Focus on Iran: Inaugural Issue
International and Litigation Alert
Welcome to the inaugural issue of Focus on Iran. Interest in doing business in Iran has increased since the implementation of the Joint Comprehensive Plan of Action (JCPOA). The JCPOA has made it easier for non-U.S. companies and individuals to conduct business in Iran and this has already begun to boost the Iranian insurance market, energy sectors, shipping industry, mining sector, and automotive sector. As we discuss below, however, recent events in the United States suggest that the future of the JCPOA is unclear. Because doing business in Iran at this stage comes with significant opportunities as well as legal risks, we thought it would be useful to collect and periodically report on the most noteworthy developments and cases so businesses may understand the risks and challenges the Iranian market offers. Most summaries contain links to documents that will provide you with source materials and more in-depth coverage.
Can I Do Business in Iran? The answer depends on who you are and what you want to do. With the lifting of many U.S. overseas sanctions on Iran, many more business development opportunities are now open to companies and persons not subject to the jurisdiction of the United States ("non-U.S. companies" and "non-U.S. persons" or collectively "non-U.S. entities"). Generally speaking, non-U.S. persons are no longer subject to many U.S. sanctions related to Iran. Additionally, foreign entities owned or controlled by a person (including a company) subject to the jurisdiction of the United States (a "U.S. person") are now (assuming they adopt appropriate procedures beforehand) allowed to engage in most of the transactions related to Iran in which non-U.S. persons are now allowed to engage. Thus, aside from certain exceptions, including those related to Specially Designated Nationals (SDNs) and U.S.-origin goods and services, such non-U.S. entities can engage in business development activities related to Iran.
If you are a U.S. person, however, beware. Business development related to Iran is still largely prohibited. U.S. persons are limited to exploratory and non-binding business discussions about the Iranian market, including with Iranian companies and individuals, either within or outside of Iran. Activity beyond this is prohibited for U.S. persons and thus, under current U.S. sanctions, U.S. persons are generally prohibited from discussing specific transactions with Iranian companies or individuals, and from entering into any form of contract, or agreement, whether written or oral, with regard to potential business or projects in Iran, involving any Iranian government agency or entity, or involving any person sanctioned by the United States.
After the Iran Nuclear Deal, What Business Activities Are Permitted? The "Iran Nuclear Deal"— or the JCPOA — lifted the U.S. secondary sanctions regime. Those secondary sanctions restricted non-U.S. persons (including non-U.S. companies) from conducting business with Iran's energy, shipping, shipbuilding, financial, and automotive industries. After January 16, 2016, non-U.S. persons are no longer restricted from doing business with these sectors. Non-U.S. persons are also authorized to provide any support services, such as technical assistance, training, insurance, reinsurance, brokering, transportation, and financial services, which are necessary and incident to the activity for which sanctions have been lifted.
Although the lifting of the secondary sanctions has provided some relief, non-U.S. persons are still subject to significant prohibitions. Specifically, they are prohibited from exporting and re-exporting U.S.-origin goods, services, or technology to Iran, or transferring funds through the U.S. financial system in connection with Iranian transactions.
With regard to U.S. persons, significant prohibitions remain in place. However, you are allowed, in limited circumstances, to do business in Iran, such as selling certain medical devices, but a comprehensive compliance program is needed to ensure U.S. laws and regulations are not violated.
With Whom Can I Do Business? In the wake of the JCPOA, more than 400 individuals and entities have been removed from the list of Specially Designated Nationals (SDNs) and other U.S. sanction lists. However, U.S. persons and non-U.S. persons alike remain prohibited from transactions that involve SDNs or other individuals who remain the subject of the U.S. Department of Treasury's Office of Foreign Assets Control (OFAC) or other U.S. regulatory list-based sanctions.
