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OFAC issues FAQs on latest Iran sector-based sanctions (www.lexology.com)

Introduction

In four new FAQs issued on 5 June 2020, the Office of Foreign Assets Control (OFAC) has provided a few surprises in its clarifications of the sector-based sanctions contained in Iran-Related Executive Order (EO) 13902, which was issued in January 2020.

The new FAQs confirm earlier guidance and provide:

  • detailed but mostly unremarkable definitions of the four sectors of the Iranian economy, as well as the goods and services used in connection with those sectors, that are targeted by EO 13902; and
  • the meanings of the terms ‘knowingly’ and ‘significant’.

However, the sector definitions are surprisingly closed ended and two of the definitions – particularly that of the textiles sector – are narrower than expected. There is also an across-the-board exception relating to ensuring the protection of life and the prevention of injuries.

Background

EO 13902 threatens persons (individuals and entities) with blocking sanctions if they knowingly engage in “a significant transaction for the… supply… to or from Iran of significant goods or services used in connection with” the construction, mining, manufacturing or textiles sectors of the Iranian economy. The EO also threatens:

  • any persons which operate in these sectors in Iran with the same blocking sanctions; and
  • foreign financial institutions with correspondent account sanctions if they knowingly facilitate a significant financial transaction for such a supply of goods, services or otherwise for anyone blocked pursuant to the EO.

After the issuance of EO 13902, OFAC provided a 90-day wind-down period for companies to complete their existing business with Iran, which ended on 9 April 2020.

Many questions arose when EO 13902 was issued. How will OFAC define these economic sectors, particularly with respect to the potentially large manufacturing sector? How broad is the class of goods used in connection with an identified sector? Further, although the EO exempts the provision of agricultural commodities, food, medicine and medical devices to entities in Iran, what about the entities that operate in Iran and manufacture these items?

On 16 April 2020 OFAC published web guidance that, among other things, removed Iranian manufacturers of medicine, medical devices, personal protective equipment (PPE), hygiene items and several other products from OFAC’s interpretation of the ‘manufacturing sector of the Iranian economy’, provided that they manufacture products for use in Iran and not for export from Iran (for further details please see “OFAC’s COVID-19 response: existing exceptions, filing and compliance flexibility and some relief for Iran“). That interpretation appears to have been fast tracked in response to the COVID-19 pandemic. With the new FAQs, OFAC has now released a fuller set of interpretations.

FAQ 830 – repetition of existing guidance

Exclusion of Iranian manufacturers of medical, safety and hygiene-related products

The first FAQ (830) primarily repeats the guidance already provided on 16 April 2020, but with one clarifying addition. OFAC will not consider an individual or entity in Iran to be part of the manufacturing sector if it manufactures:

medicines, medical devices, or products used for sanitation, hygiene, medical care, medical safety, and manufacturing safety, including soap, hand sanitizer, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, and manufacturing safety systems, solely for use in Iran and not for export from Iran.

While it is unlikely that any party will have made a significant sale of significant materials to an Iranian manufacturer that was producing for both the Iranian domestic and export markets after 16 April 2020, OFAC clearly saw fit to firmly exclude this possibility.

Exception for supply of agricultural and medical items

FAQ 830 also repeats the exemption contained in EO 13902 regarding the supply of agricultural items, food, medicine and medical supplies to Iran. Unfortunately, the FAQ does not extend this treatment to entities that manufacture these items in Iran (except for manufacturers of domestic use-only medicine and medical supplies noted in the exclusion above). OFAC therefore can still designate an Iranian manufacturer of food or a supplier of other items, such as machinery, to that manufacturer. OFAC may have felt restricted to repeating the specific wording of the EO, which may have been carefully reviewed and perhaps even fought over, even though OFAC may not intend to target Iranian manufacturers of agricultural products, food, medicine and medical supplies or the suppliers of non-agricultural and non-medical items to them, at least so long as they manufacture solely for domestic Iranian consumption.

Application to non-Iranian persons

Finally, FAQ 830, along with the three other new FAQs, clarifies that the sanctions risk for persons which operate in the relevant sectors of the Iranian economy applies to both Iranian and non-Iranian persons which operate in those sectors.

FAQs 831 and 832 – definition of sectors and goods or services used in connection therewith

The second and third FAQs (831 and 832) detail the activities in Iran which fall within the four named sectors of the Iranian economy and the goods and services used in connection with those sectors which will be targeted. While the title of FAQ 832 mistakenly suggests that the term ‘significant’ is defined, that term is instead handled in FAQ 833.

The various definitions are detailed, but the following observations are worth noting.

