On January 10, 2020, President Trump signed an Executive Order (“E.O.”) which further expanded U.S. sanctions on Iran after withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018. In 2018, U.S. re-imposed sanctions against Iran including secondary sanctions that have extraterritorial effect. Even non-US persons and companies can be designated by the Office of Foreign Assets Control (“OFAC”) at the U.S. Treasury Department as a Specially Designated National (“SDN”) and subject to the same sanctions if the non-US party conducts transactions with either designated Iranian SDNs or in sectors specified in U.S. secondary sanctions.

These sectors subject to secondary sanctions since 2018 include （1）Iranian automobile manufacturing (excluding finished car sales), (2) petroleum, (3) shipbuilding, (4) shipping, and (5) metals industries among others. Moreover, non-US persons and companies can be designated as SDN if the non-US party engages in any transaction with entities owned or controlled by the Iranian Revolutionary Guard Corps (“IRGC”), even when that entity is not listed as SDN. One of the grave consequences of being designated as a SDN is that the company would be cut off from the U.S. banking system which provides for dollar based transactions. Moreover, subsidiary or affiliate companies which the SDN company holds more than 50% shares will also be considered to be restricted as a SDN.

For example, in 2019, OFAC designated a Chinese oil and gas importation company as well as one of its senior officer for allegedly transacting with Iran in sectors subject to U.S. secondary sanctions, specifically oil importation. In addition, in a very bold move, in September 2019, OFAC designated six large Chinese shipping company and its five Chinese executives based on their alleged transactions with the Iranian oil sector.

The new Executive Order further expands the scope of U.S. secondary sanctions by adding 4 additional sectors subject to secondary sanctions: (1) construction, (2) mining, (3) manufacturing, and (4) textiles sectors of the Iranian economy. It targets non-US persons and companies that knowingly engage in a “significant transaction” for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with those sectors. Furthermore, the secondary sanctions target includes banks that knowingly facilitate significant financial transactions in the sale, supply or transfer of goods and services in those sectors. There is no objective standard in defining what is significant. Rather, OFAC uses a combination of factors in determining what constitutes significant transactions that incorporate value, frequency, and policy implications among others. Thus, even if it is a low value transaction, but it is conducted frequently and regularly, it could arise to the level of “significant”. The standard in defining “knowing” also can include willful disregard or reckless disregard for the sanctions restrictions.

The E.O. still exempts the provision of food, agricultural products, medicine and medical devices to Iran from U.S. secondary sanctions. However, it is important to ensure that the goods meet the regulatory definition of these commodities as common notions of those commodities may differ from the regulatory ones.

Words of Advice to Chinese Companies

With the new secondary sanctions on Iranian textiles and manufactured goods, more U.S. importers and companies may scrutinize producers’ supply chain and origins of components. In January 2019, e.l.f. Cosmetics sourced fake eyelashes in China which turned out to contain North Korean materials, in violation of U.S. sanctions on North Korea. The company paid almost $1 million in fines and had to sign a settlement agreement with OFAC. Given that China is the world's major producer and exporter of textiles and manufacturing, many companies will scrutinize more intensely their supply chain involving Chinese parties.

Moreover, the inclusion of manufacturing in the new E.O. also is quite broad in that the sale, supply or transfer of goods (such as on Chinese e-commerce sites) manufactured in Iran could also be subject to U.S. secondary sanctions.

In the face of a series of U.S. sanctions, Chinese companies often fall into three misunderstandings when establishing corporate compliance programs.

First of all, companies may assume they have done nothing wrong when facing the sanctions because it was not willful. However, U.S. sanctions laws are strict liability which means negligence or ignorance cannot exempt someone from responsibility. The U.S. Department of Justice has also stressed that "cross-border trade is a high-risk industry, and companies need to have compliance systems that are worthy of such risks".

Secondly, companies may assume that they only need a comprehensive written compliance policy without other compliance measures in place in actual practice, whereas OFAC clearly states that “we are not looking at how much the company’s compliance policy is, but how much the compliance policy is effectively implemented”. For an enterprise, it is necessary to have not only compliance policies, but also sound implementation procedures, training and audit supervision among many other measures.

Thirdly, companies consider compliance to be fulfilled by simply installing the Dow Jones list screening system so as to avoid transactions with companies and individuals on the government blacklists. In fact, screening against such lists cannot replace the establishment of enterprise compliance system. For example, if the OFAC listed party is not subject to U.S. secondary sanctions, non-US persons can trade with the listed companies without risk for U.S. sanctions action. On the other hand, even if an entity is not on the OFAC SDN list, according to OFAC’s 50% rule, entities with more than 50% ownership by a party on the SDN list are considered to be on the list by operation of law and OFAC does not actively publish such companies. It is up to the private companies to conduct appropriate due diligence to ensure that their counterparty is not owned by a SDN. 

While a company that has no business with the United States or does not use U.S. dollars may not be exposed to practical repercussions from being designated a SDN by the OFAC, any business that has any nexus to the United States or needs to process U.S. dollars for its business should review its global business and transactions to assess its risk exposure in light of the new Executive Order.