OFAC 101

By Kriyana Reddy, Research Associate

In July 2015, the United States partnered with other members of the P5+1 (China, France, Germany, Russia, and the United Kingdom) along with the European Union and Iran to sign the Joint Comprehensive Plan of Action (JCPOA).[1] The plan was officially implemented in January 2016, and the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury issued numerous accompanying documents as guidelines on the JCPOA. Included in these guidelines are the following:

OFAC has also published supplementary information, including:

Addition of general license under Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560, related to the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.
Removals from the Specially Designated Nationals and Blocked Persons List (SDN)
Removals from the Foreign Sanctions Evaders List (FSE)
Removals from the Non-SDN Iran Sanctions Act List (NS–ISA)
Specific Guidance on the Iran Sanctions
Frequently Asked Questions about sanctions programs and related policies
Interpretive Guidance

In addition to the above publications, OFAC provides readily available copies of statutes, executive orders, rules, and regulations relating to Iran on its website.[2] Both due to - and also despite - this abundance of language, there is often confusion surrounding what is and is not permitted in U.S.-Iran business operations under the new agreement. Hence, this article seeks to clarify some of these guidelines. Imagine this as “OFAC 101.”

General Guidelines: Core Documents

Before diving into OFAC documentation, one should first understand the difference between primary and secondary sanctions:

- Primary sanctions apply to US persons and subsidiaries of US companies; such sanctions restrict most trade with Iran.

- Secondary sanctions are designed to curb non-US persons’ engagement in specific types of business related to Iran (e.g. business involving Iran’s energy, shipping, and shipbuilding sectors).[3]

After the JCPOA, the United States lifted “nuclear-related secondary sanctions” on the following Iranian business sectors:

Financial
Banking
Energy
Petrochemical
Shipping
Shipbuilding
Port operations
Gold/precious metal trade
Software and related metals
Automotive

Despite this seemingly apparent openness, due to the continuation of primary sanctions, American businesses have limited freedom to engage Iran in the aforementioned sectors. OFAC’s Guidance document provides details on sanctions relief in each of the sectors above, however OFAC continues to “broadly prohibit” U.S. companies and persons from “engaging in transactions or dealings with Iran and the Government of Iran” unless such activity is approved by OFAC.[4] Furthermore, OFAC emphasizes that any business operations in Iran must be limited to those approved by the JCPOA (e.g., activities that aid in the proliferation of WMD and/or engage individuals on the SDN list are still prohibited).

In general, the Guidance document is a thorough overview of all elements of the JCPOA and should be used as a reference rather than preliminary reading. If you’re looking for the best place to begin understanding OFAC guidelines and U.S.-Iran business opportunities, the FAQs better fulfill that role.

OFAC FAQs detail over 400 individuals and entities, which have been removed from the Specially Designated Nationals (SDN), Foreign Sanctions Evaders (FSE), and Non-SDN Iranian Sanctions Act (NS-ISA) lists. Prior to the JCPOA, non-US persons were not allowed to conduct transactions with these 400+ individuals and entities. Now, the JCPOA protects non-US persons who conduct business with the 400+ individuals who have been removed from the list. The FAQs document also emphasizes, however, that primary U.S. sanctions remain intact and that the United States Government (USG) reserves the right to impose blocking sanctions on individuals engaging in or supporting Iranian terrorism, human rights abuses, and WMD proliferation (among other issues). [5]

What the FAQs also highlight is that the fate of Transition Day, set to occur in October 2023,[6] is uncertain. On this day, the United States government will re-evaluate Iran’s position on nuclear development (along with the IAEA) and determine whether to add or remove individuals from the SDN list and/or the potential termination of statutory sanctions still in place.[7]

Until then, anyone looking to do business with Iranian individuals and entities should consider only the present guidelines for non-US persons under the JCPOA (this includes non-US citizens, unincorporated associations whose members are a majority non-US citizens, and corporations incorporated outside the US). Unfortunately, many of these guidelines are quite nuanced. For instance, the guidelines stipulate that Iran’s petrochemical sector is entirely independent of the Iranian energy sector at large. While non-US persons may invest in Iran’s petrochemical sector as well as export, sell, or provide refined petroleum/petrochemical products to Iran, such persons cannot provide similar goods/services to Iran’s energy sector.[8]

