nuclear related measures specified by the JCPOA

• Various Executive Orders were terminated or amended
• Numerous individuals and entities were removed from OFAC’s List of Specially

Designated Nationals and Blocked Persons (SDN List), Foreign Sanctions Evaders List (FSE List) and the Non-SDN Iran Sanctions Act List

• Many (but not all) Iranian state owned enterprises falling within the definition
• f the “Government of Iran” in Executive Order 13599 were transferred from

the SDN List to a separate List of Persons Blocked Solely Pursuant to Executive Order 13599 (EO 13599 List)

11

U.S. Sanctions Relief Under the Deal (cont’d)

• Primary sanctions relief was implemented through

issuance of general licenses and adoption of favorable licensing policies effective as of Implementation Day:

• Export of commercial passenger aircraft and related parts

and services by U.S. persons (Statement of Licensing Policy) (General License I authorized related contingent contracts as of March 24, 2016)

• General license for importation of Iranian-origin carpets

and foodstuffs into the United States (added to ITSR as 31 C.F.R. § 560.534 effective January 21, 2016)

• Certain activities of foreign subsidiaries of U.S. persons

(General License H)

12

Timing of U.S. Sanctions Relief

• Interim relief was put in place on January 20, 2014
• i.e., certain relief under (1) U.S. secondary sanctions, and (2) favorable licensing policy

for U.S. persons engaged in safety-related export of parts and services for Iranian commercial passenger aircraft

• Licenses issued under the interim favorable licensing policy with expiration dates on or

before July 14, 2015 were extended through May 31, 2016

• Additional secondary and primary sanctions relief took effect on Implementation Day as

noted on previous slide

• But sanctions will not terminate until “Transition Day”
• Approximately eight years from now, when IAEA submits favorable report regarding

Iran’s pursuit of only peaceful nuclear activities

• Iran controls the precise timing of Transition Day: termination will occur only after the

IAEA submits a favorable report

• U.S. Congress controls the termination of U.S. statutory sanctions

13

U.S. Sanctions After Implementation of the Deal

• U.S. “primary” embargo prohibiting trade with Iran by U.S. persons and their foreign subsidiaries

remains in place, except for exempt activities or activities authorized by general or specific licenses

• General License H authorizes many activities of foreign subsidiaries and certain related actions of U.S. parent

entities but most restrictions on facilitation remain

• Secondary sanctions continue to apply to non-U.S. persons who conduct transactions with SDNs,

including

• Designation authority related to support for terrorism, human rights abuses, WMD proliferation, the Islamic

Revolutionary Guard Corps (IRGC), persons on the FSE List, etc. (i.e., “blocking” or asset freezing)

‒ Sanctions imposed on two occasions following Implementation Day and U.S. Government has signaled its intention to continue to impose sanctions to counter Iran’s ballistic missile program and support for terrorism

• Correspondent or payable-through account sanctions against foreign financial institutions who knowingly

facilitate transactions with Iranian SDNs, the IRGC or SDNs designated for support for Iran’s proliferation of WMD or support for terrorism or involving certain raw materials or software and certain prohibited parties

• “Menu-based” sanctions against persons who provide material support for the IRGC, engage in certain

transactions involving SDNs in the energy, shipping or shipbuilding sectors or related insurance transactions involving SDNs, or engage in transactions involving certain raw materials or software

• Sanctions outside the scope of the JCPOA
• U.S. arms embargo and export controls under the EAR and generally applicable statutes related to

transfers of proliferation sensitive equipment and technology remain in place

14

E.U. Sanctions

15

E.U. Sanctions Prior to the Iran Nuclear Deal

• Jurisdiction: E.U. nationals and corporates and overseas companies taking

action in the E.U.

