Understanding US Law Requirements for New Opportunities in Aircraft Transactions with Iran
For two decades, sanctions from the UN and the US have crippled Iran's aviation industry, banning new aircraft and equipment from being taken in by the Middle Eastern country. Most US exporters have heard that January 16, 2016 marked "Implementation Day" under the Joint Comprehensive Plan of Action (JCPOA) entered into between the United States, Iran, the European Union and five other world powers in July 2015. Pursuant to the JCPOA, the United States has lifted nuclear-related "secondary sanctions" imposed on Iran and announced a favorable licensing policy for certain otherwise prohibited transactions, including transactions involving the sale, lease and export of commercial passenger aircraft, parts, components and related services in Iran.
The US Treasury Department's Office of Foreign Assets Control (OFAC) issued a statement of licensing policy adopting a favorable approach to licensing civil aircraft transactions, which will allow the following kinds of transactions: (i) the export, re-export, sale, lease or transfer to Iran of commercial passenger aircraft exclusively for civil aviation end use; (ii) the export, re-export, sale, lease or transfer to Iran of spare parts and components for commercial passenger aircraft; and (iii) the provision of associated services exclusively for commercial passenger aviation, including warranty, maintenance and repair services and safety-related inspections.
While sanctions applied to Iran were lessened on Implementation Day, exporters must attend carefully to the remaining US legal requirements as they work to "implement" actual sales or leases. Less clear is what Implementation Day means for US exporters. The relaxing of sanctions does not remove the need for export licenses and a great deal of uncertainty remains with respect to how the export control agencies, primarily the Commerce Department (EAR) and the Treasury Department, through OFAC, will implement the new authority. Evidence to date is that the agencies are moving slowly as they attempt to establish the boundaries of the types of transactions that will be permitted. For example, OFAC has spent months trying to decide what range of equipment will qualify for the "safety of flight" license authorizations that are now permitted.
Any US person wanting to engage in commercial aircraft sales or leases with Iran must first apply for a license from OFAC and provide all relevant details of the proposed transaction. Applicants should include details of: (i) all parties involved in the transaction; (ii) the intended end uses by the Iranian entity of the aircraft, part or service; (iii) any related transactions associated with the transaction, such as the provision of warranty, maintenance, repair services, inspections or training; and (iv) other information relevant to whether the license should be granted. OFAC will analyze each application and determine whether to grant a license on a case-by-case basis. OFAC is not expected to grant exporters blanket licenses to engage in multiple transactions.
This evolving posture, in turn, means that US exporters are moving more slowly than their less constrained European counterparts since the US exporters know neither what transactions will be approved nor what pre-transaction activities will be allowed without finding themselves accused of "facilitating" a prohibited transaction. The slow pace is reflected in the fact that, just last week, there was considerable news coverage over the mere announcement that Boeing has been approved to "engage" with Iranian airlines to "determine their actual fleet requirements."
It is important for potential exporters and team members, including lenders and lessors, to understand that the rules against "facilitating" an unlawful transaction remain in place. "Facilitation" liability can arise just from trying to do a deal, even if the deal never occurs. As noted in the recent news stories, Boeing found it necessary to seek a license merely to begin exploratory discussions about what Iran may need to buy. The conservative approach is to seek a license early in the process of seeking new business. Careful coordination with export compliance counsel is needed to assure that potential exporters are neither violating export control obligations as they pursue new projects nor wasting their time with infeasible projects that will not obtain timely regulatory approvals.
In the near term, secondary sanctions relief will be felt primarily by non-US persons across both aircraft and nonaircraft industries, including financial and banking services, insurance, energy and petrochemical sectors, shipping and shipbuilding sectors, port operators, gold and other precious metals businesses, and the automotive sector. In addition to lifting the secondary sanctions, the United States removed over 400 individuals and entities from the OFAC List of Specially Designated Nationals and Blocked Persons (SDN List), the Foreign Sanctions Evaders List (FSE List) and the Non-SDN Iran Sanctions Act List (NS-ISA List). As of Implementation Day, non-US persons are no longer subject to sanctions for conducting transactions with any of these individuals and entities, most notably the Central Bank of Iran and other specified Iranian financial institutions.
