US International Economic Sanctions: A 2015 Round-Up

January 12, 2016

2015 was an active year in the world of international economic sanctions, with the publication of new sanctions regulations, many designations of targeted individuals and entities, and significant enforcement actions. Most notably, major developments concerning Iran, Russia, and Cuba occurred that are still unfolding, signaling that 2016 will be equally eventful. These changes create significant challenges and business uncertainties for all companies operating internationally. New sanctions typically take effect immediately and carry significant civil and criminal penalties for violations, thus requiring quick response from compliance personnel in order to minimize business disruptions and mitigate the risk of potential liability.

Here’s a brief wrap up of the major developments:

Iran: Nuclear Agreement Reached, but Broad Sanctions remain on US Persons with Additional Sanctions Possible

In July 2015, the P5+1,1 European Union, and Iran reached a Joint Comprehensive Plan of Action (JCPOA) to restrain Iran’s nuclear weapons program in exchange for the lifting of economic sanctions. The agreement lays out milestones for Iran to satisfy its commitments, enabling sanctions relief to commence. The UN Security Council approved the JCPOA on July 20. The US Congress engaged in an intensive debate but did not disapprove US participation in the agreement. The parties pronounced October 18 as “Adoption Day,” bringing the JCPOA into effect and marking the official commencement of steps necessary to implement the commitments in the agreement. Such measures will include termination by the EU and Presidential waivers in the United States of nuclear-related sanctions. Both will take effect only upon verification by the International Atomic Energy Agency that Iran has fulfilled numerous commitments, including dismantling of centrifuges and disposal of enriched uranium. Based on recent statements of the Obama Administration, it appears likely that “Implementation Day” will occur as early as January 2016.

For US and foreign businesses, the key takeaway is that the JCPOA cements an asymmetric structure of economic normalization with Iran: US nationals and companies will remain largely prohibited from doing business with Iran, while non-US persons (particularly EU companies, which since 2010 have been subject to substantial restrictions) will neither be subject to home country limitations nor the threat of secondary US sanctions. Notably, however, the United States commits in the JCPOA to license foreign subsidiaries of US entities to engage in activities consistent with the JCPOA. As such, we expect the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) to issue a General License and provide guidance regarding such activities prior to Implementation Day.

Importantly, broad unilateral non-nuclear US sanctions will remain in force. These sanctions were adopted in response to Iranian support for international terrorism, weapons proliferation, human rights abuses, and similar conduct that the JCPOA does not address. There is no current prospect that the United States will ease these sanctions.

(For a full description of the JCPOA and key US sanctions targeting Iran, please see the following O’Melveny & Myers Client Alerts: The Iran Nuclear Deal: Setting the Path Forward to Lift International Economic Sanctions; The Lausanne Nuclear Framework Agreement with Iran: A Path is Set for Congressional Review, but Key Substantive Questions Remain; US International Economic Sanctions: Ending 2014 With a Bang; The Interim Agreement on Iran’s Nuclear Program: Implications for Iran Sanctions; New Executive Order Extends Extraterritorial Reach of US Iran Sanctions; Broad New Legislation Further Expands Economic Sanctions Against Iran and Syria; New Iran and Syria Sanctions Pose Compliance Challenges for both US and non-US Businesses.)

Additional Sanctions Loom

Notwithstanding the Nuclear Agreement, a real possibility exists that the United States will impose additional sanctions on Iranian companies and individuals involved in Iran’s ballistic missile program in response to two ballistic missile tests Iran conducted in October and November 2015 in violation of a UN Security Council resolution that bans Iran’s development of ballistic missile systems.

In addition, Congressional action is also expected on the Iran sanctions front. One early step may be extension of the Iran Sanctions Act of 1996—the principal legislative basis for statutory Iran sanctions that is set to expire at the end of 2016—for an additional 10 years. Recent ballistic missile testing by Iran in apparent violation of UN sanctions had generated bipartisan calls for the imposition of sanctions. Other legislative efforts will be made to impose conditions for putting sanctions relief into effect. Provocative Iranian actions, such as recent live-fire exercises close to US Navy ships, and violations of the JCPOA could well precipitate bipartisan support for unraveling US commitments under the JCPOA, or the imposition of new non-nuclear sanctions.

