In a recent post, Sam discussed the open question of whether – pursuant to § 5.1.2 of Annex II of the JCPOA –OFAC will provide general or specific license authorization for U.S.-owned or –controlled entities established or maintained outside the United States to engage in otherwise prohibited activities in or with Iran. This question is an important one as general license authorization from OFAC might establish a backdoor way for U.S. firms – which have themselves been shut out of the Iranian market for more than two decades — to enter Iran via their non-U.S. subsidiaries.

I wanted to add my own prognosis as to the matter – especially since there is growing skepticism that OFAC will indeed provide general (as opposed to specific) license authorization. (In Sam’s post, he cites Richard Nephew, the former Principal Deputy Coordinator for Sanctions Policy at the U.S. State Department and a member of the U.S. negotiating team, as predicting specific license authorization to ensure that there are no issues with EU business returning to Iran). To be clear, I believe that OFAC will provide a general license that effectively undoes the operation of 31 C.F.R. § 560.215 and permits U.S.-owned or –controlled entities established or maintained outside the U.S. to reenter Iran at no liability to themselves.

My optimism is informed by a few things: First, the fact that I would have expected the Europeans to have favored this particular change to U.S. sanctions law. Recall that, under 31 C.F.R. § 560.215, a U.S.-owned or –controlled entity includes entities in which a U.S. person “holds a 50 percent or greater equity interest by vote or value in the entity; holds a majority of seats on the board of directors of the entity; or otherwise controls the actions, policies, or personnel decisions of the entity.” This latter element has caused considerable distress among foreign firms, including EU ones, insofar as the mere fact that a C-level officer (such as a CEO) has U.S. citizenship could put the entire firm in violation of the ITSR should it be engaged in activities in or with Iran. (OFAC has long been derelict in providing guidance as to the ultimate reach of 31 C.F.R. § 560.215, leading many of their legal advisers to broadly interpret this provision so to warn against possibility liability.)

While some might argue that this issue could be resolved via specific licensing procedures, the major problem is that foreign businesses have continued operating in Iran despite 31 C.F.R. § 560.215. For them to come forward and request specific license authorization to conduct business in Iran would mean admitting to the fact that they have likely been in violation of 31 C.F.R. § 560.215 since its inception in 2012. That invites liability, which is why specific licensing procedures seem to me unworkable. Few will take advantage of favorable specific licensing if, in doing so, they are threatened with liability for past misdeeds. That’s why a general license makes most sense, in my view, and why I think Europe’s negotiators pushed for it.

Second, in conversations I’ve had since the JCPOA was announced, there is broad agreement that continuing the operation of the U.S. trade embargo makes little sense insofar as the U.S. is not merely ending prohibitions against the activities of foreign parties vis-à-vis Iran but also encouraging foreign parties to reenter Iran to ensure that Iran receives the benefit of its bargain under the nuclear deal. Part of the reason the U.S. trade embargo with Iran was imposed in the first place was that the U.S. was trying to encourage its allies (most especially, Germany and Japan) to impose constraints of their own on trade with Iran and needed to take demonstrative action that showed its own seriousness in dealing with the Iranian threat. But now that the U.S. is no longer urging its partners to end trade with Iran but rather encouraging them to take it up, what sense does it make for the U.S. to self-impose an embargo on trade with Iran?

It doesn’t. Meaning, it looks like politics (and not policy) is governing the decision to leave the U.S. trade embargo intact. And if that’s the case, then it would make sense for the U.S. government to take limited action that allowed a back-door way for U.S. firms to reenter Iran (via their non-U.S. subsidiaries). Little attention would be drawn to it in the morass that is Annex II of the JCPOA, allowing for U.S. authorities to provide certain relief for U.S. firms without drawing too much criticism. So far, that’s the way it has played, too: no one on Capitol Hill is crying out about § 5.1.2 of Annex II.

Whether it is a general or specific license authorization, then, will do little to upset the mood in Congress. Why not, as such, provide general license authorization for U.S.-owned or –controlled firms established or maintained outside the U.S. to enter Iran? It’s the right policy, and the politics don’t get in the way.

Third, 31 C.F.R. § 560.215 is a relatively new provision of the ITSR. It was introduced following the passage of the Iran Threat Reduction Act (“TRA”), § 218 of which mandated OFAC to draft exactly such a prohibition. It is not, then, a two-decade-long prohibition on the activities of foreign subsidiaries (of U.S. parent companies) dealing with Iran, but a recent provision statutorily related to the nuclear issue. In my mind, this proximity matters – unlike the U.S. trade embargo as a whole, 31 C.F.R. § 560.215 is only a few years in the making and not so much a major change in course as it is a small revision to the regulatory scheme.

For what it is worth, I predicted changes to 31 C.F.R. § 560.215 before the JCPOA was even announced. (Not a bad call.) So chalk me up again as predicting the issuance of a general license authorizing activities that are otherwise prohibited under 31 C.F.R. § 560.215.