• Legal position: Not a blanket prohibition
• Practically: a blanket ban
• The key legislation which applied (pre roll back of sanctions on 16 January

2015) from an E.U. and U.K. perspective in respect of Iran was Council Regulation 267/2012 as amended (the “Regulation”)

• Key features
• Sectoral sanctions
• Prohibitions on dealings with those designated (equivalent of SDN)
• Financial restrictions

16

E.U. Sanctions Prior to the Iran Nuclear Deal (cont’d)

• Examples: sectoral
• Prohibition to import crude oil or petroleum products (and previously petrochemical

products)

• Prohibited to sell, supply, transfer or export listed equipment, which includes key

equipment and technology for the exploration of crude oil and natural gas and production of crude oil and natural gas (Article 8)

• Prohibited to provide technical assistance or brokering services related to the above

equipment

• Nuclear industry
• Banking
• Minerals
• Bans on creation of JVs with Iranian persons, entities or bodies engaged in the exploration or

production of crude oil and natural gas the refining of fuels or the liquefaction of natural gas

• Dual use items/common military lists
• Restrictions and licensing requirements for all transfers
• Exemptions: humanitarian

17

E.U. Sanctions Relief Under the Deal JCPOA/Iran: What This Means in Practice

• Joint Comprehensive Plan of Action regarding Iran's nuclear programme (JCPOA)
• The JCPOA sets out milestones for the lifting of sanctions
• Key Milestones for Implementation (from an E.U. perspective)
• Finalisation Day (14 July 2015): Negotiations of the JCPOA are concluded (assumed to

be 14 July 2015).

• Adoption Day (18 October 2015): The JCPOA participants made the necessary

arrangements and preparations for the implementation of their JCPOA commitments. Council Regulation (E.U.) 2015/1861, Council Implementing Regulation (E.U.) 2015/1862 and Council Decision CFSP 2015-1863 were entered into, although their measures did NOT come into force until Implementation Day.

• Implementation Day (16 January 2016): The International Atomic Energy Agency (IAEA)

confirms that Iran has met it nuclear-related commitments and the E.U. took action to lift sanctions.

• Transition Day: Eight years after Adoption Day (or the date on which the IAEA submits a

report stating that all nuclear material in Iran remains in peaceful activities), Iran ratifies the Additional Protocol and the E.U. and the United States will terminate further sanctions.

• Termination Day: Ten years after Adoption Day, the E.U. and the United States will

terminate further sanctions. The UN Security Council will pass a resolution endorsing that the JCPOA terminates according to its terms.

18

E.U. Sanctions After Implementation of the Deal: BIS/ECO

• “The U.K. Government fully supports expanding our trade relationship

with Iran.

• Iran has now received extensive economic and financial sanctions relief

and will be able to trade more freely with the rest of the world.

• We want to help British businesses take advantage of the opportunities

that economic re-engagement with Iran will bring.

• U.K. Export Finance (UKEF), the U.K.’s export credit agency, has

reintroduced cover in to support U.K. companies competing for business in

• Iran. Cover is now available on a case-by-case basis in Pounds Sterling and
• Euros. Within this, and in recognition of the U.K.’s place as a global centre
• f excellence for financial and professional services, UKEF will make

available an initial £50 million facility guaranteeing payments to U.K. professional advisory service providers advising the Government of Iran.

• UKEF will also consider applications for direct lending from purchasers of

British exports to Iran.”

19

E.U. Sanctions After Implementation of the Deal: BIS/ECO (cont’d)

• “U.K. Trade and Investment (UKTI) will be engaging with U.K. businesses to provide

support and assistance to help ensure U.K. business benefits from opportunities as they arise. UKTI based both in the U.K. and in the British Embassy in Tehran will play an important role in supporting trade and investment between our two countries.

• Although most economic and financial sanctions have now been lifted, some

sanctions will remain in place and are not affected by the deal. In particular sanctions related to human rights, proliferation and Iran’s support for terrorism remain in place.

• You will wish to consider in particular, if you are dealing with a designated person
• r entity, whether a certain trade product or material is restricted, and how and to

whom payments will be made.

• U.K. companies will also want to consider whether their proposed activity is

subject to U.S. sanctions.

• It is important to ensure appropriate due diligence measures are undertaken

before engaging in any activity.

