Iran Sanctions Update: Implementation Day

On 16 January 2016, the European Union and United States lifted a wide range of sanctions against Iran in accordance with the Joint Comprehensive Plan of Action (JCPoA). Importantly, “Implementation Day” under the JCPoA does not extend to all sanctions against Iran and there remains a mechanism for the reintroduction or “snapback” of the lifted sanctions in the event of Iran not meeting its ongoing commitments to comply with specific nuclear-related measures.
While this first round of sanctions relief may open significant commercial opportunities for EU companies, a number of important sanctions remain in force and US sanctions still generally prohibit “US persons” from engaging in Iranian-related transactions. In practice, the lifting of sanctions will increase the need for robust compliance procedures as global businesses navigate the revised EU and US sanctions framework.

The sanctions relief (effected by amendments to Council Decision 2010/413/CFSP and Regulation (EU) No 267/2012 (Regulation)) discontinued asset freezes on 34 individuals and 298 entities and has permitted a wide range of trade and associated services in respect of Iran and Iranian persons, including:

• Oil, gas and petrochemicals: import and other transactions in relation to crude oil, petroleum products, petrochemical products and natural gas from Iran; supplies of previously restricted equipment and technology relating to the oil, gas and oil, gas and petrochemical sectors; investment in Iranian sectors of oil, gas, and petrochemicals.
• Shipping and shipbuilding: supplies of previously restricted naval equipment and technology; design, construction and repair of cargo vessels and oil tankers; the inspection, testing and certification of marine equipment; conduct of surveys, audits and visits and issuance of certificates and documents of compliance; provision of vessels for transport or storage of oil and petrochemical products; provision of flagging and classification services.
• Precious metals and currency: transactions relating to gold, other precious metals and diamonds; supplies of newly-printed or unissued Iranian-denominated banknotes and minted coinage.
• Financial transfers and banking activities: financial transfers to and from non-listed Iranian entities; the establishment of relationships with Iranian banks and branches, offices or subsidiaries in Iran; the opening of branches, subsidiaries or representative offices of non-listed Iranian banks in EU Member States.
• Financial services: the provision of insurance and reinsurance to non-listed Iranian entities; the supply of specialised financial messaging services for non-listed Iranian financial institutions; transactions in public or public-guaranteed bonds with Iranian non-listed entities.
• Cargo flights operated by Iranian carriers or originating from Iran have access to EU Member States’ airports.

However, a range remain in place post-Implementation Day, including:

• Asset freezes on various Iranian persons.
• Prior authorisation is required for the supply to Iran / Iranian persons or acquisition from Iran of technology in the Nuclear Suppliers Group list (Annex I of the Regulation) and certain other technology that could contribute to activities by Iran inconsistent with the JCPoA (Annex II of the Regulation), as well as related services. Authorisation is also required to enter arrangements with Iranian persons that facilitate their participation in uranium mining, production or use or nuclear materials in the NSG list or commercial activities involving Annex II technology. Approval by the UN Security Council is required in some cases in respect of the NSG list.
• Prohibition on supply to Iran / Iranian persons or acquisition from Iran of technology on the Missile Technology Control Regime list (Annex III of the Regulation) or other items that a Member State determines could contribute to the development of nuclear weapon delivery systems, as well as related services. There is also a prohibition on entering arrangements with Iranian persons that facilitate their participation in commercial activities involving Annex III technology.
• Embargo on arms and related material, prohibition on related services and also on arrangements with Iranian persons that facilitate their participation in commercial activities involving technology on the Common Military List.
• Restrictions on the supply to Iranian persons or for use in Iran of Enterprise Resource Software for use in nuclear and military industries, and also graphite and certain raw or semi-finished metals, and related services.
• Prohibitions on supplies of certain equipment for internal repression, technology for monitoring or interception of internet or telephone communications and related services under Regulation (EU) 359/2011 (which has not been amended).

Further detailed guidance has been published in respect of the EU sanctions.

