There is an important export market for U.S. medical devices that manufacturers may not know about: Iran. Despite the imposition of strict economic sanctions that generally block all U.S. exports to Iran, U.S. law specifically permits companies to obtain licenses from the U.S. government to export medicine and medical devices to Iran. As a result of this statutory allowance, many medical products are widely available and legally sold in Iran today.
Iran, with a population of more than 71 million, is a significant market for medical devices. Imported medical devices account for at least 95% of its market, and in 2006, Iran’s medical device imports were valued at $311.4 million. This figure is expected to rise to $422 million by 2013. Accordingly, U.S. manufacturers and exporters of these products should familiarize themselves with the regulations governing exports to Iran, both to take advantage of U.S. law and to provide needed medical products to this large and growing market. This article explains the details of the export program, describing which transactions are allowed, the requirements for lawful contracts, the financing options available, and the details of the licensing process. It also identifies common pitfalls and transactions that are not permitted by the program.
An Exception to the Rule
Since 1995, U.S. law has prohibited the exportation of U.S. goods, services, and technology to Iran. U.S. companies also may not export items to third countries if they know (or have reason to know) that the items will subsequently be transferred to Iran, or incorporated into items transferred to Iran. However, in 2000, Congress enacted an exception to these general rules for medicine and medical devices. The Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) required the U.S. government to terminate all unilateral trade sanctions that restrict exports of medicine and certain medical devices, which presents a valuable opportunity for U.S. device companies.
This statutory exception also permits exports to third countries such as the United Arab Emirates (UAE) that are specifically intended for resale to Iran. Under the licensing process described in this article, U.S. companies may ship products to Iran through third countries such as the UAE, or export medical devices to international distributors, knowing that some devices will be resold to Iran.
All medical device exports to Iran are subject to a licensing requirement, i.e., exporters must receive a license before legally shipping medical devices there. This export program, as well as all economic sanctions more generally, is administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). OFAC’s practice in granting these licenses has been quite favorable. In fact, in the first two quarters of 2009, OFAC received more than 400 applications to export medical devices to Iran, and only denied four applications. Bear in mind, however, that the processing time for license applications has recently been about two to four months.
Scope of Export Licenses
TSRA and OFAC’s implementing regulations cover medical devices as defined in section 201 of the Federal Food, Drug, and Cosmetic Act:
an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them; intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or intended to affect the structure or any function of the body of man or other animals; and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.
A critical requirement for covered medical devices is that they must not appear on the Commerce Control List (CCL) in the Export Administration Regulations (EAR). The EAR are the principal U.S. export control rules for commercial items, administered by the U.S. Commerce Department’s Bureau of Industry and Security (BIS). The CCL is a list of specific goods, software, and technology that require licenses for export to certain countries and end-users or for certain end uses (see the sidebar, "Online Resources for Exports"). Any item not specifically listed on the CCL is considered “EAR99,” a classification given to nonsensitive items that do not generally require an export license. (Keep in mind, however, that the separate sanctions programs enforced by OFAC require licenses to export almost all items to countries such as Iran, even for EAR99 items.) Although most medical devices are classified as EAR99, some devices—including devices and parts related to vaccines and biological and chemical products—are not eligible for export under the TSRA program.
The statute that authorizes exports of U.S. medical devices to Iran also requires that all such exports be subject to one-year licenses issued by OFAC. In particular, a license issued by OFAC typically covers contracts entered into during the one-year period beginning on the date the license is issued. Then, the products may be shipped within a one-year period beginning on the date the contract is signed. So a license may, in theory, provide coverage for two years of shipments. For example, if a license were issued on January 1, 2010, it would authorize sales contracts made throughout 2010, and shipments made pursuant to a contract signed on December 31, 2010 may continue throughout 2011. Although a one-year license period is brief, it is relatively simple to renew a license once a company has prepared the initial application package. The renewal process is the same as the original application process, and companies may submit a new application every year (if needed) several months prior to the expiration of the current license.
Device firms may also enter into contracts for the export of medical devices prior to issuance of a license, as long as the contract expressly provides that performance under the contract is contingent upon receipt of an OFAC license. These so-called executory contracts are deemed to have been signed on the date of the license’s issuance, thereby permitting shipments under that contract during the next year. Also, while OFAC’s regulations do not specifically address which shipments are subject to the one-year period, it is a reasonable interpretation that this requirement applies only to the initial export from the United States. A distributor or intermediate consignee may ultimately ship the device to Iran after the one-year period.
In addition to the export of the actual medical device, OFAC’s regulations also authorize all transactions “ordinarily incident to a licensed transaction and necessary to give effect thereto.” This provision covers basic transactions that are reasonably required to complete the export transactions, including arranging transportation, insurance, and financing. It could also include the provision of basic operating manuals and other information required to install and safely operate the medical device. However, this provision does not extend to transactions or exports that are not strictly necessary to effect the particular sale and delivery. For example, it would not authorize service and repair, ongoing customer support, or the provision of training or other engineering information. To provide these or other enhanced services, a company must request specific authorization from OFAC, either in the original or a subsequent license application.
