On January 16, 2016, the International Atomic Energy Agency (IAEA) verified that Iran has taken the steps necessary to implement the easing of sanctions under the Joint Comprehensive Plan of Action (JCPOA or Agreement). The IAEA’s announcement is verification that Iran has taken the steps to which it was committed under the JCPOA, triggering “Implementation Day” under the Agreement.

The arrival of Implementation Day under the JCPOA will result in the termination of most EU and UN sanctions against Iran. Certain restrictions are expected to remain in place, however, including EU sanctions against Iran’s nuclear and military industries, other nuclear-related activities inconsistent with the JCPOA, Iran’s military or ballistic missile program, and transactions for the direct or indirect benefit of the Iranian Revolutionary Guard Corps.

The U.S. embargo against Iran is also impacted by Implementation Day, but the changes are significantly more modest and the benefits accrue almost exclusively to non-U.S. persons, i.e., entities that are not owned or controlled by a U.S. person.

The U.S. embargo against Iran consists of several layers of sanctions that have been created over a number of years and which address various U.S. concerns beyond Iran’s nuclear ambitions. To the extent that these sanctions are directed at the activities of U.S. persons or transactions involving U.S. origin technology or goods, they are referred to as “Primary” sanctions.

The changes triggered on Implementation Day, however, almost exclusively impact comparatively recent sanctions related to Iran’s nuclear program, known as “Secondary” sanctions. U.S. Secondary sanctions have been implemented in connection with Iran’s nuclear activities and have focused on deterring non-U.S. persons from engaging in activities related to specified sectors of the Iranian economy. These include energy, petrochemical, automotive, financial services, mining, shipping, and shipbuilding.

For example, under the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), non-U.S. companies are potentially subject to U.S. sanctions for activities such as making investments in the Iranian petroleum or petrochemical industries or engaging in transactions with parties sanctioned under this U.S. law, even if the underlying transaction has no nexus to the United States.

Having reached Implementation Day, the U.S. has waived the issuance of sanctions for non-U.S. persons engaging in the types of transactions, with some limitations. In addition, the United States government has reduced the extraterritorial impact of U.S. Secondary sanctions by removing a large number of parties from U.S. restricted parties lists.

Although these waivers impact only non-U.S. persons, a limited subset of U.S. persons does stand to benefit from Implementation Day.

One specific industry that benefits from Implementation Day is the civil aircraft industry. In a statement of licensing policy issued on January 16, the U.S. Government stated that specific licenses may be issued on a case-by-case basis for the export, reexport, sale, lease or transfer to Iran of commercial passenger aircraft, spare parts and components, and associated services for exclusively civil aviation end-use.

A larger group subset of (pseudo) U.S. persons also benefits from Implementation Day. Since October 2012, non-U.S. entities owned or controlled by a U.S. parent (e.g., foreign subsidiaries of U.S. companies) have been subject to Primary sanctions to the same extent as their U.S. parent, i.e., they have been effectively treated as if they were U.S. persons. Section 5.1.2 of Annex II of the JCPOA states that the U.S. will “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with” the JCPOA. A footnote in the Agreement provides that “U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to this [Agreement], unless authorized to do so” by the Department of Treasury, Office of Foreign Assets Control (OFAC). That is, with the arrival of Implementation Day, foreign entities owned or controlled by a U.S. person may transact business with Iran, but only to the extent authorized by OFAC.

To implement this authorization, OFAC published General License H, which provides that:

• (a) Except as provided in paragraph (c), an entity owned or controlled by a United States person and established or maintained outside the United States (a "U.S.-owned or –controlled foreign entity") is authorized to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by 31 C.F.R. § 560.215.

Prior to Implementation Day, there was some concern that any General License issued would only authorize U.S. controlled foreign affiliates to engage in transactions related to the industries previously subject to “Secondary” Sanctions. However, General License H is much broader. As a result, with some exceptions set forth below, foreign affiliates owned or controlled by a U.S. person are now effectively on the same footing as their competitors that are not U.S. owned.

Transactions that are not authorized by the General License include:

1. The exportation, reexportation, sale, or supply, directly or indirectly of goods, technology, or services subject to U.S. jurisdiction (e.g., goods or technology that are 10 percent or more U.S. content by value) without a license from OFAC, a restriction that applies to the goods themselves, and not to U.S. jurisdiction over a person. Hence, this restriction applies to completely non-U.S. persons as well as to entities owned or controlled by a U.S. person;

2. Transfers of funds to, from, or through a United States depository institution or a United States-registered broker or dealer in securities;

3. Dealings with any persons on OFAC's list of Specially Designated Nationals list or any activity that would be prohibited by any OFAC regulations other than the Iranian Transactions and Sanctions Regulations, such as Specially Designated Terrorists;

4. Dealings with any person identified on the List of Foreign Sanctions Evaders list;

5. Any activity involving any item subject to the Export Administration Regulations (e.g., goods or technology that are 10 percent or more U.S. content by value) that would require a license from the Bureau of Industry and Security unless such a license is in place, i.e., activities involving goods subject to U.S. jurisdiction;

6. Any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;

7. Any activity that would be in violation of other Executive Orders relating to Iran (e.g., relating to the proliferation of weapons of mass destruction and their means of delivery, including ballistic missiles, international terrorism, Syria, Yemen;

8. Any nuclear activity involving Iran that has not been approved as part of the JCPOA.

In addition to the transactions authorized under subparagraph (a), General License H also provides some relief to U.S. companies in connection with activities in support of their foreign affiliates to authorize activities that could otherwise be considered prohibited facilitation under OFAC regulations. Subparagraph (b)(1) authorizes U.S. Persons to establish or alter operating policies and procedures to allow controlled foreign affiliates to utilize subparagraph (a). U.S. parent companies may take advantage of this authorization to modify policies and procedures prohibiting their owned or controlled affiliates from transacting business with Iran without violating OFAC’s prohibition on facilitation. 

Similarly, subparagraph (b)(2) allows U.S. persons to make available to controlled foreign affiliates “automated and globally integrated computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to transactions authorized in paragraph (a).”  In other words, if a U.S. company has a U.S.-based accounting, email, or other business support system, General License H authorizes U.S. controlled foreign affiliates of that to use that system to engage in transactions with Iran. U.S. individuals are still prohibited from providing direct support to such activities, beyond maintenance of such systems. There is some lack of clarity surrounding the scope of this authorization, as OFAC’s regulations already make clear that activity of a purely clerical nature does not constitute prohibited facilitation by a U.S. person.

Finally, we note that the JCPOA does not impact the Securities and Exchange Commission disclosure obligations under Section 13(r) to the Securities Exchange Act of 1934. This requirement, also enacted in 2012, requires issuers that engage in transactions or dealings with the Government of Iran or certain parties on the SDN List to disclose that information to investors, even if the underlying transactions are in compliance with applicable law. Because a rulemaking would be required to modify this provision, no changes are expected in the immediate future.