Changes to Iran Sanctions Regulations Means Good News for US Medical Device Manufacturers

OFAC Expands General Licenses to Export Medical Devices, and Associated Services, to Iran; OFAC Also Redefines “Iranian-Origin” Goods Eliminating Its Unintended Capture of Goods Just Passing Through Iranian Ports and Airports

On December 23, 2016 in pre-holiday spirit, the Treasury Department’s Office of Foreign Asset Control sent US medical device manufacturers and their overseas subsidiaries and affiliates a present last week in the form of a revised General License for medical devices to Iran. OFAC also issued general licenses that provide much greater flexibility for training on the devices, as well as maintenance and repair. The full Federal Register notice is available here. OFAC also narrowed the list of excluded agricultural products, authorizing exports of shrimp and shrimp eggs to Iran under the general license.
 
Exporters will need to review the new regulations carefully, first to see if their medical devices qualify for the new broader general license, but also to see if they can now support their products more fully in Iran. We discuss both of these major changes below.
 
A. Revised General License for Medical Devices to Iran
 
OFAC has provided a general license for the exportation or reexportation of certain listed medical devices to Iran, 31 C.F.R. § 560.530(a)(3), since October 22, 2012. On December 23, 2016, OFAC expanded the general license to authorize medical device manufacturers to export from the US to Iran all EAR99 medical devices, or to export from other countries to Iran non-US medical devices that would be EAR99 if they were in the US, provided the medical devices in question do not appear on a special exclusion list, the List of Medical Devices Requiring Specific Authorization (effective December 23, 2016).
 
Companies need to review the new exclusion list carefully: if their medical devices appear on that list, the general license is not available and they need to continue to apply for specific licenses.
 
The new general license works as follows:

• All EAR99 medical devices qualify for the general license unless they appear on the exclusion list.
• Most of the items on the exclusion list are described in technical terms that hopefully will be clear to medical device manufacturers. For example, the list includes the following items: oxygen generators, pumps with flow rates of more than 1 liter/minute, fermenters, bioreactors and chemostats, and autoclaves larger than 20 liters. 
• However, the exclusion list also contains a mysterious note excluding two other sets of items based on their status under the Export Administration Regulations  (the “EAR”), which we discuss in detail in the paragraphs below:
  • Items “within the scope of the Statement of Understanding - medical equipment at Supplement No. 3 to Part 774 of the Export Administration Regulations (EAR);” and
  • Items “excluded from an otherwise applicable Export Control Classification Number (ECCN) on the Commerce Control List of the EAR because it is medical equipment, or because it is designed or modified for medical equipment or medical purposes.”^[1]

The first set of EAR items excluded from the General License is medical equipment at Supplement No. 3 to Part 774 of the EAR. Supplement No. 3, medical equipment are “{c}ommodities that are ‘specially designed’ for medical end-use” that “incorporate commodities or software on the Commerce Control List (Supplement No. 1 to part 774 of the EAR) that do not have a reason for control of Nuclear Nonproliferation, Missile Technology, or Chemical & Biological Weapons are designated by the number EAR99 (i.e., are not elsewhere specified on the Commerce Control List).” More information on medical equipment at Supplement No. 3 to part 774 of the EAR is available here. 
 
If the first set of EAR items excluded from the General License is read literally, all medical equipment in Supp. 3 is excluded from the General License. This reading would mean that all EAR99 medical devices containing any part, component, or software on the CCL, even if that part is controlled for Anti-Terrorism reasons, would not qualify for the general license. Since large numbers of electronic parts of medical devices (such as ordinary microprocessors) may be AT-controlled, this exclusion, if intentional, would exclude most of the medical devices that OFAC just included in the General License. It would also be extremely difficult to manage, requiring medical device manufacturers to obtain the ECCNs of every part and component, no matter how minor.
 
We suspect that OFAC may not have meant this far-reaching of an exclusion and may intend to exclude just EAR99 medical devices that incorporate parts and components controlled for NP, MT, or CB reasons. We are clarifying this question with OFAC and BIS and will update this alert when we have received an answer.
 
The second set of EAR items excluded from the General License is medical equipment that is classified as EAR99 only because it is “medical equipment, or because it is designed or modified for medical equipment or medical purposes.” In other words, if your product would be a controlled laser under ECCN 6A005, but is excluded from that ECCN because there is a note in the ECCN excluding medical equipment, you still need an OFAC specific license to export to Iran. Manufacturers will need to dust off their BIS classification determinations (CCATS) and see if they relied on the “medical equipment” notes to reach the EAR99 classification. If they did, they cannot use the general license. One wonders if this exclusion may end up excluding some medical devices that actually qualified for the general license prior to the revision?
 
