Implementation Day is here. On the evening of 16 January 2016, the EU and the United States lifted nuclear-related sanctions on Iran, in accordance with the Joint Comprehensive Plan of Action (JCPOA).

The lifting of sanctions followed receipt of the necessary report from the International Atomic Energy Agency (IAEA), which had been sent on that day to the UN Security Council verifying Iran’s compliance with its obligations under the JCPOA (see our client alert of 15 July 2015).

Summary

What can you do now?

In broad terms (and each situation still requires individual examination), if you are a U.S. person, there is little real cause for exuberant celebration. If you are a non-U.S. person, there is cause for cautious celebration but the era of due diligence is not entirely over.

  • The United States nuclear-related restrictions will remain in place for U.S. persons. The United States has, however,lifted most of its nuclear-related restrictions for non-U.S. persons. The EU has also lifted most of its nuclear-related restrictions.
  • For parties to international trade transactions, each proposed transaction has a counterparty, product, destination, insurance and finance component. Each of these must pass through careful consideration before a proposed transaction may be concluded.
  • Prohibitions have been lifted on a number of products in so far as they relate to non-U.S. persons. As a result, a non-U.S. shipowner and/or trader may now deal with most or many more products in and out of Iran. This is subject tono other counterparty being one of the remaining EU designated individuals or entities or OFAC SDNs in respect of which or whom secondary sanctions still attach. It is also subject to compliance with insurance and finance requirements. It is important to note that some products require that prior authorisation be obtained from the competent authority of the relevant EU Member State.
  • U.S. insurers and reinsurers and banks are still prohibited from Iran-connected activity. The prudent non-U.S. person, should, therefore, first very carefully consider its insurance and finance documentation to avoid the risk of potential default from trading with Iran. The U.S. dimension for non-U.S. persons has not entirely disappeared.
  • While the changes are liberalising, particularly for non-U.S. persons, it is still critical that companies conduct thorough due diligence for all transactions involving Iran. For companies that choose to venture into Iran, it is important to recognise that a number of practical limitations are still in place – like the inability to conduct business in U.S. dollar transactions.
  • The U.S. government has removed a significant number of individuals and entities from the lists of persons subject to Office of Foreign Assets Control (OFAC) sanctions, including the Central Bank of Iran (CBI). Despite this move, hundreds still remain sanctioned and non-U.S. persons must remain vigilant in monitoring their trading partners or risk being subject to secondary sanctions.
  • The EU has removed a large number of prohibitions and restrictions previously in place. These include dealing with Iran in (a) key equipment or technology for the oil, gas and petrochemical industries, (b) key naval equipment or technology for ship building, (c) crude oil or petroleum products, (d) petrochemical products, (e) natural gas, (f) gold, precious metals and diamonds, (g) providing insurance or re-insurance in Iran or to Iranian persons and (h) prohibitions on fund transfers to and from Iran.
  • The EU has also replaced blanket prohibitions with requirements to obtain prior authorisations, including those relating to the sale, supply, transfer or export of graphite and raw or semi-finished metals.
  • As part of the staged de-listing of those designated under the EU nuclear-related sanctions programme, the EU has de-listed 36 persons and 316 entities from the list of asset freeze/visa-ban targets.

Health Warning! The specific changes are set out in more detail below. However, key points to be aware of:

  1. The measures put in place by the EU and United States are not entirely in alignment and so it is important that both regimes are considered. Crucially, U.S. dollar payments in respect of trades now permitted by the EU may be caught, as U.S. banks (and U.S. branches of EU banks) are still barred from the majority of Iran trade.
  2. Non-U.S. persons continue to be prohibited from knowingly engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran.
  3. Secondary sanctions (i.e. those which apply to non-U.S. persons) continue to attach to activities with (a) any of the more than 200 Iranian or Iran-related individuals and entities which remain on the SDN List; (b) the Islamic Revolutionary Guard Corps (IRGC) and its designated agents or affiliates and (c) any other person on the SDN List in connection with Iran’s proliferation of weapons of mass destruction or their means of delivery or Iran’s support for international terrorism.