The Iran Nuclear Deal (or JCPOA) – Is It Here to Stay? President Trump has frequently criticized the JCPOA. He has also personally questioned Iran's compliance with its obligations. In early September, President Trump's envoy to the United Nations, Nikki Haley, suggested that President Trump would be on solid ground if he refused to certify Iran's compliance with its obligations under the JCPOA. She also said the U.S. would act despite the fact our European allies want us to stay in the deal. Her assessment of the world community appears correct—world leaders have repeatedly stated that Iran is honoring its obligations under the JCPOA and that there is no legitimate ground for finding otherwise.
Nonetheless, the U.S. statements on this issue are significant, particularly as to the issue of certifying Iran's compliance. The legislation implementing the JCPOA requires that the president certify to Congress, every 90 days, that Iran is in compliance with the JCPOA. On July 17, 2017, Secretary of State Rex Tillerson submitted such certification, while also noting that Iran remains a state sponsor of terror and that there is an ongoing interagency review of the JCPOA to determine whether continued suspension of nuclear related sanctions is vital to the national security interests of the United States. This certification keeps the JCPOA alive through October, but the national security review, and recent statements by the president and others in his administration, have raised serious questions as to whether the U.S. will attempt to reimpose the sanctions lifted under the JCPOA.
Given these divisions in the world community, it is difficult to predict what happens next. The JCPOA contains joint resolution procedures—sometimes referred to as a "snapback" provision—but these procedures are premised on presentation of a dispute to an international body. Given that the International Atomic Energy Commission has not supported U.S. claims of non-compliance, it seems unlikely the U.S. intends to exercise those provisions. The U.S. could, alternatively, simply attempt to reimpose secondary sanctions unilaterally, but doing so would arguably place the U.S. in breach of the JCPOA. Whether that would lead Iran to invoke the joint resolution provision, would lead Iran to withdraw from the JCPOA, or whether it would lead to some other result is unclear. Also unclear is how U.S. secondary sanctions will work if they are opposed by the remainder of the world community. The only certainty going forward is that this is a critical issue to watch.
U.S. Imposes New Sanctions on Iran: On August 2, 2017, President Trump signed a new law imposing sanctions on Iran. The Iran sanctions are directed at U.S. and foreign persons and fall into four categories: 1) ballistic missile sanctions; 2) Islamic Revolutionary Guard Corps (IRGC) sanctions; 3) human rights abuse sanctions; and 4) sanctions to enforce arms embargoes. Transactions involving the sale of agricultural commodities, food, medicine, or medical devices to Iran, or for the provision of humanitarian assistance to Iran, including related financial, transportation, or other necessary services will still be allowed, as well as certain activities related to national security. Though this legislation codifies U.S. sanctions against Iran, the president said in his signing statement that the administration retains "flexibility in granting routine licenses to American businesses, people, and companies." This legislation follows sanctions imposed by the Trump administration in connection with Iran's ballistic missile program. It remains to be seen whether such sanctions will cause Iran to withdraw from the JCPOA, triggering the snap back of U.S. sanctions. More information about these new sanctions can be found in Miller & Chevalier's recent Trade Compliance Flash.
OFAC the U.S. Government Enforcer: OFAC enforces sanctions against Iran and if a company or individual violates U.S. sanctions, OFAC can impose hefty civil penalties and even refer corporations or individuals for criminal prosecution to the Department of Justice (DOJ).
When OFAC opens an investigation into a company's conduct it can decide to (1) take no action; (2) send a cautionary letter; (3) find a violation; (4) impose a civil monetary penalty; (5) make a criminal referral to the DOJ; or (6) issue a cease and desist order or action relating to an OFAC license.
In deciding what type of penalty to impose or action to take, OFAC considers 11 factors, and factors such as having a robust compliance program, a proper remedial response, and cooperation with OFAC can weigh against a severe penalty.
In the sections below, we review recent significant criminal and civil enforcement actions related to the Iran sanctions.
