On October 13, 2017, as part of his administration’s new Iran strategy, US President Donald Trump declined to recertify the Joint Comprehensive Plan of Action (JCPOA) to the US Congress. President Trump stated that he is directing his administration “to work closely with Congress and our allies to address the deal’s many serious flaws so the Iranian regime can never threaten the world with nuclear weapons.” The Trump administration is not seeking to pull out of the JCPOA for the time being, but is looking to Congress to pass new legislation that would trigger the snapback of the nuclear-related sanctions if Iran crosses certain thresholds related to, among other things, its nuclear and ballistic missile programs.
The President’s “decertification” of the JCPOA does not automatically reimpose sanctions and, without further action, should not immediately endanger the nascent business in Iran that has begun to build momentum since the JCPOA was implemented in January 2016. The fate of the United States’ participation in the JCPOA, which has vital implications for the future of the JCPOA overall, currently rests with the US Congress, and it has been reported that a majority in Congress has little appetite for reimposition of US nuclear-related sanctions on Iran, let alone a full termination of the JCPOA.
What is the purpose of certification, and what happens now that President Trump has not certified?
Now that President Trump has chosen not to certify Iran’s compliance with the JCPOA, Congress may decide whether or not to take action against Iran, including whether to reimpose secondary sanctions on Iran. The certification requirement stems from a US law, the Iran Nuclear Agreement Review Act (INARA),1 which Congress passed prior to the United States accepting the JCPOA.
Pursuant to INARA, the President is periodically required to certify to Congress that (i) Iran is “transparently, verifiably and fully implementing” the JCPOA, (ii) Iran has not committed a material breach, (iii) Iran has not taken any action that could significantly advance its nuclear weapons program, and (iv) the suspension of sanctions is appropriate and proportionate to the measures taken by Iran, and vital to US national security interests. President Trump stated that the JCPOA is no longer in the national security interest of the United States.
As the President has announced that he will not make the certification, Congress may, within 60 days, introduce, consider, and vote on “qualifying legislation,” which will be entitled to expedited consideration. Qualifying legislation is defined in INARA as a bill reinstating statutory sanctions with respect to Iran. But this is only one option available to Congress; Congress could instead seek to pass new, non-nuclear sanctions on Iran (as it did recently), pass a measure threatening Iran with future action, or take no action at all.
What are waivers, and what does it mean that President Trump extended the waivers?
Separate and apart from the INARA certifications, the President also has the power to reimpose the pre-JCPOA nuclear-related sanctions or to impose entirely new sanctions on Iran. This is because President Obama implemented the JCPOA by issuing waivers of the relevant sanctions statutes. Each of the statutes that set out the US secondary sanctions includes time-limited waivers, which the President must renew at certain specified intervals; otherwise, the statutes automatically reimpose their respective secondary sanctions.2
The waivers are separate from the certification; President Trump could choose not to certify (as he has just done) while continuing to waive the relevant secondary sanctions. Notably, President Trump renewed certain of the waivers as recently as September 2017; this renewal may be an indication that he is not actively seeking to pull out of the JCPOA. Indeed, it has been reported that the Trump administration is not seeking to upend the deal, but to renegotiate certain of its terms, during which time the JCPOA would presumably remain in place.
What could happen if, because of congressional action or rescindment of waivers, the US secondary sanctions were reimposed?
Secondary sanctions give the US government the ability to impose significant penalties on non-US persons that engage in certain transactions involving Iran, even if those persons have no connections to the United States. For example, one of the suspended secondary sanctions authorizes the President to penalize non-US companies that make certain large investments or conduct certain types of business in Iran’s petroleum or petrochemical sectors. Other secondary sanctions can trigger hefty penalties on non-US banks for financing significant Iranian business.
If secondary sanctions were to be reimposed, non-US banks may decline to engage in, and perhaps terminate existing, Iran-related transactions or financing. Non-US companies doing business with Iran may also reconsider continuing such business. New opportunities could be shelved as a result of the increased sanctions risk profile associated with doing business in Iran, since many corporates and financial institutions may not want to risk being subject to US sanctions. Nevertheless, as discussed below, the effectiveness and durability of US secondary sanctions could depend on non-US governments’ responses to the reimposition of US secondary sanctions.