U.S. Position. The relevant OFAC announcement is to be found here: OFAC Release.

With the long-awaited Implementation Day upon us, the U.S. government has now lifted the nuclear-related sanctions against Iran “which generally are directed toward non-U.S. persons for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction and does not involve U.S. persons.” See Implementation Guide JCPOA.

In its most basic terms, with a few exceptions, the U.S. sanctions relief affords non-U.S. persons the ability to reengage in industries they were previously prohibited from participating in, where they risked severe penalties and being blocked from the U.S. commercial market. Transactions for which restrictions will be lifted for non-U.S. persons, but will remain in place for U.S. persons are:

  • Transactions with certain Iranian financial, credit and banking institutions
  • Insurance, re-insurance and underwriting services for non-nuclear activities and transactions
  • Investment and participation in ventures involving the oil, gas, or petrochemical sectors in Iran
  • Shipping, shipbuilding, and port transactions, including the following operators: IRISL, South Shipping Line and NITC
  • Sale, supply, export, or transfer of gold and precious metals
  • Trade with Iran in graphite, raw or semi-finished metals such as aluminium and steel, coal
  • Sale, supply or transfer of goods and services in Iran’s automotive sector

The U.S. government also removed over 400 individuals and entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), Foreign Sanctions Evaders List (FSE List), and/or Non-SDN Iran Sanctions Act List (NS-ISA 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 are no longer subject to sanctions for conducting transactions with those delisted individuals and entities. However, secondary sanctions will continue to apply to non-U.S. persons for conducting transactions with any of the more than 200 Iranian or Iran-related individuals and entities who remain on the SDN List. Accordingly, non-U.S. persons must still continue to conduct screening to verify they are not doing business with an SDN.

For U.S. persons, the U.S. government has issued a statement of favourable licensing policy to permit the export, re-export, sale, lease or transfer of commercial passenger aircraft and related parts and services by U.S. persons to Iran for exclusively civil, commercial passenger aviation end-use. Further, a general licence will also permit the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.

However, one of the most anticipated provisions of the sanctions relief relates to the new General License H (See Iran General Licence H), which authorises certain transactions by foreign entities owned or controlled by a U.S. person. For purposes of this general licence, an entity is “owned or controlled” by a U.S. person if the U.S. person:

  • Holds a 50 per cent or greater equity interest by vote or value in the entity
  • Holds a majority of seats on the board of directors of the entity
  • Otherwise controls the actions, policies, or personnel decisions of the entity.

General License H does not authorise U.S.-owned or controlled foreign entities to engage in any transactions involving:

  1. The direct or indirect export or re-export of goods, technology, or services from the United States (without separate authorisation from OFAC).
  2. Any transfer of funds to, from, or through the U.S. financial system.
  3. Any entity on the SDN List or any activity that would be prohibited by non-Iran sanctions administered by OFAC if engaged in by a U.S. person or in the United States.
  4. Any individual or entity identified on the FSE List.
  5. Any activity involving an item subject to the Export Administration Regulations (EAR) that requires a licence under Part 744 of the EAR; or participation in any transaction with a person whose export privileges have been denied pursuant to part 764 or 766 of the EAR, unless authorised by the Department of Commerce.
  6. Any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any officials, agents, or affiliates thereof.
  7. Any activity that is sanctionable under Executive Order 12938 or 13382 (relating to Iran’s proliferation of weapons of mass destruction and their means of delivery, including ballistic missiles); Executive Order 13224 (relating to international terrorism); Executive Order 13572 or 13582 (relating to Syria); Executive Order 13611 (relating to Yemen); or Executive Order 13553 or 13606, or section 2 or 3 of Executive Order 13628 (relating to Iran’s commission of human rights abuses against its citizens).
  8. Any nuclear activity involving Iran that is subject to the procurement channel established pursuant to paragraph 16 of UNSCR 2231 (2015) and section 6 of Annex IV of the JCPOA and that has not been approved through the procurement channel process.  This refers to nuclear activities not approved by the Procurement Working Group (PWG), a new regulatory body created under the JCPOA. This body has 20 days to determine whether to approve or deny proposals related to Iran’s commercial involvement in uranium mining or production, provision of technical assistance regarding uranium mining/production to Iran, or investments in this area. If these transactions involving commercial applications of uranium have not already been approved by the PWG, a business may not engage in such transactions.

