January 18, 2016
On January 16, 2016, the comprehensive international sanctions restricting dealings with Iran and Iranian entities were substantially eased. Financial institutions and businesses hoping to access the Iranian market have new, immediate and substantial opportunities to do so; but this potential comes with continued complexities, ambiguities, and risks, particularly for U.S. companies.
The relief was triggered by the arrival of "Implementation Day," a major milestone set out in the Joint Comprehensive Plan of Action ("JCPOA") — the Iran nuclear deal that was finalized in July 2015 (discussed in detail in our Client Alerts of July 14, 2015 and October 19, 2015).
In accordance with the JCPOA, Implementation Day was announced following the International Atomic Energy Agency’s confirmation that Iran had successfully completed its initial agreed-upon JCPOA obligations with respect to dismantling and repurposing aspects of its nuclear program. Implementation Day brings significant — and in parts comprehensive — sanctions relief by the international community and especially the European Union ("E.U.") and the United States.
Following Implementation Day, E.U. and United Nations ("UN") sanctions have all broadly been eased; U.S. sanctions have not been. Consequently, U.S. companies will be at a significant disadvantage with respect to dealings with Iran compared to their global competitors.
However, the continuation of the bulk of U.S. sanctions — especially with respect to restricted dealings with the U.S. financial system and the provision of U.S. goods and services to Iran — means that international companies will still face daunting challenges and uncertainties with respect to Iranian business they may wish to pursue. Indeed, given this continuing exposure under U.S. law, which in practice is more actively enforced than the sanctions laws of the E.U. and its member states, for companies with potential obligations under both U.S. and E.U. laws the most pressing priority in the short term may be to continue to ensure compliance with U.S. obligations, notwithstanding the apparent opportunities for European firms.
UN Sanctions Relief
Implementation Day has seen the termination of all existing UN Security Council resolutions that imposed sanctions on Iran, other than UN Security Council Resolution 2231 which implemented the JCPOA. This resolution is subject only to snap-back (that is to say, expeditious re-institution) in the event of significant non-performance of Iran’s undertakings under the JCPOA commitments. However, the United Nations arms embargo on Iran continues to be in force for another five years, though countries may petition the UN Security Council for authorization to sell certain weapons systems. And UN sanctions on individuals previously designated for participating in Iran nuclear and ballistic missile programs will remain in place unless such persons are explicitly removed from the list by the UN Security Council.
From the perspective of financial institutions and businesses, the termination of UN Security Council Resolution 1929 is a critical development. Under Resolution 1929, core elements of the Iranian economy were subject to significant restrictions including intrusive inspections of Iran Air and Iran’s state-owned shipping line ("IRISL"), as well as substantial limitations on the provision of insurance and reinsurance to Iranian parties, and the prohibition of the opening of new Iranian bank branches or subsidiaries outside Iran, and limiting UN member states from doing the same inside Iran. These restrictions have all been terminated.
U.S. Sanctions Relief
U.S. sanctions on Iran have included the "blacklisting" of more than 700 individuals and entities on the U.S. Treasury Department’s Office of Foreign Assets Control’s ("OFAC’s") list of Specially Designated and Blocked Nationals ("SDN List"), as well as economic restrictions imposed on entities under U.S. jurisdiction ("primary sanctions") and restrictions on entities outside U.S. jurisdiction ("secondary sanctions"). While the sanctions relief that came into effect on Implementation Day includes relief to each of these three aspects of U.S. sanctions, the majority of the relief provided by the United States under the JCPOA concerns secondary sanctions. OFAC has helpfully published a Frequently Asked Questions on its website.
In short, the U.S. domestic trade embargo on Iran remains in place with changes only at the margins.
On Implementation Day OFAC released several documents including: Guidance Relating to the Lifting of Certain Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day; Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the JCPOA on Implementation Day; General License H: Authorizing Certain Transactions relating to Foreign Entities Owned or Controlled by a United States Person; and a Statement of Licensing Policy for Activities Related to the Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services.
These documents detail the specific elements of U.S. sanctions relief which include:
A. Secondary Sanctions — Prohibitions on non-U.S. Entities Engaging with Iran
Until Implementation Day, non-U.S. financial institutions, corporations and individuals faced U.S. sanctions exposure if they engaged with certain Iranian persons or in transactions with specified Iranian sectors — even if the transactions had no connection to the United States, U.S. persons, or the U.S. Dollar. The U.S. has now lifted secondary sanctions with respect to non-U.S. parties’ engaging with or providing associated services to:
In order to implement this relief, the United States revoked several sanctions-focused Executive Orders, waived portions of numerous pieces of sanctions legislation, and removed over 400 individuals and entities from the SDN List including most of Iran’s major financial institutions and oil and energy firms.
