As discussed in our prior alert, on July 14, 2015, after years of negotiations, the P5 Plus 1, comprised of the permanent United Nations Security Council members (the United States, the United Kingdom, France, Russia and China) and Germany, and the European Union ("EU") reached agreement with Iran on the Joint Comprehensive Plan of Action ("JCPOA") regarding Iran's nuclear program. On January 16, 2016, following the International Atomic Energy Agency's reported verification of Iran's implementation of key nuclear-related measures under the JCPOA, the United States and the EU liberalized their nuclear-related sanctions on Iran ("Implementation Day").
As to the context for this liberalization, the United States imposes an embargo on Iran-related activity of U.S. persons (individuals and entities) and entities that are owned or controlled by U.S. persons. The U.S. government also administers "secondary sanctions" measures, which provide for sanctions against non-U.S. persons in response to their engagement in certain types of activity regarding Iran, including activity involving Iran's financial, energy and shipping sectors. EU sanctions have generally forbidden certain activity related to Iran by nationals of EU member states and persons in the EU in these same sectors.
As they understand to be contemplated by the JCPOA, U.S. and EU authorities have, as of January 16, 2016, provided relief regarding some of these sanctions measures while others remain applicable. In this regard, U.S. and EU authorities committed in the JCPOA to eliminate sanctions that were imposed to address Iran's nuclear program. As discussed below, this has resulted in broad lifting of the EU's Iran-related sanctions since most of those sanctions were established in response to Iran's nuclear program. Most U.S. sanctions regarding Iran remain in place, however, because the U.S. government established most U.S. sanctions for reasons apart from Iran's nuclear program, including addressing international terrorism and proliferation of weapons of mass destruction.
A. U.S. Secondary Sanctions
With some exceptions, U.S. sanctions liberalization under the JCPOA is limited to U.S. nuclear-related secondary sanctions measures. Secondary sanctions measures are designed to deter non-U.S. persons from engaging in various Iran-related activities. Secondary sanctions measures (statutes and executive orders) authorize, and sometimes direct, the President to impose sanctions on the non-U.S. persons who engage in specified Iran-related activities.
On January 16, the U.S. government announced that it is carrying through on its JCPOA commitments to terminate or suspend secondary sanctions measures relating to activities in the following sectors of the Iranian economy: (i) finance and banking, including such as provision of loans, investments, securities, foreign exchange services (including Iranian rial-related transactions), specialized financial messaging services and purchase, subscription to and facilitation of the issuance of Iranian sovereign debt, (ii) energy and petrochemicals, including activities such as investments, exports, acquisitions, sales, transportation and marketing, (iii) insurance, including provision of underwriting services, insurance and re-insurance, (iv) shipping, shipbuilding and ports, (v) gold and other precious metals, (vi) software and metals, and (vii) the automotive sector.
As the JCPOA requires, the U.S. government has also removed over 400 individuals and entities from the U.S. Office of Foreign Assets Control's ("OFAC") List of Specially Designated Nationals and Blocked Persons ("SDN List") and other OFAC-administered lists of sanctioned persons. Organizations removed from these lists include, for example, the Central Bank of Iran and other Iranian financial institutions, the National Iranian Oil Company, the Naftiran Intertrade Company and the National Iranian Tanker Company. As a result, secondary sanctions measures no longer prescribe sanctions against non-U.S. persons who engage with these organizations in activities that would otherwise be sanctionable under secondary sanctions measures.
Some secondary sanctions measures remain in place and continue to provide for sanctions against non-U.S. persons who engage in certain types of Iran-related activity. Surviving secondary sanctions measures still cover, in particular, a variety of types of activities with persons on the SDN List. As a result, non-U.S. companies should continue to exercise caution in their dealings with Iran even if their Iran-related dealings are no longer subject to sanctions prohibitions imposed by their home countries.
B. U.S. Primary Sanctions
The U.S. embargo of Iran generally forbids business with and in Iran by "U.S. persons" – U.S. citizens and residents, companies and other legal entities organized under U.S. law (including their non-U.S. branches), and all persons while acting in the United States. The U.S. government imposed the embargo mainly for anti-terrorism reasons. In 2012, the U.S. government broadened the embargo to cover entities that are owned or controlled by U.S. persons and established or maintained outside the United States, thereby extending the embargo to non-U.S. subsidiaries of U.S. companies ("non-U.S. subsidiaries").
With limited exceptions, the JCPOA does not rescind the U.S. embargo of Iran. So the embargo generally continues to forbid U.S. persons to engage in most transactions and other dealings relating to Iran.
The most important relaxation of the U.S. embargo of Iran relates to its application to non-U.S. subsidiaries. The U.S. government has published a "general license" (General License H), which authorizes most activities relating to Iran by non-U.S. subsidiaries. Some embargo prohibitions continue to apply to non-U.S. subsidiaries, however. Further, challenging questions remain about U.S. parent companies' legal exposure under the embargo in connection with their non-U.S. subsidiaries' dealings with Iran even if the subsidiaries are authorized to undertake them.
General License H leaves some Iran-related activities of non-U.S. subsidiaries subject to U.S. embargo prohibitions. These activities include, among others:
In addition, U.S. citizens and residents remain subject to embargo prohibitions notwithstanding that they are employed by or otherwise affiliated with non-U.S. subsidiaries (or any other non-U.S. entities).
General License H resolves some, but not all, questions about U.S. parent companies' legal exposure for their non-U.S. subsidiaries' dealings with Iran. At issue is an embargo provision that generally forbids U.S. persons to assist or otherwise facilitate non-U.S. persons' dealings with Iran that the embargo prohibits U.S. persons to undertake. Due to this prohibition on "facilitation," many U.S.-based multinationals forbade their worldwide operations to pursue Iran-related business even before the embargo was extended to non-U.S. subsidiaries in 2012.
