On July 14, 2015, after two years of sometimes intense negotiations, the United States, the United Kingdom, France, Germany, Russia, and China (known as the “P5+1” countries), along with the European Union, signed a Joint Comprehensive Plan of Action (JCPOA) with Iran in Vienna, Austria, to address concerns about Iran’s nuclear program. The JCPOA is designed to curb that program in return for certain relief from sanctions imposed by the United States, the European Union, and the United Nations.
As a threshold matter, BakerHostetler attorneys have extensive experience in evaluating the impact of the Iranian and other sanctions’ developments on individual businesses. We know the law and regulations in this area very well and have reviewed this agreement in detail. Our Partners have many years of experience, using our knowledge and relationships, in effectively representing clients before OFAC, the Department of State, and the other U.S. Government agencies involved in these and related international trade matters.
The following is a review of the sanctions relief to be provided, its timing, and its implications for business. In this regard, readers need to understand that no sanctions have yet been lifted, and none is likely to be lifted until sometime after January 1, 2016. As explained below, even then, not all sanctions will be terminated, and companies, particularly U.S. companies, need to tread carefully to make sure they do not violate those sanctions that remain in place.
Existing U.S. Sanctions Against Iran
Over the last 28 years, the United States has implemented a broad web of sanctions against Iran. This sanctions web includes a direct or primary embargo of Iran, which covers exports to, and imports from, Iran, business activities by U.S. persons with Iran, including investments in that country, as well as U.S. person financial transactions with Iran. Since 2012, the definition of U.S. persons has included foreign entities owned or controlled by U.S. persons. In addition to the above restrictions, many Iranian persons, entities, vessels, and aircraft have been identified as Specially Designated Nationals (SDNs) or have been put on the Foreign Sanctions Evaders List (“FSE List”), resulting in a prohibition on U.S. persons entering into any transactions with them.
The U.S. restrictions on exports to Iran have covered not only exports from the United States, but also reexports of U.S.-origin items from foreign countries, as well as foreign-made items containing, in most cases, more than a de minimis amount of controlled U.S. content (10 percent, by value), and in some cases, containing any U.S. content. Shipments of food, medicine, and certain medical devices are not generally subject to the broad export restrictions.
In addition to the direct or primary embargo, the United States also can impose sanctions against foreign companies that engage in certain types of transactions of concern with Iran, including transactions involving the Iranian energy, petrochemicals, financial, automotive, and metals sectors, even if those transactions do not involve U.S. persons or U.S. goods, software, or technology. These secondary sanctions can take a variety of forms, up to and including prohibiting the sanctioned foreign person from engaging in any transactions with U.S. persons.
JCPOA Changes to U.S. Sanctions Against Iran
Under the JCPOA, the U.S. secondary sanctions against Iran are scheduled to be lifted. These secondary sanctions include the following types of foreign person transactions with Iran:
- Certain financial and banking transactions with Iranian banks and financial institutions, including the Central Bank of Iran and specified individuals and entities identified as Government of Iran by the Office of Foreign Assets Control on the Specially Designated Nationals and Blocked Persons List (SDN List), including the opening and maintenance of correspondent and payable through-accounts at non-U.S. financial institutions, investments, foreign exchange transactions and letters of credit);
- Transactions in Iranian Rial;
- Provision of U.S. banknotes to the Government of Iran;
- Bilateral trade limitations on Iranian revenues abroad, including limitations on their transfer;
- Purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds;
- Financial messaging services to the Central Bank of Iran and certain Iranian financial institutions;
- Underwriting services, insurance, or reinsurance;
- Efforts to reduce Iran’s crude oil sales;
- Investment, including participation in joint ventures, goods, services, information, technology and technical expertise and support for Iran's oil, gas and petrochemical sectors;
- Purchase, acquisition, sale, transportation or marketing of petroleum, petrochemical products and natural gas from Iran;
- Export, sale or provision of refined petroleum products and petrochemical products to Iran;
- Transactions with Iran's energy sector;
- Transactions with Iran’s shipping and shipbuilding sectors and port operators;
- Trade in gold and other precious metals;
- Trade with Iran in graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
- Sale, supply or transfer of goods and services used in connection with Iran’s automotive sector;
- Sanctions on associated services for each of the categories above;
- Removal of certain individuals and entities from the SDN List, the Foreign Sanctions Evaders List, and/or the Non-SDN Iran Sanctions Act List; and
- Terminate Executive Orders 13574, 13590, 13622, and 13645, and Sections 5 – 7 and 15 of Executive Order 13628.
As part of the lifting of the secondary sanctions, between $50 and $100 billion in payments for Iranian oil currently being held in foreign banks will be released to Iran.
While U.S. direct or primary sanctions against Iran will, for the most part, remain in place, there will be some easing of them in the following respects:
- The United States will license importation of Iranian-origin foodstuffs, including caviar and pistachios, as well as of Iranian carpets.
- The United States will license shipments to Iran, for exclusive civilian end use, of commercial passenger aircraft, related parts and components, and associated services.
- As noted above, a number of Iran-related persons, entities, vessels, and aircraft, including certain Iranian banks, the National Iranian Oil Company, the National Iranian Tanker Company, vessels of the Islamic Republic of Iran Shipping Lines (IRISL), and Iran Air aircraft will be removed from the SDN and FSE Lists in two separate stages (although transactions with them are likely to continue to be prohibited).
- The United States will license certain Iran transactions by foreign companies owned or controlled by U.S. persons, if they are consistent with the JCPOA.
OFAC, the agency responsible for administering most aspects of the U.S. sanctions against Iran, will provide guidance regarding the licensing approach it will be taking.
