By Stephen Kaplitt, Esq. | AEM Carnelutti
Executive Summary: The Trump administration’s withdrawal from the Iran nuclear deal means that U.S. sanctions on Iran are more sweeping and comprehensive than ever before. The administration has continued to escalate its efforts to maximize economic pressure on the Iranian government. Today, the U.S. designated the Islamic Revolutionary Guard Corps (IRGC) as a “Foreign Terrorist Organization”, which significantly increases the number of Iranian-linked businesses and institutions that may potentially be “tainted” entities. Traps abound for unwary European companies, even those that do not do business in the US. Now is the time to assess and implement multi-step compliance procedures to identify and mitigate legal and reputational risks.
As all European and American executives are aware, on November 5, 2018, the Trump administration restored sweeping trade restrictions on Iran and tensions with Tehran are getting worse by the day. The administration’s stated goal was not only to restore sanctions that had been lifted as part of the Joint Comprehensive Plan of Action (“JCPOA” or more commonly known as the “Iran nuclear deal”), but to go further and create “the toughest sanctions regime ever imposed on Iran.” The restored and expanded sanctions target “critical” economic sectors, including energy, aviation, shipping, shipbuilding and financial services and institutions, among others. In general, the strongest sanctions target sectors and institutions that support Iran’s various military-related activities, including the Central Bank of Iran and the National Iranian Oil Company, among other government-affiliated financial institutions and entities in these sectors.
For European companies that do business with both Iran and the United States, these new sanctions environment creates – or more accurately, resurrects – significant compliance challenges. For almost 40 years, U.S. laws have restricted or prohibited most commercial and financial transactions between U.S. persons and Iran. These “primary sanctions” generally prohibit most trade in goods, services and technology with Iran by “U.S. persons”, which broadly includes all U.S. businesses, citizens and residents (and, importantly, any persons or entities under their control – including non-U.S. controlled persons). Primary sanctions have relatively limited and narrow exceptions, including trade in food, agricultural products, medicine and medical devices, and for certain other humanitarian purposes. U.S. law also prohibits a range of indirect activities that support, finance or otherwise facilitate Iran-related activities of non-U.S. persons. These include virtually any activities that support the Iranian government, and especially SDN entities such as the Islamic Revolutionary Guard Corps.
Over the years, successive legislation and rule-making have steadily expanded the scope of sanctions to include entities that effectively have little or no nexus with the United States. These “secondary sanctions” apply to all non-U.S. persons, and merit special attention from European companies with business interests in both the U.S. and Iran. Secondary sanctions include the denial of U.S. visas and access to U.S. banking, and the “blacklisting” of specific individuals, entities and organizations on various prohibition lists, the most prominent of which is the “List of Specially Designated Nationals” (or “SDNs”) published by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC List”). This last restriction carries perhaps the greatest risk for non-U.S. persons that engage in dollar-denominated, non-cash commercial transactions anywhere in the world, since it is all but inevitable that such funds will either clear or transit through a U.S. person, or a control person or affiliate of a U.S. person. Moreover, even non-U.S. persons with no U.S. nexus may themselves be subjected to secondary sanctions if they engage in “significant transactions” with SDNs or entities owned 50% or more by such SDN. The essential purpose of the OFAC List is to make it nearly impossible for SDNs to conduct non-illicit business anywhere in the world through the aggressive assertion of U.S. extraterritorial jurisdiction; therefore, even European companies that may have (or believe they have) no U.S. presence or nexus should still exercise extreme caution before conducting any business with persons who are, or who are directly or indirectly controlled by, SDNs.
The U.S. has signaled its intention to focus enforcement and investigatory efforts on activities that seek to evade or undermine sanctions, particularly with respect to shipping, oil and financial transactions. Secondary sanctions have recently been imposed on banks and currency trading firms in Turkey, Iran and the UAE that allegedly laundered nearly US $1 billion for the benefit of Iranian government and military entities.
While the European Union (EU) also maintains certain narrow sanctions targeting Iranian entities and persons associated with terrorism, in general European legal restrictions pale in comparison with U.S. sanctions. In response to the restoration of sweeping U.S. sanctions, this past January, Britain, France and Germany launched a special-purpose vehicle called the “Instrument in Support of Trade Exchanges (INSTEX), which is intended to provide a single conduit for payments permissible transactions in Iran (mainly in food, pharmaceutical and medical device sectors). Because the operational and legal specifics of INSTEX remain under development, it is unclear whether or how INSTEX will mitigate risk for European businesses trading with Iranian counterparts.
In summary, the U.S. and Europe remain starkly divided over trade policy with Iran. Indeed, the EU has even reinforced “blocking sanctions” that could penalize European businesses for complying with enhanced U.S. sanctions. As a result, all European companies should take certain basic steps to minimize or mitigate potential exposure to U.S. enforcement action. First, conduct and document proper due diligence before transacting with any new or unknown Iranian counterparty. At minimum, this due diligence should ascertain the identities of all controlling persons and their controlled persons or affiliates. Second, assess whether the transaction is a high priority focus of U.S. sanctions, either due to the nature of the Iranian counterparty or the transaction itself. Despite the broad sweep of U.S. sanctions, enforcement action is generally less likely in the case of minor or non-recurring violations. Third, assess whether any U.S. persons are involved with executing or supporting the transaction in any way. Any such involvement could “taint” transactions that are otherwise compliant with European law. Fourth, establish and document (with appropriate records) internal monitoring and compliance processes so that multiple or ongoing transactions in Iran are regularly reassessed in light of new sanctions and regulations. Fifth, proactively consult with both U.S. and European counsel to identify any known or potential compliance issues so they can be managed and addressed on a timely and effective basis.
 See generally the Iranian Transactions and Sanctions Regulations (ISTR) issued by the U.S. Department of Treasury on October 22, 2012 (31 C.F.R. Part 560) and the Iranian Financial Sanctions Regulations reissued on February 27, 2012 (31 CFR Part 561).
 See 31 C.F.R. § 560.208.
 See 31 C.F.R. § 561.404; 22 U.S.C. § 8801(B). Whether one or a series of transactions are “significant” is a subjective assessment by the OFAC, based on various criteria including monetary value, number, frequency and nature of the transaction.
Compliments of AEM Carnelutti , a member of the EACCNY