GTR asks Clyde & Co partner John Whittaker and associate Anousheh Bromfield to answer the most common legal questions about the lifting of Iranian sanctions.
1. What’s the timeline for removal of the sanctions?
The Joint Comprehensive Plan of Action (JCPOA) sets out four key milestones over a 10-year timeframe for the full termination of sanctions: Adoption Day, Implementation Day, Transition Day and Termination.
Adoption Day occurred on October 18, 2015:
- Iran agreed to apply the Additional Protocol, giving the International Atomic Energy Agency (IAEA) expanded rights of access to information regarding undeclared nuclear material and activities.
- The EU adopted the legal framework for the lifting of nuclear-related economic and financial sanctions in the form of Regulation 2015/1861.
- President Obama issued a memorandum asking appropriate agencies to take steps to give effect to US commitments regarding the suspension of certain Iranian sanctions (as set out in the JCPOA).
Implementation Day, when the first phase of sanctions will be suspended or terminated, is expected in Q1 2016, when the IAEA will be in a position to verify that Iran has implemented key nuclear-related measures described in the JCPOA [ie to never “seek, develop or acquire any nuclear weapons”]. However, given the complexities of the modifications required at Iran’s nuclear plants, this could be delayed. Transition Day, when the remaining sanctions will be lifted, will take place within eight years of Implementation Day and the JCPOA will be terminated 10 years after Implementation Day, provided that no UN sanctions are reinstated.
2. What’s the difference between US primary and secondary sanctions, and how do I know which ones are relevant to me?
US primary sanctions apply to US persons (defined as any US citizen, permanent resident, entity organised under the laws of the United States, including foreign branches, or any persons in the United States), while secondary sanctions apply to non-US persons.
US primary sanctions prohibit US persons dealing (directly or indirectly) with the government of Iran, companies and individuals in Iran, goods and services of Iranian origin, goods and services of US origin (including financial and banking services) for export to Iran and designated entities in Iran.
Secondary (or extra-territorial) sanctions seek to restrict non-US companies from trading with Iran in certain circumstances (as proscribed by US Executive Orders relating to Iranian nuclear proliferation) by imposing sanctions, including disqualification from US government contracts, restricting access from US credit and capital markets, US dollar clearing and asset freezing, on that company in the event that they do trade.
3. Which sanctions are included and not included in the JCPOA?
The extent to which the JCPOA will impact you or your business depends primarily on whether you are a US person and in what sector you operate.
In brief, the position with respect to US persons will not change on Implementation Day; the US primary sanctions will remain in place and subject to limited exceptions and licensing US persons will generally remain prohibited from engaging in any economic activity involving Iranian individuals or entities. The sanctions will continue to affect US dollar-cleared transactions. One key concession is that non-US entities owned or controlled by US persons will be licensed by the Office of Foreign Assets Control (OFAC) to engage in activities consistent with the JCPOA. In addition, secondary sanctions, which affect non-US persons, will be lifted on Implementation Day.
This is in contrast to the EU position, where nearly all restrictive measures against Iran (in respect of the nuclear issue) will be lifted. Even so, companies and individuals need to be aware of the specific provisions affecting their particular sectors. With limited exceptions, the EU sanctions affecting the finance, banking, insurance, shipping, ship-building, transport, gold, precious metals, other metals, bank notes, coinage and software sectors will be lifted. Although sanctions will also be lifted on certain dual-use and other controlled goods (those subject to an outright ban under EU Council Regulation 267/2012), licences will still be required for the export of these goods. The arms embargo and related sanctions will remain in place.
Many of the entities and individuals subject to asset freezes, including the Central Bank of Iran, will be removed from the designated entities list. However, individuals and companies will still need to conduct thorough due diligence and check that counterparties, particularly banks or military personnel, do not remain on the designated entities list.
4. Will US dollar transactions involving Iran be allowed after Implementation Day?
As a general rule, the position with respect to dollar payments will not change after Implementation Day. Therefore, unless dollar transactions comply with OFAC licence requirements they will be prohibited. Individuals and entities should refer to OFAC for specific details, but general exemptions will include the export of commercial passenger aircraft and related aircraft parts. There will also be some latitude regarding non-US subsidiaries of US companies and US imports of Iranian carpets and foodstuffs including pistachios and caviar.
Granting these licences allows OFAC to mitigate some of the competitive disadvantage that US companies and their subsidiaries will face after Implementation Day as a result of the sanctions relief granted to their foreign competitors by the EU as a consequence of the JCPOA.
5. How can I make sure I don’t violate the US primary sanctions that will remain in place?
As the position regarding US primary sanctions will remain largely unchanged, companies and individuals are advised to continue taking the steps that they have been to date in order to ensure compliance with the restrictive measures.
In case of doubt it would be wise to seek legal advice and the consent of the appropriate regulatory authorities for specific activities.
6. How can I ensure the protection of my investments and interests against the “snap-back” mechanism?
If Iran is deemed to violate the terms of the JCPOA at any stage, there is the potential that sanctions could be re-imposed, or “snapped back”. There has been much debate regarding how fast this could happen and how consistently the international snap-back would be applied by the US, EU and UN.
The EU Regulation explains that in the event of the reintroduction of restrictive measures, adequate protection for the execution of contracts concluded while sanctions relief was in force will be available but no such provision has been adopted by the US. In short, the risk of “snap-back” is very real and one which companies and individuals will have to factor in, together with other issues such as broader regulatory and compliance concerns, when considering whether to invest in Iran.
7. Where can I find the list of persons and entities that will be de-listed on Implementation Day?
These have been published in the annexures to the JCPOA. Further detail can be found in EU Regulation 2015/1861.
8. Will any steps be taken to give a general green light to selling and shipping soft commodities (like grains) to Iranian companies and ports using LCs from Iranian issuing banks to be confirmed by banks in Europe?
Soft commodities form part of humanitarian goods and in both the US and EU sanctions regime have been subject to special and more relaxed provisions. In broad terms, the export of certain soft commodities to Iran has been permissible provided a designated person is not involved in the transaction.
Under the current regime, there are legal and practical difficulties in dealing with LCs issued by Iranian banks. With the lifting of the EU sanctions affecting financial institutions under the terms of the JCPOA, the main challenge will be the position of the European banks (including US banks operating within the EU). Their position to date is to avoid any form of engagement with Iranian business and it is not apparent that their position is about to change, notwithstanding the relaxation of sanctions. Ironically the position in the US is less complicated in that the authorities are prepared to issue letters of comfort, in certain circumstances, to Iranian banks in order to effect soft commodities transactions.