On August 7, 2018, EU’s newly updated Blocking Statute entered into force. The Blocking Statute generally forbids EU citizens and established entities, residents, and persons physically in the EU from complying with a variety of U.S. measures imposing secondary sanctions on Iran, including the Iran Sanctions Act of 1996, the Iran Freedom and Counter-Proliferation Act of 2012, the National Defense Authorization Act for Fiscal Year 2012, and the Iran Threat Reduction and Syria Human Rights Act of 2012. The Blocking Statute also makes foreign court judgments based on these sanctions ineffective in the EU, and allows EU operators to recover damages arising from U.S. extraterritorial sanctions from the persons or entities causing those damages.

On Monday, August 6, 2018, President Trump issued a new Executive Order (New Iran EO) that reimposes Iran sanctions previously revoked as part of the Joint Comprehensive Plan of Action (JCPOA), consolidates the relevant authorities into one single document, and broadens the scope of previous sanctions restrictions. This action coincides with the expiration of the 90-day wind down period for a number of transactions previously authorized as part of the Agreement. OFAC also updated and issued additional Frequently Asked Questions with respect to this New Iran EO.

Reimposition of Sanctions Authorities and Revocation of Previous EO’s

In accordance with President Trump’s May 8, 2018 decision to withdraw from the JCPOA, the New Iran EO reimposes the relevant provisions of EOs 13574, 13590, 13622, and 13645 previously revoked by EO 13716. Accordingly, as of 12:01 a.m. eastern daylight time (EDT) Tuesday, August 7, 2018, sanctions targeting the following areas were reinstated:

  • The purchase or acquisition of U.S. dollar banknotes by the Government of Iran.
  • Iran’s trade in gold or precious metals.
  • The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes.
  • Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial.
  • Purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt.
  • Iran’s automotive sector.

Further, as of August 7, 2018, the wind down period terminated for transactions related to the export/re-export of Iran commercial passenger aircraft pursuant to General License I, and transactions regarding U.S. imports of, and dealings in, Iranian-origin foodstuffs and carpets, and related letters of credit and brokering services. The next wind down deadline is November 4, 2018, and relates to transactions pursuant to General License H, and sanctions targeting the following areas: Iran’s port operators and shipping/ship-building sectors; petroleum-related transactions; financial transactions and specialized messaging services with the Central Bank of Iran; underwriting and insurance services; and Iran’s energy sector.

The New Iran EO also revokes EOs 13716 and 13628 and supersedes these authorities by incorporating the blocking sanctions previously provided in sections 2 and 3, and subsection 3(c) respectively.

Expansion of Sanctions in Effect Prior to JCPOA

The New Iran EO further broadens the scope of sanctions in effect prior the implementation of the JCPOA, January 16, 2016. OFAC details this expansion in Frequently Asked Question # 601, and we have summarized those changes below:

  • New Designation Authority: The New Iran EO provides new authority to designate as Specially Designated Nationals (SDNs) any person that on or after November 5, 2018, provided material support, or goods and services in support of, persons designated for engaging in the following transactions: (1) providing support, or goods and services in support of the purchase or acquisition of U.S. bank notes or precious metals by the GOI; (2) providing support, or goods and services in support of the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), or the Central Bank of Iran (CBI); or (3) being part of the Iranian energy sector, shipping, or shipbuilding sectors, being a port operator in Iran, or providing significant support of persons designated under section 1244(c)(1)(A) of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) or other SDNs.

 

  • New Restrictions on Financial Institutions: The New Iran EO provides the authority to prohibit or significantly restrict correspondent and payable-through accounts of foreign financial institutions determined to have knowingly conducted or facilitated significant transactions on or after November 5, 2018, with persons designated pursuant to the new authorities described above.

 

  • Expanded Menu of Sanctions for Petroleum Transactions: The New EO expands the menu of sanctions available to be imposed on persons that on or after November 5, 2018, knowingly engaged in significant transactions related to Iranian petroleum products and petrochemicals, including: (1) Visa restrictions on controlling officers and shareholders; (2) certain secondary sanctions on principal executive officers of a SDN; and (3) prohibitions on investing in or purchasing debt and equity instruments from a sanctioned person.

