January 19, 2016

Implementation of Iran Accord Potentially Big News for the Commercial Aviation Industry

Holland & Knight Aviation Law Blog
Jonathan M. Epstein

On January 16, 2016, many months ahead of predictions, Iran satisfied the conditions of the Accord reached in July 2015 (see our August blog post) to reduce its nuclear capabilities, and therefore the removal or waiver of sanctions by the United Nations (U.N.), United States and European Union, (EU) has come into effect.

While U.S. companies are still prohibited from engaging in most transactions with Iran, many of the "secondary sanctions" restricting third-country entities, as well as restrictions on foreign subsidiaries of U.S. companies, have been removed. Now, however, under a new U.S. Treasury Department Office of Foreign Assets Control (OFAC) licensing policy, the sale or lease of civil passenger aircraft to most Iranian airlines is allowable (subject to receipt of an appropriate license), whether the seller/lessor is organized in the U.S. or abroad.  

What Does JCPOA Implementation Mean?  

Last summer, the United States, France, China, Russia, the United Kingdom, Germany and the EU entered into the Joint Comprehensive Plan of Action (the "Accord" or "JCPOA") with Iran. The U.N., EU, and U.S. agreed to remove or rollback certain economic sanctions effective upon confirmation of the International Atomic Energy Agency (IAEA) that Iran had taken the agreed steps to reduce its nuclear capabilities.  This step has now occurred and on January 16, 2016, the U.S. government issued/implemented a complex set of waivers, executive orders, and general licenses to implement the JCPOA.

What are the Restrictions on Sale/Lease of Aircraft to Iran? 

As agreed in the Accord, OFAC has issued a licensing policy that it would favorably consider the export, re-export, sale or lease of commercial passenger aircraft to Iran for civil aviation end use (e.g., to most Iranian airlines including Iran Air). In addition, the U.S. government will license associated services such as warranty, maintenance, and repair services, and safety-related inspections of such aircraft. We note the following points:

  • OFAC has clarified that this policy would include wide-body, narrow-body, regional, and commuter aircraft used for commercial passenger aviation, but would exclude cargo, general aviation, and military aircraft as well as unmanned aerial vehicles.
  • Effective January 16, 2016, Iran Air and a number of other Iranian airlines were removed from the Specially Designated Nationals (SDN) list. However, some airlines remain on either the OFAC or corresponding U.S. Department of Commerce Bureau of Industry & Security (BIS) Entity List or Denied Persons List and thus will generally not be affected by this favorable licensing policy.

How Does this Action Affect Non-U.S. Companies? 

The U.S. asserts export jurisdiction over virtually all modern commercial aircraft regardless of country of manufacture because of the U.S.-origin content in such aircraft, and regardless of where such aircraft is located or who owns it. Hence, a third-country seller/lessor would need an OFAC license to sell or lease most aircraft to an Iranian airline. Similarly, a license would be needed for a foreign airline to wet lease to an Iranian carrier (an issue not specifically addressed in the guidance).

Can We Negotiate with Iranian Airlines?

U.S. persons are not prohibited from traveling to Iran (and engaging in transactions incidental to such travel), and are able to negotiate for the sale or lease of aircraft to Iranian airlines not designated as SDNs. While OFAC has not yet issued guidance specifically allowing U.S. persons to negotiate and enter to into contracts, contingent on receipt of a U.S. license, we do not see any prohibition of such actions. We expect OFAC to clarify and condone such actions, provided the activity is within the scope of the licensing policy.

Other Considerations? 

There are a number of risks/unknowns, including:

  • There is a risk that the U.S. could "snap back" sanctions at any time.
  • Every party involved in the transaction should be vetted against the OFAC SDN and BIS Entity List and Denied Persons List.
  • Iran is not a signatory to the Cape Town Convention and the legal environment in Iran may create additional risks for lease transactions.
  • Iran is a high-risk country both for corruption and money-laundering, hence additional diligence on any transaction is warranted.
  • Dealings with Iran may create reporting obligations for U.S. public companies.
  • Given that Iran has been more or less off limits for so many years, the various business partners necessary for complex transactions may each take a different view of compliance/risk concerns.

For additional information on this topic, please contact Jonathan Epstein (jonathan.epstein@hklaw.com).

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