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OFAC Issues New FAQs Clarifying Iran Secondary Sanctions | Morrison & Foerster LLP (www.jdsupra.com)

On June 5, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued four new frequently asked questions (“FAQs”) that define key terms used in secondary sanctions added to the Iran sanctions program earlier this year. These FAQs define the construction, mining, manufacturing, and textile sectors of the Iranian economy and clarify that OFAC will not view sales of humanitarian, safety, and sanitation-related goods/services to persons in Iran who are not Specially Designated Nationals (“SDNs”) as operating in these sectors or transacting in goods or services used in connection with these sectors. The new FAQs continue OFAC’s recent efforts to ensure that U.S. sanctions against Iran do not prevent Iranian companies and individuals from obtaining medical supplies and safety equipment necessary to fight the COVID-19 epidemic or endanger Iranian workers.

Background

U.S. sanctions are often categorized into “primary” sanctions (which apply to U.S. persons or transactions with a U.S. nexus and carry potential monetary penalties for violations) and “secondary” sanctions (which apply to non-U.S. persons for transactions outside the United States and which threaten sanctions against foreign persons for sanctionable conduct, including engaging in certain business involving Iran). U.S. sanctions against Iran include both types of sanctions but stand out in the scope and number of secondary (or “extraterritorial”) sanctions threatened against non-U.S. parties that do business with Iran. In the Iran sanctions program, there are currently secondary sanctions applicable to transactions involving many Iranian persons listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), the Iranian energy, shipping, and automotive sectors, and even the Central Bank of Iran (“CBI”), among others.

On January 10, 2020, President Trump issued Executive Order (“E.O.”) 13902, which expanded U.S. secondary sanctions against Iran to include transactions involving the construction, mining, manufacturing, and textiles sectors of the Iranian economy and authorized the Secretary of the Treasury to add more sectors as he sees fit. The secondary sanctions in E.O. 13902 mean that OFAC may sanction non-U.S. individuals and entities if they operate in or knowingly engage in a “significant” transaction for the sale or supply to or from Iran of “significant” goods or services “used in connection with” the Iranian construction, mining, manufacturing, or textiles sectors. E.O. 13902 also authorizes the Treasury Secretary via OFAC to sanction non-U.S. financial institutions that facilitate “significant” financial transactions involving those sectors.

The expansion of secondary sanctions under E.O. 13902 raised a number of questions about which types of companies and transactions OFAC included in those sectors and which goods and services counted as “significant” or were “used in connection” with those sectors. These questions gained a sense of urgency in March, after Iran became one of the epicenters of the COVID-19 outbreak. (We previously wrote about some of the reported difficulties in exporting medical supplies to Iran.) While E.O. 13902 states that the secondary sanctions mentioned above do not apply to transactions “for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran,” it does nothing to clarify that transactions involving medical manufacturers in Iran would not be subject to secondary sanctions. For example, under E.O. 13902, OFAC could have sanctioned a firm that exported to textile companies in Iran the fabric necessary to manufacture masks and other protective equipment used in the fight against COVID-19, because fabric is not a medicine or medical device. OFAC likely issued the new FAQs to ensure that scenarios like this do not prevent Iran from acquiring the supplies it needs to fight the pandemic.  

The FAQs

As with the issuance of General License 8 and FAQ 823 earlier this year, which clarify that payments from Iran (which generally involve the CBI) for the sale of authorized food, medicine, or medical devices would not be subject to the primary or secondary sanctions applicable to the CBI, the new FAQs clarify that E.O. 13902 does not apply to many sales of humanitarian, safety, and sanitation-related goods/services to Iran. The new FAQs also define key terms, including those that OFAC will use when determining whether to impose secondary sanctions involving the construction, mining, manufacturing, and textiles sectors of the Iranian economy.

FAQ 830

FAQ 830 clarifies that when OFAC reviews potential sanctions actions under E.O. 13902, it will not view “persons in Iran manufacturing 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” as operating in the manufacturing sector of the Iranian economy (meaning that dealings with such persons would not subject others to potential secondary sanctions).

FAQ 831

FAQ 831 defines what OFAC considers to be the construction, mining, manufacturing, and textiles sectors of the Iranian economy:

  • Construction sector of the Iranian economy: 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 of the Iranian economy: 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.
  • Manufacturing sector of the Iranian economy: The term manufacturing sector of the Iranian economy means the creation in Iran of goods by manual labor or machinery that are for export from Iran or for sale within Iran, but not persons in Iran manufacturing 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.
  • Textiles sector of the Iranian economy: The term textiles sector of the Iranian economy means the fiber synthesis, dyeing, weaving, knitting, or felting in Iran of textiles, including apparel, carpets, cloths, fabric, or related goods, that are for export from Iran.

