Update on New OFAC General License for
Temporary Sojourns of Aircraft to Iran
ABA Aircraft Finance Subcommittee
Annual Meeting, Boston
September 8, 2016
Jonathan Epstein
Holland & Knight LLP
1.202.828.1870 | [email protected]
Copyright © 2016 Holland & Knight LLP All Rights Reserved
What Is General License “J” and What Is Its Effect?
• On July 29, 2016, the U.S. Treasury Department’s Office of Foreign
Assets Control (“OFAC”) issued General License J (“GL-J”)
• What is a “General License”
• GL-J affects the “hardware”
– Allows third-country airline to fly aircraft subject to U.S. jurisdiction to Iran
• GL-J does not affect U.S. lessors directly (i.e., does not affect the U.S.
person)
– Does NOT address whether a U.S. lessor can “facilitate” such flights
– Does NOT remove requirement for an OFAC specific license for sale or wet lease
of aircraft to Iranian airlines
• Net effect of GL-J
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Background
• U.S. asserts export control jurisdiction over virtually all modern
commercial aircraft under the Export Administration Regulations
(“EAR”) and/or under sanctions laws
– Includes foreign-manufactured aircraft that contain 10% or more U.S. content by
value or certain controlled inertial systems
– Civil aircraft, engines and parts are controlled on the Commerce Control List
• Hence a BA flight from London to Paris would be a temporary reexport
of the aircraft by BA
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Temporary Sojourns Under the EAR
• The EAR has a “temporary sojourn” exception (AVS) that generally
allows a third-country airline to fly to countries where a license would
otherwise be required
– This AVS exception applies to flights to Cuba, Syria, Sudan, and North Korea
– For quirky statutory reasons there is no “temporary sojourn” exception for Iran
– As a practical matter, U.S. aggressively enforced laws with respect to reexports of
U.S. aircraft on a wet lease/dry lease sale basis; but not for such temporary
sojourns by non-U.S. airlines
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New Relaxations of Sanctions Against Iran
• In January 2016 the nuclear accord called the Joint Comprehensive
Plan of Action (“JCPOA”) was implemented
• OFAC issued General License “H”
– Allows foreign subsidiaries of U.S. companies to engage in most transactions with
Iran and allows U.S. parent companies to implement policy changes/procedures to
allow such activity by such foreign subsidiaries
– Does not allow U.S. parent to “facilitate” specific transactions by foreign subsidiary
or U.S. dollar transactions
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OFAC Statement of Licensing Policy (“SLP”)
• OFAC issued a statement of Licensing Policy creating a favorable
licensing policy for the sale or lease of civil passenger aircraft to most
(but not all) Iranian airlines
– Parties still need to apply for a specific OFAC license
– In March 2016 OFAC Issued General License H (“GL-I”) to allow U.S. persons to
enter into “executory contracts” to sell or lease to Iranian airlines, subject to receipt
of specific license
– OFAC flooded with license applications including those to authorize “temporary
sojourns” to Iran
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OFAC General License “J”
• On July 29, 2016, OFAC issued GL “J”
• Why was it issued?
• Who does it cover?
– Non-U.S. Persons (e.g., foreign airlines) (not U.S. persons)
• What does it cover?
– Both passenger and cargo civil aircraft subject to the EAR
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General License “J”
• Limitations are similar to “temporary sojourn” exception under EAR
– The Third-country airline must:
• Retain operational control of aircraft (e.g., right to hire/fire crew, perform maintenance)
• Retain commercial control (e.g., right to dispatch/determine routes. Aircraft cannot fly on
Iranian air carrier flight number)
– Aircraft cannot remain in Iran more than 72 hours
– Except for emergencies, maintenance cannot be performed in Iran
• Does allow for reexport of some parts for repair (but not storage in Iran)
• Implications for a non-U.S. airline:
– This clearly covers most regularly scheduled flights to Iran
– This would not cover wet lease/dry lease to an Iranian air carrier
– Might cover some charter/inter-carrier agreements with Iranian air carriers
• Does not address the issue of U.S. Persons
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How Does GL-J Affect Aircraft Lessors?
• Legal and practical analysis is best understood in the context of a
hypothetical
– Turk Airline has leased an aircraft from ABC Ireland Leasing Ltd (“ABC Ireland”)
• ABC Ireland is also the servicer
• Lease expressly prohibits flights to Iran
– ABC Ireland is a subsidiary of ABC USA Leasing Corp. (“ABC USA”)
• ABC legal/contracts team is generally responsible for negotiating leases and approving
waivers to lease
– Turk Airline requests consent of ABC Ireland to fly temporary sojourns to Iran
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Analysis of Hypothetical
• Turk Airlines can now lawfully fly to Iran under GL-J
• ABC Ireland can consent to such flights
– It is generally authorized under GL-H to engage in lawful transactions related to Iran
• ABC USA is a “U.S. Person”:
– It cannot consent to waive a lease provision or assist in such waiver because that
would be “facilitating” a specific transaction with Iran
– It can under GL-H:
• Make a general change to its policies and procedures to allow ABC Ireland to act
independently generally with respect to Iran
• Allow certain automated systems to be used by ABC Ireland
• Have knowledge that ABC Ireland is consenting
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Common Real Work Complications to the Scenario
• What if there are U.S. citizens/residents working for ABC Ireland?
– Under GL-H, ABC USA can enact policies including recusal policies for such U.S.
citizens/residents
• What if the lessor, servicer, or owner trustee is a U.S. entity?
– These U.S. Persons cannot consent to waiver or expressly authorize a Turk Air to
fly to Iran
• What if the lease language is ambiguous?
“Lessee shall not operate the aircraft in any manner that
would cause lessee or lessor to be in breach of
Sanctions Laws”
̶ Can a U.S. person indicate that such operations would not breach the lease?
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What If the Lessor Is a U.S. Person?
• Would a U.S. lessor by not expressly prohibiting a foreign lessee from
flying to Iran be deemed to “facilitate” such flight?
– Will OFAC address this issue?
– What kind of “off the record” guidance has OFAC given in such circumstances?
– What if the lease term allows lessee to fly anywhere in the world provided such
flights are lawful?
• At the time the lease is entered into the lessee does not operate predominantly or
exclusively to U.S. sanctioned countries
• The aircraft is not in fact operated exclusively or predominantly to U.S. sanctioned
countries
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Additional Legal/Practical Issues
• Would this same analysis apply to “temporary sojourns” to other
sanctioned countries? (i.e., Cuba, Syria, Sudan, and North Korea)
• What if rent is paid in U.S. dollars?
– Can a U.S. bank process such transaction?
– Will a U.S. bank process such transaction for an aircraft on routes to Iran?
• Does insurance (including contingent cover that may be carried by
lessor) cover such flights?
• What if the U.S. lessor is (or is an affiliate of) a U.S. publically traded
company? Does this trigger reporting requirements?
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What Are the Practical Considerations?
• Lessor’s financing arrangements may have restrictions that prohibit
operations to Iran
– Raises larger concern of banking industry general view toward doing business with
Iran
• What are the practical risks of lessee operating to Iran (expropriation,
repossession in Iran)
• What are the risks of “snap back” of sanctions?
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Conclusion
• General License “J” helps clarify one major issue that has long plagued
the aviation industry
• However, it does not answer the “facilitation” issue
• What can the industry do to obtain better guidance?
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