 

  • Expanding Restrictions on Foreign Subsidiaries of U.S. Companies: The New EO also expands sanctions restrictions on foreign subsidiaries of U.S. owned or controlled companies by prohibiting transactions with persons blocked for any of the following activity: (1) providing material support for, or goods and services in support of, persons designated pursuant to Iran sanctions; and (2) being part of the Iranian energy sector, shipping, or shipbuilding sectors, being a port operator in Iran, or providing significant support of persons designated under section 1244(c)(1)(A) of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) or other SDNs. Note that this expanded restriction does not eliminate the authorization to wind down transactions pursuant to General License H by November 4, 2018.

Implications

The expansion of pre-JCPOA sanctions may come as some surprise to the business community, but largely fall within the Trump Administration’s new policy towards Iran. In his May 8th National Security Memorandum, President Trump hinted that the process of restoring sanctions could entail revising relevant sanctions regulations. These revisions make clear that after the November 4th wind-down date, any person, including U.S. persons, that attempts to directly or indirectly provide support in any way to persons designated under pre-JCPOA sanctions restrictions will also risk designation.

 

These renewed and expanded U.S. sanctions against Iran creates an increasingly complex landscape for companies operating globally, as it is impossible to comply with both sets of restrictions. However, a few large European companies have already suspended plans to invest in Iran.

On July 31, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Ukraine-/Russia-related General License 13C, which replaces and supersedes General License 13B in its entirety. 

General License 13C extends to 12:01 a.m. October 23, 2018, the “authorized period to make certain divestment and transfer activities related to debt, equity, or other holdings in EN+ Group, GAZ Group, or United Company RUSAL PLC, or in entities in which those persons own, directly or indirectly, a 50 percent or greater interest, that were issued by Irkutskenergo, GAZ Auto Plant, or Rusal Capital Designated Activity Company (Other Issuer Holdings), subject to certain conditions and exceptions.” 

Previously, General License 13B had authorized the same activity, but only until 12:01 a.m. August 5, 2018.

Further information on this topic in may be found in FAQs 570 and 571 on OFAC’s website.

 

On July 19, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Venezuela General License 5.

General License 5 authorizes U.S. persons to engage in all transactions related to, the provision of financing for, and other dealings in the Petróleos de Venezuela SA 2020 8.5 Percent Bond that would be prohibited by Subsection 1(a)(iii) of  Executive Order 13835 of May 21, 2018 (“Prohibiting Certain Additional Transactions With Respect to Venezuela”) (E.O. 13835). In practice, General License 5 expands the previously issued General License No.3. by adding a new bond to the list of previously authorized bonds.

OFAC also published two new Frequently Asked Questions (FAQs).One explains why OFAC is issuing General License 5. The other answers the question of whether E.O. 13835 prohibits a U.S. person with a legal judgment against the Government of Venezuela from attaching and executing against Venezuelan government assets.

 

 

On June 27, in accordance with President Trump’s May 8, 2018 decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) revoked two Iran-related General Licenses and amended the Iranian Transactions and Sanctions Regulations (ITSR), 31 C.F.R. part 560, to reflect the re-imposition of sanctions. OFAC also updated previously issued Frequently Asked Questions on the President’s announcement. These actions represent the first tangible steps taken by the U.S. government to implement the May 8 announcement to end some limited primary sanctions exceptions and re-impose secondary sanctions on Iran.

Revocation of General Licenses H and I

Fulfilling one of the promises made on May 8, OFAC revoked both General License H and General License I authorizing certain transactions with Iran.

  • General License H authorized U.S.-owned foreign entities to engage in transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran. OFAC revoked General License H and replaced it with an amendment to the ITSR authorizing the wind-down, until November 4, 2018, of previously permitted activity, as described in the Final Rule published on June 28, 2018 (see 31 C.F.R. § 560.537).
  • General License I authorized U.S. persons to engage in certain transactions related to the export or re-export to Iran of commercial passenger aircraft. OFAC has now revoked General License I and amended the ITSR to authorize the wind down of such transactions through August 6, 2018 (see 31 C.F.R. § 560.536).

Additional ITSR Amendments

OFAC amended the ITSR to authorize the wind-down of two previously authorized types of activity for U.S. persons.

