July 18, 2016 | Monograph

Flying Above the Radar

Sanctions Evasion in the Iranian Aviation Sector

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With the implementation of the Joint Comprehensive Plan of Action (JCPOA) in January 2016, most international sanctions against Iran have been lifted. These include long-standing U.S. sanctions against Iran’s aviation sector. The United States has removed all but four Iranian civilian airlines – Caspian Airlines, Mahan Air, Meraj Air, and Pouya Air – from its sanctions lists. Companies can now sell planes, spare parts, and services to most of the aviation industry, and financial institutions can provide financial services.

Aviation sanctions against Iran have no historical precedent. No country has faced a complete prohibition of sales of aircraft and spare parts and the provision of maintenance and ground services. After 37 years of broad U.S. sanctions against Iran and 20 years of sanctions specifically targeting the aviation sector, Iran’s airline industry was undeniably hobbled. Yet, the country’s aviation industry has experienced a steady addition of new airlines, including numerous private ones, since the 1990s.

Sanctions evasion is now no longer necessary. In the past few months, Iran has signed multi-billion dollar deals with the world’s two largest aircraft manufacturers – Airbus and Boeing – for a reported 218 combined planes.  It signed another deal for 40 regional aircraft with the Italian-French joint venture ATR,  and is rumored to be negotiating more acquisitions with Canada’s Bombardier and Brazil’s Embraer.  The list could grow further: Iran’s transportation minister announced that the country is looking to buy as many as 400-500 aircraft in the next decade to rejuvenate the country’s aging fleet.

A closer look at the body of laws that restricted Iran’s aviation sector and their impact over the years offers important lessons on the effectiveness of sector-based sanctions. Other important lessons can be drawn from Iran’s sanctions evasion, including Mahan Air’s May 2015 acquisition of nine planes. This study will provide policymakers, law enforcement agencies, and private sector compliance professionals unique insights into this cycle of sanctions and sanctions evasion. The goal is to draw lessons for future sanctions regimes, not to mention due diligence protocols.

Iran under Sanctions for Almost Four Decades

Iran has been subject to U.S. sanctions nearly continuously since the Iranian Revolution of 1979. While initial sanctions were not directly aimed at the aviation sector, broadly crafted sanctions affected Iran’s ability to access goods and services for this industry.  President Jimmy Carter first imposed sanctions freezing the assets of the Government of Iran ten days after the seizure of the American embassy in Tehran.  Over the next year, Carter expanded sanctions to include, inter alia, the prohibitions on the export of any U.S.-origin goods (with certain humanitarian exceptions) including those for Iran’s aviation sector.

These prohibitions were revoked in 1981 following the resolution of the Iranian hostage crisis.  But after a series of terrorist attacks by Iranian-backed groups and the 1983 bombing of the U.S. Marine barracks in Beirut, President Ronald Reagan designated Iran as a state sponsor of terrorism in January 1984.  This designation imposed sanctions under the Export Administration Act, the Arms Export Control Act, and the Foreign Assistance Act, which together prohibit the export of military goods, restrict exports of certain dual-use items, and prohibit U.S. foreign assistance. Controlled dual-use goods include those related to Navigation and Avionics, and Aerospace and Propulsion.  Additionally, certain aircraft parts applicable to both commercial and military aircraft were also restricted under the U.S. Munitions List.

The rules governing the export and re-export of all U.S.-origin goods are set out in the Export Administration Regulations (EAR).  “Re-export” is the secondary sale of a good from one foreign country to another after it has already been exported from the United States.  The EAR also requires foreign companies to receive export licenses if their goods contain a de minimis level of U.S.-made component parts depending on the type of good, the use, and the end-user.

During the 1980s and early 1990s, licenses for the direct export of U.S.-origin goods to Iran were generally denied, but the bans on re-exports to Iran and the sale of foreign goods with U.S. component parts contained several exceptions,  including for certain navigation and aircraft parts.  The exceptions also allowed foreign companies to re-export navigation and aircraft parts without a license, and to sell these products to Iran without a license even if they contained U.S.-origin component parts.

In the 1990s, amidst continued Iranian malign behavior, the United States began significantly expanding sanctions against the Islamic Republic. Among other measures, President Clinton issued Executive Order 13059 in 1999 prohibiting the export or re-export of all U.S.-origin goods to Iran  and removing the navigation and aviation-related licensing exceptions, thus requiring export licenses for all sales to Iran’s aviation industry.