Limits to Secondary Sanctions Relief
Non-U.S. banks, companies and persons must be aware of two key limitations to the removal of secondary sanctions:
B. Primary Sanctions — Prohibitions on U.S. Persons and those under U.S. Jurisdiction Engaging with Iran
The United States is only providing primary sanctions relief with respect to three defined categories of transactions involving (1) foreign subsidiaries of U.S. corporate parents; (2) commercial passenger aviation; and (3) the importation of Iranian foodstuffs and carpets. Each category of relief is provided differently and has distinct limitations.
1) Foreign Subsidiaries of U.S. Companies
On Implementation Day OFAC issued a regulatory exemption ("General License" or "GL") to foreign companies "owned or controlled" by U.S. persons to engage in activities with Iran "consistent with the JCPOA." This General License, "GL ‘H’," allows such companies to transact in and with Iran. However, GL H imposes several significant constraints on such transactions due to OFAC’s interpretation of what sort of dealings would be inconsistent with the JCPOA and/or contrary to other U.S. laws.
GL H does not, inter alia, permit foreign subsidiaries of U.S. parents to engage in Iran-related dealings involving:
Transactions undertaken by foreign subsidiaries that fall afoul of these prohibitions would not receive the benefit of the General License and could lead to U.S. sanctions liability for both the U.S. parent and its subsidiary.
A Firewall is Required between U.S. Parent and Subsidiaries
As a consequence, GL H implies that a significant firewall must be built between the U.S. parent and its foreign subsidiary with respect to the subsidiary’s Iran dealings. OFAC, however, has provided two dispensations that allow some contact between the parent and subsidiary — these dispensations, amongst others, were lobbied for by major industry in the lead up to Implementation Day:
We emphasize that both of these dispensations are drafted very broadly and OFAC does not clarify what sorts of policies or procedures are included, nor the full scope of the "automated" systems that a parent can share with its subsidiary. We urge clients to carefully consider operations and strategies to ensure compliance.
While the exact contours of GL H remain unclear in the initial guidance, OFAC has noted that the goal of the license and the two dispensations are to allow U.S. persons, including senior management of U.S. corporate parents, to be involved in the initial determination to engage in activities with Iran, but not to be involved in the Iran-related day-to-day operations of their foreign subsidiaries.
2) Commercial Passenger Aviation
Under the JCPOA, the United States pledged to allow the provision of commercial passenger aircraft and related parts and services to Iran, including goods with substantial U.S. content. To implement this commitment, OFAC will consider granting individual exemptions ("Specific Licenses") to companies in the aviation sector. Companies will need to apply to OFAC for such a license and, if granted, the license will also cover U.S. persons providing services "ordinarily incident and necessary" to transactions associated with the conveyance of civil aircraft to Iran. Companies that receive an OFAC license will not need to apply for a second export license from the U.S. Department of Commerce’s Bureau of Industry and Security ("BIS").
The OFAC Specific Licenses will be broad with respect to the types of activities covered but limited in important ways.
In addition to airframes, engines and avionics, the licenses may also allow the provision of warranty, maintenance, repair services, safety-related inspections, spare parts, and training. "Ordinarily incident and necessary" services could include transportation, legal, insurance, shipping, delivery and financial payment services, including the use of U.S. financial institutions for some of these services. However, it is not yet clear if U.S. financial institutions will be able to deal directly with Iranian counterparts even in the context of Specifically Licensed transactions.
Further, there are two key limitations companies must keep in mind:
3) Importation of Iranian Foodstuffs and Carpets
The United States’ ban on the importation of Iranian-origin foodstuffs and carpets was one of the last measures imposed by the United States on Iran as sanctions escalated prior to the start of the nuclear negotiations. Though of comparatively limited economic weight compared with the other sanctions relief on offer, it was an important aspect of relief for the Iranian government to obtain and if successfully implemented could provide direct benefits to some of Iran’s most economically-vulnerable populations.
In order to implement this relief, OFAC will issue a General License to cover U.S. persons’ purchases of Iranian-origin food and carpets and services ordinarily incident and necessary to such transactions. U.S. financial institutions will be able to be involved in these transactions, but OFAC will continue its restrictions on almost all direct connections between U.S. banks and Iranian counterparties which will usually mean that transactions between the U.S. and Iran for Iranian food or carpets will require intermediation by a third-country financial institution. It remains to be seen how many third-country banks will be willing to serve in such a capacity.
