Several weeks ago, Reuters reported that – following the lifting of all nuclear-related sanctions targeting Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA) – Iran’s state-controlled firms, including amongst them the Islamic Revolutionary Guard Corps, had taken a large share of major foreign trade deals as a result of Iran’s economic opening. Specifically, Reuters related that “[f]our of the 90 deals with government entities involve firms in which the Revolutionary Guards have large or controlling stakes…,” a fact which – if true – suggests that the non-Iranian parties to such deals are engaged in potentially sanctionable activities. Because the IRGC remains the subject of U.S. sanctions under multiple programs, there is growing concern that there exists a “policy gap” in which foreign parties are able to transact with Iranian entities that are either minority-owned or otherwise controlled by the IRGC or its designated agents or affiliates. I, for one, am skeptical that this is the case, as the alleged “policy gap” seems more theoretical than practical as experience with the practice of U.S. economic sanctions shows.
Here’s the legal background:
Surviving U.S. sanctions prohibit foreign dealings with the IRGC or its designated agents or affiliates or with entities owned 50% or more by the IRGC or such agents or affiliates. For example, 31 C.F.R. § 561.201 imposes correspondent or payable-through account sanctions on foreign banks that facilitate a significant transaction or provide significant financial services for the IRGC or any of its agents or affiliates whose property and interests in property are blocked pursuant to IEEPA. Similarly, § 302 of the Iran Threat Reduction Act imposes menu-based sanctions on foreign persons identified by the President as engaging in a significant transaction with the IRGC or any of its officers, agents, or affiliates the property and interests in property of which is blocked pursuant to IEEPA. Significant for the operation of these laws and regulations, OFAC’s 50 Percent Rule states that “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s List of Specially Designated Nationals (SDN List).” In consequence, foreign parties engaged in commercial dealings with Iran must undertake appropriate due diligence on Iranian counterparties to ensure that such parties are not owned 50% or more by the IRGC or its designated agents or affiliates (nor, for that matter, by Iranian entities constructively designated by virtue of this very rule). If a foreign bank or entity engages in a transaction with an Iranian entity in which the IRGC or its designated agents or affiliates have a 50% or greater ownership interest, then the foreign bank or entity would be engaged in activities sanctionable under current U.S. law.
Critics, however, complain that this rule elides the fact that the IRGC might exercise effective control over an Iranian entity without having a 50% or greater ownership stake or might have a controlling ownership stake in an Iranian entity without necessarily being a majority owner. For this reason, some in Congress have proposed legislation mandating the ownership threshold be lowered from 50% to 25% and for “control” to carry with it the same implications as “ownership”. It is believed that doing so will close a “policy gap” that remains present under U.S. sanctions law.
Frankly, I am skeptical that there is any so-called “policy gap”. It is useful to recall that OFAC – for instance – has issued multiple warnings regarding entering into a transaction with entities in which a U.S.-designated individual or entity has a less than 50 percent ownership share or otherwise exerts effective control but not majority ownership. As OFAC has described in its Revised Guidance on the 50 Percent Rule, “U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such entities may be the subject of future designation or enforcement action by OFAC.” Furthermore, OFAC’s Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the JCPOA states that “[i]t is not necessarily sanctionable for a non-U.S. person to engage in transactions with an entity that is not on the SDN list but that is minority owned, or that is controlled in whole or in part, by an Iranian or Iran-related person on the SDN List. However, OFAC recommends exercising caution when engaging in transactions with such entities to ensure that such transactions do not involve Iranian or Iran-related persons on the SDN List.”
In other words, OFAC has clarified time and again that while transacting with an Iranian entity that is minority-owned or that is controlled, in whole or in part, by the IRGC or its designated agents or affiliates is not “necessarily sanctionable,” such transactions could become sanctionable if OFAC decides to designate or take other enforcement action in future against such entity. For those practicing U.S. economic sanctions and advising clients interested in engaging the Iranian market, OFAC’s warning is being effectively translated in such a manner as to ensure that foreign parties do not enter into dealings with Iranian entities in which the IRGC or its designated agents or affiliates have a significant controlling stake or otherwise exercise effective control. To act otherwise – while not sanctionable – would be to invite tremendous business risk to one’s dealings with Iran, as such dealings could be sanctionable now or in the future. Effectively, there is no actual “policy gap,” as responsible foreign parties are refraining from engaging in transactions with Iranian entities in which the IRGC or its designated agents or affiliates exercise ownership or control. For those foreign parties that engage in such dealings regardless of the future consequences, it is unlikely that a change in the operative law will lead them to withdraw from their Iran-related business, as they have already made a business-risk decision that their dealings with Iran are worth the U.S. sanctions consequences.