On Saturday, January 16, 2016, the United States, the European Union and Iran announced the arrival of “Implementation Day” under the Iran nuclear deal – called the Joint Comprehensive Plan of Action (JCPOA). Implementation Day required that the International Atomic Energy Agency (IAEA) verify that Iran had satisfied its nuclear program-related obligations, as set out in the JCPOA. When the IAEA submitted its verification report on Saturday, the United States and the European Union immediately took actions necessary to lift certain sanctions, as set out in Annex V of the JCPOA.
1. Lifting of Nuclear-Related Secondary Sanctions on Iran
Upon confirmation by Secretary of State John Kerry that the IAEA had verified that Iran had met its nuclear program commitments, the United States lifted the nuclear-related secondary sanctions against Iran. Secondary sanctions are directed toward non-U.S. persons1 for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction. Importantly, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings involving Iran unless such activities are exempt from regulation or otherwise authorized by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).
More specifically, the United States has lifted nuclear-related secondary sanctions on:
- Iran’s financial and banking sectors;
- The provision of underwriting services, insurance or re-insurance in connection with activities that are consistent with the JCPOA;
- Iran’s energy and petrochemical sectors;
- Transactions with Iran’s shipping and shipbuilding sectors and port operators;
- 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;
- The sale, supply or transfer of goods and services used in connection with Iran’s automotive sector; and
- “Associated services”2 for each of the categories above.
The United States also removed the individuals and entities listed in Attachment 3 to Annex II of the JCPOA from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), Foreign Sanctions Evaders List (FSE List) and Non-SDN Iran Sanctions Act List (NS-ISA List). Therefore, non-U.S. persons will not be subject to secondary sanctions for conducting transactions with any of the more than 400 individuals and entities listed in Attachment 3, provided such transactions do not involve any of the more than 200 parties who remain or are placed on the SDN List after Implementation Day. U.S. persons will continue to be required to block the property and interests in property of individuals and entities that meet the definitions of “Government of Iran” or “Iranian financial institution,” including any party identified with an asterisk in Attachment 3. 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 remaining on the SDN List.
2. Licensing of Three Categories of Activity
On Implementation Day, the United States licensed three categories of activity that would otherwise be prohibited under the sanctions against Iran, provided that the transactions do not involve individuals or entities on the SDN List and are otherwise consistent with the JCPOA and U.S. law. To do so, OFAC issued the general licenses and statement outlined below.
- Statement of Licensing Policy for Activities Related to the Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services. The Statement of Licensing Policy establishes a favorable licensing policy under which U.S. and non-U.S. persons may request specific licenses from OFAC to export, re-export, sell, lease or transfer to Iran commercial passenger aircraft3 and spare parts for exclusively civil aviation end-use, as well as provide associated services, including warranty, maintenance and repair services and safety-related inspections for all of the foregoing. Exports or re-exports to individuals and entities listed on the Department of Commerce’s Denied Persons List and, in some instances, the Entity List, will require separate authorization from the Department of Commerce.
- General License H Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a U.S. Person. General License H authorizes U.S.-owned or -controlled4 foreign entities to engage in certain activities involving Iran. General License H also authorizes U.S. persons to engage in activities related to the establishment or alteration of 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 authorized under General License H, and to make available to foreign entities they own or control certain “automated” and “globally integrated” business support systems, as those terms are defined by General License H. The general prohibition on facilitation by U.S. persons will remain in effect, and U.S. persons may not be involved in the management or day-to-day operations of the Iran-related business of their U.S.-owned or -controlled foreign entities.
General License H does not authorize U.S.-owned or -controlled foreign entities to engage in any transactions involving: (1) the direct or indirect exportation or re-exportation of goods, technology or services from the United States; (2) any transfer of funds to, from, or through the U.S. financial system; (3) any individual or 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 on the FSE List; (5) any activity involving an item subject to the Export Administration Regulations (EAR) that is prohibited by, or requires a license under, the EAR, or participating in a transaction with a person whose export privileges have been denied; (6) any military, paramilitary, intelligence or law enforcement entity of the Government of Iran, or any official, agent or affiliate thereof; (7) any activity that is sanctionable under Executive Orders 12938 or 13382, 13224, 13572 or 13582, 13611, 13553 or 13606, or section 2 or 3 of Executive Order 13628; or (8) any nuclear activity involving Iran that is subject to the JCPOA procurement channel that has not been approved through that procurement channel process.
- General License Authorizing the Importation into the United States of Iranian-Origin Carpets and Foodstuffs, Including Pistachios and Caviar (Not Yet Effective). This general license, which will be effective upon its publication in the Federal Register, authorizes the importation into the United States of, and dealings in, certain Iranian-origin foodstuffs, carpets and other textile floor coverings and carpets used as wall hangings. The general license does not authorize debits or credits to Iranian accounts, but instead authorizes U.S. depository institutions to issue letters to credit for payments for Iranian-origin carpets and foodstuffs. U.S. persons are authorized to act as brokers for the purchase or sale of Iranian-origin carpets and foodstuffs authorized to be imported under the general license.