• Iran will remain a difficult place to do business so if in doubt you should seek legal

advice.”

20

E.U. Sanctions After Implementation of the Deal

• The key provisions of E.U. sanctions relief under the JCPOA are as follows:
• 34 individuals and 298 entities are no longer subject to the asset freeze.
• The restrictions on financial transfers to and from non-listed Iranian entities

have ended. The requirement to seek prior authorisation for, or notify HM Treasury of, transfers of funds sent to or received from Iran, is therefore no longer applicable.

• Banking activities (such as the establishment of new correspondent banking

relationships with Iranian Banks and the opening of branches, subsidiaries or representative office of Iranian Banks) in E.U. states are permitted.

• The provision of insurance and reinsurance to non-listed entities Iranian

entities is permitted.

• The supply of specialised financial messaging services is permitted for non-

listed Iranian financial institutions.

• Transactions in public or public-guaranteed bonds with Iranian non-listed

entities are permitted.

21

E.U. Sanctions After Implementation of the Deal (cont’d)

• The provision of financial support for trade with Iran such as export credit, guarantees or

insurance was permitted as of Implementation Day. The same applies for commitments for grants, financial assistance and concessional loans to the Government of Iran.

• Import, purchase, swap and transport of crude oil and petroleum products, gas and

petrochemical products from Iran was allowed as of Implementation Day.

• E.U. persons are able to export equipment or technology, and provide technical assistance, including

training, used in the sectors of the oil, gas and petrochemical industries in Iran covering exploration, production and refining of oil and natural gas, including liquefaction of natural gas, to any Iranian person, in or outside Iran, or for use in Iran.

• Investing in the Iranian oil, gas and petrochemical sectors, by the granting of any financial loan or

credit to, the acquisition or extension of a participation in, and

• the creation of any joint venture with, any Iranian person that is engaged in the oil, gas and

petrochemical sectors in Iran or outside Iran is permitted

• Shipping and shipbuilding and transport services. Bunkering services to Iranian owned or

Iranian contracted vessels.

• Gold and other precious metals

22

Issues

• The key legislation which applied (pre roll back of

sanctions on 16 January 2015) from an E.U. and U.K. perspective in respect of Iran is Council Regulation 267/2012 as amended (the "Regulation")

• However, if there is a breach by Iran of the terms of the

JCPOA then the sanctions in the Regulation could be "snap back[ed]"

• This potential for snap back has to be considered
• When entering into any agreement
• How would the agreement be suspended/terminated, if

there was a snap back

• How would payment be received

23

U.S. License Requirements & Procedures

24

General License for Importation of Foodstuffs and Carpets

• Iranian Transactions and Sanctions Regulations (ITSR), 31 C.F.R. §

560.534

• Authorizes importation into the United States, from Iran or a third

country, of Iranian origin:

• Foodstuffs intended for human consumption, including pistachios and

caviar (HTSUS Chapter 2 to 23); and

• Carpets and other textile floor coverings and carpets used as wall

hangings (HTSUS Chapter 57 or 9706.00.0060)

• Also authorizes related transactions, including financing and

brokering, subject to certain conditions

• No debiting or crediting of Iranian accounts (see, ITSR §§ 560.515 and

560.320)

25

Favorable Licensing Policy for Civil Aviation

• U.S. and non-U.S. persons may request specific authorization for the sale, lease, or

transfer, export or re-export to Iran of commercial passenger aircraft and related parts and services

• Applies to all commercial passenger aircraft subject to U.S. jurisdiction – i.e., both

U.S. origin aircraft and foreign produced aircraft with 10% or more U.S. content

• Eligible aircraft and parts include wide-body, narrow-body, regional and commuter aircraft for

commercial passenger aviation use only and parts for such aircraft

• Aircraft and parts not eligible for licenses include cargo aircraft, state aircraft, UAVs, military

aircraft, aircraft for general aviation or aerial work and parts for such aircraft