Importantly, General License H authorises U.S. persons to establish or alter their corporate policies and procedures to the extent necessary to allow U.S.-owned or controlled foreign entities to engage in transactions involving Iran that are permitted under the general licence.

OFAC has published guidance stating General License H is intended to allow senior management, board members and employees of the U.S. parent to be involved in initial decision-making regarding whether to engage in activities with Iran, as well as establish or alter their policies and procedures. (See JCPOA FAQs). With the exception of the activities authorised in General License H, the prohibitions on facilitation by United States persons under section 560.208 (See31 C.F.R. section 560.208) of the Iranian Transactions and Sanctions Regulations (ITSR) remain in effect. Section 560.208 states that no U.S. person may “approve, finance, facilitate, or guarantee any transaction by a foreign person” in regards to Iran where the transaction is otherwise prohibited, such as financial transactions and transfers and investments involving Iran which likely require an OFAC licence.

Some additional examples of prohibited activities by U.S. persons would include:

  • Involvement in ongoing Iran-related operations or decision-making of its owned or controlled foreign entity with Iran after approval of General License H is obtained. (See JCPOA FAQs provided by the Department of Treasury).
  • Day-to-day operations of the foreign entity, which includes approval, financing, facilitation, or guarantee of any Iran-related transaction by the foreign entity. (See 31 C.F.R. 560.208 and 560.417).
  • Exportation or re-exportation of U.S.-origin goods to Iran unless exempt or authorised by OFAC.

General License H also allows U.S. persons to make available to their foreign entities certain automated and globally integrated business support systems, such as integrated computer, accounting, email, telecommunications, or other business support systems, platforms, databases, or applications. The JCPOA FAQ’s further clarify that while it is acceptable for U.S. persons to perform routine and emergency maintenance on such global systems, they are not permitted to do order intake for those businesses.

U.S. businesses should ensure that they meet the legal definition of “U.S. person” before assuming that activities involving Iran will be authorised by General License H. For example, a U.S. company that is part of a joint venture and owns 49 per cent of shares in the venture with a foreign company may be unable to take advantage of General License H. Even if a U.S. business can use General License H, it will still be subject to the restrictions listed above.

U.S. persons with foreign entities with activities outside of the scope of General License H may be liable for civil penalties under section 206(b) of the International Emergency Economic Powers Act. These penalties may include a fine of (1) US$250,000; or (2) an amount twice that of the transaction which is the basis for the violation. (See 50 U.S. Code section 1705).

Not all Sunshine and Roses One day after Implementation Day, on 17 January OFAC designated 11 entities and individuals allegedly involved in Iran’s ballistic missile programme, in response to Iran launching mid-range ballistic missiles in violations of UN Security Council resolutions.

EU position. The relevant EU measure is Council Decision (CFSP) 2016/316 of 16 January 2016 concerning the date of application of Decision (CFSP) 2015/1863 amending Decision 2010/413/CFSP concerning restrictive measures against Iran (Decision 316).

The EU legislative framework put into place on 18 October 2015 (see our client alert of 21 October 2015) has, therefore, come into effect, namely:

Regulations 1862 and 1863 are now effective to amend Council Regulation EU No 267 of 2012 (Regulation 267) to the following effect (references to chapter numbers below are references to the chapters of Regulation 267 as now amended).

