Iran: Start Your Engines, But Make Sure You Know Where the Brakes Are

On January 16, 2016, the US Department of State and US Department of Treasury’s Office of Foreign Assets Control (OFAC) took two actions that impact the auto industry: permanently suspended most secondary sanctions affecting the automotive sector and implemented General License H, allowing non-US subsidiaries of US parents to conduct some business in Iran.

But with these changes remain critical restrictions, including the prohibition on the use of US financial institutions and the application of US export and reexport controls on US automotive parts and components. To help steer automotive companies through these new roads, we provide a brief analysis of the permissible activities and continuing restrictions related to the lifting of the Iranian automotive secondary sanctions and General License H.

I. Implementation Day for Iran: Automotive Sector, Start Your Engines!

January 16, 2016 marked “Implementation Day” of the Joint Comprehensive Plan of Action (JCPOA) – the Iran Nuclear Agreement reached between the United States, China, France, Germany, Russia, and the United Kingdom, addressed by our previous alerts – when the International Atomic Energy Agency (IAEA) verified that Iran fulfilled certain of its nuclear-related obligations under JCPOA. 

Two highlights of Implementation Day relating to US imposed sanctions against Iran are: (A) the removal of certain secondary sanctions, including those related to the auto industry; and (B) implementation of General License H, which authorizes non-US subsidiaries of US companies to do automotive business with Iran.

A. Removal of Secondary Sanctions

Prior to Implementation Day, non-US companies were subject to “secondary sanctions” if they engaged in specified conduct involving Iran that occurred outside of the United States. One example of specified conduct that would have previously led to “secondary sanctions” was non-US companies’ involvement in the Iranian auto sector. Secondary sanctions on the automotive sector have been have been suspended since January 20, 2014, and, as a result of Implementation Day, are now off the table.

As a result of these changes, non-US persons are no longer subject to sanctions for engaging in the direct or indirect sale, supply, or transfer to Iran of goods or services used in connection with the automotive sector of Iran, including the provision of associated services, provided that they do not involve specifically prohibited conduct (discussed in Section II). The US government defines Iran’s automotive sector as “the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles.”

While the lifting of the secondary sanctions leaves little fear of repercussions from the US government for non-US companies doing business in Iran’s auto industry, there are important restrictions of which global US-based automotive companies should be mindful. These restrictions are discussed below in Section II.

B. General License H

General License H authorizes US-owned or controlled entities that are established or maintained outside the United States to engage in most transactions, directly or indirectly, in Iran that would otherwise be prohibited by the Iranian Transactions and Sanctions Regulations (ITSR). Critically, General License H does not apply to branch offices of US companies. Because it is a general license, General License H does not require an application for a specific license to OFAC.

Activities permitted by US-owned or controlled foreign entities. The most important aspects of General License H for the automotive industry are:

  • Among other activities, US-owned and controlled foreign entities may engage in the direct or indirect sale, supply, or transfer to Iran of goods or services used in connection with the automotive sector of Iran, including the provision of associated services.
  • US-owned and controlled foreign entities may use the US parent’s “Authorized Business Support Systems” necessary to store, collect, transmit, generate, or otherwise process documents or information related to authorized transactions, provided that there is no US person intervention. Authorized Business Support Systems “are 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 related to authorized transactions.”

Activities permitted by US parents. US parents and US employees working abroad are prohibited from actions facilitating or approving Iranian transactions by non-US subsidiaries except for:

  • Establishing new policies. US persons may be involved in the establishment or alteration of company policies and procedures to the extent necessary to allow a US-owned or -controlled foreign entity to engage in authorized transactions with Iran. In other words, US parents can be involved in:
    • The initial determination of whether non-US subsidiaries will engage in activities with Iran;
    • Creating processes to enable non-US subsidiaries to do business in Iran consistent with General License H; and
    • Training, advising, and counseling personnel on these new policies.

Critically, restrictions remain, including that once an initial determination to conduct business in Iran is made, the US parent and US persons working in the non-US subsidiaries cannot take any part in the actual transactions or related day-to-day activities including approving, financing, facilitating, or guaranteeing any Iran-related transaction by the non-US entity. 

  • Use of US automation systems. US persons may establish and maintain “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 related to the authorized transactions. OFAC defines an automated system as one that operates passively and without human intervention to facilitate the flow of data between the US parent and its non-US subsidiaries.

General License H also authorizes US third party service providers to make available to US-owned or controlled foreign entities authorized business support systems that they provide to the US parent company.

II. Wait, Hit the Brakes: Remaining Restrictions

Despite this new road forward, significant restrictions remain:

  • Prohibitions against US persons remain. Implementation Day does not change any prohibitions on US persons’ transactions in Iran’s automotive sector. Indeed, in its JCPOA Frequently Asked Questions, OFAC emphasized that US persons, including US auto manufacturers, “continue to be generally prohibited from the exportation, reexportation, sale, or supply, directly or indirectly, from the United States of any goods, technology, or services to Iran’s automotive sector or the Government of Iran.” However, General License H excepts non-US subsidiaries from their parents’ restrictions.
  • Other US laws continue to apply. Among the most significant:
    • US persons and non-US persons are prohibited from engaging in the export or reexport to Iran US origin parts and components, including those containing 10% or more US export-controlled content.
    • Other US licensing regimes, such as the Export Administration Regulations (EAR) may affect the legality of a transaction.
    • Other than the two scenarios outlined above, US parent companies (and US employees working abroad) are still prohibited from all actions related to facilitating or approving Iranian transactions by their foreign subsidiaries. 
  • Transactions with certain parties. Transactions with some players in the Iranian market can still render non-US companies subject to US secondary sanctions, including persons on the Specially Designated Nationals List and the Bureau of Industry and Security’s Denied Persons List and Entity List. Additionally, transactions with the Islamic Revolutionary Guard Corps are still prohibited. Non-US subsidiaries of US companies continue to be restricted from engaging in transactions with the Government of Iran.
  • Restrictions on US financial institutions. Because they are US persons, US financial institutions cannot participate in any transactions involving Iran. 
  • Application of local country laws. Despite the changes to US regulations, companies must comply with the laws of the country from which the product would be directly exported to Iran. Accordingly, companies should consult local laws before moving forward with any business with Iran.
  • OEM distribution, reseller, and franchise agreements. In addition to US and local country laws, the automotive industry should be aware that vehicle and other automotive exports that are not made by the Original Equipment Manufacturer (OEM) may violate agreements with the OEM, such as dealer franchise agreements and warranties in place for North America.

All in all, as this new market opens, or for some non-US entities, reopens, non-US companies, including subsidiaries of US parents, can make inroads to Iran’s automotive sector.

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