The United States historically has maintained both primary sanctions, prohibiting US persons from engaging in transactions relating to Iran or involving parties on the List of Specially Designated Nationals and Blocked Persons (SDN List) maintained by the US Treasury Department’s Office of Foreign Assets Control (OFAC), and secondary sanctions, which target the activities of non-US persons.  Most of the relief under the JCPoA relates to nuclear-related secondary sanctions.  The primary sanctions remain largely in place.

Under the JCPoA, non-US persons may now engage in the following activities without a breach of US sanctions:

• Financial and banking measures: Financial and banking transactions related to Iran, including: (i) transactions with individuals and entities set out in Attachment 3 to Annex II of the JCPoA, including, with certain exceptions, opening or maintaining correspondent accounts for the specified Iranian financial institutions; (ii) transactions and other activity involving the Iranian rial; (iii)  the provision of US bank notes to the Government of Iran, including providing material support for such transactions; (iv) the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds; (v) the provision of specialized financial messaging services to certain Iranian banks and financial institutions removed from the SDN List on Implementation Day; and (vi) the provision of associated services for each of these categories.  The US commitments also include the lifting of bilateral trade limitations on Iranian revenues held abroad, including limitations on their transfer.  US persons continue to be generally prohibited under the ITSR from involvement in these activities.  In addition, transactions related to these activities are prohibited from transiting the US financial system.
• Insurance measures: Underwriting services, insurance, or reinsurance in connection with activities consistent with the JCPoA, including activities by non-US persons with individuals and entities set forth in Attachment 3 to Annex II of the JCPoA.  The US commitments also include underwriting services, insurance, or reinsurance in connection with activities in the energy, shipping, and shipbuilding sectors of Iran; for certain specified Iranian entities; or for vessels that transport crude oil, natural gas, liquefied natural gas, petroleum, and petrochemical products to or from Iran.
• Energy and petrochemical sectors: Transactions with Iran’s energy sector, including: (i) investment, including participation in joint ventures, goods, services, information, technology and technical expertise and support for Iran’s oil, gas, and petrochemical sectors; (ii) the purchase, acquisition, sale, transportation, or marketing of petroleum, petrochemical products, and natural gas from Iran; (iii) the export, sale, or provision of refined petroleum products and petrochemical products to Iran; (iv) transactions with Iran’s energy sector, including certain specified Iranian entities; and (v) the provision of associated services for each of these categories.  In addition, the United States has ceased 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.
• Shipping, shipbuilding, and port sectors: Transactions with Iran’s shipping and shipbuilding sectors and port operators, and the provision of associated services for these activities.
• Gold and other precious metals: Trade in gold and other precious metals, and the provision of associated services.
• Software and metals: Trade with Iran in graphite, raw, or semi-finished metals, such as aluminum and steel, coal, and software for integrating industrial processes, and the provision of associated services.
• Automotive sector: Sale, supply, or transfer of goods and services used in connection with Iran’s automotive sector and the provision of associated services.

The US commitments to lift secondary sanctions do not apply to transactions or activities involving individuals and entities who remain or are placed on OFAC’s SDN List after Implementation Day and are without prejudice to any other US sanctions that may apply under legal provisions other than those cited in section 4 of Annex II of the JCPoA.

Further, the United States removed over 400 individuals and entities from sanctions lists maintained by OFAC.  Secondary sanctions continue to apply to non-US persons for conducting transactions with any of the more than 200 Iranian or Iran-related individuals and entities who remain or are placed on the SDN List, notwithstanding the lifting of certain secondary sanctions.
In addition, the United States implemented certain limited relief related to the primary sanctions directed at the activities of US persons.  It issued:  (i) a Statement of Licensing Policy allowing for the case-by-case licensing of individuals and entities seeking to export, re-export, sell, lease, or transfer to Iran commercial passenger aircraft and related parts and services for exclusively civil, commercial passenger aviation end-use; (ii) a general license (General License H), authorizing non-US entities that are US-owned or –controlled, with certain limitations, to engage in transactions involving Iran; and (iii) a general license, which is effective upon publication in the Federal Register, authorizing the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.

Importantly, as detailed below, many restrictions and/or limitations still apply post-Implementation Day.

