Ever since the Joint Plan of Action–the framework to what eventually would become the Joint Comprehensive Plan of Action–was signed and there was glimmer of sanctions relief for Iran forthcoming, we’ve been getting calls from companies who want to provide “due diligence” services to non-U.S. companies seeking to enter the Iranian market. For non-U.S. service providers this hasn’t been much of an issue. However, for U.S. companies seeking to provide such services there are certain pitfalls from a sanctions compliance perspective, and a license from the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) may need to be obtained prior to providing such services.

First, it should be noted that–as far as I am aware–there is no general definition of due diligence services that OFAC relies upon. As such, those parties seeking to provide due diligence services, need to clearly identify what exact services they will be providing. For example, will there be an investigation into Iranian parties involved in the transaction? What will the investigation involve? Auditing? Interrogatories submitted to the parties? Advising on market conditions? Who will be the recipient of the services? Where will the services be performed? All of these are important considerations in analyzing whether the provision of services to non-U.S. persons by U.S. persons related to business transactions with Iran are compliant with OFAC regulations, in particular the Iranian Transactions and Sanctions Regulations (ITSR).

Second, there is a question as to whether or not the services to be provided will require the hiring or utilization of contractors, employees, etc. inside of Iran. As the ITSR maintains a prohibition on the importation of, or transactions in, Iranian-origin services, U.S. persons seeking to provide due diligence services in furtherance of Iran-related business need to ensure that they are not importing or transacting in such services. For example, U.S. persons hiring parties in Iran to gather information related to investigating certain companies in Iran could be deemed a prohibited importation or transaction in Iranian-origin services.

Finally, the big concern with providing services in support of Iran-related trade is concerns related to facilitation. 31 C.F.R. § 560.208 prohibits U.S. persons from facilitating any transaction by a foreign person when that transaction would be prohibited if performed by a U.S. person or in the United States. Another way of saying this is that U.S. persons can not do anything to further a transaction between a foreign person and Iran that they would not be able to participate in directly. As such, if U.S. persons are providing services which facilitate a foreign person’s trade with Iran, and the U.S. person could not legally engage in that trade themselves, the facilitation prohibition applies. Thus, if the work product produced by the U.S. person due diligence provider is being relied upon to enter into, or otherwise engage in Iran-related trade, there could be a concern related to prohibited facilitation.

As more and more foreign firms seek to engage in trade with Iran, service providers will continue to line up to provide a variety of services related to market research, business intelligence, and due diligence. However, service providers who meet the U.S. person definition will likely be prohibited in most instances from providing such services without specific license authorization from OFAC. Although, provision of “due diligence” services to foreign firms may seem to be in line with U.S. policy interests, it’s not that simple. In short, do your due diligence before doing due diligence.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com