  • Import of Carpets and Foodstuffs: OFAC amended 31 C.F.R. § 560.534 to authorize the wind down of transactions regarding U.S. imports of, and dealings in, certain Iranian-origin foodstuffs and carpets through August 6, 2018.
  • Credit and Brokering Services for Related Activity: OFAC amended 31 C.F.R. § 560.535 to authorize the wind down of transactions regarding letters of credit and brokering services relating to certain Iranian-origin foodstuffs and carpets through August 6, 2018.

OFAC also updated JCPOA Withdrawal-Related Frequently Asked Questions (FAQs) 4.3, 4.4, and 4.5 to address  these changes.

Additional Announcements Expected in the Coming Weeks

These changes give effect to some, but not all, of the changes announced by President Trump on May 8. Specifically, in the coming weeks, we expect the issuance of at least one new Executive Order to re-authorize previously terminated sanctions authorities as well as the issuance by OFAC and the U.S. Department of State of additional guidance regarding the re-implementation of primary and “secondary” sanctions that had been in effect prior to the JCPOA as well as potentially to announce additional restrictions beyond those that existed prior to the JCPOA (e.g., targeting ballistic missile proliferation or potentially even expanding secondary sanctions).

We will continue to update this guidance as and when these changes are announced.

 

 

 

Following the imposition of new U.S. sanctions on Russia in April 2018, Russian lawmakers have introduced two draft bills proposing Russian countersanctions against ‘unfriendly’ states, as well as criminalizing compliance with foreign sanctions in Russia.

The Countermeasures Bill

The first measure, the Draft Bill No. 441399-7 On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States (the Countermeasures Bill) passed both chambers of the Federal Assembly, and was signed into law by President Putin and officially published on June 4, 2018. It is effective from that date.

The Countermeasures Bill was significantly watered down during its passage through the State Duma. Specifically, the Duma removed the specified categories of banned products and services that were proposed in the initial draft. The revised Countermeasures Bill as enacted includes the following six measures which may target the U.S., other ‘unamicable’ foreign states (the Relevant States), entities that are subject to the jurisdiction of the Relevant States, entities that are directly or indirectly owned by entities under the jurisdiction of the Relevant States (the Relevant Entities), officials and citizens of the Relevant States, if they are involved in ‘unamicable’ acts with respect to the Russian Federation:

  • Article 2(1): Termination or suspension of international cooperation between Russia and Russian legal entities and the Relevant States, including entities that are subject to the jurisdiction of the Relevant States, or the Relevant Entities, relating to sectors to be determined by a separate decision of the Russian President.
  • Article 2(2): Prohibition or restriction on the import of products and/or raw materials into Russia originating from the Relevant States or manufactured by the Relevant Entities. The list of products and/or raw materials shall be determined by the Russian Government. Significantly, such measures would not apply to (a) products which do not have substitutes manufactured in Russia, or (b) products imported for personal use.
  • Article 2(3): Prohibition or restriction on the export from the Russian Federation of products and/or raw materials by (a) citizens of the Relevant States and/or (b) the Relevant Entities. The list of products and/or raw materials will be determined by the Russian Government.
  • Article 2(4): Prohibition or restriction on access, directly or indirectly, to public procurement for providers of works/services that are Relevant Entities. The list of particular works/services prohibited from public procurement will be determined by the Russian Government.
  • Article 2(5): Prohibition or restriction on participation in privatization of state or municipal property for (a) citizens of the Relevant States and/or (b) the Relevant Entities. Prohibition or restriction for such persons from (a) providing works/services for the organization of sale of federal property in the name of the Russian Federation and/or (b) fulfilling functions as a seller of federal property.
  • Article 2(6): All other measures determined by a separate decision of the Russian President.

Such measures must be implemented by all federal and municipal bodies, as well as the citizens of the Russian Federation and entities under Russian jurisdiction (Article 1(4)).

The Criminalization Bill

On May 14, 2018, Russian lawmakers filed another draft bill in connection with the proposed countermeasures, this time proposing criminal liability for Russian citizens complying with non-Russian sanctions. The Draft Bill No. 464757-7 On Amendments to the Criminal Code of the Russian Federation (the Criminalization Bill) passed its first hearing stage with only minor changes. The second hearing for the Criminalization Bill was scheduled for May 17, 2018 but was postponed, pending further consultations with the Russian government and the business community. A new date for the hearing has not yet been set.

