A Closer Look at OFAC’s General License H

OFAc's General License H: A Closer Look

General License H: OFAC’s New Authorizations Related to US Owned Foreign Subsidiaries

Back in July (2015) the permanent members of the UN Security Council (China, France, Russia, the United Kingdom, and the United States), Germany (collectively the P5+1), the European Union, and Iran reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program would be exclusively peaceful.

Iran agreed to take steps to dismantle and/or modify certain components of its nuclear program.  In exchange for these nuclear program concessions, the P5+1 and the European Union agreed to provide Iran with certain sanctions relief upon verification by the International Atomic Energy Agency (IAEA) that Iran had fulfilled its nuclear-related obligations.  The day when Iran’s commitments had been verified and the sanctions relief implemented is known as Implementation Day.

Implementation Day occurred on January 16, 2016, and the eagerly awaited sanctions relief promised by the EU and the US went into effect immediately after the IAEA’s verification was officially recognized.  While the EU and UN lifted most of their sanctions against Iran, the US commitment to relieve sanctions was largely limited to its nuclear-related secondary sanctions that discouraged non-US persons from engaging in business with Iran.  In large part, US primary sanctions against Iran remained unchanged.

The US did, however, loosen three aspects of its primary sanctions against Iran:

  • First, the US authorized the importation of Iranian carpets and foodstuffs.
  • Second, the US issued a new statement of licensing policy for activities related to the export or re-export to Iran of commercial passenger aircraft and related parts and services.
  • Third, and perhaps most importantly, the United States issued General License H (GLH), which authorized certain Iran-related transactions relating to foreign entities owned or controlled by a US person.

Specifically, GLH authorizes “an entity owned or controlled” by a US person and “established or maintained outside of the United States . . . to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran.”  Prior to GLH, foreign entities owned or controlled by US persons were “prohibited from knowingly engaging in any transaction, directly or indirectly, with … any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States” pursuant to 31 CFR § 560.215.

GLH, therefore, effectively revises and reverses the prohibition imposed in 31 CFR § 560.215.  However, it is important to construe this reversal as only narrowly applying to the prohibition in § 560.215.  The other prohibitions of the Iranian Transactions and Sanctions Regulations (ITSR) remain in effect.

In order for this general license to be practically implemented, US persons are also authorized to engage in limited activities to enable a foreign subsidiary to engage in business with Iran.  Without this additional authorization, such activities could otherwise be considered prohibited facilitation or trade-related transactions.

US persons are therefore authorized to engage in

    “activities related to the establishment or alteration of operating policies and procedures of a United States entity or a US-owned or -controlled foreign entity.”

It’s important to construe this authorization narrowly, as it only applies to activities to the extent they are “necessary to allow a US-owned or -controlled foreign entity to engage” in business with Iran.  US persons can also undertake certain activities to make available to the foreign subsidiary engaging in business with Iran certain automated and globally integrated business support systems such as integrated computer, accounting, and email systems.  There can be no ongoing or day-to-day US person involvement in the Iran-related activities undertaken by a foreign subsidiary.

GLH does not convert US-owned foreign subsidiaries into pathways to Iran for US persons or US goods or technology.  US persons continue to be prohibited from engaging in any day-to-day activities involving Iran.  For example, a US citizen working for a foreign subsidiary would not be able to negotiate contracts, pursue leads, input data, supervise, or otherwise be involved in the Iran-related business.  Nor are US persons authorized to export services to Iran through the foreign subsidiary.

US-origin goods and technology continue to require separate license authorization before being exported or re-exported to Iran.  Passing such goods or technology through a foreign subsidiary now operating under GLH does not circumvent this licensing requirement.  Upon enabling a foreign subsidiary to engage in business with Iran, US persons, goods, and technology should in large part be walled off from the foreign subsidiary’s Iran-related activities.

In effect, a foreign subsidiary with non-US person employees selling non-US goods, services, or technology is now largely authorized to transact with Iran.  A foreign subsidiary is no longer barred from the Iranian market simply as a result of its US ownership or control.  GLH may also offer some creative solutions to US persons experiencing certain practical problems involving Iran-related activities that are already authorized pursuant to other existing general licenses (e.g., the export to Iran of certain software, hardware, and services incident to personal communications, the export of medicine, medical devices, and agricultural commodities, etc.).

In particular, one of the common concerns for US persons conducting authorized trade with Iran is that agents, contractors, or service providers may act outside of the scope of a general license or exempt transaction, leaving the US person on the hook for the broadly-interpreted “facilitation” violation.  GLH provides US persons with the opportunity to isolate the Iran-related activities from US persons altogether.  This could limit exposure to liability for US-persons jeopardized by the actions of the many middle-men who are necessarily involved in the exportation and importation of goods and services to and from Iran.

This practical problem of finding trustworthy and sanctions-compliant middle-men may also be alleviated by the introduction of established companies to the Iranian market.  With the secondary sanctions relief of US nuclear sanctions, the lifting of EU and UN sanctions, and the issuance of GLH, it is very likely that major multinational companies will now have the means to take part in the Iranian marketplace.  This influx of trusted actors with robust sanctions compliance program will provide US persons with a range of options for banking, shipping, and insurance providers.

It is hard to understate the significance of having service-providers who are already heavily connected to the global financial system.  First, these actors have much more at stake regarding compliance, and so it is more likely that they will be aware and conscientious concerning sanctions compliance issues.  Second, whether they are foreign subsidiaries of US entities or wholly foreign entities, it will be much easier to hold such actors accountable for a breach in contract.  Third, it will likely be much easier (or at least cheaper) to obtain ancillary services like insurance when the underlying business contracts are validated by trusted companies.

In the pre-Implementation Day sanctions environment—and even now—the difficulties involved in finding vetted agents and partners posed serious problems for US persons engaged in authorized business and activities with Iran.  It has historically been a major risk that companies needed to account for in any cost-benefit calculus.  Although US persons did not see a lot of sanctions relief post-Implementation Day, those US persons who are authorized to do business in Iran will potentially reap great benefits from the impact that secondary sanctions relief will have on markets as a whole.

Lastly, US persons engaged in authorized transactions with Iran might also benefit from GLH by utilizing a foreign subsidiary as an additional layer of authorization and protection.

OFAC sanctions regulations are necessarily broad, as they need to cover many industries and transactions.  As a result, however, it is not always easy to predict how OFAC will interpret vague regulatory language like “business consulting services,” “contract negotiation,” or “market research.”  Even when US persons are acting under the authorization of a General License, there is a risk that a new OFAC FAQ or published piece of Interpretive Guidance may interpret regulatory language in a very broad or narrow manner.

A newly interpreted phrase may require US persons to change the way they provide an authorized good or service, or it may prohibit some of the goods and services they already offer.  This is one of the reasons why it is so important to have a compliance officer or counsel who can provide relevant updates on OFAC policy.  All the same, changing firm-wide policies can be expensive and time-consuming.

In contrast, a foreign subsidiary of a US person that has been properly screened pursuant to GLH may not be bound to the technical contours of an underlying general license or specific license.  This may provide US owners of foreign subsidiaries who intend to engage in underlying Iran-related transactions that are otherwise authorized by separate licenses with an extra layer of protection against unintended or unexpected sanctions liability.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.