US sanctions, the Iranian people and the coronavirus 





























Leigh Hansson is a partner in Reed Smith LLP’s Global Regulatory Enforcement group based in London and Washington, DC Shaping sanctions to inflict maximum damage to Iran’s regime and strategic sectors while minimizing humanitarian fallout has long presented a challenge for US policymakers. The spread of the coronavirus disease (COVID-19) to Iran has elevated the urgency of this challenge for the US and is forcing Washington to make difficult choices. This column explains US sanctions laws affecting Iran’s import of medical supplies and considers potential developments to this area of trade in 2020. COVID-19-related medical imports delayed Iran is one of the countries that has been hit hardest by COVID-19, with its relatively high percentage of cases per capita, deaths per case, and cases among the political elite1. Yet, the import of COVID-19 testing kits, critical at this stage of the pandemic, has been delayed due to uncertainty surrounding the requirements for receiving payments out of Iran. This seemingly preventable international trade issue resulted from the nature of the US sanctions against Iran, the fear of the international banking community of making costly errors, and decisions by both countries with the regard to the use of the humanitarian exception to the sanctions. A comprehensive program based on deep-seated mutual animosity The US first imposed sanctions against Iran in 1979, when Iranian students seized the American embassy in Tehran and took fifty-two American diplomats and citizens hostage. During that same chaotic year, an Islamic revolution also ejected from power the US-allied Shah of Iran and replaced his regime with a theocracy that turned the country into a leading member of the world’s anti-American axis. As the clerical regime became more entrenched and better able to disrupt American foreign policy, first in the Middle East but eventually as far as Latin America, the US has responded with a sanctions program that continues to increase in both comprehensiveness of scope and vigorousness of enforcement. The Trump Administration dubbed its approach to Iran a “maximum pressure” strategy, and its main architect promised to “squeeze [the Iranians] until the pips squeak.”2 Sanctions now span industrial, financial, military and scientific restrictions in their attempt to curb Iran’s sponsorship of terrorism, authoritarianism and pursuit of nuclear weapons. As applied to sectors of Iran’s economy deemed strategically valuable, the sanctions have extended globally even to non-US persons in countries with little or no relation to the US-Iran conflict. Korean marine insurers, South African mining firms and German car part manufacturers must decide whether to sell their products to Iranian or American companies because transactions connected to these industries of Iran (among certain others) trigger US “blocking sanctions.” These sanctions can effectively exclude non-US persons from the entire US economic and financial systems by prohibiting US persons (ie. US citizens, permanent residents of the US, and companies registered in the US) from almost all transactions with such persons and freezing any assets they may have in the US. Since Iran is one of four countries upon which the US has declared a complete trade embargo (along with Cuba, North Korea and Syria), sanctions are even more onerous when there is a US nexus. US persons are barred from virtually all dealings with Iran. Further, US sanctions liability arises from the use of US dollars in transactions that themselves would be not prohibited by the sanctions. The humanitarian exception and the CBI obstacle The US sanctions program, while quite comprehensive, has for the past twenty years3 allowed humanitarian aid to reach the Iranian people4. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC), the main regulatory body that governs US sanctions programs, implemented this exception by issuing general licenses5 that allow US persons and non-US persons to export food, agricultural commodities, medicine and medical devices to Iran from the US or elsewhere, subject to certain requirements and exceptions6. The US permits a variety of forms of payment for goods exported to Iran pursuant to the humanitarian exception. These forms of payments include (i) payment of cash in advance, (ii) sales on an open account provided that the creditor cannot transfer the account receivable, (iii) financing by a third-party (ie. non-US, non-Iranian) financial institution and (iv) letter of credit issued by an Iranian financial institution blocked under Iran-related sanctions if such letter of credit is confirmed by a US or third-party financial institution7. In practice, it is very difficult for a non-Iranian to receive money out of Iran without involvement of the Central Bank of Iran (CBI), due to CBI’s possession of the foreign reserves in which exporters want to be paid8. The US imposed blocking sanctions on CBI in February 2012 due to its “deceptive practices” and “deficiencies in Iran’s anti-money laundering regime.”9 These sanctions triggered potential liability for non-US persons transacting