On 16 January 2016, Implementation Day arrived, and with it came the much anticipated lifting of key economic and financial sanctions imposed against Iran by the United Nations (UN), European Union (EU), and the United States (U.S.).
While the lifting of these sanctions may create significant investment and business opportunities, it does not remove the difficult compliance, due diligence and logistical challenges for persons seeking to do business in Iran. Significant U.S. restrictions remain in place, and some limited EU restrictions still apply, though a significant number are lifted. Importantly, the U.S.’ primary embargo against Iran, as well as secondary sanctions related to Iran’s ballistic weapons program, human rights abuses, and the Iranian Revolutionary Guard Corps (the IRGC) remain in place, and non-U.S. persons could still be caught by these restrictions. For the EU, the existing sanctions relating to human rights, terrorism, and other concerns remain in place as do restrictions in relation to certain arms, nuclear-related, metals, and software activity. There remain a number of Iranian persons and entities subject to EU asset freezes and travel bans.
The Joint Comprehensive Plan of Action (JCPOA) was the agreement reached by the P5+1 (also known as the E3+3 or E3/EU+3) in Vienna on 14 July 2015. The JCPOA required Iran to implement measures designed to reduce the timeframe in which Iran was predicted to be able to produce a nuclear weapon. Iran implemented the last of the required measures (removing the core of its Arak heavy water nuclear reactor and filling it with cement) shortly before Implementation Day was announced. The International Atomic Energy Agency (IAEA) verified Iran’s fulfillment of these nuclear-related commitments on 16 January, thereby triggering the UN', the EU’s, and the U.S.’ obligations to lift the economic and financial sanctions against Iran as detailed in the JCPOA.
As a preliminary point, the temporary suspension of a small number of sanctions, first put into place pursuant to the Joint Plan of Action in November of 2013, in both the EU and U.S., ended on Implementation Day, as it is subsumed by the relief granted under the JCPOA.
Compliance under the new framework
While the lifting of sanctions will, in the medium term, result in the opening-up of the Iranian market, challenges remain for those who wish to do business in or with Iran.
For non-U.S. persons, this is particularly the case given the now greater disparity between EU and U.S. sanctions on Iran, and the continuing potential extra-territorial reach of U.S. sanctions. Key issues expected to arise for businesses seeking to play a part in returning Iran to the world economy will include:
- understanding the layers of relevant state and multinational/international sanctions legislation applicable to each proposed transaction;
- establishing robust due diligence procedures for this market;
- understanding the beneficial ownership of Iranian counterparties;
- understanding and taking account of bribery, corruption and other risks relating to Iran; and
- providing for protections should the ‘snap-back’ (re-imposition) of sanctions occur on JCPOA breach, as provided for by the JCPOA.
The creation of some avenues for business means a more nuanced approach to compliance is required for those who do wish to expand into Iran. This means increased due diligence will be required to see if parties involved in transactions are designated pursuant to one of the remaining Iranian programs or are IRGC. All aspects of a transaction, especially incidentally related services, must be considered and checked for authorisation. OFAC recommends in its FAQ that “a person considering business in Iran or with Iranian persons conduct due diligence sufficient to ensure that it is not knowingly engaging in transactions with the IRGC or other Iranian or Iran-related persons on the SDN List... and keep records documenting that due diligence”.
With respect to U.S. financial institutions’ compliance programs, OFAC continues to expect that U.S. financial institutions will implement a risk-based compliance program that tailors internal policies, procedures, and processes to appropriately mitigate their sanctions exposure. For all OFAC sanctions programs – including the Iran sanctions program – a financial institution should ensure that it has the appropriate procedures in place to identify, escalate, interdict, and report transactions that are in violation of sanctions regulations.
Summary of Sanctions Lifted
We previously summarised the sanctions to be lifted on Implementation Day in the client alert that we published following the P5+1’s agreement. Additional details regarding this sanctions relief are provided below.
European Sanctions Lifted
The vast majority of EU Sanctions have now been removed as anticipated, and the EU has published its accompanying guidance to assist those contemplating entering the Iranian market in these areas.
The changes were effected through amendments to the existing EU Decision and Regulation concerning Iran. On Adoption Day (18 October 2015) the EU published a Decision ((CFSP) 2015/1863) and two Regulations ((EU) 2015/1861 and (EU) 2015/1862) which detailed the sanctions that would be lifted on Implementation Day.
On 16 January 2016, Decision (CFSP) 2016/37 was adopted and an information notice released. These confirmed that the 18 October 2015 Decision and Regulations take effect from 16 January 2016.
