Iran Nuclear Agreement Reached

December 5, 2013

On November 24, 2013, the P5+1[1] successfully concluded negotiations with Iran on a Joint Plan of Action (hereinafter “the interim agreement”) to limit Iran’s nuclear activities and suspend certain United States and European Union sanctions on the country.[2]  Both sides are now working towards a comprehensive agreement that would further limit Iran’s nuclear activities and significantly unwind U.S. and European Union sanctions.  While the interim agreement—when implemented—will permit some previously prohibited transactions, the vast majority of sanctions on Iran will remain in place.  Businesses should remain abundantly cautious about doing business in Iran or with Iranian persons.

When Are Previously Prohibited Transactions Permitted?

The interim agreement’s sanctions relief provisions did not go into effect when the agreement was reached on November 24, 2013.  Both parties must take preliminary steps to implement the interim agreement.  The United States Department of the Treasury, Office of Foreign Assets Control (“OFAC”) will provide notification—likely within a few weeks—when the sanctions relief provisions are in effect and companies can do limited business with Iran or with Iranian persons.  Until that time, companies should not conduct transactions specified in the interim agreement as permitted, as those transactions still violate U.S. and European Union sanctions.

Which Previously Prohibited Transactions Are Permitted?

In exchange for a number of Iranian steps to curtail its uranium enrichment activities, limit its development of the Arak reactor,[3] and allow for international inspections, the United States and the European Union agreed to take a number of sanctions-relaxing measures, including:

• pause efforts to further reduce Iran’s crude oil sales and enable certain countries to continue to purchase current average amounts of crude oil.  This pause applies only to those countries designated as significantly reducing their oil imports (including China, India, South Korea, Turkey, and Taiwan).  Those countries cannot increase the amount of Iranian oil they purchase, and other countries cannot begin purchasing Iranian oil; 
• for such oil sales, suspend sanctions on associated insurance and transportation services;
• enable the repatriation of an agreed amount of oil revenue held abroad; 
• suspend sanctions on Iran’s petrochemical exports, as well as sanctions on “associated services.”  “Associated services” include any service, such as insurance, transportation, or financial, subject to the underlying U.S. or European Union sanctions applicable, insofar as it is related to the underlying sanction and required to facilitate the desired transactions.  These services could involve any non-designated Iranian entities;
• suspend sanctions on gold and precious metals, as well as sanctions on associated services.  Oil profits, however,  may not be used to purchase gold;
• suspend U.S. sanctions on Iran’s auto industry, as well as sanctions on associated services;   
• license the supply and installation in Iran of spare parts for safety of flight for Iranian civil aviation and associated services.  Sanctions relief could involve non-designated Iranian airlines, as well as Iran Air; 
• license safety-related inspections and repairs in Iran as well as associated services.  Sanctions relief could involve non-designated Iranian airlines, as well as Iran Air; 
• refrain from imposing new nuclear-related United Nations Security Council, European Union and United States sanctions;
• establish a financial channel to facilitate humanitarian trade for Iran’s domestic needs using Iranian oil revenues held abroad.  Such trade would be limited to transactions involving food and agricultural products, medicine, medical devices, and medical expenses incurred abroad.  This channel would involve specified foreign banks and non-designated Iranian banks to be defined when establishing the channel.  It could also enable transactions required to pay Iran’s UN obligations and direct tuition payments to universities and colleges for Iranian students studying abroad, up to an agreed amount for the six month period; and
• increase the European Union authorization thresholds for transactions for non-sanctioned trade to an agreed amount

When the United States and European Union implement these relaxation measures, the above transactions will be permitted.  However, businesses should pay close attention to two important caveats.  First, U.S. persons are still prohibited from doing business in Iran or with Iranian persons.  The above measures are meant to permit non-U.S. persons to transact with Iran or Iranian persons.  Without a license, U.S. persons should continue to avoid conducting business with Iran or Iranian persons. 

Second, these suspensions are limited and reversible.  If a comprehensive deal is not reached, or if the interim agreement is not renewed, the United States and the European Union have stated that they will re-impose these sanctions.  It is unclear whether this re-imposition will be automatic.  Further, the United States and the European Union would be very likely to penalize any sanctions violations after the re-imposition, including if the transactions are pursuant to contracts entered into during the six month relaxation period.  Businesses should be cautious and not assume that contracts entered into during the suspension period will provide a shield from liability for transactions that violate sanctions if the United States and European Union re-impose sanctions. 

Which Previously Prohibited Transactions Remain Prohibited?

The interim agreement provides limited sanctions relief for nuclear-related sanctions.  The broader Iranian sanctions regime remains firmly in place, including:

• any sanctions on Iran not specified above;
• any prohibited transactions by a U.S. person without a license by OFAC;
• any prohibited transactions with a blocked person or entity, even in sectors where sanctions are being relaxed (e.g., businesses cannot transact with designated entities for the sale of auto parts);
• sanctions related to energy sector investment;
• sanctions related to shipping;
• sanctions related to the Iran Sanctions Act of 1996, as amended; and 
• sanctions related to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) 

Businesses should note that the sanctions relief narrowly applies only to certain nuclear-related sanctions.  All other sanctions, including those related to Iran’s support for terrorism and its human rights abuses, are still in full force.

Will OFAC’s Relax Its Aggressive Enforcement Approach?

OFAC officials have made it clear that the agency will not relax its aggressive enforcement posture.  OFAC will likely continue to aggressively penalize sanctions violators, and may even increase its enforcement actions to show that the relief provided by the interim agreement does not signify a greater relaxation of the sanctions regime on Iran.  Businesses should assume that OFAC scrutiny may increase in the coming months.     

How Long Do the Provisions of the Interim Agreement Last?

The interim agreement would provide sanctions relief for six months and would be renewable by mutual consent of the parties.  The six month clock would begin when the sanctions relief takes effect, not on November 24, 2013 (when the parties agreed to the Joint Plan of Action).  Businesses should not assume that the sanctions relief will extend beyond the six month period (there is no “grandfathering” provision in the agreement) and should plan accordingly.