Sanctions: the pre-Implementation Day Structure
Prior to recent sanctions relief following Implementation Day on 16 January 2016, different sanctions regimes against Iran were applicable. The UN and the EU had issued multilateral/regional sanctions in the form of Security Council Resolutions implemented into national legislation and EU Regulations. Unilateral sanctions were also adopted by various countries in particular the United States, as well as Norway, Switzerland and Canada. The United States adopted very wide-ranging “primary sanctions” preventing US firms and entities from entering into most kinds of business with Iran, and non-limited “secondary sanctions” which are directed against non-US firms and entities engaging in business in certain sectors in Iran.
Background: the JPOA and JCPOA
In 2013, Iran and the P5+1 countries (China, France, Russia, the United Kingdom, the United States and Germany) agreed on the JPOA that was implemented in 2014 and which gave rise to limited sanctions relief under EU sanctions (Regulation 42/2014) and a similar suspension of US secondary sanctions.
On 14 July 2015, Iran and the P5+1 agreed on the JCPOA that provided for a comprehensive nuclear sanctions relief to be granted upon verification by the IAEA that Iran has complied with the nuclear-related commitments it had undertaken in the JCPOA. This was achieved on 16 January 2016 (”Implementation Day”).
Implementation Day: What does it mean?
All EU nuclear related sanctions were lifted on Implementation Day. In particular, the easing of sanctions marked the following:
- Freedom of transfer of funds;
- Reinstatement of SWIFT services;
- Delisting of most persons and entities; and
- Lifting of prohibitions on business operations such as those in the:
- Oil, gas and petrochemical industry and other energy related activities;
- Shipping, shipbuilding and transport sectors;
- Gold, other precious metals, banknotes and coinage market;
- Insuranceand Re-insurance services; and
- Automotive Sector.
US secondary sanctions were suspended, meaning that since Implementation Day, the US will no longer penalise non-US persons and entities who enter into business in almost all economic sectors in Iran. However, the US continues to prohibit non-US persons and entities from entering into business with persons and entities who remain on the List of Specially Designated Nationals and Blocked Persons (“SDN List”).
A “US Nexus”: How It May Affect You
US primary sanctions remain in place: persons and entities owned or controlled by US persons will continue to be generally prohibited from entering into Iran-related transactions.
Nonetheless, primary sanctions on civil aviation were lifted and US Persons will be able to enter into transactions with Iranian airlines for the sale of civilian passenger aircrafts, parts and components. Non-US persons may also sell aircrafts and civil aviation equipment having more than 10% US content to Iran. Primary sanctions are also lifted with regard to Iranian Carpets and Foodstuff, that is to say, US persons are permitted to purchase and import these goods directly from Iran.
More importantly, The United States has issued a “General License H”, which (i) allows non-US entities (including non-US subsidiaries of US entities) owned or controlled by US persons to engage in business transactions with Iran as far as US personnel in those entities do not involve in the activities related to Iran, and (ii) allows US persons to engage in activities concerning establishment or alteration of operating policies and procedures of a foreign entity owned or controlled by US persons and enters into permitted transactions with Iran under this license; and to provide automated globally integrated services (such as computer, accounting, email, telecommunications or other business support systems) to these entities.
What Sanctions and Risks still remain?
What about a “Snap-back”?
According to the JCPOA, UN sanctions may be re-imposed by the Security Council if it is deemed that Iran has failed to comply with its commitments. If sanctions are re-imposed, they will not apply with retroactive effect to contracts signed in the interim. Both the United Sates government and the European Union, while emphasising the remoteness of a snap-back, as a matter of legal concern, have interpreted JCPOA snap-back provisions and clarified their likely impact as follows:
The US Government in its guidance issued after the JCPOA Implementation Day, stated that in the event of a snap-back, (i) it will not impose any penalty on companies who enter into legitimate contracts under JCPOA with Iran and Iranian persons after its Implementation Day; and (ii) Will work with foreign companies for minimizing the impact of re-imposition of sanctions.
EU, in the preamble to Regulation 2015/1861, which lifted sanctions pursuant to JCPOA, clearly provides for adequate protection for the execution of contracts concluded in accordance with the JCPOA while sanctions relief is in force, consistent with previous provisions when sanctions were originally imposed.
EU Information Note, issued on the occasion of Implementation Day, clarifies that contracts that are permitted after Implementation Day will not be targeted by the re-introduction of sanctions and in case of a Snap-back occurs, sanctions shall not have a retroactive effect which means that companies will be given due time to perform their contractual obligation.
- What Should You Do to Ensure Compliance?
- Business with persons and entities who remain listed as subject to the asset freeze under the EU sanctions for EU persons and entities continues to be prohibited. The listed entities include certain banks and other prominent companies. Due diligence as to contractual partners therefore remains necessary.
- If there is a US nexus such as a US presence of a company that exposes it to US secondary sanctions, or if any financing arrangement requires compliance with US sanctions, care should be taken not to contract with persons and entities on the SDN list.
- USD transactions that are cleared through the US financial system remain prohibited.
- US employees and directors must be ring-fenced from any Iranian business.
- The risk of snap-back should be provided for contractually.