• Primary US sanctions on Iran remain in place.  Other than certain limited exceptions provided for in the JCPoA, the US trade embargo on Iran broadly remains in place.  US persons continue to be prohibited generally from engaging in transactions or dealings with Iran or its government or with SDNs.  In addition, the Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked.  Absent an exemption or other OFAC authorization, US persons continue to have an obligation to block the property and interests in property of all individuals and entities that meet the definition of the Government of Iran or an Iranian financial institution, regardless of whether or not the individual or entity has been designated by OFAC.  In addition, non-US persons continue to be prohibited from knowingly engaging in conduct that seeks to evade US restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran.
• US export controls on Iran remain in place.  US controls in the exportation or reexportation of goods, technology, and services to Iran imposed pursuant to the ITSR, as well as the Export Administration Regulations, 15 CFR parts 730-774, and the International Traffic in Arms Regulations, 22 CFR parts 120-130, remain in place.  Absent an exemption or other authorization, the exportation or reexportation by a US person or from the United States to Iran or the Government of Iran, as well as the reexportation by non-US persons of items that contain 10 percent or more U.S.-controlled content with knowledge or reason to know that the reexportation is intended specifically to Iran or the Government of Iran, generally requires a license.
• Several US sanctions targeting Iran’s other activities remain in place.  US sanctions targeting Iran’s support for terrorism, regional destabilization, human rights abuses, and missile activities will remain in effect and continue to be enforced.
• Secondary sanctions targeting non-US person dealings with Iran-related persons on the SDN List or trade in certain materials involving Iran remain in place.  After Implementation Day, secondary sanctions continue to attach to significant  transactions with: (1) Iranian persons that are on the SDN List; (2) a specified Iranian military organization and its designated agents or affiliates; and (3) any other person on the SDN List designated under Executive Order 13224 or Executive Order 13382 in connection with Iran’s proliferation of weapons of mass destruction  or their means of delivery or Iran’s support for international terrorism.  In addition, sanctions targeting certain activities related to trade in materials described in section 1245(d) of the Iran Freedom and Counter-Proliferation Action of 2012  that are outside the scope of the JCPoA and related waivers remain in place.
• Non-US subsidiaries still may face limitations in engaging in Iran-related activities.  US-owned or controlled foreign subsidiaries can, with certain limitations, engage in Iran-related business.  US persons, however, can have no involvement in the business, except that US persons can be involved in the alteration or establishment of operating policies and procedures of the parent or the foreign entity to the extent necessary to allow the foreign entity to engage in Iran-related transactions and also can engage in activities to make available certain automated and globally integrated systems owned or controlled by the parent.  Importantly, General License H does not authorize payment to, from, or through US depositary institutions.  Any such payments would need to be blocked by the financial institution.  This places an important practical limitation on the ability of foreign subsidiaries to engage in Iran business.

Further detailed guidance and FAQs have been published by OFAC.

The extent of the sanctions relief is substantial and may pave the way for significant commercial opportunities for non-US companies in key Iranian sectors, including energy, shipping and finance. From a compliance perspective, businesses will need to carefully manage their transition into the new business environment, given that a number of important sanctions remain in force. For most sectors, the key sanctions to consider will be the asset freeze restrictions, meaning that companies going into Iran will need to carefully screen their proposed counterparties and include appropriate provisions in their contracts. This is important not only in connection with the EU asset freezes, but also the US secondary sanctions, since the relief of these sanctions does not generally extend to transactions involving targets of US asset freezes (Specially Designated Nationals).  In the UK, this could perhaps be an area of focus for the incoming Office for Financial Sanctions Implementation (OFSI), which will be tasked with ensuring that financial sanctions are properly implemented and enforced.

Companies will therefore need to review and update their operating procedures for doing business with Iran to focus on the sanctions still in force. For non-US subsidiaries of US companies proposing to engage in such business under General License H, this task could prove to be somewhat complex, as the provisions and conditions of that Licence will need to carefully interpreted. In addition, any companies which are trading in technology still restricted or prohibited for Iran under EU sanctions will also need to exercise special caution to ensure that they have procedures in place to avoid breaches of the remaining sanctions.