with CBI, unless the transaction involved exports of humanitarian goods, and for US persons in all transactions with CBI, humanitarian goods not excepted. A more recent imposition of sanctions on CBI, however, has also given rise to US sanctions liability for non-US persons for using CBI even in trades that would otherwise be authorized by the humanitarian exception. On September 20, 2019, OFAC announced that it would designate CBI pursuant to OFAC’s main counterterrorism authority, Executive Order 13224, because “Iran’s Central Bank has provided billions of dollars to the Islamic Revolutionary Guards Corps (IRGC), its Qods Force (IRGC-QF) and its terrorist proxy, Hizballah.”10 This designation is different than the 2012 one because the regulation governing payment for goods traded under the humanitarian exception state that a person “who is designated or otherwise subject to any sanctions under, the terrorism, proliferation of weapons of mass destruction, or narcotics trafficking programs” cannot be involved in an authorized humanitarian trade11. Several months later, OFAC reversed course and issued a general license that permits use of the humanitarian exception despite involvement by CBI in the transaction12. Under these circumstances, it is hardly surprising that exporters of medical supplies and non-Iranian correspondent banks are uncertain as to the status of CBI and payment under the humanitarian exception. This confusion coupled with the Trump Administration’s policy of maximum pressure on Iran through rigid enforcement of US sanctions laws has caused significant apprehension to taking part in Iran-related transactions, even when they appear to be authorized. Obstacles to selling humanitarian goods to Iran at this time due to US sanctions are exacerbated13 by a recent decision by the Financial Action Taskforce, a Paris-based global anti-money laundering watchdog, to add Iran back to its terrorism financing blacklist after three years of warnings14. Special action due to the spread of COVID-19 In addition to keeping a humanitarian export channel open at all times (albeit, as discussed above, plagued by serious practical obstacles) the US has also historically allowed humanitarian donations when a natural disaster strikes Iran. Following the Bam earthquake in Iran in December 2003, OFAC temporarily allowed US persons to make donations to nongovernmental organizations that aided affected Iranians. In August 2012, OFAC issued a similar authorization to temporarily allow US-based NGOs to transfer funds to Iran used for relief efforts in the aftermath of the East Azerbaijan earthquakes. Similarly, in response to the spread of COVID-19 in Iran, the State Department has expressed its desire to assist the Iranian people in this challenging time,15 and OFAC has released guidance stating that donations of humanitarian goods such as medical supplies are permitted, provided that such donations are not made to the government of Iran or any individual or entity that OFAC has specially designated or blocked under its sanctions authorities16. While CBI is not an obstacle in this scenario given the lack of payments, the role of another instrument of the Iranian government creates similar problems. Iran’s Social Security Organisation (SSO) is managing the response to the COVID-19 outbreak, including the testing of potentially infected individuals and caring for those diagnosed. The parent agency of SSO is the government’s Ministry of Welfare and Social Security. A member of the Iranian government’s organizational umbrella, this institution’s central role in the management of the COVID-19 outbreak presents an obstacle to making authorized donations similar to the one presented by the central role of CBI in Iran’s foreign exchanges. An alternative arrangement Two weeks ago, the US and Switzerland finalized the terms of an alternative arrangement for facilitating humanitarian trade with Iran. The Swiss Humanitarian Trade Arrangement (SHTA), which was first announced around the time that CBI was designated for terror finance and then tested in trial over the early months of this year,17 is designed to bypass CBI and “help ensure that humanitarian goods continue to reach the Iranian people without diversion by the regime,” according to Treasury Secretary Mnuchin18. While limited to Swiss companies, the new arrangement reduces barriers to humanitarian exports because of the assurances provided by the US Treasury Department that transactions compliant under the SHTA will not give rise to US sanctions liability. Compliance under the SHTA will require Swiss banks and Swiss exporters to conduct enhanced due diligence on Iranian counterparts in line with the standards promulgated by FATF. The Swiss companies will need to provide detailed information about the transaction, their business activities, and their Iranian counterparts to Switzerland’s State Secretariat for Economic Affairs (SECO). SECO will share such information with the US Treasury Department. Looking ahead The US sanctions program against Iran, now over forty years old, is as robust in scale and rigid in application as ever before. The maximum pressure strategy by the US, combined