Criminal Prosecution Proceeds Against Non-U.S. Citizen Who Used U.S. Banking System in Deal with Iran: Reza Zarrab, a non-U.S. person who conducted business on behalf of Iran has been charged in the United States with conspiracy to violate U.S. Iranian sanctions. The U.S. government has accused Zarrab of using the U.S. banking system to process transactions made on behalf of the government of Iran. Based on this link to the U.S. financial system, the DOJ charged Zarrab with conspiracy to defraud the United States, conspiracy to violate the International Emergency Economic Powers Act (IEEPA), and the Iranian Sanctions Regulations. Before the U.S. District Court, Zarrab maintained that the U.S. could not criminally prosecute him because he did not violate U.S. sanctions, he is not a U.S. person, and did not make any exports to Iran. He contended that the transactions at issue did not originate from the U.S. and any use of the U.S. banking system was intermediary and in the form of a very minor processing role. The court rejected Zarrab's arguments, and held that the U.S. has criminal jurisdiction over Zarrab's conduct because of his use of the U.S. financial system. The U.S. government filed a superseding indictment in September 2017 naming high-profile Turkish officials. For now, foreign companies doing business in Iran should be aware of the expansive reach of U.S. judicial jurisdiction.
OFAC Penalizes Chinese Oil Company Subsidiary for Sending U.S. Goods to Iran Through Singapore and the United Arab Emirates: On August 24, 2017, OFAC imposed a $415,000 civil penalty against COSL Singapore, a subsidiary of China Oilfield Service Limited. COSL owns rigs and enters into time charter agreements with third party drilling partners, but agrees to maintain the rigs and to procure spare parts and equipment for the oil rig's operations. COSL, through its subsidiary (COSL Drilling Pan-Pacific), re-exported 55 orders of oil rig supplies from the United States, through Singapore and the United Arab Emirates to Iranian territorial waters.
OFAC Penalizes U.S. Freight Forwarder for Shipping Cars to Afghanistan but Passing Through Iran: On August 17, 2017, OFAC fined American Export Lines (AEL), a freight forwarder, $518,000. OFAC imposed the fine for transshipment of cars and parts through Iran to Afghanistan. OFAC considered AEL's small size and compliance program as a mitigating factor, and AEL's supposed sophistication and OFAC knowledge (as demonstrated by compliance program) as an aggravating factor.
OFAC Penalizes U.S. Parent for Not Clearly Disassociating from Iran Business Conducted by Subsidiaries: On August 10, 2017, OFAC imposed a $259,200 civil penalty against IPSA International Services. IPSA is a global business investigative and regulatory risk mitigation firm that provides due diligence services for various countries. OFAC found that: 1) IPSA imported Iranian-origin services into the United States because its foreign subsidiaries in Canada and Dubai conducted due diligence in Iran on behalf of and for the benefit of IPSA (a U.S. company); and 2) IPSA engaged in transactions or dealings related to Iranian-origin services because it "facilitated the foreign subsidiaries' engagement in such transactions [by] review[ing], approv[ing], and initiat[ing] the foreign subsidiaries' payments to providers of Iranian-origin services."
OFAC Penalizes Singapore Company Conducting Business in Iran in U.S. Dollars: On July 27, 2017, OFAC imposed a $12 million civil penalty on CSE for "causing" financial institutions to engage in unauthorized exportation or re-exportation of financial services from the United States to Iran. CSE entities (non-U.S. companies) used U.S. dollar accounts in Singapore to process telecommunications work in Iran. OFAC noted that this violated CSE's agreements with its Singapore bank not to route any transactions related to Iran through the bank, and it also suggested that the U.S. dollar transfers intentionally omitted references to Iran. OFAC cites this as an example of the diligence that is required when making warranties to financial institutions about non-use of the U.S. financial system in connection with sanctioned countries. This case pushes the limits of the "causing" theory since the Singapore banks had their own dollar reserves and there is no allegation they were "clearing" specific Iran transactions.