In overview, for EU persons, many activities are allowed , including those which relate to the following:
- transfers of funds between EU and non-listed Iranian persons, entities or bodies;
- banking activities (including establishing correspondent banking relationships, the opening of new branches, subsidiaries and representative offices of non-listed Iranian credit and financial institutions in the EU and EU financial and credit institutions in Iran, non-listed Iranian credit and financial institutions owning, or increasing, interests in EU credit and financial institutions, and EU credit and financial institutions entering into joint ventures and opening bank accounts with Iranian credit and financial institutions);
- the provision of insurance and reinsurance in connection with Iran;
- the supply of, and access to, specialised financial messaging services (including SWIFT) for de-listed Iranians;
- financial support for trade with Iran (including export credit, guarantees or insurance);
- commitments for grants, financial assistance and concessional loans to the Government of Iran;
- transactions in public or public-guaranteed bonds;
- certain trade in, transportation of, and the provision of associated services for, Iranian crude oil, petroleum products, gas and petrochemical products;
- certain trade in key equipment or technology and provision of certain associated services in connection with, and investment in (including granting of a loan or credit, or participating in a relevant person, entity or body, or creating a joint venture), the Iranian oil, gas and petrochemical sectors;
- certain trade in key naval equipment and technology for ship building, maintenance or refit and the provision of certain associated services;
- design and construction in respect of cargo vessels and oil tankers, or participation in the same, and provision of transport or storage vessels for oil and petrochemical products;
- the provision of classification services in respect of Iranian oil tankers and cargo vessels;
- access to EU airports of cargo flights operated by Iranian carriers or originating from Iran, and provision of fuel, engineering and maintenance services to Iranian cargo aircraft not carrying prohibited items;
- provision of bunkering, ship supply or any other servicing of vessels where the vessels are not carrying prohibited items;
- certain trade and transport of gold, precious metals and diamonds, and the provision of certain associated services;
- delivery of newly printed or unissued Iranian bank notes and coinage for the Central Bank of Iran;
- certain trade of graphite and raw or semi-finished metals and the provision of certain associated services;
- certain trade of certain software and the provision of associated services; and
- transfers and activities concerning goods and technology which are nuclear-proliferation sensitive, and the provision of certain associated services (there is a prior authorisation process which, depending on the good or technology in question, may be carried out by the Member State competent authority on its own, or together with the UN Security Council under the process established by the JCPOA and the UN Security Council).
In addition, a number of persons and entities (including, for example, the National Iranian Oil Company (NIOC)) have been removed from the asset freeze and travel ban list.
European Sanctions Remaining Post-Implementation Day
A number of restrictions remain in place. These include:
- an arms embargo (provision of certain military items, and the provision of certain associated services);
- the provision of missile goods and technology, and the provision of certain associated services;
- asset freezes, travel bans, and prohibitions relating to specialised financial messaging services (SWIFT) for those persons and entities still listed as targeted;
- sanctions imposed on human rights, terrorism and other grounds, which include asset freezes, travel bans and a ban on exports to Iran of certain equipment; and
- the general EU dual-use regime, which is not specific to Iran, and which restricts trade in relation to certain types of equipment and technology.
In addition to the EU framework, Member States of the EU will each have separate regimes providing for sanctions enforcement and penalties. These regimes will need to be amended or repealed to take account of the sanctions lifts. Confirmation of the position in each relevant jurisdiction will be necessary for each contemplated transaction.
U.S. Sanctions Lifted
In taking steps necessary to effectuate the U.S.’ commitments, President Obama noted “a fundamental shift in circumstances with respect to Iran’s nuclear program” as result of Iran’s implementation of its commitments under the JCPOA. The President issued an Executive Order (EO), which operates to:
- revoke EOs 13574, 13590, 13622, and 13645;
- amend EO 13628, by revoking sections 5 through 7 and 15 of EO 13628; and
- provide implementation authorities for aspects of certain statutory sanctions outside the scope of the United States’ commitments under the JCPOA (namely under the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA)).
In addition, the contingent waivers of certain statutory sanctions - issued by the U.S. Secretary of State on Adoption Day (18 October 2015) - also came into effect. These waivers are to be renewed at specified intervals, and notices of such renewals are expected to be published in the Federal Register.
The result is the lifting of the nuclear-related secondary sanctions set forth in sections 4.1 to 4.7 of Annex II and section 17.1 to 17.2 of Annex V of the JCPOA, including with respect to:
- Iran’s financial, banking, energy, petrochemical, shipping, shipbuilding, and automotive sectors;
- Treasury has now determined that NIOC is no longer an agent or affiliate of the IRGC;
- Iran’s port operators (OFAC noted that as of Implementation Day, Tidewater Middle East Co. appears to no longer be the port operator of Bandar Abbas port);
- the provision of insurance, re-insurance, and underwriting services in connection with activities that are consistent with the JCPOA;
- Iran’s trade in gold and other precious metals;
- trade with Iran in graphite, raw or semi-finished metals such as aluminum and steel, coal and software for integrating industrial processes, in connection with activities that are consistent with the JCPOA; and
- the provision of associated services for each of the aforementioned categories.