FAQ 832

FAQ 832 clarifies which transactions may be subject to secondary sanctions under E.O. 13902 by defining the term “goods used in connection with” each sector and by giving examples of “services used in connection with” each sector that qualify for the sanctions. These include the following:

Goods or services used in connection with the construction sector of the Iranian economy:

  • 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 the definition of the construction sector of the Iranian economy above, including: building supplies, concrete, scaffolding, lifts, hoists, cranes, conveyors, and mechanized equipment for material handling. Goods that ensure the protection of life and prevention of injuries to persons operating in the construction sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.
  • 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 and prevention of injuries to persons operating 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 connection with the mining sector of the Iranian economy:

  • 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 the definition of the mining sector of the Iranian economy above, including: boring equipment, conveyor belts, directional digging technology, haul trucks, hydraulic excavators, explosives, and power shovels. Goods that ensure the protection of life and prevention of injuries to persons operating in mines in Iran are excluded from this definition, including personal protective equipment, 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 and prevention of injuries to persons operating 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 use of protective goods described above.

Goods or services used in connection with the manufacturing sector of the Iranian economy:

  • 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 and prevention of injuries to persons operating in the manufacturing sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.
  • The term services used in connection with the manufacturing sector of the Iranian economy includes: new installment, additions, alteration, maintenance, and repair of manufacturing equipment; procurement or supply of raw materials for the manufacturing sector of the Iranian economy; and distribution services to persons operating in the manufacturing sector of the Iranian economy. Services that ensure the protection of life and prevention of injuries to persons operating 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 connection with the textiles sector of the Iranian economy:

  • 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 the definition of the textiles sector of the Iranian economy above, including: looms, industrial sewing machines, industrial washers and dryers, and industrial embroidery machinery. Goods that ensure the protection of life and prevention of injuries to persons operating in the textiles sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.
  • The term services used in connection with the textiles sector of the Iranian economy includes: procurement or supply of raw materials for textiles production and design of textiles products. Services that ensure the protection of life and prevention of injuries to persons operating 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.

FAQ 833

FAQ 833 starts by restating the definition of “knowingly” from the Iranian Financial Sanctions Regulations – a person has actual knowledge or should have known of the conduct in question – which is the same definition used in E.O. 13902 and which is a prerequisite finding before OFAC may impose the applicable secondary sanctions. The FAQ then provides a broad set of factors that OFAC may consider when determining whether to view goods or services used in connection with one of the sectors of the Iranian economy above as “significant.” These factors – similar to “significance” definitions elsewhere within OFAC’s regulations – include (a) the value and number of goods or value and frequency of services; (b) the nature of the good or services, including their type, complexity, and commercial purpose; (c) the level of awareness of management and whether the provision of goods or services is part of a pattern of conduct; (d) the involvement of designated persons in transactions involving goods and services defined in FAQ 832; (e) the impact of the provision of goods or services on the objectives of E.O. 13902; (f) whether the provision of the goods or services involved deceptive practices; and the catchall, (g) other relevant factors that the Secretary of the Treasury deems relevant.

FAQ 833 does not define, at least on its face, the term “significant” for the purposes of determining whether a transaction is significant, only whether goods and services are significant. However, OFAC has provided a list of factors that it will use to determine transactional significance in other contexts that are similar to those mentioned above. It stands to reason that OFAC would review transactional significance consistently and is therefore likely to apply some combination of the factors above and those used to determine transactional significance in other contexts to determine transactional significance under E.O. 13902.

Conclusions

E.O. 13902 expanded U.S. secondary sanctions to threaten those who engage in transactions involving the construction, mining, manufacturing, and textiles sectors of the Iranian economy. OFAC’s new FAQs define these sectors and other key terms, and they clarify that OFAC will not view sales of humanitarian, safety, and sanitation-related goods/services to persons in Iran who are not SDNs as operating in these sectors or transacting in goods or services used in connection with these sectors. Now that OFAC has clarified these terms, non-U.S. companies that were previously hesitant to supply materials to Iran to help with its fight against COVID-19 should consider whether the new FAQs allow them to do so. 

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