Sector definitions are most important because they are exclusive

The sector definitions generally explain that the relevant sector means the specific activities included on a list that has no catch-all phrases such as “and any other activities that”. For example, the ‘construction sector’ means activities relating to “the production, procurement, devising, framing, or arranging” and the ‘textiles sector’ means activities relating to ‘the fiber synthesis, dyeing, weaving, knitting, or felting”. If an activity is not reasonably understood to be one of the activities listed in a sector’s definition, parties which undertake that activity are not considered part of that sector.

Construction sector

The term ‘construction sector of the Iranian economy’ means the production, procurement, devising, framing or arranging in Iran of parts or materials to fabricate, shape or form buildings or structures, including the on-site development, assembly or construction of residential, commercial or institutional buildings in Iran. The term applies to engaging in new work, additions, alterations, maintenance and repairs of residential, commercial or institutional buildings. Persons such as for-sale builders, design-build firms and project construction management firms in Iran may be considered as operating in this sector.

Mining sector

The term ‘mining sector of the Iranian economy’ means any act, process or industry of extracting, at the surface or underground, ores, coal, precious stones or any other minerals or geological materials from the Earth in Iran.

Open-ended definitions of ‘goods or services used in connection with’ sectors

Conversely, the definitions of ‘goods or services used in connection with’ a sector are more open ended (see below). Those definitions make greater use of the words ‘including’ or ‘includes’ in key places, which OFAC normally interprets to refer to an illustrative and not an exclusive list. Accordingly, a company which is considering transactions that it feels may involve one of the sectors should look closely at the specific language used in the relevant sector definition. Even if the company’s supply of goods or services appears to be included in the open-ended ‘goods or services’ definition, those goods or services must still relate to the specific activities listed in the sector definitions, and there may be room for some activities to fall outside those carefully worded sector definitions.

Small gap in ‘manufacturing sector’ definition

Unfortunately, the definition of the ‘manufacturing sector’ does not reduce its breadth by much, but it is restricted to manufacturing for export from Iran or sale within Iran. This may leave some space for the sector to not include the production of items that will remain in Iran but will not be sold there (ie, items manufactured by a company for its own use).

Manufacturing sector

The term ‘manufacturing sector of the Iranian economy’ means the creation in Iran of goods by manual labour or machinery that are for export from Iran or for sale within Iran. For the purposes of evaluating sanctions pursuant to EO 13902, persons in Iran which manufacture medicines, medical devices or products used for sanitation, hygiene, medical care, medical safety and manufacturing safety, including soap, hand sanitiser, ventilators, respirators, personal hygiene products, nappies, infant and childcare items, PPE and manufacturing safety systems, solely for use in Iran and not for export from Iran, will not be considered to operate in the manufacturing sector of the Iranian economy. Persons which conduct or facilitate transactions for the provision, including any sale, of agricultural commodities, food, medicine or medical devices to Iran will not be subject to sanctions under EO 13902.

Big gap in ‘textiles sector’ definition

The definition of the ‘textiles sector’ is surprising as it includes only activities relating to textiles “that are for export from Iran”. Entities in Iran that work with textiles solely for domestic sale or other domestic use are not considered part of the textile sector for the purposes of EO 13902.

Textiles sector

The term ‘textiles sector of the Iranian economy’ means the fibre synthesis, dying, weaving, knitting or felting in Iran of textiles, including apparel, carpets, cloths, fabric or related goods, that are for export from Iran.

Exceptions for protection of life and prevention of injuries

With one possibly erroneous exception, each of the separate definitions of goods or services used in connection with the different sectors contains an exception for good or services “that ensure the protection of life and prevention of injuries to persons operating in” the relevant sector. The odd exception is for goods used in connection with the mining sector. That definition excepts only “goods that ensure the protection of life and prevention of injuries to persons operating in mines” and not all of those operating in the mining sector. This feels more like a mistake than an intentional narrowing and it remains to be seen whether OFAC will amend this language in the FAQ or when these definitions are added to formal regulations.

FAQ 833 – defining ‘knowingly’ and ‘significant’

The fourth and final new FAQ (833) contains no surprises. The term ‘knowingly’ is defined in the same manner as in existing regulations to mean actual knowledge or reason to know (see below). The FAQ defines ‘significant’ in terms of goods and services so that it also follows the general contours of similar definitions in existing regulations, including:

  • the nature, value and number or frequency of the goods or services involved;
  • the awareness of management;
  • the presence of deceptive practices; and
  • the involvement of a specially designated national (the full definition is provided below).

Notably, the FAQ defines ‘significant’ only in terms of its second use, and not its first use, in the relevant EO prong language (ie, “significant transaction for the supply of significant goods or services). It is unclear why OFAC defined it for only one use and not the other, unless perhaps it is politely hinting that the repetition may have been unfortunate and did not add much to the EO language (eg, any transaction for the supply of significant goods or services is by definition a significant transaction). However, it seems fair to assume that a similar definition will be used each time the term ‘significant’ appears.