OFAC also removed over 400 individuals and entities from its Specially Designated Nationals (SDNs) and Blocked Persons List (the SDN List), the Foreign Sanctions Evaders List (the FSE List), and/or the Non-SDN Iranian Sanctions List. The names of those individuals and entities are set out in Attachment 3 to Annex II of the JCPOA. Beginning on Implementation Day, non-U.S. persons will no longer be subject to sanctions for conducting transactions with any of the more than 400 individuals and entities so removed. Further, as a result of these de-listings, it is estimated that nearly $100 billion in Iranian assets that were frozen in foreign financial institutions were unblocked.
A key component of the JCPOA was the U.S.’ commitment to license U.S.-owned and -controlled foreign persons to engage in certain activities with Iran. In line with that commitment, OFAC issued General License H, which generally authorises a U.S.-owned or –controlled foreign entity to engage in transactions, directly or indirectly, with the Government of Iran (GOI) or any person subject to the jurisdiction of the GOI, subject to certain limitations. In short, General License H essentially reopens the so-called subsidiary loophole, which was closed by statute and corresponding amendment to the ITSR in 2012. Prior to 2012, the Iran Sanctions program generally observed the corporate formalities between U.S.-incorporated parent entities and their foreign-incorporated subsidiaries, and the program’s prohibitions applied generally only to U.S. Persons, which, for example, extended to foreign branches, but did not include separately incorporated foreign subsidiaries.
General License H also includes a one-time authorisation for U.S. persons to establish or alter the operating policies and procedures of a United States entity or a U.S.-owned or –controlled foreign entity to the extent necessary to allow a U.S.-owned or –controlled foreign entity to engage in transactions authorised by General License H. This authorisation generally extends to providing training, advice, and counseling in the new or revised operating policies and procedures. General License H also authorises U.S. persons to allow their U.S.-owned or–controlled foreign entities access to certain automated and globally integrated computer applications in support of authorised business activities, including those that are owned and/or operated for the U.S. parent company on a contract basis by one or more third-party service providers.
OFAC also submitted for publication in the Federal Register an amendment to the ITSR, creating a general license authorising the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar. This general license contains additional provisions authorising certain specified financial transactions and brokering activities in support of these activities, and will not be effective until such publication has occurred.
Finally, OFAC also established a favorable licensing policy for U.S. persons, and where there is a U.S. nexus, non-U.S. persons, to apply for a specific license from OFAC for the export, re-export, sale, lease, or transfer to Iran of commercial passenger aircraft exclusively for civil end-use and related spare parts, components, and associated services. U.S. persons may also engage in transactions that are ordinarily incident and necessary to give effect to a licensed transaction, including those related to transportation, legal, insurance, shipping, delivery, and financial payment services. OFAC will also consider specific requests from U.S. persons to provide certain other associated services. Effective Implementation Day, specific licenses that were issued pursuant to OFAC’s Second Amended Statement of Licensing Policy on Activities Related to the Safety of Iran’s Civil Aviation Industry and that have an expiration date on or after July 14, 2015, are extended until 31 May 2016.
U.S. Sanctions Remaining Post-Implementation Day
U.S. persons are still broadly prohibited from engaging in transactions or dealings involving Iran, including the GOI, with the exception of the few categories of transactions now authorised by general license, discussed above. Primary U.S. sanctions, including the U.S. domestic trade embargo on Iran, remain in place, and the GOI and Iranian financial institutions remain persons whose property and interests in property are blocked. In addition, non-U.S. persons remain prohibited from engaging in conduct that seeks to evade U.S. sanctions or from causing the export of goods or services from the United States to Iran.
Notwithstanding the aforementioned limited exceptions, the general prohibition on facilitation remains in place. Accordingly, as clarified by the FAQ, while U.S. persons may be involved in the initial determination to engage in authorised activities with Iran, as well as the establishment or alteration of the necessary policies and procedures, they may not be involved in the ongoing operations of or decision making related to the Iran business, including by approving, financing, facilitating, or guaranteeing any Iran-related transaction by the foreign entity.
Post-Implementation Day, the U.S. may also continue to designate persons pursuant to the criteria set forth in a number of EOs that will remain in place with respect to Iran’s non-nuclear activities, including in certain cases, for providing material support to persons engaged in such activities.
