Clients who have received our prior alerts on the negotiations with Iran over its nuclear program—for example, our comments the day after the Lausanne Framework was announced in early April —have consistently asked the same three questions:
- Is there really going to be an agreement—or is this just another round of dust-kicking to which I needn’t pay attention, since no change will come of it?
- Which parts of the U.S. sanctions regime will change under the agreement, and which will remain the same?
- Will my competitors in Europe, or Asia, or the Americas be getting more or faster access to business with Iran than I will?
With the release yesterday of the text of the Joint Comprehensive Plan of Action—referred to by the negotiators as “JCPOA,” but likely to be known as the Vienna Agreement—we have some answers. They will not be reassuring to all, particularly to our U.S. clients. As has been the case for decades, most U.S. businesses will continue to be barred from doing business with Iran for the foreseeable future, even if the Vienna Agreement is fully implemented. And even non-U.S. clients will need to exercise care and caution to avoid being snared in the continuing, non-nuclear-related U.S. sanctions that will remain in effect on Iran business. Iran sanctions compliance has never been simple, and when—if—the Vienna Agreement takes full effect, the complexity (regrettably) is likely to endure.
We have our own thoughts on the technical and historical sides of the Agreement, which we share briefly below. But first, the business questions:
Is There Really Going to Be an Agreement?
Yes. This is an eight-party deal. (Iran, U.S., U.K., France, Germany, the E.U., Russia, and China.)
Whether the U.S. will remain one of the eight is open to some uncertainty, since Congress can block implementation of the Agreement by the U.S. if opponents can muster a veto-proof “no” vote. But such a Congressional vote—which will require two-thirds of both the House and Senate to override President Obama’s promised veto—would mean only that the U.S. will not implement the Agreement’s terms. In that event, the full set of current American sanctions on Iran will stay in place. The remainder of the Vienna accord, however, could well proceed to conclusion without the U.S., including adoption by the U.N. Security Council of a new resolution lifting multilateral nuclear sanctions on Iran and rolling back the primary European sanctions that have been in place since 2012.
It also became certain from the early hours after the Vienna announcement that the Netanyahu government in Israel will conduct a sharp campaign against the Agreement, focused primarily on persuading the American Congress to block it. We expect that Israel’s campaign will be quietly paralleled by reservations against the Agreement expressed by the Gulf states, for whom an Iran with renewed oil revenues means regional mischief.
But in the end, the Congressional vote (which must come before September 12 under the Corker legislation) does not appear to create a roadblock to the other participating countries going forward, and Iran might well seek to go forward with the deal even if the U.S. stands alone in failing to carry it out. We do not foresee a circumstance in which the Obama Administration’s U.N. delegate lodges a veto of the Security Council resolution that the Administration is presenting today. Thus, this is a deal that could survive—whether or not the U.S. stays in.
What U.S. Sanctions Will Change?
This has been the trickiest question for U.S. sanctions lawyers. The Lausanne Framework, as reflected in the State Department’s characterization, made clear that only “nuclear-related” sanctions would be lifted. What Lausanne termed “[c]ore provisions” in the current U.N. Security Council resolutions dealing with transfers of sensitive technologies would be preserved, as well as longer-standing restrictions on conventional arms and ballistic missile supplies. As we noted in our post-Lausanne analysis, “it is no simple matter to determine which current U.S. sanctions are ‘nuclear-related’” and which are not.
The Vienna Agreement fleshes out this key uncertainty, but it opens new ones. To those not steeped in the fits and starts of the Iran regulations overseen by OFAC, it can be difficult to unpack. The magic is, of all places, in a footnote.
The central language on removal of sanctions is contained in Annex II of the Agreement, which lists “Sanctions-related commitments” of the parties. The U.S. commitments, contained in part B.4 of that annex, are “to cease the application of” and seek legislative removal of “all nuclear-related sanctions” on Iran. That part goes on to specify a comprehensive list of U.S. sanctions that will no longer be applied:
- Transactions with primary financial and banking institutions, including the Central Bank of Iran, Bank Melli, Bank Saderat, and other key Iranian players (such as NIOC and NITC), which are to be removed from the U.S.’s list of “Specially Designated Nationals” (SDNs).
- Sanctions on the issuance or underwriting of government bonds by the Iranian government.
- Insuring or reinsuring ordinary (non-nuclear) activities and transactions.
- Investment in or support of the oil, gas, or petrochemical sectors in Iran.
- Sale or purchase of Iranian oil, gas, or petrochemicals and refined products.
- Shipping, port, and shipbuilding transactions.
- Trade in gold and other metals.
- Trade in Iran’s automotive sector.
The catch is in footnote 6, which hangs off the phrase “nuclear-related sanctions” preceding this list. Footnote 6 states:
The sanctions that the United States will cease to apply, and subsequently terminate … under section 4 are those directed towards non-U.S. persons. (Emphasis added)
Sanctions applicable to U.S. persons—that is, U.S. nationals, entities incorporated in the U.S., or entities controlled by U.S. persons or parent companies—will be unchanged, as the footnote confirms: “U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted by this JCPOA” without prior authorization by OFAC.
