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OFAC Illuminates Its Most Recent Iran Sector-Based Sanctions

In four new FAQs issued on June 5, OFAC provides a few surprises in its clarifications of the sector-based sanctions contained in Iran-related Executive Order 13902, which was issued this past January.

In a Nutshell

The new FAQs confirm earlier guidance and provide detailed but mostly unremarkable definitions of the four sectors of the Iranian economy, as well as the goods and services used in connection with those sectors, that are targeted by E.O. 13902, and the meanings of the terms “knowingly” and “significant.” The sector definitions, however, are surprisingly not worded in an open-ended fashion, and two of the definitions – particularly the definition of the textiles sector – cover less than expected. There is also an across-the-board exception related to ensuring the protection of life and prevention of injuries.

Background

E.O. 13902 threatens persons (individuals and entities) with blocking sanctions if they knowingly engage in “a significant transaction for the . . . supply . . . to or from Iran of significant goods or services used in connection with” the construction, mining, manufacturing, or textiles sectors of the Iranian economy. The E.O. also threatens any persons operating in these sectors in Iran with the same blocking sanctions, and it threatens foreign financial institutions with correspondent account sanctions if they knowingly facilitate a significant financial transaction for such a supply of goods or services or otherwise for anyone blocked pursuant to the E.O. After its issuance, OFAC provided a 90-day wind-down period for companies to complete their existing business with Iran, which ended on April 9.

Many questions swirled when E.O. 13902 was issued. How will OFAC define these economic sectors, particularly with respect to the possibly gargantuan manufacturing sector? How broad is the class of “goods used in connection with” an identified sector? And although the E.O. exempted the provision of agricultural commodities, food, medicine, and medical devices to entities in Iran, what about the entities themselves that are operating in Iran and manufacturing these items?

As discussed in a Client Alert we provided in April, on April 16 OFAC published web guidance that, among other things, removed Iranian manufacturers of medicine, medical devices, PPE, hygiene items and several other products from OFAC’s interpretation of the "manufacturing sector of the Iranian economy,” provided they are manufacturing products for use in Iran and not for export from Iran. That interpretation appears to have been fast-tracked in response to the COVID-19 pandemic. With the new FAQs, OFAC has now released a fuller set of interpretations.

FAQ 830 – Repeating (Mostly) What Is Already out There

Exclusion of Iranian manufacturers of medical, safety, and hygiene-related products. The first FAQ (830) primarily repeats the guidance already provided on April 16, but with one clarifying addition. OFAC will not consider an individual or entity in Iran to be part of the manufacturing sector if it manufactures:

“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.”

While it is unlikely that anyone would have been bold (or foolish) enough after April 16 to do a significant sale of significant materials to an Iranian manufacturer that was producing for both the Iranian domestic and export markets, OFAC clearly saw fit to firmly close the door on that possibility. It’s either all domestic or forget about it.

Exception for the supply of agricultural and medical items. FAQ 830 also repeats the exemption contained in E.O. 13902 regarding the supply of agricultural items, food, medicine, and medical supplies to Iran. Unfortunately, the FAQ does not take any steps to extend this treatment to entities that are manufacturing these items in Iran (with the exception of the manufacturers of domestic use-only medicine and medical supplies noted in the exclusion above). OFAC therefore can still designate an Iranian manufacturer of food or a supplier of other items, such as machinery, to that manufacturer. It is possible OFAC feels restricted to only repeating the specific wording of the E.O., which may have been carefully reviewed and perhaps even fought over, even though OFAC may not intend to target Iranian manufacturers of agricultural products, food, medicine, and medical supplies, or the suppliers of non-agricultural and non-medical items to them, at least so long as they are manufacturing solely for domestic Iranian consumption.

Application to non-Iranian persons. Finally, FAQ 830, along with the other three other new FAQs, clarifies that sanctions risk for persons operating in the relevant sectors of the Iranian economy applies to both Iranian and non-Iranian persons operating in those sectors.

