OFAC has now published FAQs that discuss and outline how the re-imposition of Iran-related nuclear sanctions will be implemented. The FAQs can be found here.
The decision not to renew a waiver of U.S. Iran-related nuclear sanctions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA), was due to expire on 12 May 2018, although Trump has tweeted on 07 May that he would make his announcement on 08 May 2018 ahead of the deadline.
As outlined in the recent OFAC FAQs (and as anticipated in OFAC’s previous FAQs regarding the JCPOA), wind-down periods will now commence consisting of a 90-day wind down period for some activities, and a 180-day wind-down period for others.
By 06 August 2018 (90-days), the following sanctions will be fully reinstated:
- sanctions on the purchase or acquisition of U.S. dollar banknotes by the Government of Iran
- sanctions on Iran’s trade in gold or precious metals
- sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes
- sanctions on significant transactions related to the purchase or sale of Iranian Rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian Rial
- sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, and
- sanctions on Iran’s automotive sector.
Following the 90-day wind down period, OFAC will revoke any specific licenses issued authorising activities undertaken in connection with the Statement of Licensing Policy for Commercial Aircraft (OFAC’s General License I - formally the General License Authorizing Certain Transactions Related to the Negotiation of, and Entry into, Contingent Contracts for Activities Eligible for Authorization Under the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services).
OFAC has indicated it would consider resubmission of license requests related to safety of flight and did not revoke General License J-1 (formally the General License Authorizing the Re-exportation of Certain Civil Aircraft to Iran on Temporary Sojourn and Related Transactions), which allows for temporary layover of commercial aircraft on scheduled flights by non-U.S. carriers into Iran and related transactions (covered by our previous elexica article).
After 90-days, sanctions will also be re-imposed on the importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. § 560 (ITSRs).
By 05 November 2018 (180-days), the following sanctions will be reinstated:
- sanctions on Iran’s port operators and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates
- sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran
- sanctions on transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 NDAA
- sanctions on the provision of specialised financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (“CISADA”)
- sanctions on the provision of underwriting services, insurance, or reinsurance, and
- sanctions on Iran’s energy sector.
As of 5 November, OFAC will also revoke General License H Authorizing Certain Transactions relating to Foreign Entities Owned or Controlled by a United States Person, which has authorised foreign subsidiaries of U.S. companies or non-U.S. companies that would be considered as ‘controlled’ by U.S. Persons due to organisational structure and/or board of directors composition, to engage in transactions with Iran under limited conditions.
Furthermore, effective as of 05 November 2018 following the 180-day wind-down period, there will be a re-listing of all 444 individuals and organisations, 76 planes and 227 shipping vessels that were removed from OFAC’s List of Specially Designated Nationals and Blocked Persons (the SDN List) and/or other lists maintained that, as a result of the JCPOA’s “Implementation Day” on 16 January, 2016 were previously removed from the SDN List.
We have covered the issue of the JCPOA’s implications, including with regards to “Implementation Day”, in a number of our previous elexica articles available here, here and here.
During the Wind-Down Period
According to the response to Question 2.1 of the OFAC FAQs, if a non-U.S, non-Iranian person (for example, an entity established in the Middle East, Europe, Japan, etc.) is owed payment after the conclusion of the wind-down period on 06 August 2018, or November 4, 2018 (as applicable), for goods or services fully provided or delivered to an Iranian counterparty prior to 06 August 2018, or 04 November 2018 (as applicable), the U.S. Government would allow the non-U.S., non-Iranian person to receive payment for those goods or services according to the terms of the written contract or written agreement. This is conditional upon the existence of a written contract or written agreement entered into prior to 08 May 2018, and that such activities were consistent with U.S. sanctions in effect at the time of delivery or provision (for example not with an SDN that at the time on the SDN List). The same provisions apply if payment is owed to such non-U.S., non-Iranian person for loans or credits extended to an Iranian counterparty prior to the 90- or 180-day wind-down period (as applicable). The stated objectives of OFAC’s position is to enable non-U.S., non-Iranian parties “to be made whole for debts and obligations owed or due to them for goods or services fully provided or delivered or loans or credit extended to an Iranian party” prior to the end of the relevant wind-down dates stated.
What is stated as sanctionable is the provision or delivery of additional goods or services and/or the extension of additional loans or credits to an Iranian counterparty after the wind-down periods stated (as applicable), even if there is a written contract or agreement in place that was entered into prior to 08 May 2018, “unless such activities are exempt from regulation, authorized by OFAC, or otherwise not sanctionable.”
OFAC has stated that it would consider issues on a case-by-case basis.