All of this is consistent with the Obama Administration’s core premise that the Lausanne Framework and Vienna Agreement are directed to a specific problem—restraining Iran’s nuclear weapon development capability—and not to the broader questions of Iran’s provocative conduct in the region. Thus, what will be removed from the “architecture” of the wide-sweeping U.S. Iran sanctions are four specific executive orders (and portions of a fifth), each issued by President Obama between May 2011 and July 2013, expanding sanctions on banking transactions, dealings in Iranian rials, or providing goods or support to the Iranian energy or petrochemical sectors.
Iran’s primary revenue generator, oil, is illustrative. The U.S. ban on imports of Iranian oil, imposed in 1995 (well before the advanced state of the Iranian nuclear program was revealed in 2009), will remain in place, and it will continue to restrict any U.S. national or U.S.-controlled company (even if located overseas) from trading in Iranian crude. But the U.S. program initiated in 2011 to pressure other countries to reduce purchases of Iranian oil will be discontinued. At its peak, that program successfully sliced Iranian crude exports to China, Japan, South Korea, and other large consuming countries by more than half, and was one of the levers that brought Iran to the table to negotiate with the P5+1. In the view of the framers of the Vienna Agreement, the cutoff of Iranian oil sales to third countries was part of the post-2011 sanctions that were fashioned in response to the September 2009 disclosure of Iran’s secret nuclear program. But the prohibition on dealings by U.S. nationals with Iranian oil long preceded that disclosure, and thus was not a “nuclear-related” sanction within the scope of the Vienna negotiations.
Similarly, the long-standing centerpiece of OFAC’s Iran Transaction and Sanctions Regulations—prohibiting any U.S. person from dealings with the Iranian government—remains untouched by Vienna. So too does the 2012 extension of this prohibition to controlled foreign subsidiaries of U.S. companies—though, as noted below, it may be accompanied by a more lenient licensing policy for the overseas subsidiaries of American companies.
Also not changed is the uncertainty we encounter frequently for non-U.S. technology companies that might see new opportunities in post-Vienna Iran. As a designated “state sponsor of terrorism” since 1984 (following the bombing of the U.S. Marine barracks in Lebanon), Iran is barred from receiving U.S.-origin military or “dual-use” commercial products or technology. Those restrictions are reflected in the export control regimes operated by the State and Commerce Departments. Vienna does not change those. As a result, clients that might otherwise be freed post-Vienna to sell to Iranian buyers will have to examine their products carefully to ensure that they are not snagged by the “reexport” rules on items that contain U.S.-origin components or technology.
Will European or Asian Competitors Get a Leg Up?
Our U.S. clients often have a third question: will I be disadvantaged, as compared to my European or Asian competitors, in getting into the Iran market once it opens?
The answer is not clearcut. Annex II contains a further component that could assist American suppliers and vendors: section 5 obligates the U.S. to “[l]icense non-U.S. entities that are owned and controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.” This raises two questions.
First, the influential footnote 6 specifies that “U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted by this JCPOA.” How does this square with the affirmative U.S. commitment in the text of section 5 to “license” such entities and transactions? The answer may lie in the maw that always accompanies drafting any complex international agreement, particularly one involving pressurized negotiations in a neutral capital with eight parties at the table. But it may also lie in the differences between the enumerated specific sectors listed in section 4, to which the U.S. sanctions will no longer apply when engaged in by a non-U.S. person, and the generalized licensing undertaking in section 5. The drafters’ aim may be to make clear that U.S. companies (and their foreign subsidiaries) should not expect to enjoy liberalized licensing treatment if the transaction involves the banking, insurance, energy, or shipping sectors (covered by section 4), as opposed to non-core sectors in which licensing will tilt liberally. That interpretation will not sit easily with the Iranians, but if the doors are opened to dealings with non-U.S. counterparties in these sectors, they may view it as inconsequential.
Second, how precisely will the White House and OFAC implement this foreign-sub licensing provision? If confronted with a license application from the foreign operation of a U.S. company that is competing against a European or Asian competitor for an Iran project, will a license be available (as section 5 suggests)?
To a degree, this question may be affected by the interpretation of section 5’s phrase “activities with Iran that are consistent with this JCPOA.” That phase may suggest that if an activity is permitted by the specific provisions of section 4 of the Agreement—for example, a banking activity outside the U.S. that was subject to the U.S.’s expanded nuclear-related sanctions but no longer is proscribed after Vienna—it would be “consistent with th[e] JCPOA” for an overseas affiliate of a U.S.-controlled bank to engage in that activity as well. But the phrase may also be read by OFAC to mean that activities that are not permitted for U.S. persons cannot, by definition, be “consistent with” JPCOA if carried out by a U.S. foreign sub.