In fact, OFAC regulations (and export licenses) prohibit the export of technology or software used to design, develop, or produce medical devices. Therefore, while there is room for interpretation of what constitutes a transaction “ordinarily incident” to the licensed export, exporters may not provide production or engineering technology. In terms of technology and technical data, companies may only export basic information for installation, operation, and troubleshooting.
OFAC has recently issued guidance on when the export of replacement parts for medical devices is automatically authorized as a transaction “ordinarily incident” to the original licensed export. Replacement parts are covered under the original one-year license as long as they are separately classified as EAR99 and are shipped within the validity period of the original license. As described later, exporters may need to obtain a classification ruling from BIS to confirm an item’s EAR99 classification. To ship replacement parts, those parts must have separate classifications. Exporters may not rely on an EAR99 classification issued for the medical device as a whole. If replacement parts are needed after the original license has expired (i.e., the license under which the actual device was shipped), the exporter must submit an additional license application to export the replacement parts. Moreover, if a device exported under this program must be reimported into the United States for repair, the exporter must apply for a separate license. Both of these license applications should include a copy of the original application and license. Also, an import application should describe the circumstances under which the device came to need repair, and explain what repairs will be done.
Applying for a License
Exporters must first obtain a license before shipping any products destined for Iran. OFAC’s regulations outline set forth specific application procedures for export licenses under this program. Manufacturers should review their applications carefully because incomplete applications are returned without action. An application package must include the following elements:
? The applicant’s legal name, state of incorporation, and contact information.
? Names and contact information for all parties with an interest in the transaction, including financial institutions, distributors, brokers, purchasing agents, and end-users. If the device is exported to a purchasing agent in Iran, the applicant must identify the agent’s principals at the wholesale level for whom the purchase is being made. If the device is sold to an individual, the applicant must identify any organizations with which that individual is affiliated that have an interest in the transaction.
? A description of all products to be exported under the license, their intended end use, and an explanation of how the products meet the definition of a medical device.
? Documentation showing that the products are all classified as EAR99. Numerous devices have already been classified as such (see the sidebar). For devices not on this list, the applicant must first receive an official EAR99 classification ruling from BIS. This is a separate application made with a different agency, and it should be prepared by export compliance personnel or a lawyer. A commodity classification request may require a month to process, so firms should consider the need for an EAR99 classification ruling at the beginning of the export license process.
Note that companies may only apply for an export license (and a classification ruling) for individual products, not an entire product catalog. However, companies may group together categories of products that are generically similar and consider them one product. For example, if 100 stainless-steel orthopedic screws in a particular product line all have the same composition and function and only vary in slight dimensions, these parts may be considered one product. Companies should also request an EAR99 classification ruling for all parts and subassemblies that may need to be exported separately from the complete device.
Finally, applicants must ensure that no party identified in the application is a restricted party and that the exported products are not intended for any restricted end use. OFAC maintains a list of persons and entities with whom U.S. persons may not transact any business called the Specially Designated Nationals (SDN) List. Prior to submitting a license application, applicants must determine whether any party involved in any stage of the transaction appears on the SDN list—
including financial institutions. There are many Iranian SDNs, including many of the major Iranian banks. If an SDN is possibly involved, the transaction must be restructured so that no SDN is involved. Also, a company may not export a medical device if it knows (or has reason to know) that the device will be used for a restricted end use, such as the development of chemical or biological weapons.
Financing of Exports
U.S. law is also very specific about the types of funding permitted for export to Iran. The following three payment arrangements are generally authorized:
? Payment of cash in advance.
? Sales on open account, provided that the account receivable may not be transferred by the person extending the credit.
? Financing by financial institutions in third countries.
Although some European banks are reluctant to finance transactions with Iran (often under U.S. pressure), banks in the UAE and third countries routinely finance trade with Iran through letters of credit. Also, U.S. banks may confirm or advise financing by third-country financial institutions. In addition to these three options, OFAC may authorize alternative payment arrangements on a case-by-case basis if a license application includes such a request. However, it is unlikely that OFAC would authorize direct financing by a U.S. or Iranian bank. Finally, a commercial export to Iran under this program may not be made with U.S. government assistance.
Companies should be careful not to overlook applicable export exceptions and consequently forego valuable business opportunities. Exporting medical devices to Iran is one of these opportunities. U.S. companies can legally export medical devices to Iran and take advantage of a significant market if they are aware of this program and comply with the requirements.
Michael Gershberg is an associate at Steptoe & Johnson LLP (Washington, DC).