OFAC Penalizes AIG for Providing Insurance on Shipments to Iran: On June 26, 2017, OFAC fined AIG approximately $150,000 because of 555 transactions totaling approximately $400,000 in premiums and claims for insurance of goods and materials were destined for or transited through Iran, Sudan, or Cuba. Many transactions occurred under global insurance policies but some occurred under single shipment policies. Some insurance contracts had exclusion policies dealing with sanctioned countries but most of the exclusion policies were defective; other contracts had no exclusion policies. Some single shipment policies were negotiated by insureds without exclusion policies.
OFAC, BIS, and DOJ Fine Chinese Company Over $1.2 Billion for Violating Iran Sanctions: On March 7, 2017, OFAC, the Bureau of Industry and Security (BIS), and the DOJ fined Chinese telecommunications corporation Zhongxing Telecommunications Equipment Corporation (ZTE) and several of its subsidiaries over $1.2 billion—a record-breaking penalty for all three agencies. Over six years, ZTE allegedly engaged in 251 violations of the Iranian Transactions and Sanctions Regulations (ITSR) involving approximately $40 million of U.S.-origin goods. According to the settlement agreement between OFAC and ZTE, ZTE evaded the U.S. sanctions on Iran by using third-party companies to facilitate the sale of U.S. origin goods to Iranian entities. For a more in-depth discussion see Miller and Chevalier's ZTE Trade Compliance Flash.
U.S. Asserts Jurisdiction Over Foreign Company, Based on Its Appearance in U.S. Bankruptcy Court, for Unrelated Iranian Sanctions Violation: On February 3, 2017, OFAC announced that it had issued a Finding of Violation against B Whale Corporation (B Whale), a Liberian company based in Taipei, Taiwan, and a member of the TMT Group of Shipping Companies. The finding was based on B Whale's Liberian flag vessel having conducted a ship-to-ship transfer of approximately two million barrels of oil with a vessel owned by an Iranian National Tanker Company. The Iranian vessel had been included on OFAC's SDN list prior to the approximately four-day period between August 30, 2013 and September 2, 2013, when the oil transactions occurred. In its announcement, OFAC explained that it had found jurisdiction over this transaction, even though it was between two foreign entities and took place outside the United States, because B Whale had entered into bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of Texas on June 20, 2013, and remained a party to those proceedings at the time of the transactions. For a more in-depth discussion see Miller and Chevalier's Trade Compliance Flash.
OFAC Reaches $17,500 Settlement with Offshore Drilling Company for Violations of Iran Sanctions: In January 2017, Aban Offshore Limited agreed to pay OFAC $17,500 to settle possible civil claims for violating the Iran sanctions in 2008. Aban's largest subsidiary, Aban Singapore Pte Ltd., allegedly ordered oil rig supplies from a U.S. vendor, which they planned to re-export from the United Arab Emirates to an oil rig located in Iranian territorial waters, South Pars Gas Fields. According to OFAC, the value of the order was $10,127. Despite finding several aggravating factors, OFAC determined the matter was non-egregious. OFAC considered the following to be aggravating factors: Aban failed to exercise a minimal degree of caution, Aban's conduct developed Iran's energy resources, Aban is a sophisticated company doing business throughout the world, and Aban lacked a compliance program. In deciding that the violation was non-egregious, OFAC considered and credited Aban with cooperation during the investigation, lack of prior sanctions violations, and implementing a compliance program.