In the sanctions regimes that sweep in U.S.-controlled foreign subs (i.e., Cuba and Iran), OFAC’s received practice is to treat controlled subs the same as the U.S. parent. Yet it takes no prescience to anticipate pleas to OFAC from overseas subs of U.S. companies who are competing for Iran business against competitors that need no government authorization to bid. The resolution of this uncertainty will be influenced by the way the political climate in the U.S. develops toward the Vienna Agreement in the next 18 months, and perhaps by which party controls the White House after the 2016 election.
This much is clear: the Vienna Agreement recognizes plainly that U.S. companies must have lower expectations than E.U. companies for the post-Vienna environment. Look at the closing paragraph of the “sanctions” section of the Agreement. Paragraph 33 provides the boilerplate that the P5+1 (including the U.S.) “will agree” with Iran “on steps to ensure Iran’s access in areas of trade, technology, finance, and energy.” But it continues that “the E.U.”—but not the U.S.—“will further explore possible areas of cooperation between the E.U., its Member States, and Iran,” including “export credits … project financing and investment in Iran.” There is no obligation for the U.S. to do the same, and the Agreement’s preservation of the basic OFAC prohibitions on U.S. person dealings with Iran underscores that no opening for broader U.S. business engagement is visible as a result of Vienna.
How Would “Snap-Back” Work?
A further question has arisen in the weeks following the April Lausanne announcement, which referred to the ability of the U.S. and the other P5+1 countries to reimpose sanctions instantly (“snap back”) in the event Iran cheats on the nuclear program limits of the Agreement. The Obama Administration has emphasized that it will retain the “architecture” of the present Iran restrictions, which can be reinvoked by the same executive orders of the President that will be withdrawn under Vienna.
The Agreement and its Annexes are not specific about how “snap back” will occur. We see no reason to believe that the President’s powers to reimpose the withdrawn sanctions (or indeed to order new ones) in the event of Iranian cheating are limited; those powers have been used for years by OFAC on an overnight basis when crises arise.
We do note, however, one critical question the language of the Vienna Agreement raises: under section 30 of the Agreement, each signatory agrees that it “will not apply sanctions or restrictive measures to persons or entities for engaging in activities covered by the lifting of sanctions provided for in this JCPOA.” What happens if a company enters into a multi-year contract with an Iranian counterparty once sanctions are lifted, then the sanctions are reimposed? Does section 30 guarantee that the company is insulated from being sanctioned if it continues to perform that contract? Lawyers working on terms for Iran deals in the post-Vienna climate will want to anticipate this concern and ensure that a U.S. or other Western company commencing business with Iran has a clear “out” in the event reimposed sanctions lead to complications.
This assessment of yesterday’s Vienna Agreement addresses our initial thoughts on the area about which our clients ask most frequently—how the sanctions will work post-agreement.
There is, of course, an entirely separate part of the Vienna Agreement that falls outside our expertise: the undertakings by Iran in Annex I with respect to its nuclear program, and the system for monitoring and confirming Iranian compliance. We noted in our earlier analysis how comprehensive that monitoring regime is, at least on paper. The Agreement’s sanctions-removal provisions are triggered by what the Agreement refers to as “the IAEA-verified implementation by Iran” (Annex V, sec. 14), and one wonders if there is any single harder job in public life than that of the IAEA verification team under this Agreement.
There will be a variety of classified protocols related to the IAEA verification process, including subprotocols governing how the P5+1 countries will be given ongoing comfort that the IAEA has the access, in a timely manner, to support the conclusions it reports on Iranian compliance. There will also be unavoidable suspicion, already loudly voiced by opponents of the Vienna Agreement and by tentative supporters alike, that there are “knives hidden behind the back of Iran’s smiling diplomats” and that Iran will use revenues freed up by sanctions relief to foment more upheaval in the Middle East. Both suspicions will be verified or disproved only by history, though it is worth noting that the technical means to detect cheating and to monitor the funds flows that follow renewed oil sales by Iran have advanced well beyond even those that proved relatively effective in the days of the Saddam Hussein regime in Iraq.
In the end, though, we draw some comfort from the prior broad-scale agreement that resolved a sustained crisis between Iran and the U.S.—the Algiers Accords, signed in 1981 to end the American embassy hostage crisis. That agreement was less comprehensive than the Vienna Agreement, and grew out of indirect negotiations through a neutral intermediary rather than the direct negotiations of the eight global powers that met under the spotlights in Lausanne and then in Vienna for weeks. It did not work perfectly by any measure. Iran (and the arbitrators it appointed to the Hague Tribunal that handled claims under the accord) proved difficult and non-compliant at points along the way.
But it did work. No one thought of it as a transformative agreement (as some believe the Obama White House hopes the Vienna Agreement will prove to be), and it was not transformative. But the international system fashioned by able lawyers and negotiators in the Algiers process proved a basic success for international law. We hope the Vienna Agreement will achieve that status as well.