Are there any other steps the US government could take?
Rather than reimposing secondary sanctions, Congress could take other steps that would disrupt the ability of multinational companies to conduct business involving Iran. For example, Congress could pass legislation that reverses a key feature of the JCPOA (General License H) and prohibit non-US companies with US parents from doing business in Iran. Congress could also impose new sanctions on Iran, including potentially imposing secondary sanctions, that Congress could characterize as being related to Iran’s ballistic missile program, support for terrorism, or human rights violations, that arguably would not directly contradict the United States’ political commitments under the JCPOA.
What steps will Europe take in response to the decertification?
In response to President Trump’s announcement, European leaders have affirmed that the EU and its member states will continue to adhere to the terms of the JCPOA, and have urged the US Congress not to take any steps that might undermine the deal. Their outreach may be successful, as historically unilateral US sanctions – particularly unilateral US secondary sanctions – have not been as effective as harmonized multilateral sanctions. Penalizing EU companies and financial institutions for doing business with Iran could sour relationships between the United States and EU member states, and could politically isolate the United States from its EU allies.
As an alternative, the EU and the E3 (France, Germany and the UK) may consider tightening the JCPOA within its current form. The UK has suggested enforcing the terms of the JCPOA more strictly (while acknowledging that the International Atomic Energy Agency continues to affirm Iran’s material compliance with the terms of the deal). France has referred to plans to enter into talks for a follow-up agreement to enter into force in 2025, when sunset provisions in the JCPOA would otherwise release Iran from several nuclear-related restrictions. The EU may be willing to initiate or participate in sanctions targeting Iranian activities outside the scope of the JCPOA, such as activities related to Iran’s ballistic missile program, and the EU may attempt to calm negative attitudes in Iran toward the JCPOA and seek to convince Iran not to take further provocative actions, such as additional ballistic missile tests. It has in fact already been reported that the EU and Iran have been discussing Iran’s ballistic missile program and support of groups outside of Iran involved with conflicts.
The EU will need to assure European companies that it will remain committed to the JCPOA, and provide guidance on how the JCPOA could continue even without the United States’ participation. We understand this would primarily be accomplished on a political and/or diplomatic level. However, if the United States does reimpose secondary sanctions, the current EU blocking regulation, which prohibits EU persons from complying with certain US sanctions that reach beyond EU sanctions, may be widened in scope. Although an expansion of the EU blocking regulation may prohibit EU persons from complying with reintroduced US secondary sanctions, it is unlikely that this legal mechanism would eliminate the risk for EU companies of being subject to harsh penalties under US rules.
What does this mean for current and future Iran business, and what should companies do now?
The uncertainty around the future of the Iran deal has intensified now that President Trump has decertified the JCPOA. Even with Europe continuing to encourage and support companies doing business in Iran in compliance with the terms of the JCPOA, if the United States reimposes secondary sanctions, such business could quickly fall apart. The few international banks that are currently willing to enter into Iran-related transactions may cease such activity under the threat of being penalized by the United States, and the potential sting of US sanctions may outweigh the benefits companies are able to obtain from any recent Iran re-entry. If non-US companies stop doing business with Iran, there will likely be little motivation for Iran to continue complying with the terms of the JCPOA.
Even if Congress does not take action in the next 60 days, the decertification raises questions about the political durability of the JCPOA and amounts to a vote of “no confidence” in the nuclear deal. Now would be a good time for companies that are doing business in Iran to take stock of any exit provisions in contracts with Iranian counterparties, and to understand any steps that may be available in the event US secondary sanctions are reimposed. Companies looking to enter into contracts with Iranian counterparties may wish to consider how quickly and easily they would be able to terminate any Iran business and build in appropriate exit mechanisms (such as sanctions force majeure provisions, termination rights or liquidation rights that can be triggered even if unilateral US secondary sanctions are reimposed).
Updated: The EU has published a press statement stressing its commitment to the “continued full and effective implementation of all parts of the JCPOA,” and stating that the EU “encourages the US to maintain its commitment to the JCPOA and to consider the implications for the security of the US, its partners and the region before taking further steps.”3