OFAC Authorization of Contingent Contracts for Commercial Passenger Aviation Sales to Iran Accompanied by New Sanctions

International Alert
03.28.16

On March 24, 2016, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a new general license designed to streamline the processing of applications for specific licenses for activities related to the export or re-export to Iran of commercial passenger aircraft and related parts and services pursuant to the licensing policy announced in January upon implementation of the Joint Comprehensive Plan of Action (JCPOA). At the same time, OFAC added four new "FAQs" to previously issued guidance. The FAQs clarify the scope of the new general license and stipulate the information required to be provided in support of specific license applications. However, as it did upon implementation of the JCPOA, OFAC concurrently sanctioned entities and individuals for supporting Iran's ballistic missile program and Iranian airline Mahan Air, which remains designated for support of the Islamic Revolutionary Guard Corps (IRGC) and numerous terrorist groups.

The New General License & FAQs

New General License I (GL I) authorizes U.S. persons to negotiate and enter into so-called "contingent contracts" for activities eligible for authorization under the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services. According to the note to paragraph (a)(1) of GL I, "contingent contracts" include "executory contracts, executory pro forma invoices, agreements in principle, executory offers capable of acceptance such as bids or proposals in response to public tenders, binding memoranda of understanding, and any other similar agreement." In addition, new FAQ J.12 provides that negotiation of and entry into a non-disclosure agreement (NDA) in connection with the negotiation of a contingent contract also is authorized.

However, the scope of GL I is limited in that no contingent contracts may be signed with persons on OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List). As discussed below, simultaneous designations of additional SDNs connected with Iran's aviation industry highlight the importance of due diligence to ensure that this condition is met.

Furthermore, GL I and FAQs J.9 and J.10 make it clear that a specific license from OFAC still is required in order to authorize performance of the activities contemplated by a contingent contract. Any contingent contract entered into under GL I must contain an express condition that performance is contingent upon issuance of a specific license. While FAQ J.9 states that non-U.S. persons are not prohibited from entering into contingent contracts for the re-export of eligible aircraft, parts or services (and thus need not rely on General License I in order to do so), the FAQ re-emphasizes that non-U.S. persons do require a specific license from OFAC in order to perform such contracts. Presumably, in view of General License H, these statements apply equally to non-U.S. entities owned or controlled by U.S. persons, but the risk of facilitation remains for U.S. parent entities who do not take appropriate steps under General License H to allow the foreign entities to engage in transactions authorized by General License H.

The broad requirement for a specific license prior to performance raises the question whether a contingent contract entered into under GL I may include any obligations to be performed prior to issuance of a specific license. In the export control context, for example, it would not be unusual for a major contract contingent upon issuance of an export license to require the exporter to file the license application by a certain date and require the buyer to pay a deposit towards the purchase price or even a fee for preparation and submission of the application. On the one hand, GL I authorizes "all transactions ordinarily incident to the negotiation of and entry into" contingent contracts, but the requirement for a specific license prior to performance appears to rule out many typical commercial terms designed to protect the exporter.

Importantly, while FAQ J.12 clarifies that an NDA is an authorized contingent contract for the purposes of GL I, it also makes it clear that enforcement of an NDA entered into in connection with negotiation of a contingent contract is not authorized by the new general "and may require separate authorization." The FAQ makes no mention of enforcement of other types of contingent contracts, but given the insistence upon a specific license prior to performance, it appears that OFAC does not expect contingent contracts to contain any obligations to be performed prior to issuance of the license.

New FAQ J.11 offers guidance on applying for specific licenses pursuant to the Statement of Licensing Policy. This FAQ states that applications, at a minimum, should include:

  • the types and number of aircraft being exported or leased; 
  • the Export Control Classification Number(s) for the aircraft, related parts and/or technology being exported or leased; 
  • the Iranian airline receiving the aircraft; 
  • the proposed end-use of the aircraft; and 
  • any other information that may be relevant to the processing of the request, including as much detail about the transaction as possible.

These requirements suggest that OFAC expects applicants to complete their negotiations and arrangements for sales of eligible aircraft, parts and services before requesting a specific license from OFAC. GL I now provides the authorization necessary to allow U.S. persons to do so, albeit perhaps not as clear or broad an authorization as might have been desirable.

The new general license and related FAQs also fall short of addressing uncertainty regarding the scope of parts eligible for licenses under the Statement of Licensing Policy when the parts in question are common to both commercial passenger aircraft and other civil aircraft. If a part can be used in other civil aircraft as well as commercial passenger aircraft, does this mean that the part does not meet the exclusive use requirement, or does the requirement for exclusive use in commercial passenger aviation pertain only to the intended use in Iran? In addition, OFAC has not yet clarified the relationship between facilitation by U.S. persons of conduct abroad and permissible exports of parts and components to a third-country original equipment manufacturer (OEM) that manufactures non-commercial passenger aircraft. Such exports are not prohibited by Section 560.204 of the Iranian Transactions and Sanctions Regulations unless intended "exclusively or predominantly" for Iran. These and other uncertainties regarding the U.S. implementation of the JCPOA remain to be clarified by future guidance.

The New Sanctions

The limited additional relief provided by GL I was accompanied, as was implementation of the JCPOA, by simultaneous designations under Executive Orders targeting proliferators of weapons of mass destruction and terrorism and those who support them. Treasury officials took the opportunity to reiterate that these Executive Orders were beyond the scope of JCPOA relief, and emphasized the U.S. government's "steadfast commitment" to continue to use all available tools, including sanctions, to counter Iran's ballistic missile program and its support for terrorism. Persons added to the SDN List as a result of these designations included additional Commands of the IRGC, two affiliates of a previously designated Iranian industrial group, two U.K. entities and two U.K. individuals and two U.A.E. businesses. All are now subject to blocking of property or asset freezing by U.S. persons and banks. In addition, foreign financial institutions that facilitate transactions for them could be exposed to correspondent or payable-through account sanctions denying access to the U.S. financial system, and foreign persons who support them risk being designated as SDNs and blocking of their property.

The new designations are a sobering reminder of the care that must be taken by U.S. or foreign persons wishing to take advantage of the opportunities to trade with Iran provided by implementation of the JCPOA. Transactions by U.S. persons with SDNs remain off-limits, and transactions by non-U.S. persons with SDNs may still expose them to secondary sanctions.


For questions or comments about this article, please contact:

Larry E. Christensen, lchristensen@milchev.com, 202-626-1469

Barbara D. Linney, blinney@milchev.com, 202-626-5806

Kuang H. Chiang, kchiang@milchev.com, 202-626-5564

Also published as a Trade Compliance Flash on March 28, 2016.

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