On May 8, 2018, President Trump announced that the United States will withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose all sanctions formerly waived under that agreement, following wind-down periods of 90 and 180 days. This means that the application of secondary sanctions that were previously suspended after the January 16, 2016 implementation of the JCPOA will no longer be waived and non-US companies could be sanctioned for certain activities involving Iran after August 6, 2018 or November 4, 2018, depending on the specific sanction.1 This will impact non-US companies more harshly than US companies, as the primary sanctions relief granted under the JCPOA waived sanctions on non-US companies wishing to do business in Iran while maintaining the primary embargo on US companies doing so.
The JCPOA is an agreement between the United States (US), China, France, Germany, Russia, the United Kingdom (UK), and Iran, in which Iran agreed to certain commitments regarding its nuclear program in exchange for suspension of nuclear-related sanctions. Pursuant to the JCPOA, the US had waived or lifted many secondary sanctions against Iran, which apply to non-US persons, but the main US embargo on transactions by US persons with Iran remained in place.
Now, with the US withdrawal from the JCPOA, secondary sanctions on non-US persons doing certain types of business with Iran will "snap back" into place, including those involving Iran's financial, energy, oil, insurance, and automotive sectors, among others. The sanctions imposed on Iran's financial sector are particularly stringent, extending to the Central Bank of Iran. In addition to secondary sanctions in these wide-ranging sectors, the US plans to reverse several favorable licensing policies that were in place to authorize otherwise prohibited dealings involving the export of commercial passenger aircraft (and related parts and services) to Iran, as well as to enter into certain types of contingent negotiations involving Iran. Finally, in connection with the US withdrawal from the JCPOA, the Office of Foreign Assets Control (OFAC) will put a large number of Iranian individuals and entities back onto its Specially Designated Nationals (SDN) List that had been taken off of the SDN List in 2016.
The implication of these actions—in particular for non-US entities that had relied on the JCPOA sanctions relief for the past several years to engage in trade involving Iran—will be substantial. Such companies will need to wind down business in the sectors subject to secondary sanctions, or risk being shut out of the US financial system, being added to the SDN List, among other potential sanctions.
The three European parties to the JCPOA have announced their intention to remain in the deal even after the US's withdrawal, although its future is uncertain. Iran has indicated interest in negotiating with the remaining parties to the JCPOA but has threatened to resume suspended parts of its nuclear program should negotiations fail.
Persons engaged in business with Iran should immediately determine which, if any, formerly suspended US sanctions apply to their activities and begin winding down such activities if they wish to avoid sanctions. Depending on the particular sanction, after either a 90-day or 180-day wind down period, the US will resume application of sanctions in full force.
All sanctions formerly lifted or waived in connection with the JCPOA will be reinstated, including those under the National Defense Authorization Act for Fiscal Year 2012, the Iran Sanctions Act of 1996, Iran Threat Reduction and Syria Human Rights Act of 2012, the Iran Freedom and Counter-proliferation Act of 2012, and the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of 2010. This will be done over the course of 180 days, so that all US nuclear-related sanctions lifted under the JCPOA will be in full effect by November 5, 2018.
In the interim, the State Department has issued waivers to protect transactions previously permitted pursuant to JCPOA. These waivers are intended to permit the orderly wind-down of activities over the course of either a 90-day or 180-day timeline, depending on the particular sanction at issue.2
The following sanctions will be re-imposed after a 90-day wind down period, ending on August 6, 2018:
- Sanctions on the purchase or acquisition of US dollar banknotes by the Government of Iran;
- Sanctions on Iran's trade in gold or precious metals;
- Sanctions on the 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;
- Sanctions on 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;
- Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
- Sanctions on Iran's automotive sector.
In addition, following the 90-day wind down period, the US will revoke the following JCPOA-related authorizations, making the following activities forbidden:
- The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR);
- Activities undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (JCPOA SLP); and
- Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.
