Recent OFAC Amendments - Sudan & Iran
Recent OFAC Amendments Make Significant Changes to Sudanese Sanctions Regulations, Expand General Licenses for Agricultural Commodities, Medicine and Medical Devices under the Iran Transactions and Sanctions Regulations, and Clarify Definition of Goods of Iranian Origin and Iranian-Origin Goods
The Department of the Treasury's Office of Foreign Assets Control ("OFAC") has been keeping busy during its final month acting under the direction of the Obama Administration. In addition to publishing final rules implementing significant changes to the Sudan and Iran sanctions programs – which are discussed in detail in the remainder of this article – OFAC also published long awaited Compliance Service Guidance confirming that, despite the broad prohibition on facilitation, U.S. person attorneys and compliance personnel may provide legal and compliance advice to U.S. and foreign persons regarding the requirements of U.S. sanctions laws, including opining on the legality of specific transactions regardless of whether a U.S. person would be prohibited from engaging in them.
Suspension of Sudanese Sanctions Regulations
On January 13, 2017, in conjunction with Executive Order 13761, OFAC announced an amendment to the Sudanese Sanctions Regulations ("SSR"), 31 C.F.R. Part 538, that, effective January 17, 2017, authorizes all transactions previously prohibited by the SSR and by Executive Orders 13067 and 13412, including transactions involving U.S. persons related to the petroleum and petrochemical industries in Sudan and transactions involving property in which the Government of Sudan has an interest. The amendment also suspends prohibitions on U.S. person facilitation of transactions by foreign persons that a U.S. person would have been prohibited from performing directly under the SSR before the amendment. The SSR are not, however, dead; caution and compliance mechanisms are still required.
First, the amendment, which OFAC has dubbed the "2017 Sudan Rule," only suspends the SSR. While the related EO contemplates complete revocation of the SSR following a six-month waiting period, such action will be at the discretion of the new Administration and is conditional on the Government of Sudan satisfying certain conditions (maintaining peace, improving humanitarian access, and cooperating with the United States to address regional conflicts and terrorism threats).
Second, the amendment is issued as a General License. While the General License is very broad and generally supersedes all existing general and specific licenses, along with their terms and conditions, it has a few important constraints: (1) any exports or reexports of agricultural commodities, medicine, or medical devices subject to the EAR to the Government of Sudan, to any individual or entity in Sudan, or to any person in a third country purchasing specifically for resale to Sudan must be shipped within 12-months of the signing of the contract for export or reexport; (2) as with any General License, users must maintain records of transactions performed under its authority; and (3) the General License does not authorize activities with persons who have been blocked by the South Sudan Sanctions Regulations, the Darfur Sanctions Regulations, or by Executive Order 13400.
Finally, the 2017 Sudan Rule does not affect OFAC enforcement actions related to activities predating the 2017 Sudan Rule, even if those activities would now be authorized, because OFAC assesses the legitimacy of transactions based on the laws and regulations in place at the time the activities occurred.
Expansion of Iran General Licenses for Agricultural Commodities, Medicine, and Medical Devices
On December 23, 2016, OFAC issued a Final Rule, effective immediately, expanding the scope of the General Licenses ("GL") for export and reexport of agricultural commodities, medicine, and medical devices under the Iranian Transactions and Sanctions Regulations ("ITSR"). While the changes primarily focus on medical devices, new GLs authorizing training and certain repair/recall-related imports also apply to agricultural commodities and medicines. The GLs continue to exclude transactions involving military or law enforcement purchasers or importers but also add Iranian "intelligence" entities to the list of excluded persons, potentially requiring companies to update their General License-related screening procedures and checklists. Payment and financing terms also remain subject to the strictures of 31 C.F.R. 560.532.
- Medical Devices. The Final Rule expands the scope of authorized medical device exports and reexports by doing away with the restrictions imposed by the old List of Medical Supplies. The GL now authorizes the exportation or reexportation to Iran of all items meeting the definition of the term "medical device" as set forth in 31 C.F.R. § 560.530(e)(3) with the exception of a small number of devices specified on a new (two page) List of Medical Devices Requiring Specific Authorization. While the new list is short, it continues to exclude (and thus require a specific license for) certain medical equipment, including diagnostic medical imaging equipment and a number of laboratory equipment devices, including certain types of microscopes, face mask respirators, laboratory glassware, and decontamination equipment. And all devices exported under the GL must continue to meet the definition of medical device, which means items that are classified as EAR99 under the Export Administration Regulations ("EAR") (or that would be so classified if subject to the EAR) and that constitute "an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is … intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or [ ] intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes."
- Replacement Parts and Repair Services for Medical Devices. The Final Rule expands authorization for exports and reexports of replacement parts for medical devices, subject to several requirements, including that: (i) the parts are designated as EAR99 (or would be so designated if they were subject to the EAR); (ii) the devices were exported or reexported to Iran with authorization; and (iii) the number of replacement parts exported or reexported does not exceed the number of corresponding operational parts in use in Iran. Under the previous rule, replacement parts could only be exported on a one-for-one basis to replace a specific broken or non-operational component. This amendment permits not only replacement of broken parts but also provision of parts "necessary and ordinarily incident to the proper preventative maintenance of" properly exported medical devices, and allows storage of a reserve of replacement parts equal to the number of existing operational parts. In a similar patient-safety promoting expansion of scope, the Final Rule adds new authorization for the performance of repair services for medical devices previously exported with authorization, including inspection, testing, calibration, and diagnostic services to ensure patient safety or effective operation. Such services must not substantively alter the functional capacities of the medical device as originally authorized for export.
