Iran sanctions

Commodity traders and shipping companies have been forced to reconsider Iran-related activity following the “snap-back” of US sanctions on 5 November 2018. On top of that, EU businesses are finding themselves in a conflict of laws due to the US and EU’s divergent positions on Iran.

Introduction

On 8 May 2018 President Trump announced the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA) (the JCPOA provides that Iran shall not develop or acquire nuclear weapons and shall in exchange receive relief from sanctions.  It was agreed between China, France, Germany, Russia, the UK, the US, the EU and Iran and came into force on 16 January 2016) and directed the US Secretary of State and the US Treasury to immediately begin taking steps to re-impose all those US sanctions which had been lifted as a result of US participation in the JCPOA within 180 days. 

The re-imposition of the US sanctions was subject to two wind-down periods, the first of which expired on 6 August 2018 (the ’90-Day Wind-Down Period’) and the second of which expired on 4 November 2018 (the ‘180-Day Wind-Down Period’). The final tranche of sanctions snapped back into place on 5 November 2018. Nearly all of the sanctions which have been re-imposed have extraterritorial reach – known as secondary sanctions - and therefore affect non-US businesses and people as well as those based or incorporated in the US.

The EU has censured the US for its withdrawal from the nuclear deal and has promised to support EU businesses to continue trade with Iran. To this end, on 7 August 2018 the EU countered the US withdrawal by amending the EU Blocking Regulation to extend to the US sanctions on Iran. The effect of the amended Blocking Regulation is that EU persons are prohibited from complying with the re-imposed US sanctions.  As the Blocking Regulation and the US sanctions regime are directly conflicted, EU persons with Iran-related dealings are left between a rock and a hard place: facing US penalties if they fail to comply with US sanctions but in breach of the Blocking Regulation if they do comply with them.

This briefing explains the Iran sanctions which are in force now.

What changes have been made to US law to implement the US decision to withdraw from the JCPOA?

Executive Order 13846  

On 6 August 2018 President Trump issued Executive Order 13846 re-imposing and amplifying the sanctions that had been in effect prior to the implementation of the JCPOA on 16 January 2016.

General licenses revoked

On 28 June 2018 OFAC (the Office of Foreign Assets Control, or OFAC, is the division of the US Treasury which administers the US sanction programmes) revoked General License H (authorising non-US entities owned or controlled by US persons to engage in specified Iran-related dealings), General License I (authorising the export of passenger aircraft to Iran) and the general licenses at sections 560.534 and 560.535 of the Iranian Transactions Sanctions Regulations (ITSR) (the Iranian Transactions Sanctions Regulations (ITSR) are contained in Part 31 of the US Code of Federal Regulations (CFR)) authorising imports of Iranian foods and carpets. The revocation of each General License was subject to a wind-down period, each of which has now expired.

More SDNs added

On 16 October 2018 OFAC reinstated a number of financial institutions to its list of Specially Designated Nationals (the ‘SDN List’) including Bank Mellat, Parsian Bank and Sina Bank.

On 5 November 2018 OFAC added or reinstated a total of over 700 individuals, entities, aircraft and vessels to the SDN List.  

What activities are sanctioned now?

The following activities have been sanctioned since 7 August 2018:

• Assisting, sponsoring or supporting the purchase or acquisition of US bank notes or precious metals by the Government of Iran
• Knowingly engaging in a significant transaction for the sale, supply or transfer to Iran of significant goods or services used in connection with the Iranian automotive sector
• The purchase, subscription to or facilitation of the issuance of Iranian sovereign debt
• Conducting or facilitating significant transactions related to the purchase or sale of Iranian rials or the maintenance of significant funds or accounts outside of Iran denominated in Iranian rials
• The 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 purposes

The following activities have been sanctioned since 5 November 2018:

• Assisting, sponsoring or supporting the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO) or the Central Bank of Iran
• Transactions or activity relating to:
  • Iranian petroleum, petroleum products or petrochemical products
  • Iran’s energy, shipping or shipbuilding sectors
  • The operation of ports in Iran
  • Iranian persons on the SDN List

What measures might the US take against persons who engage in sanctioned activities?

• Blocking of the person’s property and interests in the US so that it may not be transferred, paid, exported, withdrawn or otherwise dealt in
• Fines
• Declining the person the issuance of a guarantee, insurance, extension of credit from the Export-Import Bank of the United States
• Declining the person permission to export or re-export goods or technology
• Refusal of entry to the US
• Where the person is a financial institution, it may be:
  • denied designation as a primary dealer in US Government debt instruments
  • prevented from serving as an agent of the US Government or serving as a repository for US Government funds
  • excluded from procurement contracts
• Where the person is a foreign financial institution, it may be prohibited from opening or maintaining in the US a correspondent account or a payable-through account
• Adding the person to the SDN List

Temporary waivers

In a press briefing on 5 November 2018 US Secretary of State Michael Pompeo announced that the US Government was issuing ‘temporary allotments’ to eight countries - China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey - being countries identified as heavily reliant on imports of Iranian crude but which had demonstrated substantial reductions in their purchasing of crude from Iran since President Trump’s withdrawal announcement in May 2018. The precise terms of the temporary allotments are unknown but they are understood to involve permitting the eight countries mentioned above to continue importing Iranian crude on an exceptional and temporary basis (understood to be for six months, expiring in May 2019) and on condition that they continue gradually reducing imports from Iran.

