In a Belt and Road project recently handled by the authors, the Iranian geopolitical environment and foreign investment environment were found to be very complex, making foreign investment quite risky. According to statistics, close to 100 Chinese enterprises are presently active in numerous sectors in Iran, including infrastructure, energy, electric power, chemicals, telecommunications, automotive manufacturing, etc. Instances where projects are affected by factors relating to the sanctions on Iran frequently arise. There additionally are projects that are not Iran projects per se, but because they involve such factors as Iranian shareholders, due diligence relating to US sanctions on Iran must be added.
On 8 May 2018, US president Trump announced that the US was withdrawing from the Joint Comprehensive Plan of Action (JCPOA). Pursuant to the president’s order, in different industries and sectors, sanctions on Iran will fully resume after a transition period of 90 or 180 days. Although the UK, France, Germany, China, Russia and the European Union have not followed the US in withdrawing from the JCPOA, due to the US’s massive influence on the international economic and financial systems, the uncertainty in Iran’s foreign investment environment has clearly increased.
The US’s sanctions on Iran may be divided into two types, direct jurisdiction and indirect jurisdiction.
Direct jurisdiction. Pursuant to the Iranian Transactions and Sanctions Regulations, any individual or entity that satisfies the requirements for being a “United States person” is directly subject to the US Treasury’s Office of Foreign Assets Control (OFAC). The following three types of subjects are deemed “United States persons”: (1) a United States citizen, permanent resident alien or entity organized under the laws of the United States (including subsidiaries and offices registered in the United States); (2) a third country enterprise owned or controlled by a US individual or entity; and (3) an individual or enterprise that is located in the United States at the time that he or it conducts a prohibited transaction.
Furthermore, pursuant to the International Emergency Economic Powers Act, if the transaction engaged in by a Chinese enterprise has any of the following “US elements”, it may also be directly subject to OFAC: (1) if, in a transaction between the Chinese enterprise and Iran, such transaction is facilitated, approved or guaranteed by or through a US individual or entity without permission, the Chinese enterprise could be subject to penalties; (2) if a relevant transaction between the Chinese enterprise and Iran uses services of the US financial system, the transaction will be subject to OFAC, and both the Chinese enterprise that conducted the transaction and the Chinese financial institution that assisted it could face penalties; and (3) pursuant to the Iranian Transactions and Sanctions Regulations, an individual or enterprise from a third country may not re-export goods, technology or services imported from the US to any Iranian entity or individual.
Indirect jurisdiction. Pursuant to such laws and regulations as the Iranian Sanctions Act, the Iran Freedom and Counter-Proliferation Act, etc., OFAC may still impose indirect sanctions against a Chinese enterprise that conducts certain transactions even if such enterprise is not a “United States person” and the relevant activities do not have a US element. It mainly targets certain industries (gold, petroleum, energy, ports, etc.) and certain specific Iranian individuals and entities. After the transition period for withdrawing from the JCPOA, the US will resume the sanctions on the individuals and entities that were on the original sanctions list before the JCPOA.
For the purposes of countering the risks that the US’s Iranian sanctions policies may pose for Chinese enterprises, the authors provide the following recommendations based on their experiences in relevant projects that they are currently handling:
Firstly, before a Chinese enterprise makes a direct investment in Iran, it needs, in addition to conducting due diligence on Iran’s investment environment and the legal issues relating to the project itself, engage a professional lawyer expert in sanctions law issues to conduct in depth legal due diligence on the impact that the US and EU sanctions on Iran could have on the Chinese investor.
Based on our experience, even in investment projects in many other countries (e.g., certain African countries), as long as there is an Iranian investor participating or the target company to be acquired has an Iranian shareholder, the Chinese enterprise needs to engage a professional lawyer to conduct due diligence on the impact that the US and EU sanctions on Iran could have on the Chinese investor before making its investment decision, so as to be able to take the necessary precautions when designing the transaction structure and, based on relevant requirements, make the relevant arrangements in terms of corporate governance matters, such as decision-making, distribution of dividends, etc.
Secondly, given the complexity of the legal issues relating to the US sanctions against Iran and the wide discretion that US law enforcement authorities enjoy with respect to relevant sanctions regulations, we would recommend that a Chinese enterprise engage, with the assistance of a Chinese lawyer, a US lawyer with expertise in international sanctions to provide advice and recommendations, actively establish contacts with relevant US law enforcement authorities, such as OFAC, timely disclose information, maintain open and smooth communications and secure the advance written confirmation of OFAC when there is uncertainty as to whether a transaction falls within the scope of its jurisdiction.
Lastly, as the liquidity of deposits is key to controlling the risks of investing in Iran, we would recommend that a Chinese enterprise attach great importance to the design of the path which the investment funds are to follow into and out of Iran. In the course of designing such a path, the use of the US’s financial service system and elements in any manner should be avoided so as to prevent the US’s relevant sanctions regulations having a long-arm jurisdiction effect on the Chinese enterprise.