3. Remaining Prohibitions
As noted above, U.S. persons continue to be prohibited from engaging in transactions or dealings with Iran and the Government of Iran unless such activities are exempt from regulation or otherwise authorized by OFAC. (As if to underscore the point, on January 17, 2016, OFAC listed 11 new entities and individuals that the U.S. Government believed were involved in procurement on behalf of Iran’s ballistic missile program.) The clearing of transactions involving Iran through the U.S. financial system, including foreign branches of U.S. financial institutions, continues to be prohibited. In addition, U.S. controls on the export or re-export of goods, technology and services to Iran will remain in place. Therefore, the export or re-export by a U.S. person or from the United States to Iran or the Government of Iran, as well as the re-export by non-U.S. persons, of items that contain ten percent or more U.S.-controlled content with knowledge or reason to know that the export or re-export is intended specifically to Iran or the Government of Iran, generally requires a license from OFAC. The export or re-export of U.S.-origin goods that are designated as EAR99 from a third country to Iran without knowledge or reason to know at the time of export from the United States that the goods are intended for Iran is not prohibited.
Non-U.S. persons will continue to be prohibited from knowingly engaging in conduct that seeks to evade U.S. sanctions on Iran. In addition, secondary sanctions will continue to apply to significant transactions with persons or entities on the SDN List, the Islamic Revolutionary Guard Corps and its designated agents or affiliates, and any other person on the SDN List designated under Executive Orders 13224 or 13382 (regarding Iran’s proliferation of weapons of mass destruction).
Implementation Day was formally announced in the Official Journal of the European Union on January 16, 2016. As a result, and in accordance with legal instruments adopted on October 18, 2015, EU economic sanctions against Iran are substantially modified, although many restrictive measures remain, if only in the form of a prior authorization requirement. In addition, and in line with the JCPOA, sanctions may be reintroduced immediately in case Iran does not comply with its commitments.
1. What Changes?
Most importantly, the EU has removed restrictions targeting 331 individuals and entities, including the Central Bank of Iran and major banks and shipping companies, and allows with limited exceptions:
- The transfer of funds between EU persons and entities, including financial institutions, and Iran (without notification or authorization requirements);
- Banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the EU;
- Insurance and reinsurance activities;
- The supply of specialized financial messaging services, including SWIFT;
- Financial support for trade with Iran (export credit, guarantees or insurance);
- Commitments for grants, financial assistance and concessional loans to Iran;
- Transactions in public or public-guaranteed bonds from the Iranian Government and other financial institutions;
- The import and transport of Iranian oil, petroleum products, gas and petrochemical products from Iran;
- The sale, supply, transfer or export of gold, metals, diamonds, banknotes and coinage;
- The export of equipment or technology for the naval, oil, gas and petrochemical sectors; and
- Investment in the oil, gas and petrochemical sectors in Iran.
The European Union has also replaced outright prohibitions with a prior authorization regime for certain sensitive commercial activities, including dealings in dual-use items.
2. Restrictions (and Risks) Remain
The European Union maintains both proliferation-related and non-proliferation-related sanctions against Iran.
The European Union continues to impose asset freezing and other restrictive measures on specific individuals and entities (including several banks). The arms embargo, missile technology sanctions and other specific prohibitions, for example with respect to telecommunications monitoring equipment, remain in place. Finally, the European Union will also continue to strictly control certain nuclear transfers or activities, as well as dealings in certain metals and software.
Beyond the risks under EU economic sanctions laws, companies should consider all legal risks, including those stemming from the cumulative application, and sometimes extra-territorial application, of sanctions laws. For most multinational companies, this will be a complex assessment.
Possible Sanctions “Snapback”
It is still unclear how the financial sector as a whole will react to the partial lifting of sanctions, nor is it clear how businesses will consider the possibility of a sanctions “snapback.”
In the event that sanctions on Iran snap back into place due to Iran’s violation of the terms of the JCPOA, activities for which sanctions are re-imposed will be considered to be sanctionable. Although the United States and the European Union will not retroactively impose sanctions for legitimate activity undertaken after Implementation Day, the JCPOA will not grandfather contracts signed prior to snapback. Neither the U.S. Government nor the EU authorities have indicated how far in advance any notice will be given in the event that sanctions snap back, nor have they indicated whether, and for how long, they would authorize a wind-down period to allow companies to disengage from Iran.
As a result of the above, OFAC and EU authorities expect companies to continue to implement a risk-based compliance program that tailors internal policies, procedures and processes to mitigate sanctions exposure. Companies should ensure that they have the appropriate procedures in place to identify, escalate and report transactions that are in violation of sanctions regulations. In addition, companies should consider incorporating “escape clauses” in any contracts with Iranian individuals and entities in case sanctions snap back into place.