Although Paragraph 37 of the JCPOA states that:
“…if sanctions are reinstated in whole or in part, Iran will treat that as grounds to cease performing its commitments under this JCPOA in whole or in part”,
Iranian President Hassan Rouhani stated in a televised address on 09 May 2018 that Iran would work with Europe, Russia and China to keep the deal intact in stating that:
"If we achieve the deal's goals in cooperation with other members of the deal, it will remain in place... I have instructed the Ministry of Foreign Affairs to negotiate with the European countries, China and Russia in coming weeks. If at the end of this short period we conclude that we can fully benefit from the JCPOA with the cooperation of all countries, the deal would remain."
The UN Secretary-General’s Statement
In a statement issued on 08 May 2018, the UN Secretary-General stated that he was “deeply concerned” about the decision taken by U.S. President Trump, calling on “other JCPOA participants to abide fully by their respective commitments under the JCPOA and on all other [UN] Member States to support this agreement”.
The EU’s Position
Following President Trump’s announcement, Federica Mogherini (High Representative of the EU for Foreign Affairs and Security Policy) released a statement on the EU’s position regarding the JCPOA, confirming that the EU remains committed to the JCPOA as long as Iran continues to comply with its nuclear-related obligations.
She also emphasised the EU’s expectation that the “international community do its part to guarantee” the JCPOA.
In a joint statement, the Prime Minister of the United Kingdom, Theresa May, the German Chancellor, Angela Merkel, and the French President, Emmanuel Macron, expressed regret at President Trump’s announcement and have urged “all sides to remain committed to [the JCPOA’s] full implementation and [encouraged all] to act in a spirit of responsibility”. The joint statement states that the three countries:
“…urge the US to ensure that the structures of the JCPoA can remain intact, and to avoid taking action which obstructs its full implementation by all other parties to the deal. After engaging with the US Administration in a thorough manner over the past months, we call on the US to do everything possible to preserve the gains for nuclear non-proliferation brought about by the JCPoA, by allowing for a continued enforcement of its main elements.”
They confirmed that they remain parties to the JCPOA and remain committed to ensuring that its terms are upheld.
The move by U.S. President Trump comes despite efforts and visits to Washington, D.C. from the three leaders issuing the joint statement in recent weeks, and an open letter to the U.S. Congress signed by around 500 lawmakers in the UK, Germany and France, to convince the U.S. to remain a party to the JCPOA.
Remarks posted via Twitter from the newly appointed U.S. Ambassador to Germany, Richard Grenell, stating that “German companies doing business in Iran should wind down operations immediately”, has received a number of critical responses from across Germany’s economic and political leadership.
Speaking to journalists on 11 May 2018 at the Ministry for the Economy and Finance in Paris, French Finance Minister Bruno Le Maire (alongside Dutch Finance Minster Wopke Hoekstra), reportedly stated that “[t]here is a realisation among all European states what we cannot keep going in the direction we are headed today whereby we submit to American decisions”. Speaking separately during a Europe-1 radio programme on 11 May 2018, Le Maire rebuked the notion of Europe being a ‘vassal’ state.
A potential mechanism that the EU could adopt (which has been the subject of much discussion in recent months and was proposed on Friday 11 May 2018 by the French Finance Minister, Le Maire, as an option) has been the potential usage of “Blocking” Statutes to counter the effects of U.S. secondary sanctions (discussed in further detail below).
The Russian Federation’s and the People’s Republic of China’s Positions
Following the announcement by U.S. President Trump, The Ministry of Foreign Affairs of the Russian Federation issued a statement on 08 May 2018 that it was “deeply disappointed by US President Donald Trump’s decision to unilaterally give up commitments to implement the Joint Comprehensive Plan of Action on Iran’s nuclear programme (JCPOA) and to reinstate the US sanctions on Iran.”
Furthermore, the Russian statement declared that a joint commission of the JCPOA member states should promptly consider and assess their options and that:
“Russia is open to further cooperation with the other JCPOA participants and will continue to actively develop bilateral collaboration and political dialogue with the Islamic Republic of Iran.”
Speaking at a press conference on 10 May 2018, Russian Foreign Minister Sergei Lavrov (alongside his German counterpart Heiko Maas) stated that Russia and the remaining signatories to the JCPOA “[w]ithout doubt…will make sure firstly that this does not destroy the JCPOA” and that the remaining JCPOA signatories must work to “enable the preservation of this important document for regional stability.” According to a Kremlin Press Announcement, Russian President Vladimir Putin and German Chancellor Angela Merkel discussed on 11 May 2018 “…the importance of the JCPOA for international and regional security.”
