It has now been eight months since Implementation Day under the Joint Comprehensive Plan of Action (JCPOA), put in place to ensure that Iran’s nuclear programme remains exclusively peaceful, as part of which sanctions against Iran have been relaxed. What progress has been made, and what issues still need to be overcome in order for businesses to trade with Iran?
There are certainly positive signs, including reports that Iran has been able to increase its sales of crude oil, shipping two million barrels of crude oil per day (bpd) in April, May and June 2016, up from 1.6m bpd in March 2016. There have been positive developments in other commodities, including gas, petrochemicals and metals. However, there is still a long way to go, with indications that, at least as of June 2016, Iran’s main historic European crude oil buyers (Italy, Spain and Greece) were still a long way behind their pre-sanctions volumes.
So what is preventing Iran from getting back to pre-sanctions levels in crude oil, as well as other markets? The key issues are:
- Ensuring compliance with remaining sanctions.
- Dealing with the risk of sanctions snapping back into place.
- Getting banks and insurers back on board.
Compliance with remaining sanctions
Significant sanctions against Iran still remain in place and due diligence is required to ensure that any trade does not infringe any applicable sanctions. This will involve checking that no one involved in the trade remains on a sanctions list, and also that the cargo is no longer subject to any relevant restrictions.
As part of this process, businesses should check which sanctions apply, for example because the business is owned by US persons, or employs US nationals, or because payments need to be made in US Dollars.
The authorities in the US and the UK have made clear that they will continue to enforce the remaining sanctions. In the UK, the Office of Financial Sanctions Implementation (OFSI) was established on 31 March 2016 with an express mandate to “ensure that financial sanctions are properly understood, implemented and enforced” in the UK.
There is no amnesty for historic transactions which infringed those sanctions which were in place when the relevant activity took place. For example, in September 2016 PanAmerican Seed Company agreed a settlement with the US Office of Foreign Assets Control (OFAC), agreeing to pay US$4.3 million to settle allegations that the company had infringed US sanctions by supplying seeds (primarily of flowers) worth US$770,000 to Iran between 2009 and 2012. The potential fine for this activity was US$ 12 million, even though the exports were likely eligible for an OFAC licence, if one had been sought.
The risk of snap back
Because of the risk that sanctions might snap back into place if Iran fails to comply with its obligations pursuant to the JCPOA, parties should include sanctions clauses in their contracts. Those clauses should include not only warranties (and ideally indemnities) regarding the lawfulness of the trade, but also suspension and termination rights in the event that there is a breach of the warranties, or the sanctions snap back into place.
Banks and insurers
Banks and insurers remain extremely cautious about trade with Iran, because of the complexity of ensuring compliance with sanctions and because of the hugely damaging consequences, (both financial and reputational) of a breach. It may be that as time goes on, they will grow in confidence but for now, they are wary.