Implementation Day: Foreign Subsidiaries of U.S. Companies

On January 16, 2016, known as “Implementation Day” under the Joint Comprehensive Plan of Action (JCPOA), the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License H, which allows foreign subsidiaries of U.S. companies to engage in business with Iran, but with strict limitation on the extent to which their parent companies can be involved. Prior to 2012, the U.S. embargo did not apply to companies incorporated abroad, including foreign subsidiaries of U.S. companies. Section 218 of The Iran Threat Reduction and Syria Human Rights Act of 2012 extended the reach of U.S. sanctions, making U.S. companies potentially liable if their foreign subsidiaries did business with Iran. As part of the JCPOA, the United States committed to rolling back this sanction.

There are three key elements of the general license:

First, General License H authorizes foreign entities owned or controlled by U.S. persons to “to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran” that otherwise would be prohibited by the Iranian Transactions and Sanctions Regulations (ITSR), but not with persons and entities that are on the List of Specially Designated Nationals (SDNs). Further, if the transactions involve exports or reexports of U.S. origin goods or technology (including foreign products with more than 10 percent U.S. content), a U.S. license may still be required.

Second, General License H authorizes U.S. persons to engage in “activities related to the establishment or alteration of operating policies and procedures of a United States entity or a U.S.-owned or -controlled foreign entity” to the extent necessary to allow that foreign entity to engage in authorized transactions with Iran. This is an important aspect of the general license, because under the ITSR changing corporate policies to exclude U.S. parent companies from involvement with Iranian business otherwise would constitute prohibited “facilitation” of transactions with Iran. As OFAC explained in its Implementation Day FAQ document, U.S. persons may be involved “in the initial determination to engage in activities with Iran… as well as the establishment or alteration of the necessary policies and procedures,” but they may not be involved “in the ongoing Iran-related operations or decision making… after these actions are taken.” In other words, U.S. companies can be involved only in making the decision to allow the subsidiaries to do business with Iran and in setting up corporate policies that exclude participation of U.S. persons from those activities but they may not be involved in business transactions conducted by the subsidiary with Iran.

This prohibition also applies to individual U.S. nationals employed by foreign subsidiaries. They may be involved in the decision to change company policy and may advise on compliance and conduct training on the new policy, including ongoing advice regarding compliance with the Iran sanctions rules related to the activities of the foreign subsidiary, but they may not be involved in facilitating the subsidiary’s ongoing business with Iran.

Third, General License H authorizes U.S. persons to make available to owned or controlled foreign entities certain “business support systems,” which are defined as:

any automated and globally integrated computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information…

This means that the computer, system or application must (i) operate passively without human intervention to facilitate the flow of data between the parties and (ii) that it is available to and in general use by the U.S. person’s global organization, including the U.S. person itself and its owned or controlled foreign entities. Also, this does not authorize the use of any of these items “in connection with any transfer of funds to, from, or through a United States depositary institution or a United States-registered broker or dealer in securities.” For example, a foreign subsidiary could use a shared system to generate an invoice, provided that the system is automated and no U.S. person involvement is required to create the invoice.

Many types of transactions remain expressly prohibited under General License H. OFAC has summarized these in its FAQ document as including:

(1) the direct or indirect exportation or reexportation of goods, technology, or services from the United States (without separate authorization from OFAC);

(2) any transfer of funds to, from, or through the U.S. financial system (including transactions in US dollars between non-US persons (so-called “U-Turn” transactions));

(3) transactions with any individual or entity on the SDN List or any activity that would be prohibited by non-Iran sanctions administered by OFAC if engaged in by a U.S. person or in the United States;

(4) transactions with any individual or entity identified on the Foreign Sanctions Evaders (FSE) List;

(5) any activity involving any item subject to the Export Administration Regulations (EAR) that is prohibited by, or requires a license under, part 744 of the EAR; or participation in any transaction with a person whose export privileges have been denied pursuant to part 764 or 766 of the EAR (without authorization from the Department of Commerce);

6) any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;

(7) any activity that is sanctionable under Executive Order 12938 or 13382 (relating to Iran’s proliferation of weapons of mass destruction and their means of delivery, including ballistic missiles); Executive Order 13224 (relating to international terrorism); Executive Order 13572 or 13582 (relating to Syria); Executive Order 13611 (relating to Yemen); or Executive Order 13553 or 13606, or section 2 or 3 of Executive Order 13628 (relating to Iran’s commission of human rights abuses against its citizens); and

(8) any nuclear activity involving Iran that is subject to the JCPOA procurement channel and that has not been approved through that procurement channel process.