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Iran Sanctions – The Nuclear Deal with Iran Agreed

Guiding Principle

On July 14, 2015, the P5 + 1 (China, France, Germany, Russia, U.S. and the U.K., coordinated by the European Union’s High Representative, reached a historic deal, a Joint Comprehensive Plan of Action (JCPOA), with Iran to ensure that Iran’s nuclear program will be exclusively peaceful. Those who wish to do business in Iran should continue to monitor the JCPOA’s implementation.

A.  Introduction

On July 14, 2015, after almost two years of negotiations, China, France, Germany, Russia, the United Kingdom, and the United States (the E3/EU+3, also known as the P5+1) and Iran, along with the European Union, reached a final comprehensive agreement, Joint Comprehensive Plan of Action (JCPOA) in Vienna, Austria, regarding Iran’s nuclear program. The JCPOA, builds on the foundation of the Joint Plan of Actions (JPOA), achieved in November 2013, and the political framework announced in Lausanne on April 2, 2015. The JCPOA serves as a detailed and complex process by which Iran must take certain steps to ensure the peaceful nature of its nuclear program, in return for certain relief from the sanctions imposed on them by the United States, the European Union, and the United Nations.

B.  Joint Comprehensive Plan of Action

The JCPOA does not provide any immediate sanctions relief to Iran. Instead, U.S. and EU shall withdraw sanctions in a phased manner, based on Iran’s achievement of certain milestones. The first phase of sanctions relief will take place on the “Implementation Day”, the date on which the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures described in the JCPOA, and therefore, sanctions relief under the JCPOA will commence will probably take six to nine months. Further sanctions relief will follow in time or upon further confirmation from the IAEA of Iran’s compliance with restrictions on its nuclear program. If Iran materially fails to comply, the suspended sanctions will “snap back.”

Until Implementation Day, only the limited relief already provided to Iran under the Joint Plan of Action, in effect since November 2013, which includes the temporary suspension of certain EU and U.S. sanctions, was extended. On Implementation Day, the JCPOA anticipates that the United States and the EU will provide sanctions relief beyond the scope of the Interim JPOA in a number of areas described further in this article.

On July 31, 2015, the European Union (EU), through Council Decision (CFSP) 2015/1148, has extended the EU temporary sanctions relief for six months to 14 January 2016. The US, through a statement issued by the Treasury Department’s Office of Foreign Assets Control (OFAC) on 14 July 2015, has confirmed that the US temporary sanctions relief remains in effect through the Implementation Day.

C.  UN Sanctions

The UN sanctions against Iran have principally focused on prohibiting certain nuclear-related activities, and exports of arms, such as battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, and missiles or missile systems, and missile-related technology, as well as on the imposition of asset and travel bans against certain Iranian individuals/entities.

On July 20, 2015, the United Nations Security Council took the first step contemplated by the JCPOA by unanimously adopting Resolution 2231 (2015), which endorsed the JCPOA and urged its full implementation. The resolution agrees to terminate on Implementation Day the seven current UN resolutions on Iran. The UN Security Council will then replace these with specific restrictions on an arms embargo and missile technology.

D.  EU Sanctions

The EU, based on Council Decision 2015/1148, adopted the first measures to prepare for the implementing of JCPOA with Iran by allowing EU Member States to open the door for allowing certain previously prohibited activities, subject to strict conditions, including prior notification to the United Nations Sanctions Committee. However, any of the other currently restricted or prohibited activities involving Iran or Iran-related parties remain in place until the EU formally lifts them. The precise timing of the lifting of sanctions on “Implementation Day” remains unclear.