FAQs 831 and 832 – Defining Sectors and Goods or Services Used in Connection With Them

The second and third FAQs (831 and 832) go about the laborious business of detailing what activities in Iran are contained within the four named sectors of the Iranian economy and what are the goods or services used in connection with those sectors that will be targeted. While the title of FAQ 832 mistakenly suggests that the term “significant” is defined as well, that term is instead handled in FAQ 833.

The various definitions are fairly detailed, but a few overarching comments and a few surprises are worth pointing out:

  • The sector definitions are most important because they are exclusive. The sector definitions generally explain that the relevant sector “means” the specific activities spelled out on a list that has no catch-all phrases such as “and any other activities that . . . .” For example, the construction sector “means the production, procurement, devising, framing, or arranging . . .” and the textiles sector “means the fiber synthesis, dyeing, weaving, knitting, or felting . . . .” If an activity is not reasonably understood to be one of the activities listed in a sector’s definition, participants in the activity are not considered part of that sector.

Construction Sector

The term construction sector of the Iranian economy means the 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 applies to engaging in new work, additions, alterations, maintenance, and repairs of residential, commercial, or institutional buildings. Persons such as for-sale builders, design-build firms, and project construction management firms in Iran may be considered as operating in this sector.

Mining Sector

The term mining sector of the Iranian economy means 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.

  • “Goods or services used in connection with” the sectors is defined in an open-ended manner. The definitions of “goods or services used in connection with,” on the other hand, are more open-ended. (See the definitions at the end of this Alert.) Those definitions make greater use of the word “including” or “includes” in key places, and OFAC normally interprets those words to refer to an illustrative and not an exclusive list. Accordingly, a company considering transactions it feels may involve one of the sectors should look closely at the specific language used in the relevant sector definition. Even if the company’s supply of goods or services appear to be included in the open-ended “goods or services” definition, those goods or services still must relate to the specific activities listed in the sector definitions, and it looks like there may be room for some activities to fall outside those carefully worded sector definitions.
  • There is a small gap in the manufacturing sector definition. The definition of the manufacturing sector unfortunately does not reduce its breadth much, but it is restricted to manufacturing for export from Iran or “sale within Iran.” This may leave some space for the sector to not include the production of items that are remaining in Iran but not being sold there (i.e. manufacturing by a company for its own use).

Manufacturing Sector

The term manufacturing sector of the Iranian economy means the creation in Iran of goods by manual labor or machinery that are for export from Iran or for sale within Iran. For the purposes of evaluating sanctions pursuant to E.O. 13902, 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, will not be considered to be operating in the manufacturing sector of the Iranian economy. Note 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 E.O. 13902.

  • There is a big hole in the textiles sector definition – textiles that stay in Iran. The definition of the textiles sector has a surprise. It includes only activities related to textiles “that are for export from Iran.” Entities in Iran that work with textiles solely for domestic sale or other domestic use are not considered part of the textile sector for purposes of E.O. 13902.

Textiles Sector

The term textiles sector of the Iranian economy means 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.

  • Exceptions for protection of life and prevention of injuries. With one possibly erroneous exception, each of the separate definitions of goods or services “used in connection with” the different sectors contains an exception for good or services “that ensure the protection of life and prevention of injuries to persons operating in” the relevant sector. The odd exception is for goods used in connection with the mining sector. That definition only excepts “goods that ensure the protection of life and prevention of injuries to persons operating in mines” and not all those operating in “the mining sector.” This feels more like a mistake than an intentional narrowing, and we will see if OFAC amends this language in the FAQ or when these definitions are moved into formal regulations.

FAQ 833 – Defining “knowingly” and “significant”

The fourth and final new FAQ (833) has no surprises. The term “knowingly” is given the same definition (provided below) that is already contained in existing regulations – actual knowledge or reason to know. The FAQ then defines “significant,” in terms of goods and services, so that it also follows the general contours of similar definitions in existing regulations – including the nature, value, and number or frequency of the goods or services involved, awareness of management, presence of deceptive practices, the involvement of an SDN, etc. (the full definition is provided below). Interestingly, the FAQ defines “significant” only in terms of its second use, and not its first use, in the relevant E.O. prong language. The prong reads: “significant transaction for the supply of significant goods or services.” It is not clear why OFAC defined it for only one use and not the other, unless perhaps OFAC is politely hinting that the repetition may have been unfortunate and did not add much to the E.O. language (for example, any transaction for the supply of significant goods or services is by definition a significant transaction). But it seems fair to assume that a similar definition will be used for each place the terms “significant” appears.