Financial transactions are also a major sticking point for businesses interested in conducting business with Iran, since any financial interactions in Iran may not be completed through the US financial system. US financial institutions may transact with third party institutions that maintain banking relationships with Iranian financial institutions that are not on the OFAC SDN.[9] However, US institutions cannot directly process Iranian transactions (and related ones) through US correspondent accounts, which banking institutions use to handle transactions for other financial institutions (e.g., credit unions, brokerages, etc.).

US financial institutions are expected to use “risk-based compliance [programs]” and other processes to properly “identify, escalate, interdict, and report transactions that are in violation of sanctions regulations.”[10] The extent to which U.S. financial institutions’ due diligence is defined in this regard remains vague at best.[11]

OFAC also provides guidelines for foreign entities owned or controlled by US persons that are interested in doing business in Iran. Foreign companies whose ownership is widely dispersed or that are publicly traded would not be subject to OFAC’s General License H, an issuance that allows foreign companies owned or controlled by a U.S. person to conduct business in Iran.[12] Foreign companies with U.S. directors, executives, and employees should make sure to “wall off” these employees in order to prevent services exports unaligned with JCPOA protocol.[13] Even though US persons must be “walled off,” they are still privy to information regarding business transactions between their controlled foreign entities and Iranian entities. For instance, those US persons can receive reports that detail the transactions, but the US persons can’t attempt to influence the business decisions behind the transactions, themselves.[14] In other words, any US person that controls a foreign entity can know about but not directly engage in the business transactions between its foreign entity and an entity in Iran.

Even for foreign companies without shared ownership, pitfalls remain. One issue that businesses should beware of is the due diligence necessary to ensure they are not conducting business with a banned individual or entity. What is the required due-diligence? Unfortunately, the answer to this question is still murky. OFAC states that checking the SDN List for the Iranian counterparty’s name “is not necessarily sufficient” as due diligence on the part of non-US persons.[15] As for what *is* sufficient -- OFAC provides some suggestions (e.g., writing and maintaining due diligence protocol, maintaining relevant due diligence records, aligning due diligence procedures with internal risk-assessment policies), but as with the due diligence required of financial institutions, the specifics are just not there.

Conclusion

While the JCPOA was hailed as a great triumph toward expanding business opportunities for companies interested in trading/working in Iran, the intricacies of the OFAC directives make following the guidelines anything but easy. Because US Persons are still largely prohibited from doing any kind of business in Iran, those companies and individuals based in the US—or those with majority US person personnel—should take extreme care to obtain the appropriate OFAC licenses and seek legal guidance in ensuring compliance with JCPOA rules and regulations. The OFAC FAQs document is a step in the right direction for clarification on JCPOA’s many stipulations; however, OFAC would do well to make its language more straightforward and less overwhelming to individuals and firms looking to conduct business in Iran.

Disclaimer

By publishing information concerning these guidelines, AIC is not recommending, endorsing, or marketing participation in any activities listed therein. Anyone interested in conducting business with Iran as it relates to these guidelines should undertake on their own to secure necessary information. Any business activity conducted with Iran must be in full compliance with all applicable laws, including U.S. economic sanctions and export control laws relating to the Islamic Republic of Iran.

Additional Resources:

List of authorized medical exports and reexports to Iran: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_gl_med_supplies.pdf

Changes to FFIs subject to Part 561: https://www.treasury.gov/ofac/downloads/561chg.pdf

[1] https://www.treasury.gov/resource-center/sanctions/Programs/Pages/iran.aspx

[2] Ibid.

[3] http://www.steptoe.com/publications-9841.html

[4] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/implement_guide_jcpoa.pdf, p. 3.

[5] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf, p. 4.

[6] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf, p. 9.

[7] Ibid.

[8] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf, p. 10–11.

[9]Ibid., p. 12–13.