On June 5, 2020, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published four new Frequently Asked Questions (“FAQs”) related to Executive Order 13902 (“EO 13902”) that may be particularly insightful for those companies that still do business involving Iran. The EO, first issued on January 10, 2020, imposed, in part, additional sanctions on entities found to be operating in the construction, mining, manufacturing, or textile sectors of the Iranian economy, or any other sector as may be determined by the Secretary of the Treasury in consultation with the Secretary of State, or have knowingly engaged in a significant transaction for goods or services used in connection with those sectors.
The four FAQs, numbered 830, 831, 832, and 833 on Treasury’s website, clarify the application of the EO and define key terms. Presumably in response to COVID-19-related questions, OFAC clarified that it will not target Iranian manufacturers of medicines, medical devices, and other products used for personal protective equipment (“PPE”) and other health-related purposes solely for use in Iran. The remaining FAQs define the four sectors enumerated in the EO – construction, mining, manufacturing, and textile – along with “goods and services used in connection” with those sectors. Finally, the FAQs define “knowingly” and “significant” for purposes of the EO. A summary of the four FAQs follows the break:
FAQ 830: Will OFAC target Iranian manufacturers of medicines, medical devices, or products used for sanitation or hygiene or as personal protective equipment for use in Iran for continuing to manufacture these items?
OFAC stated that the following persons will not be deemed to be operating in the manufacturing sector of the Iranian economy: “persons in Iran manufacturing medicines, medical devices, or products used for sanitation, hygiene, medical care, medical safety, and manufacturing safety, including soap, hand sanitizer, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, and manufacturing safety systems, solely for use in Iran and not for export from Iran.” Further, the FAQ reiterates that “persons conducting or facilitating transactions for the provision, including any sale, of agricultural commodities, food, medicine, or medical devices to Iran will not be subject to sanctions” under the EO.
FAQ 831: How will OFAC define the sectors of the Iranian economy specified in the EO?
OFAC states that it anticipates forthcoming regulations will define each of the four sectors of the Iranian economy identified in the EO. However, similar to how OFAC has previously defined the “automotive” sector (in FAQ 610), which was targeted by Executive Order 13846, and the “ports, shipping, and shipbuilding” sector (in FAQ 295), which was targeted by the Iran, Freedom, and Counterproliferation Act (“IFCA”), OFAC has now provided guidance that it interprets the four sectors to cover the following:
Construction sector of the Iranian economy: Production, procurement, devising, framing, or arranging in Iran of parts or materials to fabricate, shape, or form buildings or structures, including the on-site development, assembly, or construction of residential, commercial, or institutional buildings in Iran. The term will apply to both new works and repairs or alterations of buildings. Persons that may be operating in this sector include for-sale builders, design-build firms, and project construction management firms.
Mining sector of the Iranian economy: Any act, process, or industry of extracting, at the surface or underground, ores, coal, precious stones, or any other minerals or geological materials from the Earth in Iran.
Manufacturing sector of the Iranian economy: The creation in Iran of goods by manual labor or machinery that are for export from Iran or for sale within Iran. As described above, persons involved in medical manufacturing will not be included in this definition.
Textiles sector of the Iranian economy: The fiber synthesis, dyeing, weaving, knitting, or felting in Iran of textiles, including apparel, carpets, cloths, fabric, or related goods, that are for export from Iran.
FAQ 832: What are significant goods or services used in connection with a sector in the Iranian economy specified in the EO?
OFAC expects that regulations will be promulgated to define goods and services used in connection with the targeted sectors of the Iranian economy as follows below. Goods and services used to ensure the protection of life and the prevention of injury in each of the sectors are excluded from each definition.
Goods used in connection with the construction sector of the Iranian economy: Equipment or materials that enable the activities described above, including: building supplies concrete, scaffolding, lifts, hoists, cranes, conveyors, and mechanized equipment for building handling.
Services used in connection with the construction sector of the Iranian economy: Blasting, demolition, dredging, electrical work, excavating, masonry, plumbing, rigging, welding, for-sale building, design-build consultations, and construction management.
Goods used in connection with the mining sector of the Iranian economy: Equipment or materials that enable the services describe below, including: boring equipment, conveyor belts, directional digging technology, haul trucks, hydraulic excavators, explosives, and power shovels.
