LEGAL
As most general counsel are aware, U.S trade sanctions are complicated. Most sanctions are administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which has issued volumes of regulations setting forth what is allowed and more importantly, what is not allowed. U.S. exports to sanctioned countries are also heavily regulated by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), which has extensive regulations on what can lawfully be exported to sanctioned countries, and when a license is or is not required. Getting up to speed on these regulations is hard enough, but unfortunately, these regulations are constantly evolving as a result of changes in U.S. foreign policy, and each sanctions program differs substantially from one another. To make things even more complicated, sanctions issues appear repeatedly in the general media, but the press often oversimplifies or even mistakenly describes the programs and any changes in sanctions policy. Below, we try to correct some common misunderstandings by identifying five things all general counsel should know about U.S. Trade Sanctions.
1. The Iran agreement did not open up the Iranian market generally to U.S. companies
A good recent example of a hot media issue plagued by substantial misinformation involves the deal reached last summer regarding the Iranian nuclear program, the Joint Comprehensive Plan of Action (JCPOA). In the U.S. media, it was sometimes suggested that this deal opened up the Iranian market to U.S. companies. But the deal did no such thing, leaving almost entirely in place restrictions as to U.S. persons and companies, who remain prohibited from engaging in virtually any transactions with Iran.
Instead, the main U.S. sanctions relief provided under the JCPOA involved the U.S. “secondary” sanctions regime – a sanctions regime that was directed not at U.S. companies, but at foreign companies. Foreign companies thus obtained substantial relief from U.S. sanctions as a result of the JCPOA – which is why many U.S. companies are now watching their European and other foreign competitors enter the Iranian market relatively freely over the past few months. But because U.S. companies obtained almost no relief from the Iran sanctions as a result of the JCPOA, general counsel should continue to view any Iran-related transactions with the same extreme caution that was warranted before the JCPOA was signed. For U.S. companies at least, the Iran sanctions apply now in almost the same way they did six months ago.
2. The Iran deal may have created some limited new opportunities for U.S. owned or controlled foreign subsidiaries to participate in the Iran trade
Although for the most part the JCPOA changed nothing for U.S. companies looking to do business in Iran, it did usher in one relatively substantial change for the foreign subsidiaries of U.S. companies. While the JCPOA itself did not lift the application of the Iran sanctions for foreign entities “owned or controlled” by U.S. persons, OFAC recently published General License H, which authorizes “certain transactions relating to Foreign Entities Owned or Controlled by U.S. Persons.” This general license – which is a grant of blanket permission by OFAC for U.S. persons and companies to do something otherwise prohibited under the sanctions – permits foreign entities owned or controlled by U.S. persons to engage in most of the transactions in which non-U.S. persons are now allowed to engage. In other words, under appropriate circumstances, General License H does in fact open up the Iran market to U.S. owned or controlled foreign subsidiaries in a way that did not exist before the JCPOA.
One of the most important portions of General License H is the manner in which it addresses the subject of facilitation. As a general matter, no U.S. person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States. On its face, this prohibition prohibits U.S. persons – even U.S. persons working for foreign entities – from participating in any way in Iranian transactions. This provision would thus prohibit U.S. persons from participating in the decision to do business in Iran or the establishment or alteration of operating policies to the extent necessary to allow U.S. owned or controlled foreign entities to engage in transactions with Iran. However, General License H allows U.S. persons, including senior management of a U.S. parent company or its owned or controlled foreign entities, to be involved in the initial decision to do business with Iran and to engage in activities related to the establishment or alteration of operating policies and procedures to the extent necessary to allow the entity to engage in transactions with Iran. U.S. persons are also allowed to provide training, advice, and counseling on the new or revised operating policies. But be careful: the license does not authorize involvement by any U.S. person in the ongoing Iran-related operations or decision making after the initial actions, which means that, other than the limited participation in Iran transactions expressly allowed by General License H, U.S. persons must be entirely removed from the foreign entity’s Iran trade or business.
Additional caution is also required. General License H does not permit U.S. owned or controlled foreign subsidiaries to export or reexport U.S. goods, services or technology to Iran, or to transfer funds through the U.S. financial system in connection with Iranian transactions. Thus, a U.S. company cannot sell U.S. products in Iran through a foreign subsidiary. Like non-U.S. persons, moreover, U.S. owned or controlled foreign entities continue to be prohibited from transactions that involve individuals that have been the subject of OFAC or other U.S. regulatory list-based sanctions.
3. The Cuba market is opening some to U.S. companies, but the embargo still remains in place
Like the press surrounding the Iran deal, the press surrounding changes to the Cuba policy has been more dramatic than the changes themselves. As with the Iran sanctions, the embargo against Cuba still remains in place. That said, for U.S. companies, the changes to the Cuba sanctions have been far more substantial than those involving the Iran sanctions.
