COMPLIANCE ISSUES FOR BUSINESSES ENTERING IRAN

Outline

Sanction consulting in banking, industrial and trade sectors:

Getting to grips with international sanctions

Issues for traders and banks

What does legal advice on sanctions entail?

Case study: can I buy product from Iran?

Practical suggestions for companies dealing with sanctions on a day-to-day basis, risk minimisation

Due diligence and sanctions

Practical recommendations on advising companies during a rapidly evolving sanctions snapback

Outline

Sanction consulting in banking, industrial and trade sectors:

Getting to grips with international sanctions

Issues for traders and banks

What does legal advice on sanctions entail?

Case study: can I buy product from Iran?

Practical suggestions for companies dealing with sanctions on a day-to-day basis, risk minimisation

Due diligence and sanctions

Practical recommendations on advising companies during a rapidly evolving sanctions snapback

Implementation Day - 16 January 2016

On 16 January 2016 (Implementation Day), in a move whichhas been hailed by politicians in Tehran, London, Brussels andWashington, one of the most extensive lifting of sanctions inhistory took place.

Not all sanctions have been lifted, and some restrictions do remain. Many businesses will now be looking very closely at trade with Iran to see whether they can benefit from the opportunities which the Middle East’s second largest economy presents.

Implementation Day (cont)

A limited number of prohibitions still apply including thefollowing:

A prior authorisation will be required for the supply of software designed specifically for use in Iran’s nuclear or military industries (other restrictions in respect of software are lifted).

A prior authorisation will be required for the supply to Iran of graphite, raw and semi-finished metals (no nuclear-related activities will be permitted)

Prohibitions wrt Military Materials / Missile Technology / Nuclear Suppliers Group list

Importantly

The US will maintain sanctions applicable to dealings whichinvolve US persons or the US financial system.

Outline

Sanction consulting in banking, industrial and trade sectors:

Getting to grips with international sanctions

Issues for traders and banks

What does legal advice on sanctions entail?

Case study: can I buy product from Iran?

Practical suggestions for companies dealing with sanctions on a day-to-day basis, risk minimisation

Due diligence and sanctions

Practical recommendations on advising companies during a rapidly evolving sanctions snapback

Case study: can I buy product from Iran? (1)

Client question: “Please advise if we can buy crude product now from NIOC and NICO. What are the risks?“

NIOC – National Iranian Oil Company and

NICO - Naftiran Intertrade Company Sàrl

Step one: check WorldCompliance status for EU, CH and US listings.

Step two: check applicable Iranian sanctions regimes

Answer:

Both NICO and NIOC appear on Attachment 1 to Annex II of the Joint Comprehensive Plan of Action (JCPOA), which is the list of individuals and entities that the EU has agreed to remove from the EU list of sanctions targets on Implementation Day (16 January 2016).

Case study: can I buy product from Iran? (2)

Both NICO and NIOC appear on Attachment 3 to Annex II of the JCPOA, which is the list of individuals and entities that the US has agreed to remove from the US SDN List on Implementation Day.

The US also lifted the US secondary sanctions on transactions with Iran's energy sector including with NIOC, NICO and NITC (National Iranian Tanker Company).

Switzerland has followed suit and lifted sanctions against Iran as follows: http://www.seco.admin.ch/themen/00513/00620/index.html?lang=en

The US domestic sanctions (which apply to US persons, US companies and US banks which are clearing US Dollars) have not been lifted, meaning that US persons are prohibited from engaging in any unlicensed trade with Iran.

Case study: can I buy product from Iran? (3)

The impact of these changes is that client company, if an entirely non-US person, may trade with NIOC/NICO but should not do so in US Dollars, which attracts US jurisdiction. Client company should ensure that no US person or company is involved, and should also obtain confirmation from their bank and insurers that they are prepared to provide necessary finance and insurance for the transaction.

Note however that whilst the US is seeking to case the application of Iranian sanctions, the domestic US sanctions have not yet been lifted, meaning it is still not legal to trade with NICO or NIOC as a US citizen, company, or subsidiary, or to trade in USD or with the involvements of any US national on the trading desk, without a licence permitting same from Office of Foreign Affairs (OFAC), a division of the US Treasury.

Outline

Sanction consulting in banking, industrial and trade sectors:

Getting to grips with international sanctions

Issues for traders and banks

What does legal advice on sanctions entail?

Case study: can I buy product from Iran?

Practical suggestions for companies dealing with sanctions on a day-to-day basis, risk minimisation

Due diligence and sanctions

Practical recommendations on advising companies during a rapidly evolving sanctions snapback

Current issues for traders and banks

Who are the counterparties?

Who are their shareholders?

On whose behalf are they acting?

Who are the other parties in the contractual chain?

Who else will be receiving payment?

What currency will be used for payments?

What is the cargo?

Who are the shippers / receivers?

What form of Bill of Lading will be issued?

Can insurance be obtained?

Can payments be made?

Due diligence – US sanctions, SDNs,indirect payments and OFAC's Fifty Percent Rule.

When do US sanctions "bite" (take effect):

i) Where the payment is made in USD; or

ii) Where the buyer or seller or bank has an office (parent or subsidiary) in the US; or

iii) Where US natural or legal persons are involved in making or receiving the payment (or providing the service); or

iv) Where US nationals are shareholders in the company making or receiving the payment (or providing the service); or

v) insofar as international banks may refuse to hold accounts.

Getting delisted: EU & US remedies

Can you sue for damages? Very difficult as the US listing entities are effectively granted immunity through the power of the Executive Order.

