Iran and the international community have taken historic steps in recent weeks toward resolving long-standing concerns about Iran's nuclear program. Both the United States and European Union provided sanctions relief, with potential—but limited—opportunities for non-U.S. companies interested in exploring business in Iran. This Update outlines the U.S. and EU actions with respect to Iran sanctions and offers guidance for how to evaluate these developments.
As referenced in an earlier Update1, a "framework agreement" was reached in November between Iran and the "P5+1"2 in November that requires Iran to take a number of steps with respect to its nuclear program, in exchange for some relief from Western sanctions. After several rounds of technical negotiations concerning implementation, the framework agreement came into effect on January 20. Negotiations on a longer-term arrangement begin in mid February in New York3.
U.S. and EU Sanctions "Relief"
In announcing specific sanctions "relief," the Obama Administration focused on its "secondary sanctions." These are measures focused primarily on non-U.S. businesses that are not themselves engaged in any unlawful activities or subject to U.S. jurisdiction. A company identified as subject to these sanctions can be restricted from accessing the U.S. financial system or receiving investment from any U.S. person, prevented from exporting to the United States, or be subject to a range of other measures. In contrast, "primary sanctions" are aimed at Iran, Iranian companies, or their surrogates. This focus underscores several key themes for U.S. and foreign companies:
- All sanctions remain in place for U.S. companies. For purposes of Iran sanctions, this includes foreign subsidiaries of U.S. companies.
- All of the sanctions relief for foreign companies subject to secondary sanctions lasts only through July 20, 2014, unless and until the broader negotiations yield positive results. Any transactions potentially allowed by the new relief must begin and end during this window. Action taken before January 20 remains sanctionable, as does any action taken after July 20.
- The U.S. government will continue to pursue enforcement against those violating Iran sanctions for any activities prior to January 20 and against those who use this agreement to evade sanctions. As discussed below, the Treasury Department's Office of Foreign Assets Control (OFAC), which administers most U.S. sanctions, emphasized this through the issuance of two important penalty cases on January 23 and January 27.
The industries and activities receiving temporary sanctions relief are:
- Iranian export of petrochemicals (including support of Iranian petrochemical companies)
- Iranian automotive sector
- Sale to or from Iran of gold and other precious metals
- Spare parts for Iranian civil aviation industry, if related to safety
- Sale of Iranian crude oil
In general, the sanctions relief consists of permitting financial institutions to process non-U.S. dollar payments4 in support of these activities and committing that no entity engaged in activities in these sectors between January 20 and July 20 will be placed on the Specially Designated Nationals List or will be subjected to the broad "menu" of potential sanctions set out in the Iran Sanctions Act of 1996 and other authorities. The P5+1 are also collaborating on steps to ease humanitarian trade, defined as food, agricultural products, medicine, and medical devices.
On the European Union side, the principal change is an increase in thresholds required for monetary transfers for non-sanctioned trade that requires notification or authorization from national authorities. With this change, notification is required for transfers to or from Iran of €100,000 or above, and authorization is required for transfers of €400,000 or above.5 The EU is also easing its own sanctions on petrochemicals, gold and other precious metals, and crude oil. Just as with the U.S. steps, these measures are only in place through July 20.
Navigating the Relief
The U.S. government's sanctions relief does not signal that it expects Iran to be "open for business" for U.S. companies any time soon. The January 20 – July 20, 2014 period is a discrete window of time in which some types of transactions and conduct may begin and end; anything else must be reviewed by the U.S. government. Given that existing EU sanctions are less restrictive than U.S. sanctions, there may be more European companies returning to business with Iran.
However, companies looking to take advantage of this relaxing of sanctions should review carefully whether proposed activities fall within the scope of the January 20th announcement to avoid government scrutiny. OFAC will focus its enforcement efforts on attempts to evade sanctions during the period or create a perception that there is a change in the U.S. approach to Iran.
Indeed, on January 23, OFAC announced a $152 million penalty against Luxembourg-based Clearstream. Just four days later, it announced a $9.4 million penalty against the Bank of Moscow. In both cases, the conduct related to efforts to hide transactions with Iran from U.S. persons and regulators. Although the cases involve transactions between 2007-2009 and the timing of the announcements might be due to many factors, the Obama Administration appears to be sending a message about a continued tough stance against Iran, those who provide unlawful support to Iran, and those who attempt to draw U.S. persons into such support.
Congress continues to consider new sanctions legislation, which, as of this writing, now has 59 sponsors and co-sponsors. On January 28, two House subcommittees held a hearing to air concerns about the framework agreement and prospect for negotiations. This means that companies conducting or interested in conducting business with Iran will need to continue to watch New York, Geneva, Vienna, and other centers of negotiation, as well as Capitol Hill.