• Services eligible for favorable licensing treatment include services related to

specific licensed sales of aircraft and parts, including warranty, maintenance, or repair services, training, and safety related inspections

• “Ordinarily incident and necessary” services authorized under 31 C.F.R. 560.405 include

transportation, legal, insurance, shipping, and delivery services

• Certain financial payment services are authorized under 31 C.F.R. 560.516
• Transactions must not involve any persons on the SDN List but persons listed only
• n the “EO 13599 List” are eligible parties

26

Favorable Licensing Policy for Civil Aviation (cont’d)

• Applications must include the information specified in FAQ J.11, including

the type and number of aircraft to be sold or leased, the export classification of the aircraft and any related parts or technology included in the transaction, the Iranian airline receiving the aircraft and the proposed end-use, as well as any other relevant information

• Concurrent applications must be filed with the U.S. Department of

Commerce’s Bureau of Industry and Security (BIS) if the transactions

• Require authorization under Part 744 of the Export Administration Regulations

(EAR), which deals with end-user and end-use based controls;

• Involve persons whose export privileges have been revoked, persons on the

BIS Denied Persons List, or, in some cases, persons on the BIS Entity List require separate BIS authorization (both lists can be accessed on the BIS website at www.bis.doc.gov)

27

General License for Contingent Civil Aviation Contracts

• General License I authorizes U.S. persons to negotiate and enter into

“contingent contracts” for the export or re-export of commercial passenger aircraft, related parts and services

• BUT contracts must stipulate expressly that performance is contingent on
• btaining a specific license from OFAC
• “Contingent contracts” include:

‒ Executory contracts ‒ Executory pro forma invoices ‒ Agreements in principle ‒ Nondisclosure Agreements (NDAs), etc.

• FAQs note that non-U.S. persons are not prohibited from entering into

contracts, but MUST obtain a specific license to perform under contracts to export or reexport civil aviation aircraft, parts and services

28

General License for Activities of U.S.-owned or Controlled Foreign Entities

• General License H authorizes U.S.-owned or controlled foreign entities to engage in transactions

that would otherwise be prohibited by the ITSR, except for several enumerated categories of transactions that remain off-limits

• General License H does not authorize:
• Exportation or re-exportation of U.S.-origin goods contrary to Sections 560.204 or 560.205 of the ITSR

‒ Consistent with Section 560.205 of the ITSR, re-exportation by non-U.S. persons from a third country to Iran of U.S. origin EAR 99 items without knowledge or reason to know at the time of export from the United States that the goods are intended specifically for Iran is not prohibited; ‒ Trade by non-U.S. persons in items containing less than 10% U.S.-controlled content or U.S. content substantially transformed into a foreign-made product also is not prohibited(with certain exceptions provided in the EAR’s de minimis rules)

• Transfers of funds to, from, or through a U.S. depository institution or a U.S.-registered broker or dealer in

securities, or use of the U.S. parent's business support system in connection with such transfers

• Dealings with SDNs, FSEs or military, paramilitary or law enforcement entities of the Government of Iran or

their officials, agents or affiliates

• Activities requiring a BIS license under Part 744 of the EAR or involving persons whose export privileges have

been revoked, persons on the BIS Denied Persons List, or, in some cases, persons on the BIS Entity

• Activities sanctionable under various Executive Orders
• Certain nuclear activities not approved by the JCPOA procurement channel

29

General License H (cont’d)

• Authorizes U.S. persons to:
• Engage in activities related to establishment or alteration of operating

policies and procedures of a U.S. parent entity or a U.S.-owned or controlled foreign entity to the extent necessary to permit authorized activities by the foreign entity; and

• Make available to any of its owned or controlled foreign entities any

automated and globally integrated business support system, platform, data base, application or server necessary to store, collect, transmit or

• therwise process documents or information related to the foreign

entity’s authorized activities

• Any other form of facilitation by U.S. persons remains prohibited
• “Business support systems” include computer, accounting, email,

and telecommunications systems

• Must be “automated” and “globally integrated” as defined in the notes

to General License H

30

General License H (cont’d)