The JCPOA currently anticipates removing entirely the EU economic and financial sanctions on the oil, gas, petrochemical, and civilian nuclear sectors. Annex V to the JCPOA sets out the precise detail and timing for the sanctions’ lifting. As a result, the following activities, which are now prohibited, will be permitted:

➢ Transfers of funds between EU persons and entities, including financial institutions, and Iranian persons and entities, including financial institutions;
➢ Banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the territories of EU Member States;
➢ Provision of insurance and reinsurance;
➢ Supply of specialized financial messaging services, including SWIFT, for designated persons and
➢ Entities, including the Central Bank of Iran and Iranian financial institutions;
➢ Financial support for trade with Iran (export credit, guarantees or insurance);
➢ Commitments for grants, financial assistance and concessional loans to the Government of Iran;
➢ Transactions in public or public-guaranteed bonds;
➢ Import and transport of Iranian oil, petroleum products, gas and petrochemical products;
➢ Export of key equipment or technology for the oil, gas and petrochemical sectors;
➢ Investment in the oil, gas and petrochemical sectors;
➢ Export of key naval equipment and technology;
➢ Design and construction of cargo vessels and oil tankers;
➢ Provision of flagging and classification services;
➢ Access to EU airports of Iranian cargo flights;
➢ Export of gold, precious metals and diamonds;
➢ Delivery of Iranian banknotes and coinage;
➢ Export of graphite, raw or semi-finished metals such as aluminum and steel, and export or software for integrating industrial processes;
➢ Designation of certain persons, entities and bodies (asset freeze and visa ban); and
➢ Associated services for each of the categories above.

In addition, the EU has also committed further to explore possible areas for cooperation between the EU Member States, and Iran. In particular, the EU will consider the use of available instruments, such as export credits to facilitate trade, project financing, and investment in Iran. The EU provides an overarching framework for export credit principles, but export credit agencies which are run at a Member State level, potentially provide a range of different opportunities for EU investors.

Nevertheless, the EU political sanctions imposed in response to human rights violations in Iran, by Council Decision 2011/235/CFSP and Council Regulation 359/2011 (as subsequently amended) will remain in place. In practice, the ban on the supply of certain goods used for internal repression will continue in addition to the asset freezing measures on designated persons and entities.

E.  U.S. Sanctions

Annex II to the JCPOA commits the United States to take certain steps with respect to both U.S. primary sanctions and nuclear-related secondary sanctions on Implementation Day, although the commitments with respect to primary sanctions are more limited and in the form of certain licensing commitments.

I.  U.S. Primary Sanctions

It is a bit early to anticipate which impact the deal between Iran and 5P+1 will have on U.S. companies and their non-U.S. subsidiaries, given the JCPOA’s limited impact on U.S. primary sanctions. The U.S. government has made a commitment in the JCPOA to issue licenses for activities related to certain activities, including:

➢     Non-U.S. Subsidiaries of U.S. Companies: The wording of the JCPOA states that the U.S. will “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.” The JCPOA defines an entity as owned or controlled by a U.S. person “if the U.S. person: (i) holds a 50 percent or greater equity interest by vote or value in the entity; (ii) holds a majority of seats on the board of directors of the entity; or (iii) otherwise controls the actions, policies, or personnel decisions of the entity.” The JCPOA further clarifies that “U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to this JCPOA, unless authorized to do so by the U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC).” It remains to be seen how this licensing commitment will be implemented by OFAC.

➢     Civil Aviation: The JCPOA commits the United States to allow licenses for primary sanctions in civil aviation. Specifically, the United States committed to “allow for the sale of commercial passenger aircraft and related parts and services to Iran by licensing the (i) export, re-export, sale, lease or transfer to Iran of commercial passenger aircraft for exclusively civil aviation end-use, (ii) export, re-export, sale, lease or transfer to Iran of spare parts and components for commercial passenger aircraft, and (iii) provision of associated serviced, including warranty, maintenance, and repair services and safety-related inspections, for all the foregoing, provided that licensed items and services are used exclusively for commercial passenger aviation.” But if the United States determines that “licensed aircraft, goods, or services have been used for purposes other than exclusively civil aviation end-use, or have been re-sold or re-transferred to persons on the SDN List, the United States would view this as grounds to cease performing” its civil aviation commitments in the JCPOA.

➢     Imports of Food: The JCPOA commits the United States to provide licenses for the importation into the United States of Iranian-origin foodstuffs, specifically including pistachios and caviar. The foodstuff provision also extends to Iranian-origin carpets.

➢     Education: The JCPOA anticipates that the United States would end the exclusion of Iranian citizens from higher education coursework related to careers in nuclear science, nuclear engineering, or the energy sector.

