MEMORANDUM

To: / Lucille Laufer, Oriental Rug Importers Association
From: / Brenda A. Jacobs
Re: / General License To Be Issued for Iranian Carpets and Foodstuffs, Possibly As Soon As Wednesday, January 20, 2016
Date: / January 19, 2016

Overview

Possibly as soon as tomorrow, Wednesday, January 20, U.S. persons will be permitted to import Iranian carpets into the United States. The change in U.S. policy is part of the lifting of certain (not all) U.S. sanctions on Iran, in response to “Implementation Day,” Iran’s implementation of its nuclear-related commitments under the Joint Comprehensive Plan of Action (JCPOA) reached in July 2015, as confirmed by the International Atomic Energy Agency.

Once published in the Federal Register, importation of Iranian carpets, as well as brokering for the purchase of carpets, will be permitted under a “general license” issued by the Office of Foreign Assets Control (OFAC), which is part of the U.S. Department of the Treasury. A general license authorizes a particular type of transaction without the need to apply for a license, so long as the requirements of the general license are satisfied.[1]

But the requirements of the general license covering Iranian carpets may create some obstacles for ORIA member companies. Most significantly, while U.S. depository institutions are authorized to issue letters of credit for payments for Iranian-origin carpets, the general license does not permit debits or credits to Iranian accounts. Instead, non-Iranian banks will have to be used as intermediaries. In addition, care must be taken to ensure that no business is done with persons or entities that are identified by the United States as “Specially Designated Nationals” (SDNs).[2]

ORIA members also should keep in mind that there is the possibility that sanctions on Iran could be reinstated in the future, and the general license to import carpets canceled, if Iran fails to continue to comply with the terms of the JCPOA.

In this memorandum, we review the specifics of the new general license, identify steps necessary to comply with its requirements, and recommend terms that could be included in purchase agreements to limit the risks of doing business under the general license.

The New Regulations

The general license appears as two new regulations issued by OFAC, 31 CFR §§560.534 and 560.535, authorizing the U.S. importation of, and dealings in, Iranian carpets and certain foodstuffs, and governing the payment process for those products. Definitions for many of the terms used in the regulations appear in the footnotes to this memorandum and are key to understanding the terms of the general license.

Specifically, OFAC is amending its regulations to authorize the importation into the United States, from Iran or from a third country, of carpets of Iranian-origin, including antique Iranian carpets, whether used as floor coverings or as wall hangings, as well as Iranian-origin “foodstuffs intended for human consumption.” The first new regulation, 31 CFR §560.534, states:

(a) The importation into the United States, from Iran or a third country, of the following goods of Iranian origin is authorized:

(1) Foodstuffs intended for human consumption that are classified under chapters 2-23 of the Harmonized Tariff Schedule of the United States;

(2) Carpets and other textile floor coverings and carpets used as wall hangings that are classified under chapter 57 or heading 9706.00.0060 [antiques exceeding 100 years old] of the Harmonized Tariff Schedule of the United States.

(b) United States persons,[3] wherever located, are authorized to engage in transactions or dealings in or related to the categories of Iranian-origin goods described in paragraph (a) of this section, provided that the transaction or dealing does not involve or relate to goods, technology, or services for exportation, reexportation, sale, or supply, directly or indirectly, to Iran, the Government of Iran,[4] an Iranian financial institution,[5] or any other person whose property and interests in property are blocked . . . .

(c) This general license does not authorize the importation into the United States of goods that are under seizure or detention . . . .

(d) Iranian accounts. Nothing in this section authorizes debits or credits to Iranian accounts, as defined in §560.320.[6]

This means that any U.S. citizen, permanent resident alien, or entity organized under U.S. or state law, wherever located, and any person physically located in the United States may engage in importing or other transactions or dealings involving Iranian carpets. However, they may not sell, supply or re-export Iranian carpets to Iran, or to the Iranian Government or to an Iranian financial institution or to any person or entity whose property and interests in property are blocked (i.e., SDNs). U.S. persons may not ship or sell goods to Iran, directly or indirectly, because the United States continues to bar exports to Iran; the general license does not alter that rule. In addition, the general license does not permit debits or credits to any Iranian accounts, so other payment arrangements must be made.

