Economy, Business And Markets

Third-Country Entities With Top US Management May Engage With Iran

Third-Country Entities With Top US Management May Engage With IranThird-Country Entities With Top US Management May Engage With Iran

The US Treasury Department’s Office of Foreign Assets Control (OFAC) has updated its list of Frequently Asked Questions (FAQs) relating to the lifting of certain US Sanctions under the Joint Comprehensive Plan of Action (JCPOA). 

The updates build on OFAC’s existing JCPOA FAQs and further clarify the scope of sanctions relief that the US government instituted on Implementation Day on January 16. 

In particular, OFAC has offered additional guidance related to the parameters for foreign entities that are owned or controlled by US persons and the lifting of certain financial and banking sanctions. 

This is the first time OFAC has provided public guidance about some of the less clear issues such as recusal policies and management issues for US parent companies.

In the updated FAQs, OFAC confirmed that third-country entities may engage in Iran-related transactions even if US persons serve in senior positions (i.e. CEO, CFO, COO, director) in such foreign entities.

OFAC stated that a foreign entity may transact with Iranian persons so long as senior US persons are “walled off” or “ring-fenced” from Iran-related business. The same is true for other US-person employees of the foreign entity.

It further suggested that, with respect to Iran-related transactions, foreign entities consider instituting a blanket recusal policy for US persons as opposed to case-by-case abstentions, the latter of which run the risk of constituting prohibited “facilitation” under the ITSR.

Interests of US Persons in Foreign Entities

According to the release guidelines, both the Iranian Transactions and Sanctions Regulations (ITSR) and General License H (Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person) apply to foreign entities owned or controlled by “a United States person” in the singular, which has led to some confusion regarding foreign entities with multiple US-person owners.

"US persons for purposes of US sanctions targeting Iran are US citizens and permanent resident aliens/Green Card holders, wherever located or employed; entities organized under US laws and their non-US branches; and any individuals and entities physically located in the United States," the guidelines say.

In the updated FAQs, OFAC made clear that it would consider a foreign entity to be owned or controlled by US persons if: "the aggregated equity interests by vote or value held by US persons were 50% or more; or one or more US persons, in the aggregate, hold(s) a majority of seats on the board of directors."

Management of Foreign Entities

In the case of a US parent company that owns or controls a foreign entity engaged in Iran-related transactions under General License H, OFAC specified in the updated FAQs that the parent company and its board members, senior management, and employees may continue to be involved in the foreign entity’s day-to-day operations related to non-sanctioned jurisdictions.

OFAC also confirmed that a US person may receive reports from foreign entities that include details on transactions with Iran pursuant to General License H.

 In other words, US parent companies are not required to recuse themselves from all management or corporate governance of foreign entities that engage in Iran-related business pursuant to General License H. However, US persons may not attempt to influence or otherwise facilitate (e.g., approve, process, finance) Iran-related business decisions or transactions of such foreign entities based on reports received.

Guidance for Financial Institutions

In the updated FAQs, OFAC reiterated its existing position that US financial institutions may transact with non-US, non-Iranian financial institutions that do business with Iranian financial institutions that are not on OFAC’s List of Specially Designated Nationals and Blocked Persons.

 Third-country financial institutions may do business with both Iranian and US financial institutions so long as such business is separate from each other. In this regard, third-country financial institutions may not route Iran-related transactions through US financial institutions or in any other way involve US persons in Iran-related transactions unless authorized by OFAC. 

To address this compliance risk, OFAC advised that third-country financial institutions should have appropriate controls in place to ensure that they do not route Iran-related transactions through US financial institutions.