Canadian Bank Faces Penalties for Sanctions Violations and Lack of Compliance Program: On January 13, 2017, OFAC issued an enforcement action against Toronto-Dominion Bank (TD Bank), a Canadian company, and its Luxembourg-based subsidiaries that involved apparent violations of the Cuban Assets Control Regulations (CACR) and the ITSR. The apparent violations all stem from the activity of TD Bank's Canadian operation. First, the Canadian bank failed to screen $1.165 million dollars of transactions for "any potential nexus" to a sanctioned country or entity before processing the transactions through the U.S. financial system. Second, TD Bank maintained accounts in Canada for a customer listed as a sales agent to an entity designated as a SDN under the Iran Sanctions Program. Third, TD Bank maintained accounts on behalf of 62 Cuban nationals residing in Canada and processed 99 transactions totaling less than half a million dollars—through the U.S. financial system. As a result of these activities, which are valued at approximately $2 million—and which TD Bank voluntarily disclosed—OFAC reached a settlement for remittance of $516,105.
In addition to this settlement, OFAC issued a Finding of Violation against TD Bank's Luxembourg-based online brokerage and banking subsidiary, Internaxx. OFAC found that Internaxx "provided U.S. securities-related products and services for customers resident in countries subject to comprehensive OFAC sanctions programs"—namely to persons residing or based in Cuba or Iran. Internaxx processed 3,491 securities-related transactions valued at approximately $92.869 million. For a more in-depth discussion see Miller and Chevalier's Trade Compliance Flash.
U.S. Oil Company Fined $25 Million for Violating Cuban, Iranian, and Sudanese Sanctions: In November 2016, OFAC announced it had issued a nearly $6 million dollar penalty against U.S. oil and gas company National Oilwell Varco Inc. (NOV) and two of NOV's Canadian subsidiaries. The penalty was part of a larger settlement involving BIS and a non-prosecution agreement with the DOJ. The penalty stemmed from alleged transactions by NOV and its subsidiaries involving Iran, Cuba, and Sudan. OFAC found that senior finance executives at NOV were willfully blind to the consequences of payments to a U.K. entity that resulted from sales to Iran. OFAC noted that aggravating factors considered in the calculation of the penalty included NOV's "reckless disregard for U.S. sanctions requirements," harm to U.S. sanctions objectives, the size and sophistication of NOV, and the "wholly inadequate" nature of NOV's compliance program. The penalty is a reminder of the potential consequences of an insufficient economic sanctions compliance program, as well as the interagency cooperation in this arena.
Amazon.com Self-Reports Violations Based on Transactions with Iran: According to Amazon.com's 10-K, from 2012 to 2017, Amazon.com processed transactions and delivered goods—ranging from apparel, electronics, books, software, and home, kitchen, beauty, and automotive products—to groups controlled or owned by the Iranian government. These transactions were in violation of the Iran Threat Reduction and Syria Human Rights Act (ITRA). Amazon.com self-reported these violations to OFAC and BIS. This is an important example of how reporting export control and sanctions violations may also result in required reporting in financial documents.
Iran Sanctions 24 U.S. Companies and Individuals in Response to Missile-Related Designations by the U.S. Departments of State and Treasury: On March 26, 2017, Iran announced its decision to impose sanctions on 15 U.S. companies, including Raytheon, United Technologies, RE/MAX, and Oshkosh, for human rights violations and support of Israel and its activities in the Palestinian territories. The Iranian government characterized its designations as responsive to the U.S. Department of State's March 21, 2017 imposition of sanctions on 11 Chinese, North Korean, and Emirati entities and individuals under the Iran, North Korea, and Syria Nonproliferation Act (INKSNA), for their alleged involvement in transferring sensitive items to Iran's ballistic missile program. On May 18, 2017, Iran sanctioned an additional nine entities and individuals, including Booz Allen Hamilton and its CEO, Horacio D. Rozanski, under similar theories. The second set of designations came in response to OFAC's May 17, 2017 addition of two senior Iranian defense officials, four Chinese companies, and one Iranian entity to the SDN List for engaging in proliferation activities in connection with Iran's ballistic missile program and support of the Assad regime in Syria.
Contributors: Abigail E. Cotterill,* Sarah A. Dowd,* Patrick M. Stewart*
*Former Miller & Chevalier attorney
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