E.U. Sanctions Relief
A. Legislative Amendments Relevant to the E.U. Regime
Following the termination of all prior UN Security Council resolutions imposing sanctions of Iran, the restrictive measures imposed pursuant to those now-defunct U.N. Security Council resolutions were lifted on Implementation Day.
CFSP 2015/1863 itself is implemented by two Regulations (see below), which are directly applicable in all Member States — that is to say, they can be relied on directly in the domestic legal order, without need for domestic implementing legislation; namely Council Regulation (EU) 2015/1861 of 18 October 2015 amending Regulation (EU) No 267/2012 concerning restrictive measures against Iran, and Council Implementing Regulation (EU) 2015/1862 of 18 October 2015, implementing Regulation (EU) No 267/2012 concerning restrictive measures against Iran.
The Council of the E.U. has also issued a Statement (Council Declaration 2015/C 345/01) specifying that the commitment to lift all nuclear-related sanctions is without prejudice, inter alia, to the reintroduction of E.U. sanctions in the case of significant non-performance by Iran of its JCPOA commitments. The E.U. has also published a helpful Information Note on the lifting of the Iran sanctions.
B. The Lifting of the E.U.’s Sectoral Sanctions
The E.U.’s sectoral sanctions against Iran, subject only to the few remaining prohibitions set out below, have been removed.
The E.U. sanctions related to all activities:
The E.U.’s sanctions did not extend to foreign subsidiaries of E.U. companies, but there were broadly-phrased anti-circumvention provisions that went some way towards having this effect.
Lifting of Oil and Gas Restrictions
Critically, the terminated sanctions mean that the Iranian oil and gas sector is now sanctions-free from the perspective of the E.U. and its members. All imports of Iranian oil, and all other hydrocarbon products, are now permitted — from any supplier. Equally, exports of equipment, technology and services are now permitted to Iranian oil and gas producers, refiners and those involved in exploration and development. (As discussed above, U.S. origin equipment, technology and services remain restricted, however, from export to Iran).
The country with the world’s fourth largest proven oil reserves has just re-entered the E.U. energy market. While currently low oil prices reflect, in part, the expected rise in supply from Iran, the long-term prospect of capital expenditure, investment and modernization of Iran’s energy sector should remain the focus for participants in this space.
During the years of the E.U.’s Iran sanctions even non-E.U. customers for Iranian oil were limited in the extent to which they could receive oil because of the prohibitions on E.U. companies providing insurance for such shipments. The exclusion of Iranian fuel shipments from the important insurance markets of London and elsewhere in Europe had the effect of extending the impact of the E.U.’s sanctions.
All restrictions of insurance related to Iran’s oil and gas market have also now been removed. This is also the case in relation to the other sectors benefitting from the removal of sanctions as part of Implementation Day.
Many of the Iranian companies that were listed under the E.U. sanctions were part of Iran’s shipping industry. These had been sanctioned because of their role in exporting Iranian petroleum products. The delisting of these companies, and the removal of broader sectoral sanctions against the Iranian shipping, ship building, and transport sectors again releases this whole industry from the constraints previously imposed upon it and those wishing to deal with it.
Lifting of Financial Restrictions
The removal of all E.U. restrictions on the Iranian state and Iranian entities from entering the bond market is another of the more important developments as part of Implementation Day. The Iranian government appears to anticipate that this will enable large-scale financing to support investment and modernization across multiple sectors of the Iranian economy, as well as providing funding for government and state-owned enterprises, although the extent to which this is true will depend in large measure to the reaction of the global financial sector.
Unfreezing of Assets
In addition to these sectoral sanctions, the hundreds of individuals and companies named on the SDN on the basis of being involved in, or supporting, Iran’s nuclear program have been de-listed. Billions of dollars held in E.U. accounts by these entities will now be unfrozen. Transfers to and from these individuals and entities will now be unrestricted as a matter of E.U. law. Debts long outstanding to listed entities can now lawfully be paid.
The combined consequence of unfreezing accounts and allowing payments may have the effect of transforming the liquidity of many of the Iranian companies previously sanctioned.