• “Automated” is defined to mean business support systems

that operate passively without human intervention to facilitate the flow of data between and among the U.S. parent company and its owned or controlled foreign entities

• Note that certain human intervention may be authorized under

ITSR § 560.405 (e.g., establishment and routine or emergency maintenance of the system)

• “Globally integrated” means a business support system that is

broadly available to, and in general use by, the U.S. parent company’s global organization, including the U.S. parent company and its owned or controlled foreign entities

31

E.U./U.K. Licence Requirements & Procedures

32

E.U. Licence Requirements & Procedures

• Financial sanctions
• The following activities require a licence under the proliferation-related sanctions:
• The sale, supply, transfer or export of nuclear-related items (as listed in Annex I), the provision of

technical assistance, brokering services and financial assistance related to such items, and investment by an Iranian person, entity or body in a commercial activity related to uranium mining or the manufacture of items listed in Annex I

• The sale, supply, transfer or export of nuclear-related items (as listed in Annex II), the provision of

technical assistance, brokering services and financial assistance related to such items and investment by an Iranian person, entity or body in a commercial activity related to the items listed in Annex II of the Regulation

• Sanctions imposed in view of the human rights situation in Iran are set out in Council

Regulation (E.U.) 264/2012. The following requires a licence:

• The sale, supply, transfer or export of equipment which might be used for the monitoring or

interception of internet or telephone communications as listed in Annex IV of the Regulation

• The provision of technical assistance, brokering services and financial assistance related to items

listed in Annex IV of the Regulation

• The provision of telecommunication or internet monitoring or interception services of any kind to, or

for the direct or indirect benefit of, Iran’s government, public bodies, corporations and agencies or any person or entity acting on their behalf or at their direction

33

U.S. Export Control Regimes

34

U.S. Export Control Regimes Remain in Place

• Arms embargo remains in place
• Under the Arms Export Control Act and International Traffic in Arms

Regulations, the United States maintains a comprehensive embargo on exports of defense articles and services to Iran

• Nuclear export regime administered by U.S. Department of Energy and

Nuclear Regulatory Commission remains in place

• EAR controls and generally applicable statutes related to transfers of

proliferation sensitive equipment and technology remain in place

• Anti-terrorism license requirements apply to all exports and re-exports subject

to the EAR (dual-use and EAR 99 items)

• National security, foreign policy and other controls also apply
• Policy of denial applies to all license applications except for humanitarian

reasons or safety of civil aviation and safe operation of U.S. origin aircraft

• OFAC licenses required and exporters need not seek BIS licenses unless

transaction is not subject to OFAC regulatory authority (e.g., Part 744 of the EAR or certain General Prohibitions apply)

• Iran remains designated as a State Sponsor of Terrorism

35

E.U./U.K Export Control Regimes

36

E.U. Export Control Regimes Remain in Place

• Where sanctions are not in force, other general

licensing requirements may still be in place, for example under the E.U. dual and common military list regimes

• Licenses may still be required under these regimes
• See also Iran list

37

Challenges Going Forward

38

Challenges Going Forward

• JCPOA preserves and widens gap between E.U. and U.S. sanctions
• UN and E.U. sanctions originally were narrower in scope than U.S.

sanctions

• JCPOA relief from E.U. sanctions and U.S. secondary sanctions will be

much broader than relief from primary sanctions covering U.S. persons

• Reluctance of international banking system to support authorized

transactions

• Uncertainty regarding possibility of snap back, ongoing imposition
• f new U.S. sanctions, and possible U.S. Congressional action or

policy changes as a result of upcoming Presidential election

• Companies entering Iranian market will face other challenges (lack
• f transparency, corruption, terrorism, etc.)

39

May We Take Your Questions?

Barbara D. Linney

Member Miller & Chevalier Chartered +1 202 626 5806 blinney@milchev.com

Nichola Peters

Partner Addleshaw Goddard LLP +44 20 7160 3370 nichola.peters@addleshawgoddard.com