On May 8, 2018, the President announced his decision to cease the United States’ participation in the Iran Joint Comprehensive Plan of Action (“JCPOA” or the “Agreement”) and to begin re-imposing, following a wind-down period, the U.S. nuclear-related sanctions that were lifted to effectuate the JCPOA. In conjunction with this announcement, the President issued a National Security Presidential Memorandum (the “Presidential Memorandum”) directing the U.S. Department of the Treasury and other U.S. government departments and agencies to take the actions necessary to implement his decision.
In announcing the decision, the President cited perceived weaknesses of the Agreement. Among the weaknesses cited were that the Agreement allowed Iran to continue enriching uranium, did not impose limits on Iran’s activities in Syria and Yemen and its alleged support for terrorism, lacked adequate inspection mechanisms, and allowed Iran’s obligations to sunset after a relatively short period of time.
The President announced that the U.S. intends to institute “the highest level of economic sanction” against Iran. He also stated that the U.S. would work with its allies to achieve a solution to the Iran nuclear threat and to eliminate the threat of Iran’s ballistic missile program and stop its alleged support for terrorist activities. Meanwhile, the EU has announced its intention to continue implementing the JCPOA in all respects and its expectation that Iran will do the same. The EU has promised to take steps to attempt to immunize EU companies from the impacts of U.S. sanctions where possible.
I. The Mechanics of the U.S. Withdrawal from the JCPOA
Through the Presidential Memorandum, the President has directed the Secretary of State, in consultation with the Secretary of the Treasury and the Secretary of Energy, to “take all appropriate steps to cease the participation of the United States in the JCPOA.” The Presidential Memorandum directs the Secretary of State and the Secretary of the Treasury to revoke the statutory waivers required to preserve the JCPOA, including those issued under the National Defense Authorization Act for Fiscal Year 2012; the Iran Sanctions Act of 1996; the Iran Threat Reduction and Syria Human Rights Act of 2012; and the Iran Freedom and Counter-proliferation Act of 2012. The Presidential Memorandum requires that these steps be accomplished as expeditiously as possible, and in no case later than 180 days from May 8, 2018, the date of the memorandum.
The Secretary of State and the Secretary of the Treasury will also coordinate with respect to:
(i) preparing any recommended executive actions, including documents to re-impose sanctions lifted by Executive Order 13716 of January 16, 2016; (ii)preparing to re-list persons removed from relevant sanctions lists under the JCPOA; (iii)revising relevant sanctions regulations as necessary; (iv)issuing limited waivers during the wind-down period, as appropriate; and (v) preparing guidance necessary to educate U.S. and non-U.S. business communities on the scope of prohibited and sanctionable activity and the requirement to unwind sanctioned activity with Iranian persons.
The Presidential Memorandum states that these steps should be accomplished in a manner that, to the extent reasonably practicable, “shifts the financial burden of unwinding any transaction or course of dealing primarily onto Iran or the Iranian counterparty.”
To effectuate this action, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) expects to revoke or amend, as appropriate, general and specific licenses issued in connection with the JCPOA. In place of existing licenses, OFAC intends to issue new authorizations to allow the wind down of transactions and activities that were authorized pursuant to the revoked or amended general and specific licenses. At the end of the 90-day and 180-day wind-down periods, as applicable, the sanctions will come back into full effect.
II. Requirement to Wind-Down Sanctionable Activities Prior to August 6, 2018 or November 5, 2018, as Applicable
OFAC will allow 90 days, until August 6, 2018, for foreign persons to wind down the following sanctionable activities:
- Purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
- Direct or indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals, such as aluminum and steel, coal, and software for integrating industrial processes;
- “Significant” transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
- Purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt;
- Sale, supply, or transfer of goods or services used in connection with Iran’s automotive sector; and
- Associated services related to the above.
OFAC will permit 180 days, until November 5, 2018, for foreign persons to wind down the following sanctionable activities:
- Transactions involving Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
- Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
- Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions, imposed under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
- The provision of specialized financial messaging services to the Central Bank of Iran and certain Iranian financial institutions as described in the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
- The provision of underwriting services, insurance, or reinsurance;
- Certain investment and services related to Iran’s energy sector, including, investment to develop Iran’s oil and gas fields, sales of gasoline and related equipment or services to Iran, the provision of equipment or services for oil, gas, and petrochemical production, and the transport of Iranian crude oil; and
- Associated services related to the above.
In addition, effective November 5, 2018, the U.S. government will revoke the authorization for U.S.-owned or -controlled foreign entities to wind down activities in or involving Iran that had been authorized pursuant to General License H. This General License was designed to give foreign subsidiaries of U.S. companies more equal footing with European and other competitors operating under the EU’s JCPOA sanctions relief. When General License H is revoked, overseas subsidiaries that are “owned or controlled” by a U.S. person will no longer be permitted to engage in Iran-related trade other than in accordance with the wind-down license during the wind-down period or pursuant to a regulatory exception.