Financial Transfers and Banking
The provisions of perhaps broadest effect in preventing business with Iran were the prohibitions on financial transfers to and from all "Iranian Persons" (broadly defined) without either pre-notification to the relevant authority in each Member State or, where the transfer was above a certain threshold, pre-authorization from the relevant authority. There were limited exceptions for humanitarian purposes, medical products, and foodstuffs, but even those could be restricted if an Iranian bank was involved.
In practice, while the E.U.’s Iran sanctions regime did nothing to prohibit trade with Iranian counterparties in many types of goods and services, but E.U. company could, in practice, neither pay, nor be paid.
The liabilities created by these prohibitions applied to both trading companies, and E.U. financial institutions that facilitated the money transfers. The practical effect of these rules was that many E.U. banks were reluctant to be involved in any way with handling money related to Iran, even if the authorization or notification process was potentially available.
The restrictions on financial transfers to/from Iranian persons have now been entirely removed.
The E.U. Regulation that had removed many Iranian banks from the SWIFT system has now also been repealed. Alongside the lifting of prohibitions on E.U. banks establishing correspondent relationships with Iranian banks, and establishing offices in Iran, the result is to remove a whole series of E.U restrictions on the Iranian banking sector.
The sanctions had extended to cover a number of possible substitutes for cash. These had been designed to prevent the ready circumvention of the prohibitions. For instance the export of Iranian banknotes had been prevented, as were the exports of gold, other precious metals and precious stones. The export and transfer of these proxies for cash are now also unrestricted by E.U. law.
C. E.U.-Iran sanctions remaining in force after Implementation Day
Even in the E.U., the sanctions relief triggered by Implementation day will not create a wholly sanctions-free zone in connection with Iran. Certain E.U. sanctions regimes relating to Iran but unrelated to the sanctions aimed at nuclear proliferation will remain in full vigor and effect after Implementation Day. These include the E.U. sanctions legislation relating to human rights violations and certain sanctions relating to terrorism (Council Decision 2011/235/CFSP (Apr. 12, 2011)), as well as the arms embargo, and certain limited restrictions on software and rare metals related to nuclear proliferation.
D. Looking Forward in the E.U. — Continuing Risks
Businesses in the E.U. should be aware that a number of risks remain with respect to Iran sanctions, including the potential for liabilities for past violations of the EU’s Iran sanctions and the possibility of sanctions snap-back.
While contractual provisions can and should be devised to protect businesses’ interests with respect to snap-back, addressing past violations is more challenging.
Sanctions relief will not absolve persons of violations of the E.U.’s Iran sanctions (or indeed the UK’s rules in relation to financial transfers to and from Iranian persons, which pre-dated the E.U.’s introduction of similar restrictions and were in force for around a year in late 2011 and 2012). Those companies and individuals will, depending on the E.U. member state concerned, remain potentially subject to prosecution in connection with those violations.
Moreover, the anticipated wave of transactions with Iran would seem highly likely to lead to such past violations increasingly coming to the attention of the authorities. This is because of reporting obligations and/or incentives for entities to make notifications to the authorities in connection with criminal offences they discover in connection with their business, for example under money laundering legislation such as the UK’s Proceeds of Crime Act 2002.
Consequently, businesses considering investment in Iran, or businesses which have carried out activities in Iran, must continue to give careful consideration to the question of whether there may be legacy liabilities, and whether there are grounds for suspicion that the investments contemplated may reveal the handling of the proceeds of such historic violations, or may risk facilitating the handling of such proceeds.
An additional risk for E.U. businesses arises from the facts that, first, while in some E.U. member states, E.U. sanctions laws automatically give rise to offences under existing domestic laws, in other member states, E.U. sanctions regimes only take effect upon separate implementation by means of national laws; and second, some member states are slow to respond to legislative changes at E.U. level. As a result, some domestic criminal offences may remain in place notwithstanding the relief from sanctions at the E.U. level. While enforcement of such offenses may be unlikely, or even illegal, in the circumstances, businesses should take care to ensure that full account is taken of any applicable transitional provisions in the E.U. member states.
Next Steps and the Way Ahead
Implementation Day does not mark the conclusion of the Iran sanctions story, but it is the end of an important chapter in economic restrictions on Iran. It is unlikely that the globally comprehensive nature of sanctions on Iran will return even in the case of a "snap-back" of sanctions in the event of non-compliance. While the United States could re-impose the full suite of its unilateral sanctions on Iran — and unlike the E.U. has made it clear that there will be no grandfathering of contracts signed before a snap-back — it is not certain that other members of the P5+1, including the E.U. (let alone states in Asia, Africa and Latin America) would be willing to return to a pre-JCPOA world.