- Software for Medical Devices. The Final Rule also includes new authorization for the export or reexport of software and services related to the operation, maintenance and repair of medical devices subject to conditions including that: (1) the devices were exported or reexported to Iran with authorization; and (2) the software is EAR99 (or would be if it were subject to the EAR). This includes the export or reexport of software necessary for the installation and operation of medical devices, as well as the provision of software updates for those devices.
- Imports for Recall/Repair. In an expansion of authority not limited to medical devices, the Final Rule includes new authorization to import into the United States of U.S. origin agricultural commodities, medicine and medical devices subject to conditions including that: (i) the items were previously exported or reexported to Iran with authorization; and (ii) the items are broken, defective, or non-operational, or are connected to product recalls, adverse events, or other safety concerns.
- Training. In another expansion of scope going beyond medical devices, the Final Rule includes authorization to provide training necessary and ordinarily incident to the safe and effective use of agricultural commodities, medicine, and medical devices exported or reexported with authorization, subject to conditions including that any technology released via the training is classified as EAR99. A broad range of training activities are covered: OFAC's FAQs cite as examples the training of health care professionals on safe use, training on proper cleaning and inspection, and ongoing training and periodic testing to ensure continued safety and effective use.
- Agricultural Commodities. The Final Rule narrowed the list of excluded agricultural commodities so as to authorize exports and reexports of shrimp and shrimp eggs.
New Definitions of Goods of Iranian Origin and Iranian-Origin Goods
The Final Rule offers clarification of the terms Goods of Iranian Origin and Iranian-Origin Goods to better articulate the distinction between goods that have a substantive connection to Iran and goods that come into contact with Iran in some incidental way that does not warrant application of U.S. restrictions on imports or other dealings in Iranian-origin goods. Unsurprisingly, items that are grown, produced, manufactured, extracted, or processed in Iran are subject to OFAC restrictions. For items that were not grown, produced, manufactured, extracted, or processed in Iran, controls attach if the items "have entered into Iranian commerce." However, this new rule articulates the limits of what will be treated as having entered into Iranian commerce by clarifying that items that were not grown, produced, manufactured, extracted, or processed in Iran are not Goods of Iranian Origin if: (i) they were once "exported or reexported to Iran" (with authorization) but have subsequently been reexported and are located outside of Iran; or (ii) they were transported on a vessel or aircraft that passed through Iran (including stopping at a port) en route to a destination outside Iran, but "have not otherwise come into contact with Iran." According to the Note to paragraph (b)(2) of §560.306, temporary offloading from a vessel or aircraft in one location in Iran followed by reloading onto the same or another vessel or aircraft in the same location en route to a destination outside of Iran, without more, does not cause the goods to fall within the definition of Iranian-origin. However, according to OFAC's FAQs, goods that are removed from a port and processed through Iranian customs will be considered Iranian-origin, as will goods that transit Iran by truck or train, even if that transit is en route to a destination outside of Iran.
Despite the notable expansion of the GLs related to the export and reexport of agricultural commodities, medicines, and medical devices, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with Iran, its government, and its financial institutions, and GLs are subject to a number of conditions and limitations requiring careful attention. Other challenges also remain – quite apart from business/contract risks – public companies continue to face SEC-related and state divestment law-related risks when undertaking business with Iran, and some financial institutions continue to either balk at handling funds connected with Iran transactions in any way (even when lawful) or require completion of burdensome questionnaires related to the nature and scope of transactions with Iran. Businesses seeking to take advantage of applicable GLs to conduct business in Iran should conduct a careful review of OFAC regulations, the underlying transaction, and other risks before proceeding.
The foregoing is only a summary of a complex and evolving set of rules. If you have any questions, please do not hesitate to contact Wiggin and Dana's International Trade Practice.
 31 C.F.R. § 560.530(a)(3)(iv).
 31 C.F.R. § 560.530(a)(3). The Note to Paragraph (a)(3)(ii) was apparently overlooked and continues to refer to the now obsolete List of Medical Supplies.
 21 U.S.C. § 321(h).
 31 C.F.R. § 560.530(a)(4).
 31 C.F.R. § 560.530(a)(5)(iii).
 31 C.F.R. § 560.530(a)(5).
 31 C.F.R. § 560.530(a)(5)(i)-(ii).
 31 C.F.R. § 560.530(a)(6).
 31 C.F.R. § 560.530(a)(2)(iv).
 31 C.F.R. § 560.530(a)(3)(v).
 See OFAC FAQs: Iran Sanctions, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#lic_agmed.
 31 C.F.R. § 560.530(a)(2)(ii).
 See 31 C.F.R. §§ 560.201 and 560.206.
 31 C.F.R. § 560.306(a).
 31 C.F.R. § 560.306.