II.  U.S. Secondary Sanctions

With respect to secondary sanctions, U.S. sanctions relief will occur in a number of sectors as follow:

➢     Financial and Banking Measures: Certain secondary sanctions measures, including those related to the Central Bank of Iran and other Iranian financial institutions, the National Iranian Tanker Company and National Iranian Oil Company, along with several other Specially Designated Nationals (SDNs), transactions involving Iranian Rials and government bonds, would be suspended and eventually terminated.

➢     Insurance Measures: The JCPOA specifically addresses certain secondary sanctions measures related to the insurance industry and indicates that the U.S. will lift “sanctions on the provision of underwriting services, insurance, or reinsurance in connection with activities consistent with this JCPOA, including activities with individuals and entities set forth in Attachment 3 to this Annex.”

➢     Energy and Petrochemical Sectors: The JCPOA anticipates that the United States would cease efforts to reduce Iran’s crude oil sales, including limitations on the quantities of Iranian crude oil sold and the nations that can purchase Iranian crude oil. Additionally, many secondary sanctions restrictions would be permanently removed, including sanctions on investment, participation in joint ventures, goods, services, information, technology, and technical expertise and support for Iran’s oil, gas, and petrochemical sectors. Furthermore, sanctions on the purchase, acquisition, sale, transportation, or marketing of petroleum, petrochemical products, and natural gas from Iran; sanctions on the export, sale, or provision of refined petroleum products and petrochemical products to Iran; and sanctions on transactions with Iran’s energy sector, including with the National Iranian Oil Company and Naftiran Intertrade Company.

➢     Shipping, Shipbuilding, and Port Sectors: The agreement would permanently remove secondary sanctions restrictions that threaten sanctions for persons found to have knowingly engaged in transactions with Iran’s shipping and shipbuilding sectors and port operators, including IRISL, South Shipping Line, and the National Iranian Tanker Company, as well as the port operators of Bandar Abbas.

➢     Automotive Sector: The JCPOA includes language specifically addressing certain secondary sanctions measures related to the automotive industry and indicates that the United States will lift “sanctions on the sale, supply or transfer of good and services used in connection with Iran’s automotive sector.”

F.  Next Steps on Implementation

Under U.S. law, U.S. Congress has 60 days to review the JCPOA from the date the President submits the agreement to Congress. In theory, Congress could enact legislation to attempt to disapprove the JCPOA and interrupt the progression of the terms agreed. President Obama has indicated he would veto any such legislation, requiring a veto-proof majority, two-thirds of the House and Senate, to override the President’s veto.

Within ninety days of the UN Security Council Resolution, the JCPOA comes into effect (Adoption Day). This will be 18 October 2015, unless the parties agree on an earlier date. The parties then become legally obligated to commence preparations to implement their JCPOA commitments.

On Implementation Day, the EU will terminate specified provisions of Council Regulation 267/2012 and suspend Council Decision 2010/413/CFSP, while the United States will cease the application of specified sanctions. That said, it remains to be seen how the agreement will be implemented in practice given the complexities of the various provisions.

On Transition Day, eight years from the adoption of the Security Council Resolution, the European Union and the United States will take further steps to terminate the sanctions specified.

As the parties work to meet their obligations, the JCPOA also contemplates the “snap-back” of Iran sanctions in the event that Iran fails to comply with the agreement.

G.  Considerations from a Business Perspective

The JCPOA marks a landmark step towards reopening the Iranian market for Western businesses, though within limits. The existing US embargo affecting Americans’ trade with Iran will not be fully lifted, as that embargo is based in large part on concerns about terrorism and regional destabilization rather than nuclear proliferation.

The sanctions relief, if implemented, represents a significant opportunity for European companies, but it remains to be seen what effect the deal will have on U.S. companies and their non-U.S. subsidiaries, given the agreement’s limited impact on U.S. primary sanctions. The JCPOA will benefit EU businesses by allowing them to sell a wide range of products to Iran and engage in financial transactions with that country.

In the longer term, if the JCPOA is implemented successfully and Iran abides by its commitments, restrictions on trade by U.S. companies in non-sensitive items can be expected to be rolled back, probably in stages.

 

August, 2015 Zahra Tahsili
Meyer-Reumann & Partners, Tehran Office
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