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By David Mortlock
December 23, 2015
The United States has increasingly relied on economic sanctions as a foreign policy tool, placing a heavy burden on the private sector, but also providing a unique opportunity for companies to work together with the government to remain compliant and advance U.S. foreign policy interests. The Joint Comprehensive Plan of Action (JCPOA) between the P5+1 and Iran is an unprecedented example of the private sector's opportunity to implement the dramatic changes in sanctions, but also creates massive legal risk and liability for both U.S. and foreign companies if they fail to exercise extreme care with respect to the shift in sanctions policy.
Economic sanctions are the fastest changing regulatory regime imposed by the United States. The government is getting better at imposing sanctions. Over the last 5 years, economic sanctions have become more nuanced and precise. Instead of just isolating a country, entity, or individual, sanctions are now also targeted at certain kinds of activities and the purpose of transactions.
The U.S. government has developed unprecedented new measures over the past half decade: the use of secondary sanctions on Iran; the easing of sanctions on Burma in a way that continues to encourage policy goals; and the restrictions on financing on Russia. This increased sophistication makes sanctions a more calibrated and cost-effective tool for government, but also puts a greater burden on the private sector to comply with increasingly complex restrictions. Sanctions also place an exceptional burden on the private sector because they are driven, not by regulation of an industry, but by foreign policy crises. As a result, changes are less predictable and the interests and motivations of the government may not be immediately obvious to private actors.
The next Administration, whether Republican or Democrat, will almost certainly turn to sanctions with increasing frequency. President Obama signed over 30 sanctions Executive Orders, more than his predecessors combined. And the increasing attractiveness of sanctions as a policy tool will be obvious to his successor.
One of the most dramatic changes in sanctions policy we've ever seen is likely to occur this spring with implementation of the Iran deal. [Foreign] companies that exercise care with respect to the changes and new complex regime will help push forward the successful implementation of the deal preventing Iran from acquiring from acquiring a nuclear weapon. Those that don't risk significant fines and even being cut off from the U.S financial sector.
The JCPOA provides a path for the suspension and eventual termination of nuclear-related sanctions in exchange for Iran verifiably abiding by its commitments under the deal. It is important to remember that no relief is in effect until Iran completes its obligations ahead of Implementation Day, beyond the relief already provided by the Joint Plan of Action (JPOA) since January 2014.
According to sources in the government, U.S. policy will not aim to stand in the way of legitimate business with Iran ahead of Implementation Day. Non U.S. companies will not be subject to sanctions for exploratory talks, for travelling to Iran for initial conversations, attending conferences, or discussing potential business opportunities in Iran. However, Iran has questioned whether the recent budget omnibus passed in mid December, which places visa waiver limitations on those who have visited Iran, is a violation of the deal because those restrictions will deter business in Iran.
Despite the concerns voiced in Iran, the Obama Administration is highly unlikely to administer those new provisions in a way that endangers the deal, and Secretary Kerry has already suggested in a letter to Foreign Minister Zarif that waivers will give the Administration the necessary flexibility to avoid penalizing business leaders who visit Iran. However, companies should consult with counsel and potentially the U.S. Treasury Department’s Office of Foreign Assets Control before signing any contract or other agreement with an Iranian entity.
Once we reach Implementation Day and the International Atomic Energy Agency (IAEA) verifies that Iran has implemented its significant nuclear commitments, the United States will suspend nuclear-related sanctions. The European Union and the UN Security Council also will suspend most sanctions on Iran. Many will assume that barriers to business with Iran have been dropped. But many sanctions will remain in place and companies could face significant penalties or sanctions for direct or even indirect transactions with Iran or sanctioned individuals and entities. Companies will face two issues in particular that are likely to trip up many and risk unwanted enforcement actions.
First, the bulk of the sanctions relief applies to nuclear-related secondary sanctions and the primary sanctions that prohibit transactions with Iran by persons within U.S. jurisdiction will remain in place. Accordingly, U.S. persons will continue to be prohibited from engaging in business with Iran. This means not only that U.S. companies would be liable for civil and criminal penalties for business with Iran, but that foreign companies also could be subject to penalties for “causing” violations, such as routing transactions with Iran through a U.S. financial institution.
The primary sanctions restrictions will be subject to three key exceptions. Treasury's Office of Foreign Assets Control will issue (1) specific licenses to authorize exports and leasing to Iran of commercial passenger aircraft, parts, and services for civil end use; (2) a general license for imports into the United States of Iranian-origin carpets and foodstuffs; and (3) authorization for activities involving Iran by non-U.S. entities that are owned or controlled by U.S. persons "consistent with" the JCPOA. This third exception has been the subject of intense speculation in the private sector regarding the scope of the licensing for foreign subsidiaries of U.S. persons. It could potentially allow foreign subsidiaries to engage in business activities across the Iranian economy, including the oil and gas sector, the technology industry, and the export of consumer goods to Iran. While the scope of that licensing has not been announced, U.S. parent companies will still need to pay close attention to the activities of their subsidiaries and avoid prohibited facilitation of the activities undertaken by their subsidiaries.
Many existing general licenses will remain in place, allowing U.S companies and their foreign partners to engage in certain business with Iran. For example, broad general and specific licensing policy will allow the export of food, medicine, and medical devices to Iran. In addition, the United States will continue to encourage the export of technology to Iran to enable the Iranian people to connect with the world and to support a more open Iranian society. A general license for the export to Iran of certain technologies to enable personal communications over the Internet will continue to help Iranians access the outside world. And general licenses issued within the last couple of years will continue to authorize academic exchanges between the United States and Iran and exports for humanitarian projects in Iran.
The second critical element of the sanctions relief will be that significant non-nuclear secondary sanctions will remain in place. The United States will maintain secondary sanctions related to Iran’s support for terrorism, human rights abuses, and destabilizing activities in the region, which were not relieved as part of the JCPOA. Foreign companies could still be subject to U.S. sanctions for engaging in significant transactions with Iranian persons designated in relation to human rights abuses or terrorism, for example. The United States will vigorously enforce these sanctions after Implementation Day.
Aside from the technical implementation of the sanctions relief under the JCPOA, companies also will need to pay close attention to Iran's activities, as other destabilizing behavior could create legal or reputational risk. In October and November, for example, Iran undertook ballistic missile tests that are prohibited by a UN Security Council resolution. While the tests are not a violation of the JCPOA, the UN or the United States could respond with independent sanctions, and conduct like this will make companies nervous about long term investment or other business in Iran.
The comprehensive, multilateral sanctions regime was a major factor in bringing Iran to the negotiating table and setting the stage for a
meaningful agreement on Iran’s nuclear program. Successful implementation of the deal will require a significant amount of work
by the P5+1, Iran, and the private sector, which will face a nuanced and complex sanctions regime as numerous companies around the world initiate business with Iran. Even after Implementation Day, U.S. and foreign companies will need to pay close attention to their business partners in Iran and even the activities in Iran of their business partners outside of the country. Companies' diligence and dedicated implementation of these changes will be necessary to the deal's success. The government's implementation of these changes also will be an intense and iterative process, and OFAC will inevitably need to tweak licenses and other materials to ensure they achieving the goals of the JCPOA and avoiding unintended consequences. Companies and law firms can help the U.S. Government achieve these goals by discussing with U.S. officials the practical outcomes and whether changes are needed. Success will require a true partnership.
The writer is former director for international economic affairs at the National Security Council. The above article is drawn from his remarks delivered at the Iran Policy Forum in early December, convened by the American Iranian-Council and Steptoe & Johnson, LLP.