Implications for the Business Sector

The comprehensive lifting of UN and EU nuclear-related sanctions will, as of Implementation Day, permit EU persons (EU nationals and EU incorporated entities) to engage in a wide range of business dealings with Iran. These include: (1) the opening of financial and credit institution offices, subsidiaries, joint ventures and bank accounts in Iran; (2) the import of crude oil, petroleum products, natural gas, and petrochemicals into the EU; and (3) the provision of naval equipment and technology for ship building and transport.

The United States will delist hundreds of Iranian persons and entities currently named as “Specially Designated Nationals” and the EU will take comparable action. These delistings will have the secondary effect of removing the persons and entities from watch lists used for compliance purposes by banks and other businesses worldwide, thus substantially easing business with them. Persons and entities listed as SDNs for non-nuclear reasons (e.g., terrorism) will remain listed. Notably, this will include the Iranian Revolutionary Guard Corps and its affiliates.

In contrast to actions by the EU, the US economic sanctions relief principally benefits non-US persons, who, with little risk of US secondary sanctions, will be permitted to engage in: (1) financial and banking transactions with the Iranian banks and financial institutions, (2) underwriting, insurance and re-insurance services, (3) Iran’s energy and petrochemical sectors; (4) Iran’s shipping sector; (5) trade in precious metals with Iran; and (6) the conduct of transactions in the automotive sector. These measures will allow Iran more ease of access to the broader world market for financial services.

US persons, including foreign branches of US companies and foreign subsidiaries owned or controlled by US parent companies, will continue to be prohibited from engaging in any unlicensed business transactions in Iran. Notably, however, the United States has committed to licensing non-US entities owned or controlled by US persons to engage in activities in Iran consistent with the Agreement. Questions remain about the scope of such a general license or licenses, and whether US parent companies will be permitted to have any role in such business in Iran.

Russia: Expansion of Sanctions Targeting Individuals and Entities in Russia and Crimea

In 2014, in response to Russian and insurrectionist actions in Crimea and eastern Ukraine, the Obama Administration instituted the Russia/Ukraine sanctions program. These sanctions narrowly target end-uses and end-users in Russia, including individuals and companies supporting Russian actions in Ukraine, Russian defense industry firms, certain entities within Russia’s financial services and energy sectors, and broadly sanctioned activities in Crimea, prohibiting virtually all trade and investment between the United States and Crimea. In 2015, the Obama Administration expanded the Russia/Ukraine sanctions program targeting additional individuals and companies in both Russia and Crimea. (For a full description of the key US sanctions targeting Russia and the Crimea, please see the following O’Melveny & Myers Client Alerts: US International Economic Sanctions: Ending 2014 With a Bang; US Treasury Department Imposes Additional Sanctions on Russian Banks, Energy, and Arms Firms; New Sanctions Arising from Ukrainian Crisis Are Limited to Certain Individuals.)

Over the course of three rounds of sanctions in MarchJuly and December 2015, the Department of the Treasury added 76 individuals and entities involved in the pro-Russia uprising in eastern Ukraine and Crimea to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”). In addition, the Department of the Treasury listed 120 entities on the Sectoral Sanctions Identifications List (“SSI List”), which are affiliated with companies previously listed on the SSI List under Directive 1’s capital markets sanctions (Vnesheconombank, VTB Bank, Sberbank), Directive 3’s defense sector sanctions, (Rostec), and Directive 4’s energy sector sanctions (Rosneft). As a signal of US intent to enforce the sanctions, on July 30 OFAC issued a “Crimea Sanctions Advisory” notice “to highlight some of the practices that have been used to circumvent or evade US sanctions involving Crimea.”

In parallel, the Department of Commerce’s Bureau of Industry and Security (“BIS”), added 34 entities sanctioned by the Treasury Department to the Export Administration Regulations’ (“EAR”) Entity List, which results in a license requirement for the export, reexport or transfer of any US-origin items subject to the EAR (including goods, software and technology) to designated entities. BIS also added 15 entities from the Russian energy sector to the Entity List imposing a license requirement when the exporter, re-exporter or transferor knows items subject to the EAR will be used directly or indirectly in exploration for or production from deepwater, Arctic offshore, or shale projects in Russia. “Russia Sanctions: Addition of Certain Persons to the Entity List” (December 28, 2015), “Addition of Certain Persons to the Entity List” (September 2, 2015).