with the heavy use by Iran’s economy and society of institutions connected to the government of Iran, which enable Tehran’s support for terrorism and other malign activities, has created very little room for the humanitarian channel to operate. The SHTA, while only available to Swiss companies, creates some expanded opportunities for engaging in lawful humanitarian trade with Iran. Since the SHTA just recently launched after months of planning, it is unlikely that the arrangement will be expanded or duplicated this year. Where a path to providing humanitarian aid to the Iranian people exists, it is often not discernable to the banks and other companies on which the execution of humanitarian exports depends. Moreover, compliance professionals of such companies might determine that, given confusion as to the lawfulness of such transactions (as seen by the changing status of CBI) and steep costs of being sanctioned, the benefit of making or facilitating such exports is not worth the risk they present. Building a strong compliance department or hiring outside counsel with expertise in sanctions is invaluable for companies seeking to operate in this space. Author’s note: the contents of this communication are for informational purposes only and do not constitute legal advice. Endnotes 1. Graeme Wood, “Iran Has Far More Coronavirus Cases Than It Is Letting On,” The Atlantic (Mar. 3, 2020), available at https://www.theatlantic.com/ideas/archive/2020/03/irans-coronavirus-problem-lot-worse-it-seems/607663/ 2. “U.S. to step up sanctions on Iran, ‘squeeze them until the pips squeak’,” Reuters (Nov. 13, 2018), available at https://www.reuters.com/article/us-asean-summit-bolton/u-s-to-step-up-sanctions-on-iran-squeeze-them-until-the-pips-squeak-idUSKCN1NI0KZ 3. The US Congress passed the Trade Sanctions Reform and Export Enhancements Act of 2000 (TSRA) in the wake of the oil-for-food scandal in Iraq. TSRA prohibits the use of sanctions to target humanitarian goods unless there are entities involved in the trade of such goods that are subject to counterterrorism efforts. 4. Some other categories of interactions with Iranians, such as academic exchanges and certain publishing activities, are also permitted exceptions. 5. General licenses can be relied upon without application to OFAC. Transactions not authorized by a general license might be authorized by a specific license from OFAC, which can be applied for by completing an online form. 6. See, eg. “Clarifying Guidance, Humanitarian Assistance and Related Exports to the Iranian People”, Department of the Treasury (Feb. 6, 2013), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/hum_exp_iran.pdf; “Guidance on the Sale of Food, Agricultural Commodities, Medicine, and Medical Devices by Non-U.S. Persons to Iran,” Department of the Treasury (July 25, 2013), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_guidance_med.pdf 7. 31 CFR § 560.532 - Payment for and financing of exports and reexports of agricultural commodities, medicine, and medical devices, and certain related software and services. 8. See generally, Tyler Cullis and Amir Handjani, “The Anatomy of Humanitarian Trade With Iran,” Lawfare (May 14, 2019), available at https://www.lawfareblog.com/anatomy-humanitarian-trade-iran 9. Executive Order 13599 (Blocking Property of the Government of Iran and Iranian Financial Institutions). 10. “Treasury Sanctions Iran’s Central Bank and National Development Fund”, OFAC Press Releases (Sep. 20, 2019), available at https://home.treasury.gov/news/press-releases/sm780 11. 31 CFR § 560.530(d)(5). 12. OFAC General License No. 8 (Authorizing Certain Humanitarian Trade Transactions Involving the Central Bank of Iran). 13. “Iran’s Import of COVID-19 Test Kits Hampered by US Sanctions, FATF Blacklisting,” Iran Front Page (Feb. 24, 2020), available at https://ifpnews.com/irans-import-of-covid-19-test-kits-hampered-by-us-sanctions-fatf-blacklisting 14. John Irish, Leigh Thomas, “Global watchdog places Iran on terrorism financing blacklist,” Reuters (Feb. 21, 2020), available at https://www.reuters.com/article/us-iran-fatf/global-watchdog-places-iran-on-terrorism-financing-blacklist-idUSKBN20F1Z6 15. Michael R Pompeo, “United States Offers Assistance to the Iranian People,” US Department of State Press Releases (Feb. 28, 2020), available at https://www.state.gov/united-states-offers-assistance-to-the-iranian-people/ 16. OFAC FAQ 828. 17. During the trial operations, pharmaceutical giant Novartis supplied Iran with cancer medicine and medicines needed for organ transplants. “Swiss humanitarian channel with Iran open for business,” Swiss Info (Feb. 27, 2020), available at https://www.swissinfo.ch/eng/trade-agreement_swiss-humanitarian-channel-with-iran-open-for-business/45584196 18. “United States and Switzerland Finalize the Swiss Humanitarian Trade Arrangement,” OFAC Press Releases (Feb. 27, 2020), available at https://home.treasury.gov/news/press-releases/sm919
Where a path to providing humanitarian aid to the Iranian people exists, it is often not discernable to the banks and other companies on which the execution of humanitarian exports depends

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