419. How should U.S. persons account for the debt prohibitions under Directives 1, 2, and 3 as they relate to payment terms for the following types of transactions: (1) the sale of goods to an SSI entity, (2) the provision of services to and subscription arrangements involving SSI entities, and (3) progress payments for long-term projects?
U.S. persons may engage in commercial transactions with SSI entities provided that any such transactions do not represent a direct or indirect dealing in prohibited debt or equity. Because offering payment terms of longer than the applicable tenor specified in the relevant Directive to an SSI entity generally constitutes a prohibited dealing in debt of the SSI entity, U.S. persons should ensure that payment terms conform with the applicable debt prohibitions.
For sales of goods to an SSI entity, U.S. persons may extend payment terms of up to the applicable tenor specified in the relevant Directive from the point at which title or ownership of the goods transfers to the SSI entity. For example, for a Directive 1 SSI entity, if the title or ownership of the goods transfers to the SSI entity on December 1, 2017, the U.S. person may give the SSI entity 14 days from December 1 to pay for those goods.
For the provision of services to, subscription arrangements involving, and progress payments for long-term projects involving SSI entities, U.S. persons may extend payment terms of up to the applicable tenor specified in the relevant Directive from the point at which a final invoice (or each final invoice) is issued. Payments made under these types of payment terms should utilize a value date of not later than the applicable tenor specified in the relevant Directive from either the point at which title or ownership has transferred (for payments relating to sales of goods) or the date of each final invoice (for payments relating to services, subscription arrangements, and progress payments). For example, if a U.S. person is providing services for a long-term project involving a Directive 2 SSI entity, and a final invoice is dated December 1, then the SSI entity must pay the invoice within 60 days of December 1 (i.e. the value date of the payment should be not later than 60 days from December 1).
In the event that a U.S. person believes that it may not receive payment in full by the end of the relevant payment period, the U.S. person should contact OFAC to determine whether a license or other authorization is required. [11-28-2017]
1) Refer to Haverly Systems, Inc. (2019); an enforcement action against a common seller of software for receiving payment from a Directive 2 SSI entity in connection with an invoice constituting "new debt."
2) Note that OFAC specifies that "offering payment terms of longer than the applicable tenor specified in the relevant Directive to an SSI entity generally constitutes a prohibited dealing in debt of the SSI entity," suggesting that offering a 90 day payment term for an SSI entity subject to a 60 day restriction is prohibited even if the payment is made within 30 days.
3) Compare FAQ 410. OFAC makes certain exceptions to the principle applied in the deferred purchase agreement context, in which OFAC starts the clock on the day that the obligation to purchase an asset is entered into.
4) The treatment of long-term projects as having a clock starting from the date of a "final invoice" (term of art) is presumably based on an assumption that the final invoice will be issued within a period of time following the completion of the project that is consistent with the practice of whatever the industry at issue may be. Obviously OFAC would not permit the completion of a project, and subsequent stalling on sending a final invoice to create more time for which the SSI has to pay the invoice. By the same token, it is unlikely that OFAC would accept, in the situation of a sale of goods, an invoice being sent with significant delay following the actual transfer of title or ownership of the good, particularly if doing so is not consistent with industry practice.
* See generally General Note on the Prohibitions on Dealings in “New Debt” of Certain Sanctions Targets (System Ed. Note)