While the overall US domestic trade embargo on Iran still remains in place, thereby prohibiting US persons and entities from engaging in transactions or dealings with Iran, the United States has committed under the JCPOA to license three types of activities that would otherwise be prohibited. Accordingly, OFAC has issued the following:
- a Statement of Licensing Policy (SLP) for the case-by-case licensing of commercial passenger aircraft and related parts and services to Iran for exclusively commercial passenger aviation;
- a general license authorizing US-owned or -controlled foreign entities to engage in certain activities involving Iran; and
- a general license authorizing the importation into the United States of Iranian-origin carpets and foods.
The SLP establishes a favorable licensing policy regime through which US persons and, in some cases non-US persons, may request specific authorization to engage in transactions for the export, re-export, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran. Under the new licensing policy, wide-body, narrow-body, regional and commuter aircraft used for commercial passenger aviation are eligible for licensing approval. Cargo aircraft, state aircraft, unmanned aerial vehicles, military aircraft and aircraft used for general aviation or aerial work are specifically excluded. In addition, US persons are authorized to engage in transactions that are ordinarily incident to a licensed transaction and necessary to give effect thereto, including transportation, legal, insurance, shipping, delivery and financial payment services provided in connection with the licensed export transaction.
With the loosening of restrictions, the Iranian aircraft industry appears poised to become an active market for aircraft suppliers. According to recent news reports, Iranian transport minister Abbas Akhoundi recently stated that the country needed 500 aircraft and that Iran had entered into purchase agreements for 118 Airbus Jets and 20 ATR turboprops. The transport minister also said that the country only has 150 operational aircraft and that there are plans to form an aircraft leasing company in Iran.
Although the manufacturers and the Iranian government are taking the necessary steps to renew the country's museum-vintage fleet, they will undoubtedly encounter several political and financial hurdles. The main problem for aviation finance is that it is predominantly a dollar-dominated industry and current US sanctions ensure that no transactions in Iran can be dollar-denominated. Alongside the manufacturers and Iran itself, banks that mainly work in euros are likely to be the initial beneficiaries of the UN sanctions relief in Iran. With the dollar-account sanctions remaining in place and nervousness around US banks, aircraft financiers need to take extra care to avoid transacting in dollars.
With a lack of foreign investment and an aging fleet, the Iranian market for used aircraft and spare parts may seem attractive to foreign aviation companies. However, prospective sellers need to be aware that most aircraft have at least ten percent US content, so they will need to go through OFAC to approve any sales. This rule applies also to new aircraft—and OFAC has yet to approve the Airbus and ATR aircraft deals with Iran.
Even before considering remaining regulatory barriers, potential exporters need to consider the significant financial and logistical challenges associated with sales to Iran. To what extent will export credit guarantees again become available? What terms and conditions will lenders and lessors require? Is Iran already over-committing its available cash in light of low oil prices? Will necessary infrastructure rehabilitation and upgrade occur in a timely way? Lessors need to be cautious regarding various other risks to be encountered by lessors, such as a "snap back" in case the transaction becomes illegal.
The JCPOA has created this important carve-out: should the United States determine that aircraft, goods or services licensed to Iran under the new policy have been used for purposes other than commercial passenger aviation, or have been resold or retransferred to persons on the SDN List, it has the right to cancel the licensing policy. Other important issues to consider will be how to repossess the aircraft given the current lack of a defined legal framework on repossession rights. Initially, wet leasing aircraft may be preferable to dry leasing. The list of other issues which face lessors and financial institutions in conducting initial transactions with Iran are numerous and beyond the scope of this article.
Any US person found to be in violation of any OFAC sanctions, or to have provided false information in order to obtain a license to engage with Iranian entities for commercial aircraft, will continue to be subject to strict civil and criminal penalties.
Obviously, as this new market opens, potential entrants need to be careful. The SLP does not allow transactions simply to proceed without licenses. The most challenging issue for US persons might be determining the point at which a license application must be filed. OFAC guidance has been vague concerning when a violation is deemed to occur during the discussions phase. Companies will be compelled to consider how early they should file a license application in discussions with an Iranian counterpart to avoid an OFAC finding that the company has "facilitated" an unlicensed exchange of information.
Although the Iranian aircraft market appears to be poised for takeoff, interested exporters must remember to take adequate precautions. Those looking to take advantage of new opportunities to sell or lease commercial aircraft, parts or components to Iran should proceed carefully and ensure that their proposed transactions conform to OFAC's license requirements.