Notwithstanding the removals from the SDN List, pursuant to EO 13599, U.S. persons remain prohibited from dealing with individuals and entities who are considered to be the GOI, except as otherwise authorised by OFAC. To assist U.S. persons and U.S.-owned and–controlled foreign entities in complying with this obligation, OFAC has published a list of persons identified as blocked solely pursuant to EO 13599 — the EO 13599 List, available here. Although helpful, reliance on the 13599 List is not a replacement for conducting reasonable due diligence to ensure a U.S. Person is not knowingly facilitating or engaging in transactions with GOI persons or Iranian financial institutions.
Non-U.S. persons could continue to be subject to secondary sanctions for significant transactions with: (1) Iranian persons that are on the SDN List (including certain financial institutions); (2) the IRGC; or (3) any other person on the SDN List designated in connection with Iran’s proliferation of WMD or their means of delivery or Iran’s support for international terrorism. In addition, sanctions targeting certain activities related to trade in specific materials will also continue post-Implementation Day.
By way of official statements, OFAC issued a press release on Implementation Day, as well as further guidance and frequently asked questions relating to the lifting of sanctions and the issuance of general licenses and specific licensing policy.
U.S. POLITICAL LANDSCAPE
Uncertainty also remains surrounding the future of sanctions on Iran. Iran announced in October that it had conducted ballistic weapons testing that the UN found to be in violation of Security Council resolution 1929. Though the tests did not technically violate the JCPOA, they invited some political pressure within the U.S. to react with the imposition of further sanctions on Iran; on 17 January 2016, OFAC designated 11 individuals and entities related to Iran’s ballistic weapons testing, demonstrating the United States’ continued commitment to impose sanctions where appropriate.
Concerns also remain over Iran’s history of funding terrorist groups such as Hizballah, a recent target of OFAC sanctions, and Hamas, as well as Iran’s ongoing confrontation with Saudi Arabia, which came to a head recently over Saudi Arabia’s execution of Shia leader Nimr al-Nimr. Citing all of these factors, a number of bills are pending in the U.S. Congress seeking to expand upon the U.S. sanctions program with respect to Iran (e.g. the Iran Ballistic Missile Prevention and Sanctions Act of 2016, or the Zero Tolerance for Terror Act). Although these bills may never be enacted into law, the proposals give some flavor to the current U.S. political environment.
“SNAPBACK” OF SANCTIONS
Finally, and most importantly, if Iran violates the terms of the JCPOA, sanctions can “snapback” into place. The UN, EU and U.S. have sought to reassure businesses that the re-imposed sanctions would not be retroactively applied to persons who have taken advantage of the sanctions lift.
In the EU, though contracts entered into prior to snapback would continue to be legal, the ongoing execution of those contracts would ultimately need to comply with the reinstated sanctions. It is expected that there will be a period of time during which those contracts can continue to operate, and that the new EU snapback legislation will set out the details of the grace period, so as to allow businesses to wind down their activities.
In the U.S., businesses would need to comply with the “snapback” sanctions immediately. Though the JCPOA does not contemplate “grandfathering” contracts in a snapback scenario, the FAQs note that the “U.S. government has a past practice of working with U.S. or third-country companies to minimise the impact of sanctions on the legitimate activities of those parties undertaken prior to the imposition of sanctions... and anticipate[s] doing the same in the event of a JCPOA sanctions snapback.” Aside from this statement, the FAQs did not state whether a wind down period would be provided in the event of a snapback of sanctions.
The next event to occur under the JCPOA will be Transition Day, which is scheduled to occur at the earlier of eight years from Adoption Day (18 October 2015), or the date that the Director General of the IAEA reports to the IAEA Board of Governors and the UN Security Council that the IAEA has reached the Broader Conclusion that concludes “all nuclear material in Iran remains in peaceful activities”.
On this date, in the U.S., the statutory sanctions set forth in Sections 4.1-4.5, 4.7 and 4.9 of Annex II will be terminated, legislative action will be sought as appropriate to terminate the statutory sanctions set forth in Section 4.6 of Annex II; and the individuals and entities listed in Attachment 4 to Annex II of the JCPOA will be removed from the SDN List and/or the FSE List as set forth in Section 4.8.1 of Annex II.
For the EU, a number of steps will be taken to further progress full implementation of the JCPOA. These steps include the termination of a number of the remaining provisions of the key nuclear-related EU Regulation ((EU) 267/2012), and the de-listing, as set out in Annex II of the JCPOA, of certain individuals and entities who have remained listed.
This is a historic moment for U.S. and EU relations with Iran, and a considerable opportunity for businesses that are keen to play a part in returning Iran to the world economy. With that opportunity comes complexity as businesses look to navigate their way through the state and multinational/international sanctions that remain in place, the significant compliance issues to be taken into account, and the uncertainty over snapback of sanctions.