Iran Sanctions Update – Status Quo So Far, Uncertainty Remains

May 23, 2017

U.S. presidential candidate Donald J. Trump’s oft-repeated criticism of President Obama’s Iran diplomacy and the resulting nuclear deal, the Joint Comprehensive Plan of Action ("JCPOA"), led many observers to conclude that President Trump would move quickly to dismantle the agreement and the significant sanctions relief that came with it.  That has not been the case.  Indeed, the JCPOA has remained in place since President Trump’s inauguration and survived a first volley of tests over the last several weeks.  To date, several deadlines forced the Trump Administration to publicly indicate its support for continuing the deal, the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") imposed further rounds of non-nuclear sanctions on Iranian-related entities, and the Iranian people reelected moderate incumbent Hassan Rouhani.  However, even if the current White House will unlikely "rip up the deal," as candidate Trump suggested he would, the current administration is unlikely to provide the JCPOA with anything more than tacit support.  It remains uncertain whether that will be sufficient to maintain the deal in the mid- to long-term. 

Two weeks after the inauguration of President Donald J. Trump, we viewed it as likely that his  administration would move quickly to reassess some aspects of the Iran nuclear deal.  However, given the substantial diplomatic, economic and logistical challenges presented by a significant departure from the sanctions relief negotiated by the Obama Administration, we suggested that the Trump Administration would stay true to the text of the nuclear accord in the near term, while pressuring Iran’s activities in such areas as missile development and its support of troublesome players in Syria, Yemen, and elsewhere, through new non-nuclear sanctions. 

In the aftermath of President Trump’s first 100 days in office, we stand by this analysis. 

The JCPOA is a limited agreement focusing only on Iran’s nuclear activities and the international community’s nuclear-related sanctions.  As such, consistent with the JCPOA, the Trump Administration has continued to apply sanctions pressure on Iran’s non-nuclear-related activities while taking measures to preserve the nuclear deal.  The first such move occurred on February 3, 2017, less than 48 hours after the administration’s statement that Iran had been "put on notice" following its test of a ballistic missile.  In response, the United States issued a set of new sanctions against Iranian entities, targeting thirteen individuals and twelve corporate entities for their alleged role in supporting Iran’s ballistic missile program.  OFAC also named officials and businesspeople tied to Iran’s elite military unit, the Islamic Revolutionary Guard Corps ("IRGC"), for their suspected role in aiding the Lebanese militia, Hezbollah, and Tehran’s defense industries.[1]  Importantly, no entity that had been removed from the sanctions list due to the nuclear deal was placed back on the sanctions list due to non-nuclear activities.    

On April 13, 2017, OFAC sanctioned the Tehran Prisons Organization and Sohrab Soleimani, a senior official within Iran’s State Prison Organization, in connection with serious human rights abuses in Iran.[2]  The Treasury’s press release stated that the sanctions imposed were "fully consistent with U.S. commitments under the JCPOA," and reinforced that "[t]he United States maintains and will continue to vigorously exercise its sanctions authorities outside the scope of the [JCPOA] to counter the Iranian government’s support for terrorism, ballistic missile program, regional destabilization, and human rights abuses."[3]

On April 18, 2017, the Administration gave an even clearer assessment of its views on the nuclear deal when Secretary of State Rex Tillerson issued a letter to Congress certifying that Iran was in compliance with its commitments under the nuclear deal.[4]  Required to make this report to Congress to maintain the sanctions relief under the JCPOA, Secretary Tillerson used the opportunity to raise additional concerns about Iran’s role as a state sponsor of terrorism and alerted Congress that the Trump Administration was evaluating whether continuing to lift sanctions pursuant to the JCPOA would be in the U.S. national security interests.  Most observers felt that the language was designed to allow the Administration to continue the sanctions relief, even as they increased their pressure on Iran on non-nuclear activities.   