The second new regulation, 31 CFR §560.535, addresses letters of credit and “brokering services” related to Iranian carpets and foodstuffs:

(a) Purchases from Iran or the Government of Iran or certain other blocked persons. United States depository institutions are authorized to issue letters of credit in favor of a beneficiary in Iran, the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked . . .to pay for purchases from Iran or the Government of Iran of [the carpets and foodstuffs] described in§560.534(a), provided that such letters of credit are not advised, negotiated, paid or confirmed by the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked. . .

(b) Transactions or dealings in Iranian-origin goods located in third countries, other than purchases from the Government of Iran or certain other blocked persons. United States depository institutions are authorized to issue, advise, negotiate, or confirm letters of credit to pay for transactions in or related to [the carpets and foodstuffs] described in §560.534(a) and located in a third country, other than purchases from the Government of Iran or certain other blocked persons, or any other person whose property and interests in property are blocked . . . provided that such letters of credit are not issued, advised, negotiated, paid or confirmed by the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked. . .

(c) Brokering. United States persons, wherever located, are authorized to act as brokers for the purchase or sale of Iranian-origin [carpets and foodstuffs] provided that the goods are not for exportation, reexportation, sale, or supply, directly or indirectly, to Iran, the Government of Iran, an Iranian financial institution, or any other person whose property or interests in property are blocked. . . .

This regulation tells U.S. financial institutions that they may legally issue a letter of credit to allow the seller to be paid for the carpets purchased by a U.S. importer, so long as the carpets were not purchased from the Government of Iran or blocked persons and so long as those entities are not parties to the letter of credit. The regulation also makes clear that in order to get paid, the Iranian sellers must have accounts in non-Iranian banks. Those non-Iranian banks will have to be utilized as intermediaries. Frankly, it is unclear how receptive U.S. banks will be to issuing such letters of credit given the level of scrutiny that will be necessary to ensure that the restrictions of the general license are met.

OFAC Guidance To Explain the General License

To help explain these regulations, OFAC provides the following two examples of transactions that are permitted under the general license:

(1) A United States person living abroad is permitted to purchase or sell an Iranian-origin carpet, as long as the sale is not to Iran, the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked by the United States.

(2) A United States person may process a documentary collection relating to the importation into the United States of Iranian-origin carpets, but payment under the documentary collection may not involve the crediting of an Iranian account, as defined in §560.320.

Further, OFAC provides the following guidance as to how U.S. persons can pay Iranian companies for the imports authorized under the general license for carpets and foodstuffs:

U.S. depository institutions and registered brokers and dealers in securities are authorized to process transfers of funds to and from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran, if the transfer arises from, and is ordinarily incident and necessary to give effect to, an underlying transaction that has been authorized by a general or specific license . . . . and does not involve crediting or debiting an Iranian account, as defined in §560.320. . . This payment mechanism is available for transactions related to generally-licensed importations of Iranian-origin carpets and foodstuffs.

In addition, subject to certain conditions, U.S. depository institutions are authorized under the general license to process letters of credit for payments for Iranian-origin carpets and foodstuffs, and U.S. persons are also authorized to act as brokers for the purchase or sale of the categories of Iranian-origin carpets and foodstuffs covered by the general license.

In addition, OFAC provides the following examples of transactions permitted under the general license:

1) A U.S. depository institution may issue a letter of credit in favor of an exporter in Iran to finance the importation into the United States of Iranian-origin carpets; the letter of credit may be confirmed by a third-country bank that is not included within the definition of the term “Government of Iran” or an Iranian financial institution.