The following sanctions will be re-imposed after a 180-day wind down period, ending on November 4, 2018:
- Sanctions on 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;
- Sanctions on 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;
- Sanctions on transactions by non-US financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
- Sanctions on the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
- Sanctions on the provision of underwriting services, insurance, or reinsurance; and
- Sanctions on Iran's energy sector.
The US Office of Foreign Assets Control (OFAC) also intends to revoke General License H, which authorized US-owned or -controlled non-US entities to engage in certain activities involving Iran, as soon as is administratively feasible.3 At the same time, OFAC plans to issue a revised authorization for the wind down of activities involving Iran authorized pursuant to General License H. The wind-down of those activities authorized pursuant to General License H must be completed by November 4, 2018, in order to avoid enforcement or sanctions actions by OFAC.4
Further, no later than November 5, 2018, the US will re-impose, as appropriate, sanctions applying to persons who were removed from the SDN List and other OFAC sanctions lists pursuant to the JCPOA on January 16, 2016.5 Key parties that will resume SDN status include the Central Bank of Iran, Bank Mellat, and Bank Melli.
Finally, the Trump Administration expects to re-impose relevant provisions of Executive Orders that were revoked as a result of JCPOA that have not yet been reinstated as of May 8, 2018, specifically provisions of Executive Orders 13574, 13590, 13622, 13628, and 13645 that were revoked by Executive Order 13716.6 These sanctions relate to Iran's aerospace, energy, and petrochemical sectors and impose sanctions on certain non-US financial institutions. One practical effect of the re-imposition of these sanctions will be to halt Iran's efforts to replace its commercial aircraft fleet, which has nearly been grounded due to the many years of US sanctions. Because these sanctions impact not only US but non-US entities which incorporate US content into their aircraft, they will equally apply to many non-US as well as US aircraft manufacturers. OFAC's guidance cautions that persons engaging in activity undertaken consistent with the US sanctions relief as specified in the JCPOA should take the steps necessary to wind down those activities by the applicable deadline to avoid exposure to sanctions or an OFAC enforcement action under US law. Indeed, OFAC has advised caution even with respect to dealings with Iran during the wind-down periods, noting, for example, that "[t]ransactions conducted during the wind-down periods involving persons removed from the SDN List on January 16, 2016 could be sanctionable to the extent they are outside the scope of the wind-down waivers issued by the State Department or involve persons on the SDN List or conduct [that was still subject to secondary sanctions after the implementation of the JCPOA]."7
In contrast to the announcement made in Washington DC, the British, French and German leaders responded with a joint statement in which they expressed regret at President Trump's actions and vowed to remain strong advocates for the deal which they maintain will provide "continuing economic benefits to the Iranian people." Mindful of the effect and reach that expected US sanctions will now take, they urged President Trump to allow the structures put in place by the JCPOA to remain in place so as to permit the remaining signatories to the deal to implement its intentions.
In a statement on Tuesday the European Union's chief of foreign affairs and Vice President, Federica Mogherini, reiterated the European view that the JCPOA was "one of the biggest achievements diplomacy has ever delivered." In what has been seen as an indication that the European Union stands ready to take affirmative action in order to support the continued function of the JCPOA, Ms. Mogherini added that "The European Union is determined to act in accordance with its security interests and to protect its economic investments." Ms. Mogherini noted that the International Atomic Energy Agency has so far filed 10 reports demonstrating that Iran is acting fully in compliance with its responsibilities under the JCPOA and that the European Union has no cause to doubt the veracity of these reports.
There has, as yet, been no alteration in European policy or legislation in respect of Iran. However, European leaders are due to meet in the next few days to discuss where the US withdrawal leaves the JCPOA. Whilst it is clear that European leaders want to salvage as much of the JCPOA as possible, it is by no means clear how successful they can hope to be. A significant concern exists that if the US enacts legislation criminalizing the assistance of Iranian businesses (whether through financing, intellectual property or direct exports), this will prevent European companies from engaging with Iran in commercial ventures–an area in which limited but definite steps had begun to be taken since July 2015.