General License H authorizes U.S. parent companies to engage in a limited range of transactions to permit or enable non-U.S. subsidiaries to engage in Iran-related activity. First, such U.S. persons are authorized to engage in activities related to establishment or alteration of their or their non-U.S. subsidiaries' operating policies and procedures necessary to allow for authorized Iran-related operations of the non-U.S. subsidiaries. Second, such U.S. persons may make available to their non-U.S. subsidiaries any automated and globally integrated computer, accounting, email, telecommunications or other business support system, platform, database, application or server necessary to store, collect, transmit, generate or otherwise process documents or information related to authorized operations ("Authorized Business Support Systems"). These Authorized Business Support Systems must be passively operated without any human intervention in the United States and, as regards non-U.S. subsidiaries' Iran-related dealings, may not be used in connection with any transfer of funds to, from or through a U.S. depository institution or U.S.-registered broker or dealer in securities.
General License H does not authorize U.S. parent companies or U.S. person individuals to be involved in the Iran-related operations of a non-U.S. subsidiary, including by approving, financing, facilitating or guaranteeing any Iran-related transaction by the non-U.S. subsidiary. By and large, then, the facilitation prohibition remains in effect with respect to U.S. parent companies' dealings with their non-U.S. subsidiaries.
Finally, the U.S. government has announced that it will, on a transaction-by-transaction basis, license the export, reexport, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran, provided that the licensed items are used exclusively for commercial passenger aviation and do not involve any person on the SDN List. Further, the United States is issuing general licenses allowing for the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar, and related transactions.
On January 16, the most complex sanctions regime yet embarked upon by the EU moved to a new phase. While most EU economic sanctions have been rescinded, considerable challenges remain for business in Iran, most notably corruption and the extensive involvement of designated persons in Iranian business, particularly those related to the Revolutionary Guard.
The sanctions imposed by EU Regulation 267/2012 (as amended pursuant to the JCPOA) have been lifted. Terminated sanctions include those that represented the heart of EU restrictions regarding Iran, including those relating to the financial; oil, gas and petrochemical; shipping, shipbuilding and transport; software; and gold and other metals sectors. Notably, then, EU sanctions no longer extend to the following types of activities: (i) funds transfers between the EU and Iran (with the exception of those entities and persons who remain on the designated persons list), including financial messaging services and the opening of bank accounts, (ii) importation of Iranian crude oil and petroleum products, natural gas or petrochemical products, and restrictions on related financing, joint ventures and investment, (iii) engagement in the Iranian transportation sector, (iv) the provision of certain software, or (v) buying and selling gold and other precious metals and diamonds as well as, where authorized, the sale of graphite and raw or semi-finished metals, such as aluminium and steel to Iranian persons.
New EU guidance provides that any service that would ordinarily be associated with the activity relieved from the restraints of the sanctions is now permitted. This means that all brokering, financial, technical and insurance services related to such investment and trade are permitted.
EU legislation continues to require unusually far-reaching export controls with respect to Iran. These restraints include the following:
The competent regulatory authorities for interpretation and enforcement of the remaining sanctions and licensing regimes are the 28 EU Member States. Although authorities among the Member States are obligated to report and consult on enforcement policy, there remains the possibility of some inconsistency in early decisions as the competent regulatory authorities find their way. New EU guidance provides some comfort, however, by confirming that approval for exports of dual-use items granted in one Member State is valid in all others.
As companies assess opportunities under the changed sanctions regimes, much could depend on how regulatory authorities interpret and administer the new arrangements. There are novel aspects to Implementation Day sanctions liberalization measures, and companies should be sensitive to authorities' pronouncements on them. As noted above, there may be inconsistencies among regulators' application of sanctions provisions within the EU.
Beyond interpretive challenges, the durability of Implementation Day sanctions relief is uncertain. The JCPOA authorizes the United States and the EU to reimpose sanctions, in whole or in part, upon "significant" nonperformance of the JCPOA by Iran (sanctions "snapback"). "Snapped back" sanctions could prohibit activity to which companies have committed contractually. Given EU authorities' and the Obama Administration's commitment to the JCPOA, the risk of sanctions snapback may currently be limited, particularly given the parties' indication that they will subject alleged agreement violations to a JCPOA dispute settlement process prior to any sanctions snapback.
At the same time, preservation of JCPOA sanctions relief depends on a variety of circumstances, including political support for the JCPOA. In this regard, strong opposition to the JCPOA remains in the United States. It appears that majorities of both houses of the U.S. Congress continue to oppose the JCPOA.
Under U.S. law, the JCPOA is an "executive agreement" – a commitment by the President – without foundation or protection in U.S. legislation. To the contrary, opponents of the JCPOA in the Congress are pursuing legislation that could reverse U.S. sanctions liberalization. It appears that, today, the President could defeat such legislative attack through vetoes that would not be overridden. But events could weaken the President's hand. And the United States will have a new president roughly a year from now. Since the JCPOA is not protected by statute, the new president could withdraw U.S. JCPOA commitments, including those to sanctions relief.
Even the current U.S. Administration has taken action that could weaken the JCPOA. On January 17, the Administration imposed additional sanctions in reaction to Iranian missile-related activity. OFAC added several persons to the SDN List. Iran contends that these additional sanctions violate the JCPOA. This and similar developments could lead to partial or wholesale unraveling of JCPOA sanctions liberalization.
 Because the Iranian government controls these organizations, however, primary sanctions continue to forbid U.S. persons to deal with them.