Indeed, on May 17, 2017, as required under the JCPOA and remaining U.S. sanctions legislation, the Administration announced a continuation of waivers of certain statutory sanctions provisions that allow significant portions of U.S. sanctions relief to be implemented.[5]  Because several of these waiver determinations are in effect for a specified duration (generally 120 or 180 days), the Secretary of State has to renew waiver determinations and findings to maintain U.S. commitments under the nuclear deal.  By renewing the waivers, the Trump Administration signaled its intention to continue U.S. adherence to the JCPOA, at least in the short term.  In announcing the extension of the waivers, Acting Assistant Secretary of State for Near Eastern Affairs Ambassador Stuart Jones reiterated Secretary Tillerson’s view that the JCPOA will remain in effect as the U.S. increases pressure on Iran’s other activities:

We are communicating to the U.S. Congress that the United States continues to waive sanctions as required to continue implementing U.S. sanctions-lifting commitments in the [JCPOA].  This ongoing review does not diminish the United States’ resolve to continue countering Iran’s destabilizing activity in the region, whether it be supporting the Assad regime, backing terrorist organizations like Hezbollah, or supporting violent militias that undermine governments in Iraq and Yemen.  And above all, the United States will never allow the regime in Iran to acquire a nuclear weapon.[6]

Notably, the decision to continue the sanctions waiver came two days prior to Iran’s elections and President Trump’s trip to the Middle East.  President Trump’s first visit to the Middle Eastern region was scheduled to include important meetings with both Sunni Arab and Israeli leaders who remain opposed to the Iran deal.

The State Department’s announcement also coincided with a release of its semi-annual report to Congress detailing sanctions imposed on persons responsible for or complicit in human rights abuses in Iran and the Department of the Treasury’s announcement of still further sanctions related to Iran’s ballistic missile program.[7] 

The week ended with Iranian elections, which pitted the incumbent president Hassan Rouhanithe Iranian architect of the nuclear deal who promised to reintegrate the Iranian economy into the global systemagainst the conservative cleric Ebrahim Raisi.  A victory for the conservatives could have radically upended the nuclear deal, and polls predicted a close outcome as most of the economic benefits of the deal have yet to reach the average Iranian.  Rouhani, who won by a landslide, declared that "the Iranian nation has chosen the path of interaction with the world, a path which is distant from extremism and violence."[8]  Further victories for his reformist factions were seen at the municipal level throughout Iran.  Though the Supreme Leader and the IRGC remain the ultimate power brokers in Iran, these elections signaled broad-based support for continuing the engagement with the West, and thus continuing compliance with the nuclear deal, amongst ordinary Iranians.

Rouhani’s new mandate provides even more weight behind the conclusion that with respect to the JCPOA the status quo remains, at least for now. 

Looking Forward

The JCPOA was not designed to be a self-executing agreement.  Rather, the deal needs consistent and significant "care and feeding" from both the United States and foreign signatories. Such efforts range from the renewal of continuing waivers to the more day-to-day work of promoting Iran as a permissible destination for international investment and trade.  Whereas former Secretary of State Kerry was a primary mover in this regard, Secretary Tillerson has refused to take up the mantle.  Indeed, a day after extending the sanctions relief waivers, President Trump told an audience of fifty Muslim leaders that Iran was responsible for much of the Middle East’s insecurity and that "all nations of conscience must work together to isolate Iran."[9]

Apart from the rhetoric in Washington, Iran’s policies contribute to the uncertainty for companies seeking to invest in the region.  Iran’s continued support for Hezbollah (which the United States has deemed a terrorist group), the Houthi rebels in Yemen, the Assad regime in Syria, human rights abuses, and the development of ballistic missiles make the messaging with respect to Iran difficult and confusing.  Additionally, corruption and broader regulatory opacity remain serious concerns.