Other than in these respects, the U.S. direct embargo of Iran is not being lifted as a result of the JCPOA.
EU Sanctions Against Iran
Unlike the U.S. sanctions against Iran, which have included both primary and secondary aspects, EU sanctions against Iran have principally involved direct sanctions applicable to EU persons and companies, and have not involved a comprehensive embargo of Iran. Indeed, the EU’s direct sanctions have been targeted, and have involved similar types of activities as those covered under the U.S. secondary sanctions. Under the JCPOA, the following EU sanctions are scheduled to be lifted:
- Transfers of funds between EU persons and entities, including financial institutions, and Iranian persons and entities, including financial institutions;
- Banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the territories of EU Member States;
- Provision of insurance and reinsurance;
- Supply of specialized financial messaging services, including SWIFT, for certain persons and entities, including the Central Bank of Iran and Iranian financial institutions;
- Financial support for trade with Iran (export credit, guarantees or insurance);
- Commitments for grants, financial assistance and concessional loans to the Government of Iran;
- Transactions in public or public-guaranteed bonds;
- Import and transport of Iranian oil, petroleum products, gas and petrochemical products;
- Export of key equipment or technology for the oil, gas and petrochemical sectors;
- Investment in the oil, gas and petrochemical sectors;
- Export of key naval equipment and technology;
- Design and construction of cargo vessels and oil tankers;
- Provision of flagging and classification services;
- Access to EU airports of Iranian cargo flights;
- Export of gold, precious metals and diamonds;
- Delivery of Iranian banknotes and coinage;
- Export of graphite, raw or semi-finished metals such as aluminum and steel, and export or software for integrating industrial processes;
- Designation of certain persons, entities and bodies (asset freeze and visa ban); and
- Associated services for each of the categories above.
The lifting of these EU sanctions, unlike the removal of U.S. sanctions, which, as noted above, is mostly limited to those sanctions against foreign persons, will allow EU persons and entities to engage directly with the Government of Iran, Iranian entities, and Iranians in the above types of, now to be permitted, commercial transactions. They also will be able to continue to engage in a wide variety of other transactions that were not previously prohibited. Two areas where EU sanctions against Iran are likely to remain are continued asset freezing against certain individuals and entities, and restrictions on exports of items that could be used by Iran for internal repression/suppression of human rights, or are otherwise controlled for national security or other reasons separate from the nuclear-related sanctions.
The UN sanctions against Iran have principally focused on prohibiting certain nuclear-related activities, and exports of arms, such as battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, and missiles or missile systems, and missile-related technology, as well as on the imposition of asset and travel bans against certain Iranian individuals/entities.
Timing of Sanctions Lifting
No sanctions have been lifted yet. Most U.S., EU, and UN sanctions are scheduled to be lifted on the JCPOA’s “Implementation Day.” There is no fixed date as to when Implementation Day will occur. Rather, it is the date that the International Atomic Energy Agency (IAEA) certifies that Iran is implementing its initial nuclear-related JCPOA obligations. Most observers believe this certification is likely to take place in approximately six to nine months.
The initial lifting of the U.S. sanctions is scheduled to occur through presidential waivers of the various secondary sanctions that have been legislatively imposed. It remains to be seen what will happen if the U.S. Congress disapproves of the JCPOA in the 60-day time frame it has to consider it, and is then able to override a promised presidential veto of such disapproval, particularly since the JCPOA has already been approved unanimously by the UN Security Council.
The legislative provisions whose application the president will waive are not scheduled to be formally repealed until “Transition Day” – eight years from now, when the IAEA is scheduled to certify that all nuclear material in Iran remains in peaceful activities. At that point, UN member countries will be allowed to, and the EU will, terminate their restrictions on the export to Iran of the missile-related items currently prohibited, and both the EU and the United States will remove certain additional individuals from their respective sanctioned persons lists. Finally, in five years, UN member countries will not be generally prohibited from shipping previously restricted conventional arms to Iran.
Sanctions “Snap Back”
The JCPOA establishes a dispute resolution system for addressing disagreements on JCPOA implementation. Pursuant thereto, the sanctions to be lifted can be reimposed if a 35-day dispute resolution period cannot resolve the suspected Iranian breach. The UN Security Council would then have 30 days to vote on a resolution to continue the lifting of sanctions. Unless such resolution is approved (the United States could veto it), the sanctions would be reimposed/“snapped back.”
Evaluation of the Agreement From a Business Perspective
The JCPOA will significantly benefit Iran by releasing to it its substantial oil-related funds currently in foreign banks, allowing it to begin sourcing key equipment for its critical energy industry, and providing for its reintegration into most of the global economy. The JCPOA will also benefit EU businesses by allowing them to sell a wide range of products to Iran and engage in financial transactions with that country.
In the near term, the benefits to U.S. businesses will be rather limited. Except in the narrow areas discussed above, where the U.S. primary embargo of Iran will be eased through licensing, exports to that country will continue to be restricted. Even in the areas where licensing will occur, its nature and scope are yet to be determined, and U.S. companies will likely want to move slowly until the scope of the liberalization becomes clearer.
In the longer term, if the JCPOA is implemented successfully and Iran abides by its commitments, restrictions on trade by U.S. companies in nonsensitive items can be expected to be rolled back, probably in stages. However, in light of Iran’s record of support for terrorism, and its destabilizing activities in the Middle East, restrictions on trade in military and many so-called “dual use” items are unlikely to be eased, absent a change in its policies.
We will provide updates on sanctions events involving Iran, Cuba, and other countries in the coming months, particularly as developments warrant.