Similarly, in response to U.S. President Trump's announcement, The Ministry of Foreign Affairs of the People’s Republic of China stated that it was committed to the 2015 JCPOA deal and would “maintain communication with all parties and continue to protect and execute the agreement fully."
The Japanese and Indian Responses
Two countries that are not signatories to the JCPOA but which have heavy exposure to the Iranian markets are Japan and India.
On 09 May 2018, The Ministry of Foreign Affairs of Japan issued a Statement by Foreign Minister Taro Kono that Japan “…continues to support the JCPOA…[and] will remain in close communication with relevant parties to maintain the JCPOA.” However, the statement concluded by stating that “Japan pays close attention to the situation while carefully analyzing possible influence that this announcement may cause.”
India on the other hand, despite also being heavily exposed to Iranian crude oil imports, issued what appeared to be a more neutral statement through its Ministry of External Affairs on 09 May 2018, stating that “[a]ll parties should engage constructively to address and resolve issues that have arisen with respect to the JCPOA.”
Potential EU “Blocking” Statute
Back in 25 September 2017, following the discussions at the time over the potential for President Trump to withdraw the U.S. from the JCPOA and re-impose secondary sanctions on those doing business with Iran outside of a sanctions waiver (or within the confines of an issued and valid specific license), the potential for an EU “Blocking” Statute was mentioned by the EU Ambassador to the U.S., David O’Sullivan. This was during a panel discussion on the JCPOA’s future hosted by the Atlantic Council, and he stated that the EU had a precedent for passing such legislation. Following this, there has been much commentary and discussion on what an EU “Blocking” Statute could look like and what its potential effects could be. An understanding of the precedent cited is essential in analysing what the EU may do next.
In 1996, the EU passed blocking legislation in response to two statutes passed by the U.S. Congress - the Cuban Liberty and Democratic Solidary Act, known as the “Helms-Burton Act,” and the Iran and Libya Sanctions Act (ILSA). Both the Helms-Burton Act and ILSA introduced wide-ranging secondary sanctions on non-U.S. foreign persona that the U.S. President determined to have made an investment of $20m or more in Iran or $40m or more in Libya that directly and significantly contributes to the enhancement of Iran’s or Libya’s ability to develop petroleum resources. Secondary sanctions contained within ILSA included (amongst other things):
- limitations on U.S. export licenses under the Export Administration Act of 1979, the Arms Export Control Act, the Atomic Energy Act of 1954, or any other statute that requires the prior review and approval of the U.S. Government as a condition for the export or re-export of goods or services;
- denial of U.S. Export-Import Bank loans, credits, or credit guarantees; and/or
- a prohibition on access to financing from the U.S. financial markets - prohibiting any U.S. financial institution from making loans or providing credit to any sanctioned person totalling more than USD 10,000,000 in any 12- month period,
applicable to any successor entity, or a parent, subsidiary or affiliate of such a person if that parent, subsidiary, or affiliate engaged in the prohibited activities with “actual knowledge”.
Following a number of public statements and open letters by EU leaders and lawmakers to the U.S. President and U.S. Congress at the time, on 22 November 1996, the EU Council adopted Regulation Number 2271/96, OJ. L 309/1 (1996) (“EU Council Regulation 2271/96”), which protected “against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.”
Article 4 of EU Council Regulation 2271/96 stated that:
“No judgment of a court or tribunal and no decision of an administrative authority located outside the Community giving effect, directly or indirectly, to the laws specified in the Annex [such as the Helms-Burton Act and the ILSA] or to actions based thereon or resulting there from, shall be recognized or be enforceable in any manner.”
Article 5 of the EU Council Regulation 2271/96 stated that:
“No person referred to in Article 11 shall comply, whether directly or through a subsidiary other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the Annex [such as the Helms-Burton Act and the ILSA].”
Consequently, an EU-incorporated entity or any U.S. Person operating in the EU may be committing an offence in the EU by complying with the specific U.S. sanctions laws listed in the Annex of EU Council Regulation 2271/96 (such as the Helms-Burton Act and the ILSA). Whether an offence is committed depends on how the EU regulation has been implemented under the local domestic law of each EU Member State. Some countries chose to enforce EU Council Regulation 2271/96 by means of administrative penalties only, whilst the UK created a criminal offence of complying with those specific U.S. laws by implementing the Extraterritorial U.S. legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996 (SI 3171/1996).
The only public EU-U.S. sanctions conflict arose out of the purchase of an Austrian bank, Bawag P.S.K, by a U.S. private equity firm, Cerberus Capital.
