Article Law360

Foreign Cos. Should Consider Risks of OFAC Iran Sanctions

The Office of Foreign Assets Control’s recent sanction of 18 Iranian banks creates a dilemma for foreign entities, particularly those reliant on U.S. dollars, who must evaluate whether to wind down their existing business with Iran to minimize risk of becoming a secondary sanctions target, say Kirkland attorneys Anthony Rapa, Abigail Cotterill and Jeremy Iloulian in this article for Law360

On Oct. 8, the U.S. Department of the Treasury's Office of Foreign Assets Control designated the Iranian financial sector, including 18 major Iranian banks that previously were subject only to U.S. primary sanctions, as subject to U.S. secondary sanctions under Executive Order 13902.[1]

The OFAC designation is part of the Trump administration's maximum-pressure campaign to isolate Iran from the global financial system and economy, and seeks to compel non-U.S. persons — particularly European and Asian banks — to choose between engaging with the U.S. or Iranian economies.

The View From Washington

OFAC's decision to impose additional sanctions on the Iranian financial sector represents an intensified effort to prevent non-U.S. persons from engaging in trade with Iran.[2] The designation follows the U.S.' purported reimposition of United Nations snapback sanctions on Sept. 19 due to the U.S. assessment that Iran was not in compliance with the terms of the Joint Comprehensive Plan of Action, or JCPOA, agreement regarding Iran's nuclear program.[3]

The JCPOA's other signatories — China, France, Germany, Russia and the United Kingdom — have taken the position that the U.S. no longer could invoke the snapback mechanism after withdrawing from the JCPOA in 2018, and have not reimposed sanctions on Iran.[4]

Key Features of the Financial Sector Sanctions

After a 45-day wind-down period that expires on Nov. 22, the Oct. 8 designation authorizes OFAC to impose secondary sanctions on non-U.S. persons that do business with the 18 designated Iranian banks or certain other business within the broader Iranian financial sector.[5] For non-U.S. parties, this represents a significant escalation of U.S. sanctions risks, as OFAC may impose such secondary sanctions irrespective of whether the underlying dealings have a nexus to the U.S., U.S. persons or U.S. dollars.

The basis for the Oct. 8 designation is Executive Order 13902, which President Donald Trump signed on Jan. 20, that lists a series of potential prohibitions that OFAC could impose on persons — U.S. or otherwise — and foreign financial institutions that do business in certain sectors of the Iranian economy.[6] While EO 13902 initially authorized secondary sanctions related to the Iranian construction, mining, manufacturing and textiles sectors, it also granted OFAC the authority to designate additional sectors in the future.

Authority to Sanction Non-U.S. Persons Engaging With Iranian Financial Sector

As a result of the Oct.8 designation, OFAC now retains the authority to designate any person, including non-Iranian actors, such as those in Europe and Asia, on its list of specially-designated nationals, or SDN, and blocked persons list, if is determines that such a person:

  • Operates in the Iranian financial sector;
  • Knowingly engaged in a significant transaction for the sale, supply, or transfer to or from Iran, of significant goods or services used in connection with the Iranian financial sector on or after Jan. 10 — after application of the 45-day wind-down period;
  • Materially assists, sponsors, or provides financial, material, or technological support for, or goods or services to or in support of, a person designated on the SDN list under EO 13902, such as the 18 designated Iranian banks; or
  • Is owned or controlled by, or has acted directly or indirectly for or on behalf of, a person designated on the SDN list pursuant to EO 13902.

As U.S. persons are prohibited from conducting any dealings with parties on the SDN list, or with parties 50% or more owned by such parties, such an SDN list designation would essentially cut the designee off from the U.S. financial system and prevent any international financial institutions from accessing U.S. dollars, a necessity for many European banks.[7]

Notably, aside from the 18 banks identified on Oct. 18, OFAC has not defined the terms "Iranian financial sector," "significant transaction" or "significant goods and services," though it has stated that it will provide further guidance in the coming months.[8]

Looking to past U.S. sanctions incorporating the concept of a significant transaction, it is possible that such a determination may require a case-by-case analysis of factors such as transaction value and magnitude, nexus to the government of Iran, and potential harm to U.S. national security and foreign policy interests.[9]

Additional Menu-Based Sanctions on Non-U.S. Financial Institutions

Pursuant to EO 13902, the Oct. 8 designation will also provide OFAC with authority to impose additional sanctions on foreign financial institutions if it determines they have knowingly conducted or facilitated any significant financial transaction:

  • "For the sale, supply, or transfer to or from Iran of significant goods or services used in connection with" the Iranian financial sector; or
  • For the benefit of a person designated on the SDN list pursuant to EO 13902, such as the 18 designated Iranian banks.

The menu-based sanctions that OFAC may impose following such a determination include prohibiting the foreign financial institution from opening or maintaining a correspondent or payable-through account in the U.S.

General License for Humanitarian and Other Authorized Transactions

Though the addition of parties to the SDN list generally restricts all U.S. person-dealings and gives rise to the secondary sanctions risks noted above, OFAC has issued General License L. Pursuant to this license, all other OFAC general or specific licenses that authorize transactions under the Iranian Transactions Sanctions Regulations, the regulatory basis for most sanctions on Iran, also authorize transactions restricted pursuant to the Oct. 8 designation.[10]

For example, certain exports to Iran of agricultural commodities, medicine and medical devices, which are authorized under Section 560.530 of the Iranian Transactions Sanctions Regulations, would be authorized under General License L. The text of EO 13902 also makes this clear.

Furthermore, activities authorized under General License E — regarding certain nongovernment organization activities in Iran — would be authorized under General License L.

Other guidance from OFAC likewise clarifies that certain transactions related to health, medical and sanitation products — for example, soap, hand sanitizer, ventilators, child care items — for exclusive use in Iran are authorized, as well.[11]

Practically speaking, however, it is unclear whether financial institutions will process such transactions due to the elevated risks and associated compliance considerations.

Key Takeaways

Non-U.S. persons, and in particular non-U.S. financial institutions, are now on notice that dealings with the Iranian financial sector could subject them to designation on the SDN list or loss of U.S. correspondent/payable-through accounts.

Non-U.S. persons and foreign financial institutions should assess existing business with Iran and consider whether to wind it down by Nov. 22, to minimize the risk of becoming a target of OFAC's new secondary sanctions. The assessment should include analysis of the value, number, and nature of goods and services provided, the impact of those goods and services on OFAC's objectives, and the involvement of any persons designated by OFAC.

Previous general and specific licenses to do business in Iran are still applicable, although companies should enhance compliance programs to ensure each carefully complies with license terms and to minimize the risk of inadvertent violations. Non-U.S. companies considering continuing business subject to the Iranian financial-sector sanctions should regularly review requirements for remaining in compliance, including whether requirements to report information to OFAC may apply.

By enhancing the secondary sanctions possible for non-U.S. persons who continue to do business with Iran, OFAC makes the choice of continued business with the U.S. or continued business with Iran increasingly binary, posing a dilemma for foreign financial institutions, particularly those in Europe and Asia, who rely on access to the U.S. financial system or U.S. dollars.

Anthony Rapa is a partner, Abigail Cotterill is of counsel and Jeremy Iloulian is an associate at Kirkland & Ellis LLP.

Kirkland partners Mario Mancuso and Sanjay Mullick contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.