US Executive Order - Sec. 9. "This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person."

EU Regulation – Article 10 "The freezing of funds and economic resources or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with this Regulation, shall not give rise to liability of any kind on the part of the natural or legal person or entity or body implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.

Another US option is to make an application to OFAC with the assistance of US Counsel, for a licence to carry out certain business or requesting reconsideration of OFAC’s decision; see OFAC’s Procedure for Removal from List of Blocked Persons, Specially Designated Nationals: http://www.gpo.gov/fdsys/pkg/FR-1999-02-04/pdf/99-2571.pdf#page=1

Entities listed by the European Union can apply to the European Court for delisting, but there have been examples of Iranian entities being re-listed on different grounds not long after being delisted by the European Court, eg: Iranian Bank Saderat. The Court found that EU governments failed to provide sufficient evidence to link targeted companies with Tehran’s nuclear work, including that the LCs were linked to nuclear proliferation (which the UE was unable to provide) & noting that the fact that Bank is partly owned by the Iranian State doe snot itself imply that the applicant is providing support for nuclear proliferation.

Compliance – how do I know who is listed

Various watchlists exist to "pinpoint risk":

Accuity

Worldcheck

Worldcompliance (has its own global sanctions list)

Hiresafe employment solutions

International Screening Solutions

C6 Intelligence Group

Note that when in doubt, a trading counterparty can always be asked to disclose their full corporate structure & ownership.

Outline

Sanction consulting in banking, industrial and trade sectors:

Getting to grips with international sanctions

Issues for traders and banks

What does legal advice on sanctions entail?

Case study: can I buy product from Iran?

Practical suggestions for companies dealing with sanctions on a day-to-day basis, risk minimisation

Due diligence and sanctions

Practical recommendations on advising companies during a rapidly evolving sanctions snapback

OFAC's Fifty Percent Rule

On 13 August 2014, OFAC listed a new set of FAQs that provided clarification on the Fifty Percent Rule:

August 13, 2014 OFAC FAQs and New Aggregation Rule

"The revised guidance states that the property and interests in property of entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked regardless of whether such entities appear on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) or the annex to an Executive order. The revised guidance expands upon the earlier guidance by setting forth a new interpretation addressing entities owned 50 percent or more in the aggregate by more than one blocked person."

What if an entity is suddenly listed as an SDN?

A number of corporations have suddenly found themselves in a position where their UBO is listed as an SDN.

OFAC's 50% rule has been amended in order that property will be blocked in an entity where that entity's aggregate ownership, held directly or indirectly by one or more SDN collectively amounts to 50% or more. Previously, this rule on aggregation did not apply.

Practical Tips on Surviving Sanctions

If sanctions seem less than crystal-clear, try this link to the UK's advisory body:https://www.gov.uk/government/publications/financial-sanctions-consolidated-list-of-targets/consolidated-list-of-target

Another helpful site is the UK sanctions FAQ page:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302397/August_2013_version_-_amended.pdf

For US sanctions, the US State Department website is a good starting point: http://www.treasury.gov/Pages/default.aspx

The website of OFAC, the Office of Foreign Asset Control, sits within it: http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx

Sanctions Case Study: snapback

A sale contract chain involves three traders, A, B and C.

Refinery A sells => exporter B sells => C French Company

Overnight exporter B is relisted by EU US in a snapback on Iranian sanctions.

As a result, funds are frozen by the French Company’s French bank and payment cannot be made from C to B, although product is delivered to C.

You are acting for trader C in the chain, who has not received payment but delivered product.

Questions:

What do you advise company C to do?

What risks are involved for Company C?

Sanctions Case Study: snapback answers

One option if payment has not been made would be to draft a tripartite novation agreement in which all three parties agree that French company C steps into the shoes of the listed Iranian entity to perform the contract with A.

This avoids payment passing through the listed company B; instead it will pass from C directly to A.

Relevant issues for C are:

Is there a sanctions clause?

If not, is this a situation of force majeure or illegality?

What if payment has already been made?

What if payment is frozen?

Example sanctions clause (1)

9. Trade Sanctions

Neither party shall be obliged to perform any obligationotherwise required by this agreement (including withoutlimitation on obligation to (a) perform, deliver, accept, sell,purchase, pay or receive monies to, from, or through aperson or entity, or (b) engage in any other acts) if thiswould be in violation of, inconsistent with, or expose suchparty to punitive measures under any united nationsresolutions, under any laws, regulations, decrees,ordinances, orders, demands, requests, rules orrequirements of the EU, United Kingdom and/or the UnitedStates of America and which relate to foreign trade controls,export controls, embargoes or international boycotts or anytime (applying, without limitation, to the financing,payment, insurance, transportation, delivery or storage ofthe product) hereinafter referred to as the “tradesanction(s)”.

Example sanctions clause (2)

The affected party shall be entitled as its sole and absolute discretion:

I) To immediately suspend the affected obligation (whether payment or performance) until such time as the affected part may lawfully discharge the obligation; and/or

II) Where the inability to discharge the obligation continues until the end of the contract, to a full release from the affected obligation, provided that where the relevant obligation relates to payments for goods which have already been delivered, the affected payment obligation shall remain suspended (without prejudice to the accrual of any interest on an outstanding payment amount) until such time as the affected party may lawfully resume payment; and/or

III) Terminate the agreement following which both parties will be relieved of their further contractual obligations, expect for their accrued rights and obligations which shall survive the termination of the agreement in accordance with this provision.

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