Services used in connection with the mining sector of the Iranian economy: Auguring, boring, backfilling, combusting, crushing, exploration, grinding, grading, irrigating, impounding, magnetic separation, mineral processing, geophysical surveying, mapping services, operating mines or quarries, site preparation, and related construction activities.
Goods used in connection with the manufacturing sector of the Iranian economy: Equipment or materials, including raw materials, tooling machinery, and components of finished products, that enable the services described below.
Services used in connection with the manufacturing sector of the Iranian economy: New installment, additions, alteration, maintenance, and repair of manufacturing equipment, procurement or supply of raw materials for the manufacturing sector of the Iranian economy; and distribution services to persons operating in the manufacturing sector of the Iranian economy.
Goods used in connection with the textiles sector of the Iranian economy: Equipment, machines, materials, and items used in the textile sector of the Iranian economy or that enable the services described below, including: looms, industrial sewing machines, industrial washers and dryers, and industrial embroidery machines.
Services used in connection with the textiles sector of the Iranian economy: Procurement or supply of raw materials for textiles production, and design of textiles products.
FAQ 833: How will the terms “knowingly” and “significant” be interpreted for purposes of the EO?
OFAC will rely on the definition of “knowingly” as currently defined in the Iranian Financial Sanctions Regulations at 31 C.F.R. § 561.314. As currently defined, “knowingly” means that “a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”
To determine if the goods or services used in connection with the identified sectors of the Iranian economy is “significant”, OFAC will follow its usual approach, and utilize a multi-factor approach that examines the same types of things it has examined in other definitions of “significant” while still providing the agency flexibility to consider anything it chooses to consider:
1. The value and number of goods or value and frequency of services;
2. The nature of the good or services, including their type, complexity, and commercial purpose;
3. The level of awareness of management and whether the provision of goods or services is part of a pattern of conduct;
4. The involvement of designated persons in transactions involving goods and services defined above;
5. The impact of the provision of goods or services on the objectives of the EO;
6. Whether the provision of the goods or services involved deceptive practices; and
7. Other relevant factors that the Secretary of the Treasury deems relevant.
Takeaways for Industry
While these FAQs are not legally binding on the agency, there are a few important takeaways for industry:
– Useful Guidance on Sectors: While the FAQs do not exclude that much activity, they do provide helpful guidance on the types of activity that OFAC is considering to fall within those definitions. As a result, entities that are directly operating in Iran or entities indirectly exposed to Iran (e.g., material counterparty exposure to entities operating in Iran), now have the means to conduct a more focused risk assessment whether that Iranian exposure presents a meaningful designation risk pursuant to the EO.
– Humanitarian Exemptions: The new FAQs come closely on the heels of April 16th guidance (“Humanitarian Guidance”) released by OFAC addressing humanitarian trade involving jurisdictions sanctioned by the United States, including Iran. These efforts coupled together could signal OFAC’s willingness to clarify the pathways forward for COVID-19 relief without running afoul of its sanctions regimes. The Humanitarian Guidance outlined recent authorizations, exemptions, and guidance available to support the provision of humanitarian assistance under its Iran, Venezuela, North Korea, Syria, Cuba, and Ukraine/Russia-related sanctions programs. In these FAQs, OFAC clarifies that certain Iranian manufacturers of health and safety-related products solely for the use in Iran as well as persons conducting or facilitating transactions for the provision, including any sale, of food, medicine or medical devices, to Iran will not be subject to sanctions. The new FAQs also cross-reference FAQ 828 that addresses requests to contribute to humanitarian responses to COVID-19 in Iran.
– Scope for Additional Sectors: The FAQs provide detailed definitions of the four sectors enumerated in the EO. Importantly, however, the EO provides OFAC the authority to identify additional sectors at its discretion. The FAQs provide no clarity on how OFAC is considering that additional authority, but OFAC has recently used similar authorities, most prominently in the Venezuelan context, to designate new sectors and then commercially meaningful actors soon thereafter (e.g., the designation of Petroleos de Venezuela S.A. on the same day that OFAC used the authority in EO 13850 to target the “oil” sector). Any entities still operating in the Iranian economy should therefore be on notice that new sectors could be added at any time.
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