Lastly, no later than November 5, 2018, the U.S. government will re-impose, as appropriate, the sanctions that applied to persons removed from the List of Specially Designated Nationals and Blocked Persons (the “SDN List”) and/or other lists maintained by the U.S. government on January 16, 2016 — a total of at least 600. OFAC states that, depending on the authority or authorities pursuant to which these actions to re-list are taken, there may be secondary sanctions exposure for non-U.S. parties that engage in certain activities with these persons after their re-listing. Accordingly, OFAC recommends that a person conducting activities in Iran or with Iranian persons during the wind-down periods exercise due diligence sufficient to ensure that it is not knowingly engaging in transactions with persons on the SDN List or in activities that would be sanctionable under authorities targeting Iran’s malign activities.
III. What Activities Are Considered to Be Authorized During the Wind-Down Period?
OFAC advises that any non-U.S. person engaging in any activities that will be sanctionable as listed above should take the steps necessary to wind down those activities by the end of the applicable wind-down period so as to avoid exposure to sanctions or an enforcement action under U.S. law. While it has not yet defined the universe of permissible “wind-down” activities, OFAC states that when considering a potential enforcement or sanctions action with respect to activities engaged in after August 6, 2018, or November 4, 2018, as applicable, OFAC will evaluate efforts and steps taken to wind down activities and will assess whether any new business was entered into involving Iran during the applicable wind-down period. This suggests that OFAC may not consider the entry into new orders, projects or transactions during the wind-down period to constitute permissible “wind-down” activity.
OFAC has stated that, in the event that a non-U.S, non-Iranian person is owed payment after the conclusion of the relevant wind-down period for goods or services that were fully provided or delivered to an Iranian counterparty prior to the conclusion of the authorized wind-down period, the U.S. government would allow the non-U.S., non-Iranian seller to receive payment for those goods or services according to the terms of the written contract or written agreement, provided that (i) the written contract or written agreement was entered into prior to May 8, 2018; and (ii) such activities were consistent with U.S. sanctions in effect at the time of delivery or provision. The same general parameters apply to repayments on loans or credits extended to an Iranian counterparty prior to the end of the relevant wind-down period.
According to OFAC’s guidance, the provision or delivery of additional goods or services and/or the extension of additional loans or credits to an Iranian counterparty after the relevant wind-down period, including pursuant to written contracts or written agreements entered into prior to May 8, 2018, may result in the imposition of U.S. sanctions, unless such activities are exempt from regulation, authorized by OFAC, or otherwise not sanctionable. The U.S. government will evaluate matters falling outside the above parameters on a case-by-case basis and, in considering what potential enforcement or sanctions actions to take with respect to activities engaged in after November 4, 2018, OFAC will take into account the efforts to wind down activities involving Iran prior to that date.
IV. Outlook for U.S. Sanctions Implementation and Enforcement
Across a range of sectors, companies in France, Germany, Italy, and the U.K. have deep exposure - estimated $20 billion or more - to Iran following the 2016 implementation of the JCPOA. These companies, and the international financial institutions which facilitate banking transactions between Iran and Europe, now face the threat of the U.S. “secondary sanctions” described above. In this context, John Bolton, National Security Advisor to President Trump, recently stated that the U.S. is prepared to impose sanctions on European companies that continue to deal with Iran past the relevant wind-down periods.
EU regulatory authorities have been forced to react. European diplomats have proposed a mixture of retaliatory sanctions, a possible complaint at the World Trade Organization, and the possibility of issuing euro-denominated credit lines in support of Iran business. Since last week’s announcement, the UK Foreign Office has issued revised recommendations to British firms investing in Iran, urging them to consult the U.S. Treasury sanctions plans, as well as to seek their own legal advice on them. European companies must confront the reality of the U.S. secondary sanctions impacts resulting from Iranian business. Such sanctions can include loss of access to the U.S. financial system, placement on a U.S. denial list, and blanket prohibition on imports/exports to/from the United States, in effect forcing many companies to choose between doing business with Iran and doing business with the United States.
For the majority of U.S. companies who chose not to take advantage of the JCPOA extraterritorial sanctions relief, the sanctions picture remains unchanged. However, overseas subsidiaries of U.S. companies who were taking advantage of General License H have been provided only a short window of 180 days to wind down authorized activities. Exporters of U.S. aircraft and aircraft parts to Iran must wind down authorized transactions in an even shorter period- 90 days. Meanwhile, the international financial system is reacting to the news and contending with the reality that any activities benefiting Iran by or involving U.S.-owned or -controlled foreign entities, including U.S. correspondent bank accounts, that continue after the unauthorized wind-down period may be subject to civil or criminal enforcement, which in recent years have resulted in settlements with foreign banks in the hundreds of millions of dollars.