On October 8, 2020, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) significantly strengthened sanctions directed at operations in, or engagement with, the financial sector of the Iranian economy, in a manner that targets the actions of non-U.S. persons beyond the Iran sanctions previously in place.1 Such action was taken pursuant to the authority in Executive Order (EO) 13902. OFAC simultaneously enhanced the Specially Designated National (SDN) designations of 18 Iranian banks, putting non-U.S. persons on notice that transactions with those individual banks may result in secondary sanctions.2 Additionally, without the general license discussed below, the enhanced sanctions would have severely limited the use of certain authorizations available to U.S. persons under the existing Iran sanctions, including those that are humanitarian in nature. According to the Secretary of the Treasury, Steven Mnuchin, these sanctions are continued censure for Iran’s “support of terrorist activities and ... its nuclear programs.”
EO 13902, which was issued on January 10, 2020, provides the Secretary of the Treasury with the “authority to identify and impose sanctions on key sectors of Iran’s economy in order to deny the Iranian government financial resources that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.” In particular, EO 13902 allows the U.S. government to impose secondary sanctions on non-U.S. persons operating in designated sectors of the Iranian economy as well as on non-U.S. persons found to knowingly engage with those sectors or to provide support to designated members of those sectors.3 The imposition of secondary sanctions under EO 13902 means the designated non-U.S. persons would be considered SDNs and would be unable to engage in transactions with U.S. persons or within the United States. Such persons would also be cut off from the U.S. financial system and may be unable to access U.S. dollars.
While EO 13902 initially targeted non-U.S. persons’ engagement with the construction, mining, manufacturing, and textiles sectors,4 the order permitted the Secretary of the Treasury to designate additional sectors in the future. The designation of the Iranian financial sector on October 8 means that operating in that sector, or engaging in significant transactions with Iranian financial institutions, may subject a non-U.S. person to secondary sanctions even if a particular financial institution has not been previously listed as an SDN. Non-U.S. persons have the benefit of a 45-day wind-down period, until November 22, to conclude any transactions and activities involving the Iranian financial sector or any Iranian bank sanctioned pursuant to EO 13902 (as long as those transactions and activities were not themselves previously sanctionable) without risking exposure to secondary sanctions.
“Enhanced” designations, that is, designation as an SDN for a reason besides the general Iran sanctions program (those designations authorized under the Iranian Transactions and Sanctions Regulations (ITSR)), may sometimes prevent the use of general licenses, which authorize activity with SDNs blocked only pursuant to the ITSR. However, OFAC has issued a new general license — General License (GL) L — and several FAQs to clarify that transactions previously authorized under the ITSR, including donations of humanitarian goods,5 and the sale of certain agricultural commodities, medicines, and medical devices to Iran should not be affected by its October 8 action. Specifically, GL L authorizes transactions with Iranian financial institutions blocked pursuant to EO 13902 where the ITSR authorize, exempt, or otherwise do not prohibit such transactions and activities. As OFAC clarified in its FAQs, GL L authorization “includes, but is not limited to, (i) transactions and activities authorized by general and specific licenses issued pursuant to the ITSR and (ii) transactions and activities ordinarily incident to such transactions and activities and necessary to give effect thereto that are consistent with section 560.405 of the ITSR.” Further, OFAC has stated that “[f]or purposes of E.O. 13902, OFAC would not generally view transactions or activities by non-U.S. persons to be sanctionable if they are consistent with activities permissible by U.S. persons.” Non-U.S. persons thus should not be exposed to secondary sanctions risk where the same activities by a U.S. person would be authorized under GL L.
For both U.S. and non-U.S. persons, the effect of GL L and the clarifying FAQs is that transactions previously authorized under the ITSR, including the sale of certain agricultural commodities, food, medicine, or medical devices to Iran, should remain permissible. However, the addition of the financial sector to EO 13902 may cause non-Iranian financial institutions to become even more reluctant to get involved in transactions related to Iran, even where such transactions are authorized under the ITSR.
For those non-U.S. persons engaging with the Iranian financial sector in a manner that would not be authorized if engaged in by a U.S. person, it is important to carefully evaluate the risks that arise from this new action and to closely review any further guidance that OFAC may provide as to the sanctions risk that may result from continuing engagement with this sector.6
1 U.S. Department of the Treasury, Iran-related Designation Updates; Issuance of Iran-related General license; Publication of Iran-related Frequently Asked Questions (Oct. 8, 2020), https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20201008.
2 All 18 banks were designated on November 5, 2018, pursuant to EO 13599. See OFAC, “Publication of Updates to OFAC’s Specially Designated Nationals and Blocked Persons List and 13599 List Removals” (Nov. 5, 2018), https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20181105_names.
3 EO 13902 also sanctions persons (1) who materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the order, and (2) who are owned or controlled by, or who have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the order.
4 Additionally, in May 2019, EO 13871 authorized secondary sanctions on Iran’s steel, aluminum, and copper sectors.
5 See ITSR, 31 CFR 560.210(b) (exempting donations of articles such as food, clothing, and medicine intended to relieve human suffering from the ITSR’s sanctions).
6 OFAC has indicated that it anticipates providing “guidance that outlines expected regulatory definitions for the Iranian financial sector, as well as goods and services used in connection with the sector, for purposes of evaluating sanctions risk pursuant to E.O. 13902.”
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