Goods or Services Used in Construction Sector

The term goods used in connection with the construction sector of the Iranian economy means equipment or materials that enable the services described below or the activities described in FAQ 831 with respect to the construction sector of the Iranian economy, including: building supplies, concrete, scaffolding, lifts, hoists, cranes, conveyors, and mechanized equipment for material handling. Goods that ensure the protection of life and prevention of injuries to persons operating in the construction sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.

The term services used in connection with the construction sector of the Iranian economy include: blasting, demolition, dredging, electrical work, excavating, masonry, plumbing, rigging, welding, for-sale building, design-build consultations, and construction management. Services that ensure the protection of life and prevention of injuries to persons operating in the construction sector of the Iranian economy are excluded from this definition, including cleaning, safety inspections, and services necessary for use of protective goods described above.

Goods or Services Used in Mining Sector

The term goods used in connection with the mining sector of the Iranian economy means equipment or materials that enable the services described below or the activities described in FAQ 831 with respect to the mining sector of the Iranian economy, including: boring equipment, conveyor belts, directional digging technology, haul trucks, hydraulic excavators, explosives, and power shovels. Goods that ensure the protection of life and prevention of injuries to persons operating in mines in Iran are excluded from this definition, including personal protective equipment, safety devices, ventilation systems, and alarm systems.

The term services used in connection with the mining sector of the Iranian economy includes: 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. Services that ensure the protection of life and prevention of injuries to persons operating in the mining sector of the Iranian economy are excluded from this definition, including rescue and accident response services, cleaning, safety inspections, and services necessary for use of protective goods described above.

Goods or Services Used in Manufacturing Sector

The term goods used in connection with the manufacturing sector of the Iranian economy means equipment or materials, including raw materials, tooling machinery, and components of finished products, that enable the services described below. Goods that ensure the protection of life and prevention of injuries to persons operating in the manufacturing sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.

The term services used in connection with the manufacturing sector of the Iranian economy includes: 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. Services that ensure the protection of life and prevention of injuries to persons operating in the manufacturing sector of the Iranian economy are excluded from this definition, including cleaning services, safety inspections, and services necessary for use of protective goods described above.

Goods or Services Used in Textile Sector

The term goods used in connection with the textiles sector of the Iranian economy means equipment, machines, materials, and items used in the textiles sector of the Iranian economy or that enable the services described below or the activities described in FAQ 831 with respect to the textiles sector of the Iranian economy, including: looms, industrial sewing machines, industrial washers and dryers, and industrial embroidery machinery. Goods that ensure the protection of life and prevention of injuries to persons operating in the textiles sector of the Iranian economy are excluded from this definition, including personal protective equipment, safety devices, and alarm systems.

The term services used in connection with the textiles sector of the Iranian economy includes: procurement or supply of raw materials for textiles production, and design of textiles products. Services that ensure the protection of life and prevention of injuries to persons operating in the textiles sector of the Iranian economy are excluded from this definition, including cleaning services, safety inspections, and services necessary for use of protective goods described above.

Knowingly

The term knowingly, with respect to conduct, a circumstance, or a result, means that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.

Significant

In determining whether goods or services used in connection with a sector of the Iranian economy identified pursuant to E.O. 13902 are “significant,” the Department of the Treasury may consider the totality of the facts and circumstances. As a general matter, the Department of the Treasury may consider some or all of the following broad factors: (a) the value and number of goods or value and frequency of services; (b) the nature of the goods or services, including their type, complexity, and commercial purpose; (c) the level of awareness of management and whether the provision of goods or services is part of a pattern of conduct; (d) the involvement of designated persons in transactions involving goods and services defined in FAQ 832; (e) the impact of the provision of goods or services on the objectives of E.O. 13902; (f) whether the provision of the goods or services involved deceptive practices; and (g) other relevant factors that the Secretary of the Treasury deems relevant.

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