The draft bill introduces a new Article 2842 of the Russian Criminal Code, which creates the following two new types of criminal offenses and related liability:

  • Article 2842(1): Actions (or omission to act) aimed at compliance with a decision of a foreign state, union of foreign states or international organization to impose restrictive measures, if this action (omission to act) restricts or prohibits Russian citizens, legal entities incorporated in Russia, Russian Federation, subjects of the Russian Federation, municipal entities or entities controlled by any of the above (Russian private or public entities of entities controlled by them) to fulfil “ordinary economic operations or transactions”. Liability for such criminal offense ranges from (a) a fine of up to RUB 600,000 or four annual salaries or income, to (b) up to four years of imprisonment and also potentially a fine of up to RUB 200,000 or one annual salary or income.
  • Article 2842(2): Willful actions by Russian citizens that contribute to the imposition of restrictive measures by a foreign state, union of foreign states, international organization on Russian individuals, public and private entities (including their controlled entities). Such actions may involve recommendations and provision of information that led to the imposition of anti-Russian sanctions. Liability for such offense ranges from (a) a fine of up to RUB 500,000 or three annual salaries or income, to (b) up to three years of imprisonment and potentially a fine of up to RUB 200,000 or one annual salary or income.

An explanatory note to the new Article 2842 clarifies that “ordinary economic operations or transactions” means legal actions, aimed at performing contractual or other legal obligations, if such operation or transactions are carried on in the ordinary course of business, or other lawful activities, by individuals or entities (or foreign entities controlled by them) who are subject to restrictive measures (e.g., specially designated nationals or SDNs). Such transactions would include opening of bank accounts, making and accepting payments, trading securities, etc.

Based on the difference in terminology (insofar as the latter is limited to “actions by Russian citizens”), the proposed Article 2842(1) appears to apply both to Russian and to foreign citizens subject to Russian jurisdiction, in contrast to Article 2842(2), which appears to apply to Russian citizens only.

Russian business groups reportedly voiced opposition to the current draft of the Criminalization Bill. Russian President Putin has stated that the new law “should be balanced” and that it “must not do harm to our own economy and to those of our partners with good conscience do business in Russia.” We would therefore expect that the Criminalization Bill will be amended before being passed through its second hearing.

On May 23, 2018, the State Duma’s Law-making Committee held a meeting among policymakers and representatives of, among others, the Russian Union of Industrialists and Entrepreneurs, Retail Companies Association, European Businesses Association, and Russian banks and retailers. The majority view on the business side appears to be that the appropriate liability for compliance with foreign sanctions (i.e. the new criminal offense under Article 2842(1)) would be administrative (e.g. a fine), not criminal. However, the proposed criminal offense of contributing to the imposition of foreign sanctions, etc. (i.e. under Article 2842(2)) is likely to remain in the Criminal Code. The Law-making Committee will now consult on the results of these discussions with the Russian government and the responsible ministries. The next step would be for the Committee to prepare a revised draft of the bill. It is expected that the second draft would be ready for another round of discussions between the Committee and the business community representatives a week after the consultations with the government, and will then be submitted for the second hearing at the Duma.

If the Criminalization Bill is enacted in the current version (which does not appear likely given President Putin’s comments), companies operating in Russia and, in particular Russian citizen managers of the operation of Russian subsidiaries of U.S. or non-Russian companies, would face a substantial risk arising from the potential conflict generated by U.S. obligations that can apply to even non-U.S. entities (e.g., “secondary” sanctions or the designation authority in Section 228 of the Countering America’s Adversaries Through Sanctions Act (CAATSA) and the provisions in the Criminalization Bill.

 

On June 4, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Ukraine-/Russia-related General License 16 (GL16).

General License 16 authorizes U.S. persons to engage in specified transactions related to winding down or maintaining business involving EN+ Group PLC, JSC EuroSibEnergo, or any entity in which EN+ Group PLC or JSC EuroSibEnergo owns, directly or indirectly, a 50 percent or greater interest, until October 23, 2018.

GL16 is subject to a series of conditions that are familiar from OFAC’s previous wind-down licenses arising from the same action including, among other things: (a) that the transactions must be conducted pursuant to a contract or other agreement in place prior to April 6, 2018, (b) payments to these entities must be made to a blocked account, except to the extent authorized by General License 14 (related to United Company RUSAL PLC), (c) products cannot be exported from the United States to these persons, and (d) U.S. Persons utilizing the authority must file comprehensive reports with OFAC within 10 days from GL16’s expiration.