B. New General Licenses Provide Much Greater Flexibility for Medical Device Training and Maintenance/Repair
 
In addition to expanding the list of medical devices qualifying for the general license, OFAC’s recent changes provide greater flexibility for training on the devices, as well as maintenance and repair. These general licenses for training, services, replacement parts, software updates, and imports of broken items go a long way toward filling the significant holes in the prior general license: holes that forced many exporters to file for specific licenses, even when their products qualified for the general license.
 
New General License for Medicine and Medical Devices Training 
 
There is a new general license for “training necessary and ordinarily incident to the safe and effective use of medicine and medical devices exported or reexported pursuant to {the general license} to the Government of Iran, to any individual or entity in Iran, or to persons in a third country purchasing such goods specifically for resale to any of the foregoing.” The conditions of this general license are as follows:

• Payment terms and financing have to meet the standard requirements of 31 C.F.R. § 560.532;
• Any technology released in the training must be EAR99; and
• The training cannot be provided to any military, intelligence, or law enforcement entity, or any official or agent thereof. 

Expanded General License for Medical Device Replacement Parts
 
OFAC expanded the general license for replacement parts for medical devices exported under general or specific license. The conditions of this general license are as follows: 

• The replacement parts must be EAR99 (or if non-US origin, EAR99 if they were located in the US);
• The replacement parts must be exported to replace a broken or non-operational component of a medical device that was legally exported or the exportation or reexportation of such replacement parts is necessary and incident to the proper preventive maintenance of such medical device;
• The number of replacement parts stored in Iran cannot exceed the number of corresponding operational parts currently in use in relevant medical devices in Iran;
• The broken or non-operational replacement parts that are being replaced are promptly exported, reexported, or otherwise provided to a non-Iranian entity located outside of Iran selected by the replacement part supplier; and
• No replacement parts for medical devices may be provided to any military, intelligence, or law enforcement purchasers or importers.

New General License for Services and Software for Medical Devices and Replacement Parts

There is a new general license to export software necessary for the installation and operation of medical devices and replacement parts exported or reexported under general or specific licenses, and the conduct of related transactions. The conditions are as follows:

• The software must be EAR99 (or if non-US origin, EAR99 if it were located in the US);
• Payment terms and financing have to meet the standard requirements of 31 C.F.R. § 560.532;
• EAR99 software updates are also authorized provided they are “intended for and limited to the provision of safety and service updates and the correction of system or operational errors in medical devices, replacement parts or software that was previously exported;”
• Services “necessary to maintain and repair medical devices that previously were exported or reexported pursuant to this section including inspection, testing, calibration, or repair services to ensure patient safety or effective operation and the conduct of related transactions” are also authorized; and
• No software or services for medical devices may be provided to any military, intelligence, or law enforcement purchasers or importers. 

New General License for US Imports of US-origin Agricultural Products, Medicine, and Medical Devices
 
This new general license authorizes the import into the US of US-origin agricultural products, medicine, and medical devices, including parts, components, and accessories that were exported/reexported under OFAC authorizations and are broken, defective, or non-operational; or are connected to product recalls, adverse events, or other safety concerns, and the conduct of related transactions. Again, no imports are permitted from any Iranian military, intelligence, or law enforcement purchasers or importers.
 
C. Amended Definition of “Iranian-Origin Goods”
 
Finally, OFAC did the public service of amending the definition, contained in 31 C.F.R. § 560.306, of “Iranian-origin goods” to exclude two fact patterns that were likely never meant to be captured in the first place. The definition of Iranian-origin goods has traditionally contained not only: 1) Goods grown, produced, manufactured, extracted, or processed in Iran, as one would expect, but also (2) “Goods which have entered into Iranian commerce.” The latter category had the habit of catching some innocent passers-by of Iranian commerce.
 
OFAC has rectified this by adding a note clarifying that goods which have entered into Iranian commerce do not include:

• Those that were legally exported to Iran under an OFAC authorization, and now are located outside of Iran; and
• Those that passed through Iranian territorial waters or stopped at an Iranian port or airport en route to a destination outside of Iran, or even were temporarily offloaded from the vessel/aircraft and placed on another vessel/aircraft to leave Iran. This issue had been bedeviling exporters for some time and it is a pleasant surprise to see it resolved in time for 2017!

Arent Fox has significant experience in helping companies navigate and comply with US sanctions laws and export controls. If you have any questions regarding the above, please contact Kay Georgi, Regan Alberda, or Julia L. Diaz with Arent Fox’s International Trade practice.

^[1] For example, balancing machines as described in the note to ECCN 2B119.a; Motion simulators or rate tables as described in the notes to ECCNs 2B120 and 2B121; and accelerators as described in the notes to ECCNs 3A101.b and 3A201.c.