OFAC warns businesses: Mitigate diversion risk of dual-use components that can have military application
Recent reports by the Wall Street Journal and the Institute for Science and International Security indicate that certain Iranian drones supplied to Russia and shot down in Ukraine contain parts and components of aerospace and defense companies from Japan, Germany, Austria, the UK, Israel and the United States. On September 8, 2022, the US Treasury Department’s Office of Foreign Assets Control (OFAC) cautioned that “[t]he United States is committed to strictly enforcing our sanctions against both Russia and Iran and . . . will also not hesitate to target producers and procurers who contribute to Iran and its IRGC’s [Iran’s Islamic Revolutionary Guard Corps] UAV program.”
Companies also face significant reputational harm when their parts or components find their way into Iranian military hardware. This is especially true when those parts or components are used to attack Ukraine at the hands of Iran’s Islamic Revolutionary Guard Corps (IRGC), which is designated by the United States as a Foreign Terrorist Organization.
Below is a brief overview of the foreign direct product rule under the US Export Administration Regulations (EAR), US sanctions measures aimed at Iran, and how companies might mitigate diversion risk to Iran.
US export controls
The US Department of Commerce’s Bureau of Industry and Security (BIS) exercises legal authority over exports of items subject to the EAR, including exports of US origin components incorporated into foreign-produced items destined for Iran.
BIS deems an item to be “subject to the EAR” when the item is (1) of US origin, (2) present in the United States, (3) foreign-produced but incorporating or bundling more than a certain de minimis level of US-origin controlled content, (4) foreign-produced but the direct product of certain technology or software subject to the EAR, or (5) foreign-produced but the direct product of certain plants or major components of plants that are themselves the direct product of certain US-origin software or technology. ((15 C.F.R. §§ 730-774), 15 CFR § 734.3(a))
A foreign-produced item that contains any amount of certain special US-origin items will be subject to the EAR in all cases. For example, there is no de minimis level for certain foreign-made computers incorporating US-origin controlled semiconductors (other than memory circuits) classified under ECCN 3A001 and high speed interconnect devices classified for export under ECCN 4A994.j. In some cases, there may be no de minimis value threshold for US-origin encryption commodities controlled under ECCN 5A002. In such exceptional cases, any foreign-produced item incorporating US-origin ECCN 5A002 commodities may be subject to the EAR. Moreover, no one can reexport to Iran US origin goods through a third country if they know, or should know, the goods or technologies are intended for Iran.
According to BIS, “[y]ou will violate the EAR if you export or reexport any items subject to the EAR without a required OFAC authorization, even if the transaction would not have required a license from BIS.” The exportation, reexportation, sale, or supply, directly or indirectly, of any US-origin goods or technology or by a US person (even if that person is outside of the United States) to Iran is prohibited. These include US components comingled with an item outside of the United States.
Additionally, generally any transaction, directly or indirectly, with Iranians placed on OFAC’s list of Specially Designated Nationals is prohibited – such as the IRGC. OFAC cautions that the IRGC owns or controls large parts of Iran’s economy, including the defense, construction, and oil industries, and is “involved in a diverse array of activities.” Therefore, even seemingly permitted exports may violate US and other sanctions if there is an IRGC nexus. Due to Iran’s 40+-year history of evading sanctions and the paucity of reputable audit firms in Iran, it is difficult to identify if an Iranian party is actually owned or controlled by the IRGC.
Iran is a significant US national security concern, so requests for Iran-related OFAC specific licenses will typically require US State Department concurrence. Accordingly, those seeking Iran-related exports should consider when and how to engage the US Department of State, in addition to OFAC and/or BIS. The State Department has always played a critical role in approving or denying license applications to OFAC that have foreign policy implications, as licenses for Russia, Iran, China, and other key jurisdictions will. The State Department’s role in enforcing sanctions has increased since 2019, when it created its own sanctions targeting team. The State Department targeting team has since grown to over 60 individuals empowered to identify sanctions violators for designation or other action, and is continuing to expand with oversight of Iran, Russia, and other sanctions programs.
Non-US exports to Iran
According to the Defense Ministry of a key US ally in the region a “preliminary review of the relevant international export control regimes indicates” that certain components on the Iranian drones are “neither a controlled defense item nor a dual-use item, according to [local] law based on international arrangements.”
Export controls of certain US allies do not align with much broader US sanctions and export control regulations, and US sanctions include extra-territorial secondary sanctions. Accordingly, US person employees of non-US companies must exercise caution and comply with US sanctions. Moreover, non-US companies may face secondary sanctions and/or avail themselves to US jurisdiction by using US correspondent banks, the US dollar, or another US nexus.
Strategies to mitigate risk
Companies with an international footprint, even if exports to Iran are not contemplated, should adopt Global Trade Compliance program with policies and procedures designed to address trade risk commensurate with its transactional risk. These policies and procedures should address multilateral sanctions and export control regimes to mitigate diversion risk to foreign adversaries of the United States subject to comprehensive or other sanctions. A robust Global Trade Compliance program demonstrates the company’s commitment to follow trade laws, among other things. In turn, the program and its implementation could create partnerships with US regulators that provide long-term value-added. The added value can include building relationships that will help provide insight into new high-risk markets that a company can enter or continue to engage, receiving insight into fast-moving maritime-related transactions, and building partnerships with national security officials that can lead to engagement with other parts of government.
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