Finally, BIS amended the EAR to impose a licensing requirement for the export to Crimea of all items subject to the EAR, other than food and medicine designated as EAR99, and software necessary to enable personal communications over the internet. “Russian Sanctions: Revisions and Clarifications for Licensing Policy for the Crimea Region of Ukraine” (May 22, 2015), “Russian Sanctions: Licensing Policy for the Crimea Region of Ukraine” (January 29, 2015).

The Implications

The current sanctions against Russia and Russia-backed persons and entities operating in Crimea impose significant limitations on current and future business in Russia and Crimea, as well as with Russian partners in the financial services, defense and energy sectors. The Crimea sanctions in particular may cause increased business conflicts in Russia for US companies that are prohibited from engaging in business in Crimea, which Russia now considers fully part of the Russian state. Screening counter-parties and product end-uses are two effective risk mitigation measures for companies continuing to operate in Russia and Crimea. In December 2015, the EU extended its Ukraine sanctions for another six months, despite reportedly rising concerns within some member states about continuing that course. There may well be a more divisive debate in Europe in July 2016 when renewal of the sanctions will once again be required. Nevertheless, on-going Russian interventions in Ukraine (and elsewhere in Eastern Europe) – as exemplified by the recently reported cyber-attack that disabled Ukrainian power stations – together with a continued lack of progress in implementing the Minsk Accord may prompt additional targeted sanctions by the United States and steadfastness in Europe.

Cuba: Continued Easing of Some Rules, but Broad Restrictions Remain

Following the restoration of full diplomatic relations with Cuba in December 2014, 2015 saw implementation of the policy changes facilitating authorized travel to Cuba by US persons, certain authorized commerce, and the flow of information, to, from, and within Cuba. In January 2015, both OFAC and BIS amended their respective regulations to expand the list of general licenses available for travel to Cuba and ease restrictions on remittances to Cuba by US persons. With regard to trade and financial transactions, OFAC and BIS authorized commercial exports to Cuba of certain goods and services, including building materials for private residential construction, goods for use by private sector Cuban entrepreneurs and agricultural equipment for small farmers. The export of certain consumer communications devices, related hardware, software, applications, and services are also now permitted, and telecommunications providers are allowed to establish the necessary mechanisms, including infrastructure, in Cuba to provide commercial telecommunications and internet services. In addition, US financial institutions are permitted to open correspondent accounts at Cuban financial institutions and travelers to Cuba are permitted to use US credit and debit cards. US-owned or -controlled entities in third countries are also generally licensed to provide services to, and to engage in financial transactions with, Cuban individuals in third countries.

In September 2015, OFAC and BIS amended their regulations a second time to further facilitate travel to Cuba, to expand the general licenses for telecommunication and internet-based services, and to permit additional financial transactions as well as a number of activities, including legal services and educational activities.

Separately, on May 29, 2015, Secretary of State Kerry rescinded Cuba’s designation as a state sponsor of terrorism. As a result, BIS amended the EAR to implement the rescission and remove the anti-terrorism license requirements that previously applied to Cuba.

The Implications

The broad trade embargo against Cuba continues to remain in effect, and most transactions between the United States, or persons subject to US jurisdiction, and Cuba continue to be prohibited. The trade and investment embargo is largely enshrined in law by the Cuban Democracy Act of 1992 (22 U.S.C. §§ 6001-6010 ) and the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (22 U.S.C. §§ 6021-6091). Action by Congress is therefore required to more fully restore normal economic relations between the United States and Cuba. In the interim, companies are permitted to do business in Cuba within the limited avenues now permitted following the restoration of diplomatic relations.

1The P5 are the permanent members of the United Nations Security Council (the United States, China, France, Russia, and the United Kingdom). Germany is the “+1.”

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O’Melveny partner licensed to practice law in the District of Columbia and Georgia, Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, and David Ribner, an O’Melveny associate licensed to practice law the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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