Iran Nuclear Agreement Implications for U.S. and EU Sanctions against Iran


Key Points

  • The Joint Comprehensive Plan of Action ("JCPOA") is not expected to result in any U.S. or EU sanctions relief until the International Atomic Energy Agency ("IAEA") certifies that Iran has completed a number of steps to limit its nuclear activities.  "Implementation Day" is unlikely to occur before early 2016.
  • If and when the IAEA certification emerges, broad lifting of EU sanctions regarding Iran is expected.
  • The prospects for lifting of U.S. sanctions are less certain given procedural complications.  Depending on the outcome of a 60-day U.S. congressional review process, the JCPOA may not lead to changes in U.S. sanctions.
  • Even if the United States fully implements the JCPOA, there will be little change in the general embargo on most dealings by U.S. companies and individuals relating to Iran.  As a result, the JCPOA could lead back, by and large, to a unilateral ban on business by U.S. companies relating to Iran.
  • If the United States implements the JCPOA, there is to be at least some ostensible relaxation of the application of the U.S. embargo to non-U.S. subsidiaries of U.S. companies.  As was the case before the embargo was extended to those subsidiaries in 2012, however, there will likely be practical impediments to those subsidiaries pursuing business relating to Iran.  Some EU and other non-U.S. entities could, therefore, effectively remain constrained by U.S. sanctions by virtue of having a U.S. parent.
  • If Iran violates the JCPOA, subject to a variety of uncertainties, suspended sanctions could "snap back" into place.  Companies may have to stop performance under a contract covered by "snapped-back" U.S. or EU sanctions prohibitions.
  • Even after the EU starts to progressively lift sanctions, it is unclear if and when European banks will participate in Iran-related business in light of snap-back risk.


On July 14, 2015, after years of negotiations, the permanent United Nations ("UN") Security Council members (the United States, the United Kingdom, France, Russia and China) and Germany — the "P5 Plus 1"— reached agreement with Iran on the JCPOA.  The JCPOA commits Iran to take certain steps to ensure the peaceful nature of its nuclear program.  In exchange, the United States and the European Union commit to lift certain sanctions related to Iran's nuclear program.

At present, 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 United States also maintains so-called "secondary sanctions" measures that 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 generally forbid certain activity related to Iran by nationals of EU member states and persons in the EU in these same sectors.

U.S. Sanctions Relief

    1. Secondary Sanctions

With some exceptions, sanctions liberalization to which the United States committed in 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.  In response to these activities, secondary sanctions measures (statutes and executive orders) authorize, and sometimes direct, the President to impose sanctions on the non-U.S. persons involved.  Sanctionable Iran-related activities include those related to (i) finance and banking, (ii) energy and petrochemicals, (iii) insurance, (iv) shipping, shipbuilding and ports, (v) software and metals and (v) the automotive sector.

Subject to the IAEA certification requirement, the United States has agreed to suspend certain secondary sanctions measures that apply to the activities listed above, among others.  The President would waive the requirements of statutory secondary sanctions measures.  He would rescind secondary sanctions measures that take the form of executive orders.

It appears that the JCPOA would not require suspension of some secondary sanctions measures, including certain measures targeting dealings with parties on the U.S. Office of Foreign Assets Control ("OFAC") List of Specially Designated Nationals ("SDNs").  Thus non-U.S. companies will remain well advised to exercise caution in any activities related to Iran.

    2. Primary Sanctions

The U.S. embargo of Iran generally forbids business with and in Iran by "U.S. persons" - U.S. citizens and residents, entities organized under U.S. law, and all persons in the United States.  The embargo, which dates back to 1995, has been imposed mainly for anti-terrorism reasons.  In 2012, the embargo was extended to cover entities owned or controlled by U.S. persons and established or maintained outside the United States, thereby effectively extending the embargo to non-U.S. subsidiaries of U.S. companies.  With just a few exceptions, the JCPOA does not mandate relaxation of the embargo, so the embargo will, in general, continue to forbid U.S. persons to engage in most transactions and other dealings relating to Iran.

Subject to the IAEA certification requirement, the JCPOA does require the United States to liberalize application of the embargo to entities that are owned or controlled by U.S. persons.  Specifically, the United States has committed to "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 scope of such licensing and how it will be implemented remain uncertain.  If licenses are broadly granted, it could have a significant impact on how non-U.S. subsidiaries of U.S. companies interact with Iran, rolling back the 2012 embargo extension.  But prior to expansion of the embargo in 2012, due to compliance risk for U.S. parent companies, most major U.S. companies forbade their non-U.S. subsidiaries to do business relating to Iran.  After JCPOA implementation, U.S. companies will still be prohibited to approve, finance or otherwise facilitate transactions by their non-U.S. subsidiaries that would be prohibited by the embargo if performed by a U.S. person.  As a result, to the extent that licenses are granted there may still be questions about whether a U.S. parent could be at risk based on the actions of its subsidiaries.

The JCPOA provides for other, relatively limited relaxation of the U.S. embargo.  The agreement specifies that the United States will license the sale to Iran of commercial aircraft and spare parts, components and services for civil aviation.  It also prescribes issuance of licenses for importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.