Bawag P.S.K was operating bank accounts for Cuban nationals and in order to ensure U.S. sanctions compliance with the U.S. Helms-Burton Act, Bawag decided to close the accounts. The Austrian Government initiated proceedings against Bawag P.S.K. for breaching EU Council Regulation 2271/96 by complying with the U.S. Helms-Burton Act. The U.S. private equity firm, Cerberus Capital responded by approaching OFAC to obtain a license to allow their acquisition of Bawag P.S.K to proceed with the Cuban accounts reinstated. An OFAC specific license was reportedly obtained within two months and the Austrian Public Prosecutors dropped the case.
However, in an OFAC Enforcement Notice dated 23 July 2013 against American Express Travel Related Services Company, Inc. (TRS), New York, NY, for breach for apparent violations of the Cuban Assets Control Regulations, 31 C.F.R. § 515 (the CACR), an aggravating factor (amongst several others) was that:
“…at the time of the apparent violations, TRS’ compliance program was inadequate, given the nature of TRS’ operations, to detect and prevent Cuba travel bookings, particularly from countries that had adopted antidote measures” [Emphasis added]
It should be noted that the TRS Enforcement Case involved a U.S. domiciled company acting through both itself and its foreign branches in breach of U.S. sanctions with a “significant sanctions history during the five years preceding these apparent violations”.
On Friday 11 May 2018, the French Finance Minister, Bruno Le Maire stated that the EU had to defend its “European economic sovereignty”. Le Maire proposed utilising an EU “Blocking” Statute approach stating that “[w]e want to reinforce this regulation and incorporate the recent decisions taken by the United States”.
Needless to say that navigating through the current legal and regulatory framework is not with without its challenges.
The JCPOA’s Dispute Resolution Mechanism and the UN Element
Under Paragraphs 36 and 37 of the JCPOA, there is an in-built dispute resolution mechanism for complaints of non-compliance, whereby sanctions on Iran may ‘Snap-Back’ to the position prior to 16 January 2016. This is a 65-day tranched process whereby the specific issues of non-compliance with the JCPOA are discussed by a Joint Commission consisting of representatives from all the JCPOA’s signatories, followed by the issues being elevated to the relevant ministers of foreign affairs after 15 days. At that stage the issues may be referred to an Advisory Board Board consisting of three members (one from either side of the complaint and a third independent member) to provide a non-binding opinion during a further 15 days, that may be considered in a reconvening of the mentioned Joint Commission. If the issues are unresolved in the following five days, the UN Security Council (UNSC) will consider the issuing of a resolution to continue sanctions relief. However, if there is no UNSC resolution on the matter after 30-days, the Iran-related nuclear regulations automatically “Snap-Back”.
Whilst the above provisions were designed to hold Iran to account in case of a breach of its nuclear-related obligations, it would be possible for Iran to similarly be the complaining party and commence actions pursuant to the procedures outlined above. If Iran wanted to free itself of its nuclear-related obligations, it could trigger this process. However, the U.S. could also trigger this process. If it does and there is no resolution to continue sanctions (which the U.S. with its veto powers could block), all UNSC-level sanctions contained within various UNSC Resolutions could automatically be re-imposed “unless the Security Council decides otherwise” (Operative Article 12 of UNSC Resolution 2231 (2015), see below). UNSC Resolution 2231 (2015), which endorsed the JCPOA, also terminated all previous UNSC Resolutions concerning Iran’s nuclear program, such as UNSC Resolutions 1696 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1835 (2008), 1929 (2010), and 2224 (2015). These UNSC Resolutions would be automatically re-imposed if there was no resolution on the matter.
UNSC Resolution 2231 (2015) states (at Operative Paragraph 10) that this mechanism shall be used for “significant non-performance of commitments under the JCPOA”. The International Atomic Energy Agency (IAEA), the international nuclear watchdog tasked with monitoring Iran’s nuclear-related compliance with the JCPOA, has stated that it has not identified any such “significant non-performance of commitments under the JCPOA”, and as such, it is a subject of debate as to whether the U.S. would be able to initiate this process.
Please note that the issues regarding “Snap-Back” from a U.S. and EU perspective has been discussed in our previous article available here.
As this unprecedented situation continues to develop, it is likely that events during the next few weeks and months will continue to present new challenges and developments for those exposed to the Iranian markets. Whether the EU will develop a “Blocking” Statute like it has done in the past, and to what extent such a measure would be effective, remains to be seen. For those with existing exposure to Iran, it is recommended they urgently consider the options available, including an assessment of existing contractual provisions.
For further specific guidance on the potential next steps, please contact Muneer Khan, Adrian Nizzola and Samir Safar-Aly, or your usual contact.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.