Iran and the P5+1 countries (United States, Russia, China, United Kingdom, France and Germany) on 14 July 2015 announced their agreement on a comprehensive plan under which certain international sanctions against Iran will be eased in a phased manner in exchange for Iran meeting certain commitments regarding its nuclear program.

The Joint Comprehensive Plan of Action (“JCPOA”) still requires approval by all parties. Such approval is likely to be achieved, although it remains possible that hardliners in Washington or Tehran in particular might derail this process. Even once approved, the agreement will not lead to any immediate easing of sanctions imposed against Iran by the United States, European Union or other countries. Certain sanctions will be lifted under the agreement, but only once the international community has verified that Iran is complying with its nuclear-related commitments. Once this happens, the EU has committed that it will lift most of the nuclear-related economic and financial sanctions which it currently imposes on Iran. However the US commitment is more limited: secondary sanctions – i.e., those applying to non-US persons – will be lifted, but primary sanctions will continue to prohibit US persons from engaging in most transactions involving Iran even after such verification occurs.

I. Timing of Sanctions Relief

Under the JCPOA, there will be no immediate relief from either EU or US sanctions against Iran. Instead, certain sanctions will be eased as two key milestones (the so-called “Implementation Day” and “Transition Day”) related to the implementation of the JCPOA are reached – and this will not occur for several months. The JCPOA identifies four relevant steps in the easing of sanctions:

  • Finalisation Day”: The date on which JCPOA negotiations concluded (14 July 2015).
  • Adoption Day”: The date on which the JPCOA is deemed to come into effect. This will occur 90 days after the UN Security Council adopts a resolution endorsing the JCPOA and terminating (with effect from Implementation Day) the current UN sanctions on Iran, subject to snap-back in the event of significant non-performance by Iran (or at an earlier date by mutual consent).
  • Implementation Day”: The date on which the International Atomic Energy Association (“IAEA”) verifies that Iran has implemented various nuclear-related commitments. At this point the UN, EU and US will lift/ease certain sanctions against Iran (as described in more detail below).
  • Transition Day”: The earlier of eight years after Adoption Day or the date on which the IAEA verifies that all nuclear material in Iran is for peaceful purposes only. At that time, the EU and US will fully terminate the sanctions measures that will be suspended on Implementation Day.  

Pursuant to the Iran Nuclear Review Act passed earlier this year, the US Congress has 60 days to review and approve the deal. Although the JCPOA does not refer to this period, it is understood that the UN Security Council will wait for Congress to approve the deal before it lifts the UN sanctions. While Congress may not need the full 60 days, this means that the UN resolution might not be put up for approval for 60 days, with Adoption Day occurring 90 days after that (unless an earlier date is agreed) – so Adoption Day might be at least five months away. Only at that stage does the JCPOA even come into effect such that the IAEA can start its verification. Implementation Day is not, therefore, likely to occur until 2016.

II. Nature of Sanctions to be Eased

Both the United States and European Union have confirmed that certain measures against Iran that have been suspended since January 2014 will continue to be suspended while the JCPOA is implemented. On Implementation Day, additional sanctions will be eased as follows:

A. United States

Despite the significance of the JCPOA, all US sanctions against Iran that are applicable to US persons – and to non-US entities that are owned or controlled by US persons – will remain in effect. Such persons will remain broadly prohibited from engaging in almost all trade with Iran. In addition, pending further guidance from the US Government, it appears that non-US persons will continue to be restricted from engaging in most transactions denominated in US dollars with Iran, as US correspondent banks will continue to reject such transactions in most instances.

However, US secondary sanctions that target non-US persons who engage in certain activities will be eased on Implementation Day as Iran’s nuclear-related commitments are verified by the IAEA. In particular, on Implementation Day, the United States will waive or terminate almost all secondary sanctions that currently authorize the imposition of penalties against non-US persons that engage in certain activities involving Iran, including transactions involving Iran’s financial, energy, shipping, automotive and precious metals industries.

The United States also will establish a favorable licensing regime with respect to certain transactions involving Iran, including transactions involving: (i) non-US entities that are owned or controlled by US persons and are seeking to engage in “activities consistent with the JCPOA” (the exact scope of relevant activities is unclear at this time); (ii) the export of US-origin commercial aircraft and related parts, components and services for Iran’s civil aviation industry; and (iii) the import of Iranian-origin carpets and food (including pistachios and caviar) into the United States.

The United States also committed to removing an extensive list of individuals and entities connected to Iran from the SDN List. As a result, US persons no longer will be required to block the property of such persons (though US persons will remain prohibited from dealing with any such persons that are located in Iran). Non-US persons also will not be subject to potential penalties under US secondary sanctions for engaging in transactions with such persons.

B. European Union

The EU will lift most of its nuclear-related economic and financial sanctions. This includes its sectoral sanctions restrictions (on banking, insurance, SWIFT, oil and gas, petrochemicals, graphite, certain precious metals, etc.) and the asset freeze on most listed persons and entities. It will, however, retain some elements (e.g., arms restrictions, related transport provisions, some nuclear-proliferation related measures, and some asset freezes), as well as the sanctions imposed on Iran in relation to human rights, which largely consist of an asset freeze regarding those believed to have been responsible for serious human rights violations in Iran (and which are set out in a different legal instrument to the nuclear-related sanctions).

C. Other Countries

Other countries which apply only the mandatory UN sanctions can be expected to lift their restrictions (the UN resolution will provide for its sanctions to be lifted from Implementation Day). However the US and the EU are not the only jurisdictions to apply more comprehensive restrictions on Iran. It remains to be seen what countries such as Canada, Norway, Japan, Switzerland and Australia will do, although it seems likely that they will align with either the US or the EU approach.

III. What does this mean for Dechert clients?

For the immediate future, there is no change. Until Implementation Day, probably in early 2016, UN, US and EU sanctions against Iran remain in place.

For clients outside of the United States jurisdiction, the arrival of Implementation Day likely will represent a significant re-opening of access to Iran. Not only will most EU sanctions be lifted, but the risk of exposure to secondary US sanctions will be removed, at least for the sectors outlined above. In particular, multinational companies operating in the energy, financial, aviation and industrial materials sectors can prepare to have access a significant new market However, US companies and US persons (wherever located) will remain broadly prohibited from engaging in most transactions involving Iran and therefore should exercise extreme caution before conducting transactions involving Iran (either directly or through non-US partners).

The easing of sanctions set to occur on Implementation Day will not mean an end to Iran sanctions restrictions even outside the United States. Mistrust between Iran and the West remains, and US, EU and UN sanctions against Iran may yet “snap-back” (i.e., be reinstated) if Iran violates its commitments under the JCPOA.