Finally, the JCPOA contemplates that OFAC will remove some individuals and entities from the SDN List.  Individuals and entities to be removed include Iran Air, the National Iranian Oil Company ("NIOC"), Naftiran Intertrade Company ("NICO"), the National Iranian Tanker Company ("NITC"), and the Islamic Republic of Iran Shipping Lines.

EU Sanctions Relief

In addition to implementing the international sanctions imposed on Iran by the UN Security Council, the EU imposes a broad array of autonomous restrictive measures.

As required by the JCPOA, the EU is expected to adopt legislation providing for significant sanctions relief that is far broader than that contemplated for the United States.  Among other things, the EU is to suspend (i) prohibitions on financial transfers to and from Iran, (ii) sanctions on banking and insurance activities, (iii) sanctions on financial support for trade with Iran, and (iv) sanctions on Government of Iran public-guaranteed bonds.  Sanctions in connection with the oil, gas and petrochemical sectors as well as those related to shipping, shipbuilding, precious metals, banknotes and coinage are also to be progressively lifted.  Access to EU airports for cargo flights that are either operated by Iranian carriers or originating from Iran is to be permitted.  The timing issues outlined below will have an impact on the pace of sanctions relief for specific business activities, and the overall process is envisioned to take up to fifteen years.

In addition, the EU is to release the assets of many of the blacklisted Iranian banks and financial institutions as well as persons and entities connected to the oil, gas, petrochemical and transport sectors.  Companies to benefit from delisting include the Central Bank of Iran, Islamic Republic of Iran Shipping Lines, NIOC, and NITC.

EU restrictive measures that respond to the human rights situation in Iran and the military embargo will remain in place.  Furthermore, the relief from EU sanctions pursuant to the JCPOA will not extend to the sanctioned targets of individual EU Member States.

As noted above with regard to the compliance position taken on non-U.S. subsidiaries of U.S. companies prior to 2012, Western banks may take the view that business risk still remains and that the snap-back provision in particular is a legal risk that they do not wish to countenance.  The ability of EU entities to take advantage of the opportunities created by the lifting of sanctions will be determined, in part, by their ability to finance that business.  The specific drafting and implementation guidance on the snap-back provisions will therefore take on increased significance.

Timing Considerations Regarding Sanctions Relief

The Agreement specifies that all U.S. and EU commitments to suspend sanctions are to be implemented when the IAEA certifies that Iran has implemented certain JCPOA commitments regarding nuclear activity.  The JCPOA refers to this date as "Implementation Day."  Many experts and officials, including U.S. Secretary of State John Kerry, expect "Implementation Day" to occur in early 2016.

In the EU, changes to sanctions regimes put in place by the EU Council are subject to "qualified majority" voting pursuant to Article 238 of the Treaty on the Functioning of the European Union.  This means that a vote of the EU Council that represents 55% of the EU Member States in number and at least 65% of the total population is required.  In practice, this means 15 of the 27 EU Member States representing a population of 314 million voting in favor (with the P5 Plus 1 states of the UK, France and Germany already accounting for 210 million).

In the United States, sanctions relief is also subject to delay and possible congressional disapproval under the recently enacted Iran Nuclear Agreement Review Act of 2015.  This statute required President Obama to submit the JCPOA to the U.S. Congress for its consideration, which the President did on July 19, 2015.

The statute continues that for up to 60 calendar days allotted for congressional review – that is, until September 17 – the President cannot "waive, suspend, reduce, provide relief from, or otherwise limit the application of statutory sanctions with respect to Iran"  unless the Congress passes a joint resolution stating that it favors the agreement.  Although ambiguous, this statutory mandate appears to have been intended to block all U.S. sanctions relief regarding Iran during the congressional review period.

At the end of the review period, the President may grant the sanctions relief contemplated by the JCPOA unless the Congress passes a resolution of disapproval.  Consequently, it is possible that the United States will never implement sanctions relief for which the JCPOA provides.  This risk seems to be mitigated by the President's assurance that he would veto a resolution of disapproval, such that sustaining the resolution would require a vote of support from two-thirds of each of the U.S. Senate and House of Representatives.

The JCPOA provides that the United States and the EU may reimpose suspended sanctions if Iran violates the JCPOA (sanctions "snap back").  While many analysts cast doubt on the likelihood of sanctions snap back, this is a risk that companies will have to assess as an element of overall sanctions risk associated with Iran-related business.  While a provision addressing UN sanctions indicates that UN Security Council sanctions would not be applied retroactively to contracts signed during the period of sanctions relief, it appears that neither the United States nor the EU has provided assurances on the application of snapped-back sanctions to contracts established while sanctions were suspended.

The U.S. practice has normally been to withhold any such grandfathering treatment.  The EU has taken a more mixed approach with, for example, the Rhum field in the North Sea permitted to resume production, albeit with the NICO subsidiary Naftiran Intertrade's proceeds paid into a blocked account.  The Shah Deniz field in Azerbaijan is an example of grandfathering under both the EU and the U.S. regimes.  The latter may be an exception only because of the relatively small Iranian investment in a significant project of non-sanctioned parties in a third state, but suggests that, until the snap-back provisions are better understood, states may be cautious in allowing significant Iranian overseas investment.