Exceptions

The following are exempt from the US sanctions:

• Certain transactions for the sale, supply or transfer to or from Iran of natural gas and/or relating to natural gas projects
• Certain transactions for the provision of agricultural commodities, food, medicine and medical devices to Iran

The EU’s response to the US withdrawal from the nuclear deal

Amendment to the EU Blocking Regulation

The purpose of the EU Blocking Regulation, Council Regulation (EC) No 2271/96, originally introduced in 1996, is to counteract the effects of the extra-territorial application of laws of third countries to EU persons where such application affects their engagement in international trade. It is based on the EU’s view that such extra-territorial application of laws is a violation of international law. In response to President Trump’s announcement in May 2018 it was amended with effect 7 August 2018 by Commission Regulation (EU) No 2018/1100 to cover most of the reimposed US sanctions on Iran, as listed in the annex to the EU Blocking Regulation (the ‘Annex’).

The EU Blocking Regulation counteracts the US sanctions by:

1. Prohibiting EU persons from complying with the US sanctions in the Annex. (Article 5)
2. Nullifying the effect in the EU of any foreign decision (judicial, arbitral or administrative) giving effect to the US sanctions listed in the Annex. (Article  4) 
3. Entitling EU persons to recover damages arising from the application of the US sanctions in the Annex or actions based on them, together with legal costs, from the person causing them.  The recovery of such damages may take the form of seizure and sale of assets. (Article 6)
4. Requiring EU persons whose economic or financial interests are affected by the application of the US sanctions specified in the Annex to notify the European Commission within 30 days of becoming aware of same. (Article 2)

INSTEX

France, Germany and the United Kingdom have launched a special purpose vehicle, known as INSTEX (Instrument for Supporting Trade Exchanges), to act as a clearing house creating a payment channel for Euro monetary transfers with Iran. INSTEX will enable trading parties to circumvent the US block on sanctioned dollar payments by transacting independently of the US dollar-denominated international financial system.  Initially, the use of INSTEX will be limited to the exportation of goods to Iran as required for humanitarian reasons, specifically pharmaceutical goods, medical devices and foods. At the time of writing, INSTEX is not yet operational and it is believed that is will take some weeks or months until it is up and running.

What are the penalties for non-compliance with the Blocking Regulation?

The Blocking Regulation does not itself impose penalties for breach of its terms, but instead provides that EU Member States must impose sanctions where a breach arises and the sanctions must be “effective, proportional and dissuasive”. So far, EU member states do not appear to have enforced the Blocking Regulation.  However they may of course start doing so.

What steps can businesses take to avoid breaching sanctions laws?

We make the following general recommendations to businesses seeking to avoid falling foul of US sanctions laws (and for that matter residual EU and UN sanctions, of which there are some):

1. Sale contracts, charterparties, insurance policies and all other contracts should be drafted to take into account the US sanctions. This may involve including a sanctions clause entitling the parties to refrain from performing their contractual obligations in the event that it would cause them to breach sanctions regulations
2. Vessels should not call at Iranian ports
3. Vessels and counterparties – and their beneficial owners – should be screened against the SDN List
   Where there is a chain of contracts it is prudent to screen all parties in the chain
   If an entity is owned 50% or more by an SDN, the company itself is also considered by the US Government to be blocked regardless of whether it appears on the SDN List.  This is known as OFAC’s 50 Percent Rule
4. Check the SDN List regularly as OFAC is updating it often

As always it is critical that the precise measures taken in any particular case are tailored to the specific business or transaction, and are designed with careful reference to the factual and legal context – which may encompass the amended EU Blocking Regulation. Clearly EU businesses must tread extra carefully as they navigate the difficult path between the US sanctions regime on the one hand and the EU Blocking Regulation on the other.  

As outlined above, EU businesses have the opportunity to apply under Article 5, paragraph 2 of the Blocking Regulation for an authorisation to comply with US sanction laws if non-compliance would seriously damage the EU person’s interests or those of the European Community.  Such authorisations shall enable an EU person to achieve compliance with both the EU Blocking Regulation and the US laws. However authorisations shall be issued only where the EU person is able to demonstrate that non-compliance with the US sanctions would cause serious damage and specified criteria are met. 

Iran sanctions timeline: key dates