OFAC Eases Iran Oil-Related Restrictions for Two Months, But Will Financial Institutions Cooperate?

The sanctions reprieve was announced on June 21 with the publication of General License (GL) X by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). This authorization covers most of the identified transactions (see below) that would otherwise be prohibited by the OFAC-administered sanctions programs related to Iran, Weapons of Mass Destruction Proliferation, Global Terrorism, or Russia/Ukraine (the Covered Sanctions Programs). It is currently valid through the end of the day in Washington, DC, on August 20. 

What GL X Authorizes

GL X authorizes all transactions that are “ordinarily incident and necessary to the production, sale, delivery, or offloading of crude oil, petrochemical products, or petroleum products of Iranian origin” that would otherwise be prohibited by the Covered Sanctions Programs. This is a significant and broad authorization that seems focused on enabling the movement of Iranian-origin oil and petroleum and petrochemical products to importers around the world, including within the United States. Although GL X provides examples of shipping-related activities that are covered — such as safe docking, management, bunkering, and insurance of vessels carrying or storing Iranian oil or oil products — these are only illustrative. GL X appears to also cover all aspects of production and sale of Iranian oil and oil products. 

Iranian petroleum and petrochemical products are defined in the relevant executive orders and OFAC sanctions regulations and frequently asked questions (FAQs) as follows:

• “Petroleum products” includes unfinished oils, liquefied petroleum gases, pentanes plus, aviation gasoline, motor gasoline, naphtha-type jet fuel, kerosene-type jet fuel, kerosene, distillate fuel oil, residual fuel oil, petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt, road oil, still gas, and miscellaneous products obtained from the processing of crude oil (including lease condensate), natural gas, and other hydrocarbon compounds. The term does not include natural gas, liquefied natural gas, biofuels, methanol, and other non-petroleum fuels.

• “Petrochemical products” includes any aromatic, olefin, and synthesis gas, and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea.

We expect OFAC to use these same definitions for GL X.

GL X explicitly clarifies that the authorized transactions include:

• Transactions involving vessels carrying or storing Iranian oil, petroleum products, or petrochemical products even if those vessels are listed on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List (or are otherwise blocked) under the Covered Sanctions Programs. 

• Imports into the United States. Here, GL X strangely states that such imports must be “ordinarily incident and necessary to transactions authorized by GL X,” but we are scratching our heads to come up with examples of imports that would not be ordinarily incident to production, sale, delivery, or offloading of the merchandise (maybe an OFAC FAQ will soon come out explaining this language).

• Payments in US dollar-denominated funds. This authorizes the involvement of US financial institutions in processing payments owed to Iran, the Government of Iran, or any person blocked under the Covered Sanctions Programs.

What GL X Does Not Authorize

GL X does not authorize any transaction prohibited by a sanctions program other than the Covered Sanctions Programs.

GL X also does not authorize transactions involving a person located in or organized under the laws of Cuba, North Korea, or the Crimea, Donetsk, or Luhansk regions of Ukraine, or any entity that is owned or controlled by, or in a joint venture with, such persons.

Finally, we think it is safer to read GL X as not authorizing the use of funds currently in blocked accounts (such as using funds currently in a US blocked account to pay for Iranian oil). While this point is not directly addressed in GL X, the relevant regulations make clear that a general license does not authorize transfers or payment from blocked accounts unless it does so explicitly, which GL X does not. Accordingly, it is best to assume currently blocked funds cannot be used in transactions authorized by GL X.

Will Non-US Persons Be Subject to Sanctions Targeting?

OFAC has yet to issue an FAQ clarifying that foreign persons will not be targeted for sanctions (such as being placed on the SDN List) for engaging in transactions that would be licensed by GL X for a US person. We expect we may see such an FAQ shortly, but given OFAC’s longstanding practice and existing FAQs stating that this is its normal interpretation, we believe foreign persons would not be subject to OFAC targeting for transactions that meet all of the criteria in GL X, provided those transactions occur entirely before the end of August 20, unless GL X is extended.

Things to Watch Out For

GL X’s two-month validity period is relatively long for such a politically significant (and potentially controversial) general license, and we think it shows real intent of the Trump Administration to make it possible for the authorized transactions to happen. Nevertheless, businesses looking to rely on GL X may wish to consider the following:

1. No transactions will be authorized after August 20 unless GL X is extended, and this includes payments after August 20 for transactions that occurred on or before August 20.

2. GL X does not clearly cover downstream transactions once Iranian oil or petroleum or petrochemical products are delivered. These include further processing (substantially transforming) these Iranian products into new products in a third country, or transactions with third-country SDNs or other blocked persons that are not specifically related to the production, sale, delivery, or offloading of the original Iranian oil or petroleum or petrochemical products. We look forward to seeing OFAC issue additional authorizations or FAQs clarifying this. 

3. GL X can be revoked or amended at any time. Although this rarely occurs, it has happened. If the Trump Administration decides that the further negotiations with Iran are souring, or if there are other political pressures (international or domestic) that push against GL X, it could be revoked. 

4. Financial institutions may not be able or willing to handle Iran-related transactions quickly or at all based on their own compliance procedures (including the time it may take to remove barriers contained in those procedures), the financial institutions’ overall risk tolerance in dealing with Iran, and their trust that the Trump Administration will not make changes to or revoke the GL without warning.

5. There are US and foreign victims of Iran’s past support for terrorism who may have outstanding judgments against Iran and Iranian entities, and who may seek to attach payments owed to Iran.

6. Other jurisdictions, such as the UK and the EU, have Iran-related sanctions that may be applicable and that have not been waived, so reviewing those restrictions is an important step before engaging in Iran-related transactions.

Conclusion

This broad, two-month authorization provides real opportunity for those able to move and complete their transactions quickly, but various obstacles — including the ability of financial institutions to rapidly reorient their compliance processes — make us wonder just how much business will occur before the license expires.

Reach out to your sanctions counsel if you have questions about GL X or any other aspect of the Iran sanctions program.