In the coming weeks and months we expect to see five factors come into play which together will determine the success of the JCPOA’s sanctions relief. While most of these elements focus on the United States they have potentially global implications for the ability and willingness of companies to take advantage of new Iranian opportunities.
First, we expect many companies in the U.S. and outside it — not just those in the civil aviation sector — to consider and apply for specific licenses from the U.S. government. In an unprecedented move, OFAC has said that it will consider license requests from non-U.S. parties in certain cases. Further the U.S. administration has made it clear that specific licenses covering activities outside the confines of the defined JCPOA relief — but in line with U.S. foreign policy interests — may be considered in light of the broader U.S. interest in effectuating real sanctions relief and further solidifying the deal.
Second, Implementation Day leaves untouched existing General Licenses available under U.S. Iran sanctions. These include allowances for the exportation of agricultural goods, pharmaceuticals, medical devices, and certain services, software and hardware incident to personal communications (such as smart phones). Before Implementation Day these licenses remained largely unused as potential exporters could not find insurers, financiers or others willing to engage in transactions with Iran. With Implementation Day we expect more of these trade intermediaries to become willing to serve in such roles which will allow exporters to take greater advantage of existing permissions.
Third, a significant unknown that will be worked out in the months ahead concerns how and if non-U.S. international financial institutions will acclimate to eased sanctions. It remains to be seen how major banks, many of which that have suffered significant fines and reputational damage over the past several years for violating U.S. sanctions — and in some cases remain under consent orders or other restrictions from state (rather than federal) authorities in the United States — will adjust to a new reality in which the federal legal prohibitions may have changed but state restrictions and potential reputational exposure remain. Of note, OFAC makes clear in its guidance that even after Implementation Day, Iran remains a "Jurisdiction of Primary Money Laundering Concern" under section 311 of the USA PATRIOT Act — under which the U.S. Treasury has the authority to require U.S. financial institutions to take "special measures" with respect to such jurisdictions, financial institutions and/or international transactions related to such jurisdictions.
Fourth, OFAC and other sanctions authorities in the United States and in Europe will continue to maintain and enforce remaining sanctions. The aggressiveness of such enforcement will be a factor in companies’ investment appetite for Iran. For instance, in the U.S., Implementation Day also saw the addition of nearly a dozen new ballistic missile program-related sanctions to the SDN List. In the E.U., the UK is launching its own OFAC-style body in April 2016 — the Office of Financial Sanctions Implementation which is forecast to have an enforcement focus. Additionally, in mid-December 2015, the General Court of the E.U. (the E.U.’s lower court) dismissed the first challenges to sanctions listings brought by persons listed under the E.U.’s sanctions on Iran targeting violations of human rights — sanctions which remain even after Implementation Day. This occurred in the Sarafraz and Emadi cases (Sarafraz v Council (Case T-273/13)  (Dec. 4, 2015) and Emadi v Council (Case T-274/13)  (Dec. 4, 2015)).
Continued and potentially increased enforcement and maintenance of remaining measures means that companies who wish to take advantage of any opening must make sure they stay compliant with continuing restrictions.
Fifth, prior to its issuance of JCPOA sanctions relief, OFAC conceded that the relief process will likely be iterative — that is, there was a realization that this first tranche of licenses and interpretative guidance may not be sufficient to fully implement the relief that the United States agreed to provide. As such, we expect continued reassessments and potentially issuances of new licenses and interpretative guidance in the time ahead as the administration attempts to calibrate its relief in order to effectuate it as much as possible within the continuing constraints set by unchanging sanctions statutes passed by Congress. On Congress’ part, the disquiet on behalf of Republicans with respect to the Iran deal and any sanctions relief remains and especially in an election year there continues to be a risk of additional Congressional action. Though the President has underscored that he will veto any legislation that undercuts the JCPOA, Congressional creativity — and the potential of obtaining a veto-proof majority if Iranian behavior deteriorates — makes flux from the Congressional side as important to watch as that coming from the administration.
The following Gibson Dunn lawyers assisted in preparing this client alert: Judith Alison Lee, Adam Smith, Jose Fernandez, Patrick Doris, Mark Handley, David Wolber and Mehrnoosh Aryanpour.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the firm’s International Trade Group:
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Mehrnoosh Aryanpour* – Washington, D.C. (+1 202-955-8619, firstname.lastname@example.org)
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** Ms. Aryanpour is not yet admitted to practice in the District of Columbia and currently practices under the supervision of the Principals of the Firm.
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