Current sanctions on Iran
As a result of the JCPOA, many international sanctions measures on Iran (including most UN and EU sanctions measures) were lifted from 16 January 2016, opening up opportunities for non-US companies to resume previous activities in Iran or enter into new relationships with Iranian parties.
Notwithstanding US agreement to the deal, many US sanctions measures (primarily those targeted at alleged human rights abuses and terrorism activities, as opposed to Iran's nuclear weapons programme) remained in place following the deal. As a result, US persons generally remained prohibited from engaging in transactions directly or indirectly involving Iran. These US sanctions measures prohibited the following:
- US persons (including US companies, citizens or green card holders (wherever located), or anyone located in the United States) from engaging in most activities connected with Iran;
- US Dollar transaction involving Iran (including direct and indirect payments to or receipts from Iranian parties); and
- US persons facilitating conduct by non-US persons that would otherwise be prohibited by sanctions if that conduct had been carried out by a US person. Accordingly, US persons are prevented from arranging, approving or financing transactions involving Iran, including, for example, providing management oversight or approvals, structuring relationships or arranging intra-group funds transfers in support of Iranian business – even if the business is primarily conducted by non-US persons.
In addition, the US may impose "secondary sanctions" on non-US persons who engage in certain activities with Iran, including for example entering into relationship with parties connected to Iranian companies or organisations that are connected with US sanctions targets. This could result in the non-US person from being listed on the US list of Specially Designated Nationals (SDNs) (the United States' list of designated sanctions targets), effectively blocking their access to the US market (including existing US suppliers or customers) and the US financial system.
Since implementation of the JCPOA, most US secondary sanctions measures relating to Iran have been suspended. In addition, the US introduced an authorisation (General License H) whereby non-US subsidiaries of US parent companies were authorised to engage in business with Iran, provided such activities did not involve US persons, US-origin goods or services, US Dollar transactions or any Iranian parties listed as US sanctions targets.
The broad nature of current US sanctions measures mean that many international banks (in particular, banks with a significant presence in the United States or which process US Dollar transactions) are reluctant to engage in any business involving Iran, for fear of exposure to US penalties. This means that most major European banks have adopted a blanket policy position that they will not process payments directly or indirectly involving Iran. This has led to practical difficulties for European companies who have sought to engage in business with Iran, even if such activities are entirely legal under EU and national laws.
Effect of President Trump's announcement
Following President Trump's announcement, the US sanctions measures described above will remain in place and US persons will continue to be prohibited from engaging in activities relating to Iran. Critically, the US withdrawal from the JCPOA will primarily affect non-US persons who are doing business with Iran, particularly those who have been relying on the specific sanctions relief offered by the JCPOA.
A number of US sanctions measures on Iran, including many of the sectoral sanctions measures that were previously in place prior to the JCPOA, will be re-imposed at the end of a 90-day wind-down period, on 6 August 2018.
The remaining US sanctions measures, including sectoral sanctions on Iran's energy industry, will be re-imposed from 4 November 2018, 180 days after President Trump's announcement. At that time, non-US persons engaging with Iran will no longer benefit from relief from US secondary sanctions. Accordingly, non-US persons will need to ensure that their activities do not fall within the potential jurisdictional scope of US sanctions measures or they could risk exposure to penalties or designation under secondary sanctions.
The US Office of Foreign Assets Control (OFAC), which is responsible for administering compliance with US sanctions measures, has published guidance on the steps it has taken to allow companies to wind down existing business with Iran over the coming 3 or 6 months. For example, payments owed on goods or services fully provided or delivered by a non-US person to an Iranian company pursuant to a written contract or agreement entered into prior to 8 May 2018 may be made according to the terms of that agreement, without risk of exposure to US sanctions measures. This wind-down relief does not necessarily apply to new activities taking place after 8 May 2018, and will certainly not be available for new business entered into after 4 November 2018. Companies therefore need to exercise caution in relation before entering into any new business transactions involving Iran after 8 May 2018.
Further, OFAC has announced that it intends to revoke General License H "as soon as administratively feasible" and will be replacing this with an equivalent authorisation that allows non-US persons to wind down any existing activities that were previously authorised under General License H. That new wind-down licence will expire on 4 November 2018, after which such activities will be prohibited.
Iranian parties that were previously designated on the US Specially Designated Nationals and Blocked Persons List are expected to be re-designated from 5 November 2018. Any non-US persons that engage in activities directly or indirectly connected with SDNs risk exposure under US secondary sanctions.
Senior White House officials and other US Government representatives have indicated that the US is prepared to impose sanctions on European companies that continue to do business with Iran after the end of the wind-down period. There have also been suggestions that the US could impose new, additional sanctions measures on Iran over the coming months.
The European Union has expressed its regret over President Trump's announcement and confirmed that it is seeking to find a diplomatic solution with Iran that allows full and effective implementation of the JCPOA, notwithstanding the US withdrawal. It remains to be seen what steps this could involve. Some European leaders and officials have called for measures that provide waivers for European companies from exposure to US penalties, or for blocking legislation to be adopted that prevents European companies from complying with US sanctions. Until a clear approach has been established (whether or not this includes agreement from the US), companies should be taking steps to ensure compliance with US sanctions measures once they are re-imposed in November.
It is likely that non-US banks that had been processing payments to or from Iran will now be even more restricted due to the threat of US secondary sanctions, even if such transactions are entirely outside the scope of US jurisdiction.
As a result of the United States' decision to withdraw, a number of major European companies that had re-entered the Iranian market under the US sanctions relief granted by the JCPOA have announced that they are now preparing to unwind their operations there or will stop accepting new orders from Iran.
Practical steps to ensure continued compliance
As a result of this significant development, companies that are currently engaged in activities directly or indirectly involving Iran should be conducting a thorough assessment of these activities to ensure compliance with applicable sanctions measures. In particular, companies relying on the sanctions relief under the JCPOA should review their position and consider whether they are required to wind down these activities prior to 4 November 2018. This should include:
- considering whether activities are only permissible as a result of General License H or the relief from US secondary sanctions granted as a result of the JCPOA, and whether there may be a need to cease these activities before 4 November;
- ensuring that any ongoing activities that are subject to US jurisdiction are fully covered by an appropriate OFAC licence or authorisation;
- taking advice as to the likelihood of exposure to penalties (including designation as a sanctions target by the US), if considering to continue doing business with Iran after the expiry of the wind-down period;
- reviewing the contractual position vis-à-vis agreements with Iranian customers or suppliers, or other third parties such as distributors who are supplying goods or services to Iran on behalf of the company, and discussing the sanctions position in detail with Iranian counterparties in order to manage legal risks and commercial expectations; and
- continuing to ensure that there is no US involvement whatsoever in any business activities involving Iran including, for example, management approvals by US citizens or permanent residents, involvement of US parent companies or the supply of US-origin goods, components or services, and that this message is communicated clearly throughout any affected parts of the business.