This lack of care and feeding for the deal creates real risks for the JCPOA.  First, the most important sanctions relief that the United States provided under the nuclear deal was a commitment not to enforce "secondary sanctions" on non-U.S. actors that engage in certain activities with organizations and companies that had been subject to U.S. nuclear-related sanctions.  This includes almost all of the largest financial institutions in Iran and key economic actors, such as those in the energy sector.  However, the United States continues to enforce secondary sanctions for non-U.S. parties engaged in non-nuclear activities, including but not limited to association with the IRGC or the abuse of human rights.  As of yet, President Trump has refrained from re-imposing sanctions on any of the major financial institutions or industries for IRGC- or human rights-related reasons.  If he did, the impact on the nuclear deal could be substantial as it would deny many non-U.S. companies "clean" counterparties with which to do business. 

Second, the same financial institutions and other significant actors in Iran could be sanctioned for activities outside of Iran, such as in Syria, Lebanon, Iraq or Yemen.  If that happened, non-U.S. companies may also shy away from Iranian commerce, again due to a potential inability to find counterparties that do not expose them to significant reputational damage and possible sanctions consequences.

In its first hundred days in office, the Trump Administration appears to have been careful to continue pressing Iran on the non-nuclear arena while leaving nuclear-related sanctions relief untouched.  Global financial institutions and many major corporationsconcerned about remaining U.S. sanctions and potential for "snap back" of former measureshave been very slow to reengage with Iran.  If such activity does not increase in the near term, and the White House expands its sanctions pressure on the country, the JCPOA itself could soon be troubled.  


   [1]   OFAC, "Iran-related Designations; Non-proliferation Designations; Counter Terrorism Designations; Balkans Designation Update" (Feb. 3, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170203.aspx.  For more analysis regarding these sanctions, please see our client alert, New Sanctions Against Iran (Feb. 3, 2017), http://www.gibsondunn.com/publications/Pages/New-Sanctions-Against-Iran.aspx.

   [2]   OFAC, "Iran-related Designations; Counter Terrorism Designations; Libya Designations" (Apr. 13, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170413.aspx.

   [3]   OFAC Press Release, "Treasury Takes Action to Target Serious Human Rights Abuses in Iran," (Apr. 13, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0043.aspx.

   [4]   https://www.state.gov/secretary/remarks/2017/04/270315.htm.

   [5]   U.S. Dep’t of State, "U.S. State Department Issues Report on Human Rights Sanctions on Iran" (May 17, 2017), https://www.state.gov/r/pa/prs/ps/2017/05/270925.htm.  The waivers were originally issued by the State Department on October 18, 2015, under the JCPOA, and came into effect on Implementation Day, January 16, 2016.  U.S. Dep’t of State, "JCPOA Contingent Waivers" (Oct. 18, 2015), https://www.state.gov/e/eb/rls/othr/2015/248320.htm.  For a summary of Iran sanctions developments in 2016, please see our client alert, 2016 Year-End Sanctions Update (Feb. 6, 2017), http://www.gibsondunn.com/publications/Pages/2016-Year-End-Sanctions-Update.aspx#_Toc473798766.  

   [6]   U.S. Dep’t of State, "U.S. State Department Issues Report on Human Rights Sanctions on Iran" (May 17, 2017), https://www.state.gov/r/pa/prs/ps/2017/05/270925.htm.

   [7]   OFAC Press Release, "Treasury Sanctions Iranian Defense Officials and a China-Based Network for Supporting Iran’s Ballistic Missile Program" (May 17, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0088.aspx.

   [8]   BBC News, "Iran election: Hassan Rouhani says voters rejected extremism" (May 20, 2017), http://www.bbc.com/news/world-middle-east-39987338.

   [9]   CNN News, "Transcript of Trump’s Speech in Saudi Arabia" (May 21, 2017), http://www.cnn.com/2017/05/21/politics/trump-saudi-speech-transcript/.

 


The following Gibson Dunn lawyers assisted in preparing this client update: Adam M. Smith, Judith Alison Lee, Stephanie Connor and Kamola Kobildjanova.

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