Goods or services used in construction sector

The term ‘goods used in connection with the construction sector of the Iranian economy’ means equipment or materials that enable the services described below or the activities described in FAQ 831 with respect to the construction sector of the Iranian economy, including:

  • building supplies;
  • concrete;
  • scaffolding;
  • lifts;
  • hoists;
  • cranes;
  • conveyors; and
  • mechanised equipment for material handling.

Goods that ensure the protection of life of and the prevention of injuries to persons which operate in the construction sector of the Iranian economy, including PPE, safety devices and alarm systems, are excluded from this definition.

The term ‘services used in connection with the construction sector of the Iranian economy’ includes:

  • blasting;
  • demolition;
  • dredging;
  • electrical work;
  • excavating;
  • masonry;
  • plumbing;
  • rigging;
  • welding;
  • for-sale building;
  • design-build consultations; and
  • construction management.

Services that ensure the protection of life of and the prevention of injuries to persons which operate in the construction sector of the Iranian economy are excluded from this definition, including cleaning, safety inspections and services necessary for use of protective goods described above.

Goods or services used in mining sector

The term ‘goods used in connection with the mining sector of the Iranian economy’ means equipment or materials that enable the services described below or the activities described in FAQ 831 with respect to the mining sector of the Iranian economy, including:

  • boring equipment;
  • conveyor belts;
  • directional digging technology;
  • haul trucks;
  • hydraulic excavators;
  • explosives; and
  • power shovels.

Goods that ensure the protection of life of and the prevention of injuries to persons which operate in mines in Iran are excluded from this definition, including PPE, safety devices, ventilation systems and alarm systems.

The term ‘services used in connection with the mining sector of the Iranian economy’ includes:

  • auguring;
  • boring;
  • backfilling;
  • combusting;
  • crushing;
  • exploration;
  • grinding;
  • grading;
  • irrigating;
  • impounding;
  • magnetic separation;
  • mineral processing;
  • geophysical surveying;
  • mapping services;
  • operating mines or quarries;
  • site preparation; and
  • related construction activities.

Services that ensure the protection of life of and the prevention of injuries to persons which operate in the mining sector of the Iranian economy are excluded from this definition, including rescue and accident response services, cleaning, safety inspections and services necessary for the use of protective goods described above.

Goods or services used in manufacturing sector

The term ‘goods used in connection with the manufacturing sector of the Iranian economy’ means equipment or materials, including raw materials, tooling machinery and components of finished products, that enable the services described below. Goods that ensure the protection of life of and the prevention of injuries to persons which operate in the manufacturing sector of the Iranian economy are excluded from this definition, including PPE, safety devices and alarm systems.

The term ‘services used in connection with the manufacturing sector of the Iranian economy’ includes:

  • new instalments, additions, alterations and the maintenance and repair of manufacturing equipment;
  • the procurement or supply of raw materials for the manufacturing sector of the Iranian economy; and
  • the provision of distribution services to persons which operate in the manufacturing sector of the Iranian economy.

Services that ensure the protection of life of and the prevention of injuries to persons which operate in the manufacturing sector of the Iranian economy are excluded from this definition, including cleaning services, safety inspections and services necessary for use of protective goods described above.

Goods or services used in textile sector

The term ‘goods used in connection with the textiles sector of the Iranian economy’ means equipment, machines, materials and items used in the textiles sector of the Iranian economy or that enable the services described below or the activities described in FAQ 831 with respect to the textiles sector of the Iranian economy, including:

  • looms;
  • industrial sewing machines;
  • industrial washers and dryers; and
  • industrial embroidery machinery.

Goods that ensure the protection of life of and the prevention of injuries to persons which operate in the textiles sector of the Iranian economy are excluded from this definition, including PPE, safety devices and alarm systems.

The term ‘services used in connection with the textiles sector of the Iranian economy’ includes the procurement or supply of raw materials for textiles production and the design of textiles products. Services that ensure the protection of life of and the prevention of injuries to persons which operate in the textiles sector of the Iranian economy are excluded from this definition, including cleaning services, safety inspections and services necessary for use of protective goods described above.

Knowingly

The term ‘knowingly’, with respect to conduct, a circumstance or a result, means that a person has actual knowledge or should have known of the conduct, the circumstance or the result.

Significant

In determining whether goods or services used in connection with a sector of the Iranian economy identified pursuant to EO 13902 are ‘significant, the Department of the Treasury may consider all of the facts and circumstances. As a general matter, the Department of the Treasury may consider some or all of the following broad factors:

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