What Your Chinese Operations Needs To Know About Iranian Sanctions

Recent news about a framework agreement between Iran, the United States, China, France, Germany, Great Britain, and Russia raises important geopolitical issues – and also important business considerations. The agreement basically rests on two important representations. Iran would allow monitoring of its nuclear programs and the United States and Europe would agree to eliminate restrictive sanctions on commercial dealings with Iran. Such an agreement would dramatically change the way companies conduct business globally.  

For companies with even the slightest interest in expanding sales to Iran, even the current framework discussions and possible elimination of U.S. and E.U. sanctions is likely spurring careful analysis about how such Iranian sales would be structured. This caution is due to the restrictive nature and severe penalties of current U.S. sanctions on dealings with Iran.

For U.S. companies with Chinese operations, U.S. law generally prohibits the U.S. companies and their Chinese subsidiaries from engaging in commercial and financial transactions with Iran and its citizens. A U.S. company’s Chinese wholly foreign-owned entity (“WFOE”), and a Chinese Joint Venture subsidiary in which the U.S. company owns at least half of the controlling interests, cannot sell or export products manufactured in China to Iran. Doing so violates U.S. sanctions laws on transactions with Iran.

U.S. companies and and their Chinese subsidiaries also generally cannot sell or ship products to a distributor if they know or have reason to know the distributor will transship or sell the products to Iran. In other words, U.S. companies and their Chinese subsidiaries cannot structure “blind-eye” sales transactions to Iran through third parties and claim they were unaware of their products’ delivery destination.

The reason to know standard can be established through circumstantial evidence. For example, a Chinese subsidiary and its U.S. owner may have reason to know that a sale to a distributor is destined for Iran if the distributor’s customer base is exclusively or overwhelmingly Iranian companies. In such an example, the U.S. owner and its Chinese subsidiary would be well advised to undertake and document due diligence to confirm the ultimate destination of such sales in order to comply with U.S. sanctions on Iran.

Current negotiations on the framework agreement do not preclude U.S. enforcement of its Iranian sanctions. In fact, the contrary may be true as the United States most likely wants to demonstrate not only its resolve to effecting change through sanctions if an agreement is not concluded, but also how Iran can benefit if such sanctions are eliminated.

Last October, while the negotiations were underway, the U.S. Office of Foreign Assets Control (“OFAC”) entered into a settlement agreement with Indam International, Inc. located in Houston, Texas. Indam paid about $45,000 to settle potential civil liability stemming from alleged violations of U.S. Iranian sanctions based on shipments to the United Arab Emirates that Indam had “reason to know” were intended for transshipment to Iran. OFAC stated that the $45,000 settlement amount was based on the following aggravating factors:

• Indam’s failure to conduct due diligence of its products’ end users.

• Indam’s understanding that exports for use by Iran violated U.S. sanctions based on a previous incident.

• Awareness by Indam’s management that the shipments were ultimately destined for Iran.

• The benefit Indam’s shipment would have conferred on Iran’s petroleum industry, which would have harmed U.S. sanctions’ objectives.

• Indam’s failure to implement appropriate corporate policies and procedures to avoid transactions that violate U.S. sanctions.

The Iran framework agreement is currently just that – a framework. It faces intense scrutiny in the signatories’ home countries and further detailed negotiations between the parties before it can be finalized. Consequently, companies contemplating possible commercial engagement with Iran must carefully understand their current obligations and risks under Iranian sanctions implemented by the U.S., E.U., and other countries. As the U.S. OFAC’s settlement agreement with Indam suggests, U.S. companies and their Chinese subsidiaries have a reason to know about trade sanctions and a reason to ensure compliance with such sanctions.

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Source: http://www.chinalawblog.com/2015/04/your-chinese-operations-still-needs-to-know-about-iranian-sanctions.html