2) A U.S. depository institution may advise or confirm a letter of credit issued by a third-country bank that is not included within the definition of the term Government of Iran or an Iranian financial institution to finance the purchase from a third country of Iranian-origin carpets by a U.S. person or third-country national.

3) A U.S. person may broker the sale of Iranian-origin carpets from Iran to a third-country national located outside Iran or to another U.S. person wherever located.

4) A bank that is owned or controlled by the Government of Iran may forward letter of credit documents, strictly on a documentary collection basis, either directly or indirectly to a United States depository institution or to a third-country bank that is not included within the definition of the term Government of Iran or an Iranian financial institution and that is a party to a letter of credit issued by the United States depository institution. The Iranian bank may not, however, send the documents on an “approval” basis, since it is not and cannot be a party to the letter of credit.

Concluding Points and Recommendations

It is important to note that most sanctions against Iran remain in force, and will be vigorously enforced. While the United States is suspending many “secondary sanctions,” which target non-U.S. persons, and is implementing a new licensing policy to allow foreign subsidiaries of U.S. companies to conduct business consistent with the JCPOA, there are many other U.S. sanctions that continue, and some new sanctions.Thus, secondary sanctions related to Iran’s human rights record, proliferation of weapons of mass destruction and support for terrorism remain in place, as do most primary sanctions restricting U.S. persons from doing business with Iran. The general license for carpets and foodstuffs for human consumption is an exception to that restriction, reflecting in part the belief that trade in these products will benefit the more impoverished Iranians.

Also, as noted earlier, the general license for Iranian carpets could be revoked if it is subsequently determined that Iran has violated its continuing JCPOA commitments. There is no indication how far in advance any notice would be provided in the event of a snapback, or whether there would be any contract sanctity or for how long there would be an authorized wind-down period to allow companies to disengage from such transactions.

To do business under the general license, ORIA members should ensure the following:

1.Appropriate procedures are in place to identify whether potential sellers and other parties to transactions are SDNs, that is, all parties should be screened.

2.Steps are taken to properly structure each transaction so that the Government of Iran, Iranian financial institutions and any SDNs are not parties to any letters of credit and their accounts are neither credited or debited.

3.Before finalizing any purchase agreement, affirmative steps are taken to confirm that U.S. and third country banks are willing and able to participate in such transactions.

4.Consider incorporating “escape clauses” in any Iranian carpet contracts and purchase orders, in the event that sanctions snap back into place.

Additional Resources

For additional information on the JCPOA, including the achievement of “Implementation Day,” and the general license for carpets, please see the following links:

1

[1] A general license is distinguished from a specific license. A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application.

[2]Property and interests in property of SDNs are blocked and will remain blocked. To identify SDNs, many companies utilize commercially available software screening programs. The U.S. Government also maintains a web-based “Sanctions Search List,” available at

[3] A “U.S. person” is defined as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.” See 31 CFR §560.314.

[4]The “Government of Iran” is defined as (a) The state and the Government of Iran, as well as any political subdivision, agency, or instrumentality thereof, including the Central Bank of Iran; (b) any person owned or controlled, directly or indirectly, by the foregoing; (c) any person to the extent such person is, or has been acting or purporting to act, directly or indirectly, for or on behalf of the foregoing; and (d) any other person determined by OFAC to be included among (a)-(c). See 31 CFR §560.304.

[5]An “Iranian financial institution” is defined as “any entity (including foreign branches), wherever located, organized under the laws of Iran or any jurisdiction within Iran, or owned or controlled by the Government of Iran, or in Iran, or owned or controlled by any of the foregoing, that is engaged in the business of accepting deposits, making, granting, transferring, holding or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. It includes but is not limited to depository institutions, banks, savings banks, money service businesses, trust companies, insurance companies, securities brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, and holding companies, affiliates, or subsidiaries of any of the foregoing.” See 31 CFR §560.326.

[6]“Iranian accounts” are defined as “accounts of persons who are ordinarily resident in Iran, except when such persons are not located in Iran, or of the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked. . . .” See 31 CFR §560.320.