All references to annexes are to the annexes to Council Regulation (EU) 267/2012. In very broad/general terms:

  • Annex I relates to goods and technology, including software, which are dual-use items or technology.
  • Annexes II and III relate to other goods and technology which could contribute to Iran’s enrichment-related, reprocessing or heavy-water related activities to the development of nuclear weapon delivery systems or to the pursuit of activities related to other topics about which the IAEA has expressed concerns or has identified as outstanding.
  • Annex VIIA includes software for integrating industrial processes which is relevant to industries controlled by the Islamic Revolutionary Guard Corps (IRGC) or which is relevant to Iran's nuclear programme.
  • Annex VIIB includes graphite and raw or semi-finished metals (e.g. aluminium and steel), which are relevant to industries controlled by the IRGC or which are relevant to Iran's nuclear programme.

Chapter II: Export and Import Restrictions Prohibitions and restrictions related to the following have been removed:

  • Key equipment or technology listed in Annexes VI and VIA (for the oil, gas and petrochemical industries in Iran).
  • Key naval equipment or technology listed in Annex VIB (for ship building, maintenance or refit, including equipment or technology used in the construction of oil tankers).
  • Crude oil or petroleum products.
  • Petrochemical products.
  • Natural gas.
  • Gold, precious metals and diamonds.
  • Transfer or export of newly printed or unissued Iranian denominated banknotes and minted coinage to or for the benefit of the Central Bank of Iran.

Prior authorisation is required from the competent authority of the relevant EU Member State:

  • For the sale, supply, transfer or export of:
    • Goods and technology listed in Annexes I or II
    • Software listed in Annex VIIA
    • Graphite and raw or semi-finished metals listed in Annex VIIB  whether or not originating in the EU, to any Iranian person/entity or for use in Iran.
  • For the purchase, import or transport from Iran of goods and technology listed in Annexes I or II, whether or not originating in Iran.
  • For the provision of (i) technical assistance or brokering services and (ii) financing or financial assistance, related to:
    • Goods and technology listed in Annex I or II
    • Software listed in Annex VII
    • Graphite and raw or semi-finished metals listed in Annex VIIB  to any Iranian person/entity or for use in Iran.
  • Before entering into any arrangement with an Iranian person/entity or any person/entity acting on their behalf or at their direction that would enable them to participate in or increase its participation in commercial activities involving (i) uranium mining, (ii) production or use of nuclear materials listed in Part 1 of the Nuclear Suppliers Group list (set out in Regulation 1861) or (iii) technologies listed in Annex II.

It is prohibited to:

  • Sell, supply, transfer or export the goods and technology listed in Annex III, whether or not originating in the EU, to any Iranian person/entity or for use in Iran.
  • Purchase, import or transport from Iran goods and technology listed in Annex III, whether the item concerned originates in Iran or not.
  • Provide (i) technical assistance or brokering services and (ii) financing or financial assistance, related to goods and technology listed in Annex III or the Common Military List (including providing manufacture, maintenance and use of goods and technology on that list), to any Iranian person/entity or for use in Iran.
  • Enter into any arrangement with an Iranian person/entity or anyone acting on their behalf or at their direction that would enable them to participate in or increase its participation in commercial activities involving technologies listed in Annex III or the Common Military List.
  • Provide technical assistance, brokering services or other services.

Chapter III: Restrictions on Financing of Certain Enterprises Prohibitions and restrictions in relation to the following have been removed: (i) the granting of any financial loan or credit to, (ii) the acquisition or extension of a participation in or (iii) the creation of any joint venture with, any Iranian person/entity engaged in:

  • The manufacture of goods or technology listed in the Common Military List or in Annexes I or II
  • The exploration or production of crude oil and natural gas, the refining of fuels or the liquefaction of natural gas
  • The petrochemical industry

Chapter IV: Freezing of Funds and Economic Resources It should be carefully noted that although 36 persons and 316 entities have been removed from the list of asset freeze/visa-ban targets (as part of the staged de-listing of those designated under the EU nuclear-related sanctions programme), a number of persons and entities continue to be designated. As a result, it remains essential to check counterparties to ensure that, in doing business with them, funds and economic resources are not being made available directly or indirectly, to or for the benefit of a designated natural or legal person, entity or body.

