On 14 July 2015, the so-called “P5+1” and the Islamic Republic of Iran reached an agreement on a Joint Comprehensive Plan of Action (JCPOA), the implementation of which aims to ensure the exclusively peaceful nature of Iran’s nuclear program in exchange for significant sanctions relief for Iran.
The calendar for implementation of the JCPOA identified five main events: Finalisation Day, Adoption Day, Implementation Day, Transition Day and UN Security Council resolution Termination Day. Finalisation Day took place on 14 July 2015 when the negotiations on the JCPOA were successfully concluded and endorsed. Adoption Day occurred on 18 October 2015 and marked the coming into effect of the JCPOA, as well as the beginning of Iran’s efforts to implement its nuclear-related commitments and EU and US preparations for the sanctions relief scheduled to come into effect on Implementation Day.
Implementation Day took place on 16 January 2016 – much sooner than many had expected – following the verification by the IAEA that Iran had implemented the nuclear-related measures contained in the JCPOA.
The impact of Implementation Day: Sanctions relief with caveats
In accordance with UN Security Council resolution 2231(2015) of 15 July 2015, all provisions of previous UN Security Council resolutions on the Iranian nuclear program have been terminated. Specific restrictions will remain in place in areas such as military, nuclear and missile technology.
The EU has lifted all its economic and financial sanctions taken in connection with the Iranian nuclear program. EU persons and entities can now engage again in activities and associated services in the following sectors (in addition to those sectors where there was never a prohibition under the sanctions):
- financial, banking and insurance;
- oil, gas and petrochemicals;
- shipping, shipbuilding and transport;
- gold, other precious metals, banknotes and coinage;
- metals (subject to an authorisation regime); and
- software (subject to an authorisation regime).
In addition, most (but not all) of the Iranian or Iran-related persons and entities who were listed as being subject to an asset freeze have been delisted. This means that EU persons and entities can now trade normally with them again.
The Information Note published by the EU on Implementation Day is drafted in a positive way, and appears to be designed to encourage EU businesses to re-engage with Iran.
In particular, the Information Note confirms that prohibitions on dealings with Iranian banks have been lifted, as have the prior authorisation and notification requirements for payments to and from Iranian persons and entities. It also states that the supply of specialised financial messaging services, including SWIFT, is now allowed for Iranian persons and entities, including the Central Bank of Iran and those financial institutions that are no longer subject to restrictive measures.
The same EU Information Note states that the import, purchase, swap and transport of crude oil and petroleum products, gas and petrochemical products from Iran is now allowed. As a result, EU persons and entities can now export equipment and technology and provide technical assistance, including training, for use in the oil, gas and petrochemical industries in Iran or to any Iranian person or entity, in or outside Iran. Similarly, the EU Information Note confirms that “investing in the Iranian oil, gas and petrochemical sectors, by the granting of any financial loan or credit to, the acquisition or extension of a participation in, and the creation of any joint venture with, any Iranian person that is engaged in the oil, gas and petrochemical sectors in Iran or outside Iran is now permitted.”
In sum, for European companies, it should, in principle, be back to business as usual for those involved in mainstream commercial and industrial sectors. However, care will still need to be taken for activities in more sensitive areas. Moreover, it should be remembered that certain persons and entities, including Iranian banks, remain on the asset freeze list. As a result, any business transactions involving those persons and entities will continue to be prohibited. The message here is therefore that proper due diligence will still need to be undertaken before entering into Iran-related business, both as to the nature of the business and also as to the identity of contractual partners in Iran.
Finally, even if there are no problems under the EU sanctions, there may nevertheless continue to be practical difficulties, particularly at the outset, because of the continuing effects of U.S. sanctions as outlined below.
The United States has lifted nuclear-related “secondary sanctions”, i.e. sanctions that were applicable only to non-US persons and entities with activities in the following sectors in Iran:
- financial and banking;
- energy and petrochemicals;
- shipping, shipbuilding, and automotive;
- port operators;
- insurance, re-insurance and underwriting;
- gold and other precious metals;
- graphite, raw or semi-finished metals such as aluminium and steel, coal, and certain software.
The provision of associated services for each of these categories is now also permitted.
The United States has also removed numerous individuals and entities from its List of Specially Designated Nationals and Blocked Persons (SDN List), Foreign Sanctions Evaders (FSE List), and/or Non-SDN Iran Sanctions Act List (NS-ISA List).
Additionally, the United States has taken steps under its “primary” sanctions (i.e. those that are applicable to U.S. persons and entities) to: 1) allow for the export, re-export, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran for exclusively civil, commercial passenger aviation end-use; 2) license the importation into the United States of Iranian-origin carpets and food, including pistachios and caviar; and 3) license non-US entities that are owned or controlled by a US person to engage in activities that are consistent with the JCPOA and applicable US law and regulations (“General Licence H”).
General Licence H
General Licence H relieves US parent companies from certain primary sanctions that were adopted to discourage them from allowing their foreign subsidiaries to engage in Iranian business. US-owned or controlled foreign entities may engage in certain transactions involving Iran that would otherwise be prohibited. This authorisation is not limited to specific economic sectors. However, it clearly circumscribes activities that remain outside of this exemption. In particular, it provides that US-owned or controlled foreign entities engaging in transactions may not export or re-export US-origin goods to Iran without separate authorisation from OFAC. Moreover, the language of the General Licence H implies that it is applicable only to subsidiaries that already exist, and that a U.S. person or entity cannot simply create a foreign subsidiary now in order to enter the Iranian market. As to foreign entities having operations in Iran and which become US-owned or controlled after Implementation Day, OFAC may need to clarify if these activities are covered by the General Licence H.
US primary sanctions continue to apply, meaning that US persons, including US companies and financial institutions, continue to be broadly prohibited from engaging in transactions or dealings with Iran and the Government of Iran unless such activities are exempt from regulation or authorised by OFAC. This implies for instance that foreign financial institutions need to continue to ensure that they do not clear US dollar-denominated transactions involving Iran through US financial institutions.
In addition, US sanctions which were outside the scope of the JCPOA will continue to apply (US anti-terrorism or human rights violations related sanctions).
The Guidance Relating to the Lifting of Certain US Sanctions Pursuant to the JCPOA on Implementation Day issued by the US Department of the Treasury and the US Department of State can be found here and the Frequently Asked Questions Relating to the Lifting of Certain US Sanctions Under the JCPOA on Implementation Day are available here.
Snapback of sanctions
In the event of significant non-performance by Iran of its commitments under the JCPOA, the so-called “snapback” provisions allow for the reintroduction of the sanctions that have been lifted or suspended. According to the EU “snapback” provisions, sanctions will not apply with retroactive effect and the execution of contracts concluded in accordance with the JCPOA while sanctions relief was in force will be permitted in order to allow companies to wind down their activities. For instance, the execution of investment contracts concluded before the reintroduction of sanctions will be permitted consistent with previous provisions when sanctions were originally imposed.
The United States equally confirms that it is committed not to impose sanctions retroactively for legitimate activity undertaken after Implementation Day and it would work with the parties concerned to minimise the impact of snapback sanctions on the legitimate activities undertaken prior to the re-imposition of sanctions.
Although “snapback” may not be an immediate concern in the current political climate, thought should nevertheless be given to the risks that such an eventuality represents for any significant long-term venture in Iran, and to the possible contractual protections against such risks.
Companies wishing to invest in Iran will welcome this easing of sanctions and the opportunities it entails in numerous sectors of the Iranian economy. However, companies should continue to exercise caution with regard to other regimes of sanctions, primarily US-related, that remain in place.