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Dec 16, 2016

Iran Sanctions: OFAC Provides—at Least for Now—Assurances of a Wind-Down Period in Case of Snap-Back

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On December 15, 2016, the Office of Foreign Assets Control revised its Frequently Asked Questions guidance that concerns the re-imposition of sanctions in the event of a sanctions snapback under the Joint Comprehensive Plan of Action (“JCPOA”). The amended FAQs, which can be found below, convey OFAC’s general view that should the US re-impose certain sanctions pursuant to a JCPOA snapback, the US government would provide a 180-day wind-down period for payments related to contracts entered into and executed during the JCPOA period. In addition, OFAC also issued License J-1, which authorizes the temporary re-export of certain aircraft that are involved in code-sharing arrangements.

The previous versions of the FAQs acknowledged that the United States has historically made efforts to work with companies, both foreign and domestic, to minimize the impact of newly imposed (or re-invoked) sanctions on legitimate activities that companies undertook prior to the imposition of sanctions, but pointedly did not provide any assurance that this would take place in the event of a snapback under the JCPOA, saying only that OFAC would provide guidance at that time on its website. Now, however, OFAC has amended the FAQs to state affirmatively that, consistent with this past practice, the US would provide a 180-day wind-down period following any potential sanctions snapback under the JCPOA. In addition, if a non-US, non-Iranian entity has either provided goods or services, or extended credit to an Iranian entity prior to a JCPOA snapback, that party would be permitted to collect such payment, provided that no additional goods, services, or loans were extended to Iranian entities following a JCPOA snapback. Any such payments, of course, would still need to be fully compliant with US sanctions, and therefore would not be permitted to involve US persons or the US financial system—or, effectively, US dollars. This grant of permission for non-US, non-Iranian companies, conducting business outside the United States, and in currencies other than the US dollar, is, therefore, somewhat of a theater piece, but it does provide some comfort to companies and banks engaged in high-value transactions that might be covered by reinstated secondary sanctions targeting particular sectors of the Iranian economy.

More consequentially, the amended FAQs also contain language applicable to US businesses that have re-entered the Iranian market under the authorization of general or specific licenses issued by OFAC. Any such entity would also be entitled to a similar 180-day wind-down period following any potential sanctions snapback under the JCPOA, which would necessarily revoke any licenses that had been issued in favor of those businesses. In addition to the wind-down period, US businesses would be permitted to receive payments owed them under the terms of a written agreement, but would not  be entitled to deliver any additional goods or services or extend additional loans or credit to an Iranian counterparty following a JCPOA snapback. Any such conduct could result in the imposition of US sanctions against that US business.

OFAC’s decision to add language specifically calling for a wind-down period and subsequent permissibility of collecting payment from Iran entities is likely related to the coming change of administration in the United States. As noted, the previous FAQs themselves recognized OFAC’s past practice of minimizing the immediate impact on theretofore permissible activities undertaken by non-sanctioned entities prior to the imposition of new sanctions programs. Here, however, OFAC—or its superiors in the current administration—may have felt it necessary to attempt to embed this practice to provide reassurance to companies both in the United States and elsewhere that any policy changes with respect to the JCPOA after 20 January will not, notwithstanding heated campaign rhetoric and promises, completely ignore commercial realities to the detriment of those companies that acted in reliance on the international agreement and its implementation by the US and other countries. Indeed, it is probably not a coincidence that Secretary Kerry issued a statement on the same day that OFAC amended the FAQs announcing the United States’ continued commitment to the JCPOA and waiving the sanctions imposed under the newly renewed Iran Sanctions Act.

What the Trump administration will do with respect to the JCPOA or Iran sanctions generally is unknown. Thus, although OFAC’s amended guidance regarding the practical implications of a potential JCPOA snapback may seem somewhat reassuring to businesses, it is important to remember that these FAQs lack a stable backbone. The guidance offered in the amended FAQs is non-binding, and the Trump administration is under no legal obligation to follow this guidance. At the very least, though, these updated FAQs would present a small hurdle to any drastic shifts in JCPOA and Iran foreign policy by the Trump administration.

Relevant Amended OFAC FAQs:

M. 4.    In the event of a snapback, will sanctions apply retroactively to legitimate business activity that takes place after Implementation Day but before the snapback occurs?

No. The United States has committed not to retroactively impose sanctions for legitimate activity undertaken after Implementation Day. Transactions conducted after the snapback occurs, however, could be sanctionable to the extent they implicate activity for which sanctions have been re-imposed. The JCPOA does not grandfather contracts signed prior to snapback. For more information regarding snapback, please see FAQ M. 5. [01-16-2016; updated on 12-15-2016]

M. 5.    In the past the US government has authorized a wind-down period when new sanctions came into effect to allow companies to disengage from Iran. Will a wind-down period be provided in the event sanctions are re-imposed on Iran?

The US government has a past practice of working with US or third-country companies to minimize the impact of sanctions on the legitimate activities of those parties undertaken prior to the imposition of sanctions, and we anticipate doing the same in the event of a JCPOA sanctions snapback.

As a general matter, in the event of a JCPOA sanctions snapback, the US government would provide non-US, non-Iranian persons a 180-day period to wind down operations in or business involving Iran that was consistent with the US sanctions lifting under the JCPOA and undertaken pursuant to a written contract or written agreement entered into prior to snapback.

In the event that a non-US, non-Iranian person is owed payment at the time of snapback for goods or services fully provided or delivered to an Iranian counterparty prior to snapback pursuant to a written contract or written agreement entered into prior to snapback and such activities were consistent with US sanctions in effect at the time of delivery or provision, the US government would allow the non-US, non-Iranian person to receive payment for those goods or services according to the terms of the written contract or written agreement. Similarly, if a non-US, non-Iranian person is owed repayment for loans or credits extended to an Iranian counterparty prior to snapback pursuant to a written contract or written agreement entered into prior to snapback and such activities were consistent with US sanctions in effect at the time the loans or credits were extended, the US government would allow the non-US, non-Iranian person to receive repayment of the related debt or obligation according to the terms of the written contract or written agreement. This allowance is designed for non-US, non-Iranian parties to be made whole for debts and obligations owed or due to them for goods or services fully provided or delivered or loans or credit extended to an Iranian party prior to snapback. Any payments would need to be consistent with US sanctions, including that payments could not involve US persons or the US financial system, unless the transactions are exempt from regulation or authorized by OFAC.

To the extent that snapback results in the revocation of general or specific licenses issued by OFAC, the US government would, consistent with the conditions described above, provide US persons and US-owned or -controlled foreign entities a 180-day period to wind down operations in or business involving Iran conducted pursuant to an OFAC authorization, and to receive payments according to the terms of the written contract or written agreement entered into prior to snapback for goods or services fully provided or delivered pursuant to an OFAC authorization prior to snapback.

With the exception of goods or services necessary to wind down operations in or business involving Iran during the 180-day period, the provision or delivery of additional goods or services and/or the extension of additional loans or credits to an Iranian counterparty after snapback, including pursuant to written contracts or written agreements entered into prior to snapback, may result in the imposition of US sanctions unless such activities are exempt from regulation, authorized by OFAC, or not otherwise sanctionable.

The US government would evaluate matters falling outside the above parameters on a case-by-case basis.

If US sanctions were to snap back in whole or in part, OFAC would provide additional guidance in this regard on its website. [01-16-2016; updated on 12-15-2016]

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Mark D. Lanpher

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