Implications for US Exporters
Even during the implementation of the JCPOA, the US domestic trade embargo on Iran remained in place. This means that US persons were and will remain broadly prohibited from engaging in transactions with Iranian companies or the Iranian government, pursuant to the Iranian Transactions and Sanctions Regulations (ITSR).8 However, while the ITSR remained in place, OFAC issued several general licenses and authorizations pursuant to the JCPOA. Transactions authorized under these general licenses must be wound down prior to either August 6, 2018 or November 4, 2018, after which time sanctions will once again fully apply.
New business consistent with current sanctions, while not prohibited, should be avoided. OFAC has stated that any new business engaged in after May 8, 2018 will be considered in OFAC's decision to bring an enforcement action against a company with lingering activities after the wind-down deadline.9
As always, US exporters should carefully monitor OFAC's list of sanctioned entities, as previously sanctioned persons and entities will again be added as sanctions are phased out.
Notably, OFAC has stated its intention to allow US persons and US-owned or US-controlled non-US entities to wind down operations (for example, those activities pursuant to General Licenses H and I) and receive payments pursuant to written agreements entered into before May 8, 2018. Affected persons should monitor the Federal Register, where OFAC will publish licenses and authorizations to engage in transactions ordinarily incident to and necessary to wind down activities.10
Implications for Non-US Exporters and Companies
The sanctions relief that the US granted under the JCPOA had a much greater impact on non-US entities;11 the reinstatement of these sanctions will likewise impact non-US entities more harshly. Any non-US individuals and companies involved in business with Iran should carefully review which sanctions, if any, apply to their activity and note whether the 90-day or 180-day wind down period applies. This will likely involve a complicated legal determination of which business activities involving Iran may trigger any of the wide variety of US sanctions. After the applicable deadline, US sanctions will return in full force. Companies in the energy, shipping, and insurance markets are likely to be affected, among others.
Non-US entities should also carefully monitor additions to the SDN list, which will be updated to re-impose, as appropriate, the sanctions that applied to parties removed from the SDN list by no later than November 5, 2018.
Treasury has issued guidance that if a non-US, non-Iranian person is owed payment after the applicable wind-down period for goods or services delivered prior to the wind-down deadline and pursuant to a written agreement entered into prior to May 8, 2018, that person will be permitted to receive the payment, so long as it was consistent with US sanctions in effect at the time of delivery. A similar rule applies to loans or credits extended to an Iranian counterparty.12
Finally while the United States is re-instating a series of secondary sanctions through its action to withdraw from the JPCOA, it is simultaneously re-instating the 'significant reduction exception' to these secondary sanctions for non-US financial institutions in countries that significantly reduce their reliance on Iranian oil. According to OFAC's guidance on this topic: 'The State Department will evaluate and make determinations with respect to significant reduction exceptions . . . at the end of the 180-day wind-down period. Countries seeking such exceptions are advised to reduce their volume of crude oil purchases from Iran during this wind-down period. . . . The State Department expects to engage in consultations with countries currently purchasing Iranian crude oil during the 180-day wind-down period.'13 This program is intended to encourage foreign nations to decrease their reliance on Iranian oil and put additional strain on the Iranian economy.
US withdrawal from JCPOA, while not altogether unexpected, will impact the wide variety of non-US entities that relied on the sanctions relief the deal provided. The web of US sanctions on Iran that will resume effect is complex and overlapping, and the timeline for re-imposition is short. Entities engaged in commerce with Iran should promptly assess US sanctions' application to all aspects of their business and continue to monitor the future of the deal.
2 Details in OFAC's JCPOA Wind Down FAQ.
3 Available here.
5 The names of the over 400 individuals and entities that the US removed from OFAC's sanctions lists are set out in Attachment 3 to Annex II of the JCPOA.
11 See, e.g., discussion in previous Arnold & Porter Advisory.
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