The list of designated natural or legal persons, entities or bodies is not static. It may be periodically augmented by the names of those who have subsequently been found to have acted contrary to the JCPOA.

Chapter V: Restrictions on Transfers of Funds and on Financial Services This relates to certain banking activities and the provision of insurance or reinsurance. The following is no longer prohibited, nor requires permission:

  • The transfer of funds between EU and Iranian persons and entities, including financial institutions.
  • Certain banking activities: the selling or purchasing of public or public guaranteed bonds directly or indirectly to or from Iran or its government, and its public bodies, corporations and agencies, or credit or financial institutions domiciled in Iran, or providing brokering services in respect of the same.
  • The providing of insurance or re-insurance or the brokering of insurance or reinsurance to Iran or its government, its public bodies, corporations and agencies, an Iranian person, entity or body other than a natural person.

This relaxation does remain subject to the provisions mentioned above in relation to asset freezes. Checking of counterparties remains important.

Chapter VI: Restrictions on Transport The restrictions on transport have been reformulated. It is prohibited to provide:

  • Bunkering or ship supply services, or any other servicing of vessels, to vessels owned or controlled, directly or indirectly, by an Iranian person, entity or body, where the providers have information that provides reasonable grounds to determine that the vessels carry goods covered by the Common Military List or goods whose supply, sale, transfer or export is prohibited under Regulation 267, unless the provision of such services is necessary for humanitarian and safety purposes.
  • Engineering and maintenance services to cargo aircraft owned or controlled, directly or indirectly, by an Iranian person, entity or body, where the providers of the service have information that provides reasonable grounds to determine that the cargo aircraft carry goods governed by the Common Military List or goods the supply, sale, transfer or export of which is prohibited under Regulation 267, unless the provision of such services is necessary for humanitarian and safety purposes.

Prohibitions and restrictions in relation to the following have been removed:

  • Providing classification services.
  • Supervising and participating in the design, construction and repair of ships and their parts.
  • Inspecting, testing and certifying marine equipment, materials and components.
  • Carrying out of surveys, inspections, audits and visits and the issuance, renewal or endorsement of the relevant certificates and documents of compliance on behalf of the flag State administration.
  • Making available to any Iranian person of entity, vessels designed for the transport or storage of oil or petrochemical products.

As is generally the case, this is subject to the provisions mentioned above in relation to asset freezes. Checking of counterparties remains important.

Chapter VII: General and Final Provisions Most importantly, the prohibition remains against participating, knowingly and intentionally, in activities the object or effect of which is to circumvent identified measures.

What next? This paves the way for the IAEA to begin verifying and monitoring Iran’s nuclear-related commitments under JCPOA.

The EU and US have reserved the right to ‘snap back’ sanctions on if Iran is found to have violated its obligations.

Following Implementation Day, the JCPOA provides for Transition Day, which will occur either (a) eight years from Adoption Day (that is to say eight years from 18 October 2015) or (b) upon a report from the IAEA, together with confirmation from the UN Security Council, that the IAEA has concluded that all nuclear material in Iran remains in peaceful activities, whichever is earlier. Transition Day will mark the next stage in the easing of sanctions, when further terminations and amendments will be made.

‘UN Security Council Resolution (UNSCR) Termination Day’ will occur 10 years from Adoption Day (that is to say ten years from 18 October 2015), provided that the provisions of previous resolutions have not been reinstated. On this day, all provisions and measures imposed by the UN Security Council will terminate, and the UN Security Council will no longer be seized of the Iran nuclear issue.

Within this timeframe, the E3/EU+3 (or the P5+1, comprising the United States, Russia, China, the UK, France and Germany) and Iran will meet at the ministerial level every two years, or earlier if needed, in order to review and address progress and to adopt appropriate decisions by consensus.