The most substantial change to the Cuba policy has involved travel, with changes making it much easier for U.S. business people to travel to Cuba by removing barriers on scheduled air carrier service between the U.S. and Cuba, and generally authorizing 12 categories of travel without a specific license – i.e., without asking for and gaining the U.S. government’s permission for the trip beforehand. In addition, the changes now provide a more favorable environment for certain types of exports to Cuba, where the exports are intended to improve the living conditions of the Cuban people, especially by increasing the information flow between the two countries. Finally, the changes loosen restrictions on certain activities undertaken in the banking, finance, and insurance sectors, with the most recent changes making the U.S. economic and monetary systems much more accessible to the Cuban trade.
There is, however, a lot U.S. Companies still cannot do in Cuba. The prohibition on travel to Cuba for tourism remains in place, and the controls on exports to Cuba remain extensive. And many of the permitted forms of trade with Cuba require a license, including trade related to medicine, medical devices, and/or environmental protection. And even for those exports that may be permitted to Cuba without a license, U.S. exporters will be required to conduct and document their efforts to ensure that the products will be sold only to users approved by U.S. licensing authorities, that the products remain with the designated end-user, and that the product will be used only in a way permitted by law. Companies that decide to take advantage of the new policies will need to take care to ensure that they are complying with all of the conditions imposed by the U.S. government, which can be complicated and extensive.
4. The Cuba sanctions are constantly changing
Although all U.S. sanctions can change relatively frequently, the pace of change in the Cuban sanctions has been especially notable. Since the President announced an easing of the sanctions in late 2014, OFAC and BIS have been regularly announcing additional substantial measures to loosen the sanctions. While it is accordingly very important to keep up with all changes in sanctions law, it is especially so with respect to the Cuban sanctions because what was prohibited yesterday may well be permitted today. U.S. companies doing business in Cuba, or looking to do business in Cuba, must keep up with these changes on an almost daily basis.
5. The Ukraine/Russia-related sanctions are very limited, but also very complicated
The U.S. sanctions on Russia arising out of the Ukraine crisis are very different than the Iran and Cuba sanctions. While the Iran and Cuba sanctions impose a general embargo on trade with those countries subject to very limited exceptions, the Ukraine/Russia-related sanctions are focused only on a few important Russian industries – the financial services, energy, and defense industries. These targeted provisions are complicated, but in general they consist of four directives regulating the manner in which U.S. persons may transact with certain Russian individuals and entities involved in particular sectors of the Russian economy. The first two directives prohibit transacting in, providing financing for, or otherwise dealing in certain new debt or equity by, on behalf of, or for the benefit of the persons operating in Russia’s financial (Directive 1) or energy (Directive 2) sectors. The third directive contains similar provisions directed at individuals working in Russia’s defense sector, prohibiting all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity of designated persons, their property, or their interests in property. Directive 4 prohibits the provision of goods, services (except for financial services), and technology for certain activities involving certain persons operating in the energy sector of the Russian Federation.
These prohibitions are relatively complicated because they apply only to certain specific individuals, and then they prohibit only certain specific transactions. As a result, it is much more difficult to come up with general rules with regard to the Ukraine/Russia-related sanctions than it is with the embargoes, where the general rule – “trade with Iran is generally prohibited” – is stated relatively easily. There is one final aspect of the Ukraine/Russia-related sanctions that looks more familiar, however. In late 2014, President Obama issued an executive order that prohibits virtually all direct and indirect transactions (including financial, trade, and other commercial transactions) by U.S. persons or within the United States to or from Crimea unless authorized by OFAC or exempted by statute. This Crimea-related sanction looks much more like the embargoes on Iran or Cuba. However, there is an additional complication even here: Crimea is not a country; rather it is a geographic region located in southeastern Ukraine bordering the Black Sea, which means that it is sometimes more difficult to determine whether a transaction involves Crimea than it is to determine whether a transaction involves Iran, Cuba, or one of the other handful of embargoed countries. The bottom line here is that any general counsel whose company is doing business in Russia will need to proceed carefully in light of these multiple, complicated sanctions.
Timothy P. O’Toole at law firm Miller & Chevalier focuses on defending allegations related to the violation of export controls, economic sanctions, and embargoes under the International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and various regulations issued by the Office of Foreign Assets Control (OFAC). He has significant experience in this area at the investigation and litigation stage, representing both witnesses and targets. Mr. O’Toole also works with companies on compliance issues related to the export controls and sanctions laws, with a significant focus on the Iran, Ukraine, and Cuba sanctions.
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