 

 

 

 

On May 18, the EU Commission announced plans to protect EU companies doing business in Iran. This announcement comes in response to President Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), known as the Iran nuclear deal, and re-impose U.S. sanctions on Iran. The EU Commission plans to mitigate the extraterritorial effect of U.S. sanctions on EU companies in four ways:

  1. Blocking Statute: revive and update a 1996 “blocking statute” to forbid EU companies from complying with U.S. sanctions against Iran and make foreign court judgements based on these sanctions ineffective in the EU. The blocking statute was originally proposed to counter the effects on EU companies of the U.S. embargo on Cuba. It will be necessary to update the list of U.S. sanctions on Iran that fall within its scope. The Commission hopes to have this measure in place by August 6, 2018, when the first set of U.S. sanctions takes effect.
  2. EIB Investment: remove obstacles to allow the European Investment Bank (EIB) to support EU investment in Iran.
  3. Sectoral Cooperation: strengthen sectoral cooperation with Iran, including “in the energy sector and with regard to small and medium-sized companies.” To facilitate this, Commissioner for Climate Action and Energy, Miguel Arias Cañete, plans to travel to Tehran this weekend. Additionally, the Development Cooperation or Partnership Instruments will provide financial assistance.
  4. Central Bank of Iran Transfers: encourage Member States to “explore the possibility of one-off bank transfers” to the Central Bank of Iran. The U.S. sanctions could target EU entities active in oil transactions with Iran, so this would help Iranian authorities receive their oil-related revenues.

After the first two measures are formally proposed, the European Parliament and the Council will have two months to object to them. If neither institution objects, however, this period can be shortened.

EU leaders gave unanimous backing to the above proposals when they were presented to them at an informal meeting in Sofia, Bulgaria, by European Commission President Jean-Claude Juncker on 16 May 2018.

 

On April 1, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended two of its pre-existing Ukraine-Russia-related General Licenses.

First, General License 12B (GL12B) replaces and supersedes General License 12A in its entirety. GL12B authorizes the listed entities to access blocked accounts for purposes of “maintenance or wind-down activities.” Previously, while GL12/GL12A had permitted maintenance or wind-down activities, it had required all payments to or for the benefit of the 12 designated entities to be made to a blocked account (this requirement was relaxed for RUSAL only in General License 14); in practice, therefore, the listed entities found it very difficult to engage in even licensed activity because most of their funds were blocked.

GL12B aims to remedy this by continuing to require U.S. Persons to make payments into blocked accounts, but authorizing the designated entities to now access those funds for “maintenance or wind down activities.” All of the other conditions on GL12/GL12A—including the 12:01 AM (East Coast) on June 5 expiration date—remain in place.

Second, OFAC issued General License 13A, which replaces and supersedes General License 13 in its entirety. General License 13A makes four general changes to General License 13:

(1) extends the authorization to three subsidiaries of the listed entities—Irkutskenergo, GAZ Auto Plant, and Rusal Capital Designated Activity Company—(previously, the divestment authorization applied only to (a) EN+ Group PLC, (b) GAZ Group, and (c) United Company RUSAL PLC and not to their subsidiaries);

(2) clarifies that U.S. persons can undertake certain “intermediate” purchases of debt/equity if those are necessary to divestment (i.e., purchases of securities to close out a short     position);

(3) clarifies the authorization extends to purchases of securities by designated persons made prior to April 6, but which have not settled due to sanctions; and

(4) extends the authorization through 12:01 AM (East Coast) on June 6, 2018 (previously it was the same time on May 6, 2018).

OFAC issued three new Frequently Asked Questions (FAQs) to explain the changes. The first two FAQs (#583-584) simply reiterate the changes summarized above. The only relevant new FAQ (No. 585) reiterates the bright line 50 percent rule, noting that U.S. Persons are “generally” not prohibited from engaging in a transaction with a non-U.S. company if one or more SDNs hold less than 50 percent aggregate interest.

This interpretation is consistent with existing guidance, but was likely re-issued to affirm the existing position as a result of the number of non-U.S. companies in which the new SDNs hold a minority interest (e.g., Renova Group’s 48 percent interest in Sulzer Group and its smaller interests in dozens of other entities).

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs