HIGHLIGHTS:
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The Trump Administration has responded to Iran's latest series of ballistic missile tests by sanctioning certain individuals and companies involved in Iran's efforts to procure ballistic missile technology or otherwise support the Iranian Islamic Revolutionary Guard Corps.
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This action does not abrogate the Iran nuclear accord.
The Trump Administration responded on Feb. 3, 2017, to Iran's latest series of ballistic missile tests by sanctioning certain individuals and companies involved in Iran's efforts to procure ballistic missile technology or otherwise support the Iranian Islamic Revolutionary Guard Corps (IRGC).
There is considerable uncertainty within the international shipping, energy and other sectors with regard to Iran-related business that has slowly restarted as a result of the Joint Comprehensive Plan of Action (JCPOA, or Iran nuclear deal). This initial U.S. response to Iran's missile testing appears to be a limited response to Iran's provocation rather than a major change in policy or a step back from honoring the JCPOA.
What Are the Designations?
The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) designated 25 Persons as Specially Designated Nationals (SDNs) – 13 individuals and 12 entities – in Iran, China, Lebanon and the United Arab Emirates associated with efforts by Iran to procure technology in support of Iran's ballistic missile program or otherwise for provision of support to the IRGC. These designations were made under existing authorities, in particular pre-existing executive orders dealing with proliferation of weapons of mass destruction (WMD) and terrorism. It is important to note that the JCPOA did not lift existing terrorism and WMD-related sanctions or limit the ability of the U.S. government to impose such sanctions on Iran. The action does not re-designate entities that were removed from the SDN list under the JCPOA, and no new Executive Order expanding sanctions was issued. The direct legal implications of the designation are:
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U.S. financial institutions and their foreign subsidiaries must block the assets of any entity owned 50 percent or more by such SDNs
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U.S. persons and their foreign subsidiaries cannot directly or indirectly transact with such SDNs
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a non-U.S. person could itself be designated as an SDN if it provides material support for such designated entity in the future
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a foreign financial institution that knowingly conducts or facilitates a significant financial transaction with such SDNs could be subject to sanctions
What Are the Immediate Practical Implications?
The practical implications are that these SDNs will now largely be shut out of the ability to transact international business and move money through international banks. U.S. companies must immediately block any funds and cease doing business with these SDNs. Non-U.S. companies that have business with these SDNs need to take immediate steps to severe relationships. In addition, as a matter of compliance policy, many non-U.S. banks are hesitant to processes lawful transactions with Iran in any currency, and these sanctions will only reinforce those strict bank policies.
Do These Designations Signal the End of the JCPOA?
No. From secondary sources and the press release issued by the Treasury Department, it is clear that these SDNs had already been linked to illicit activities and vetted through a comprehensive multi-agency designation process. It is believed that the Treasury Department provided a detailed explanation of the basis for these designations to demonstrate that the designations fall outside the scope of the JCPOA limitations. Hence, we do not see these designations as heralding a U.S. withdrawal from its JCPOA commitments.
However, the Trump Administration has signaled that it will strictly enforce the accord and sanctions, and that these are just the initial steps in responding to Iran's provocation. At a minimum, expect to see more designations in the future, as well as more robust enforcement actions against companies that breach U.S. sanctions. There is also the possibility of expanded sanctions on Iran.
Ways to Reduce Risk
The worst-case scenario for a company seeking to conduct lawful trade with Iran is having a counterparty designated as an SDN in the middle of a transaction or having new sanctions prohibit an ongoing transaction. The potential for additional designations or new sanctions highlights the need for enhanced due diligence and carefully considering sanctions clauses and exit strategies before entering into a transaction related to sanctioned countries. Such steps can mitigate the risk of breaching sanctions and reduce the potential financial impact of measures a company may be forced to take when faced with such a worst-case scenario.
