On June 27, 2018, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced that it was amending the Iranian Transactions and Sanctions Regulations (“ITSR”) to revoke or narrow certain general licenses issued as part of the US sanctions relief implementing the Joint Comprehensive Plan of Action (“JCPOA”), replacing them with more limited wind-down authorizations. Importantly, OFAC stated that these actions were in furtherance of President Trump’s May 8, 2018 decision to withdraw the United States from the JCPOA. As discussed in our earlier blog post, OFAC had previously announced its intent to replace these general licenses with more limited wind-down authorizations in public guidance issued on May 8, 2018, which OFAC updated in connection with these changes. Read more…
The European Commission has started the process by which it would add US sanctions measures on Iran to the so-called Blocking Regulation (formerly Regulation 2271/96). This is in direct response to the US President’s withdrawal of his waiver relating to the JCPOA. The effect of the withdrawal was to reintroduce US sanctions that were in force prior to the JCPOA. US sanctions on Iran not only impact US companies and persons, but can, in certain circumstances be applied to non-US persons. The most important extension of US jurisdiction relates to non-US subsidiaries of US companies. However, the US also has powers to place so-called “secondary sanctions” on non-US persons. These can be placed on any person (i.e., including non-US persons acting wholly outside US jurisdiction) engaging in certain “sanctionable activities,” as defined by the relevant US laws and regulations. These “sanctionable activities” are detailed in OFAC’s recent FAQ document available here. The US Government has a considerable degree of discretion in determining whether to impose “secondary sanctions” on non-US persons engaging in these “sanctionable activities,” and this will likely depend in part on the nature and scope of the activities, the parties involved, etc.
Most countries, and all the other signatories of the JCPOA (UK, Russia, China, France and Iran) plus Germany have reaffirmed their adherence to the JCPOA.
What does the Blocking Regulation do?
The Blocking Regulation has four main elements.
First, it requires any EU person to notify the Commission of any effects on the economic and/or financial interests of that person caused by a measure blocked in the Annex.
Second, no judgment of a court or tribunal, and no decision of an administrative authority located outside the EU that gives effect, directly or indirectly, to the measure in the Annex, or to actions based thereon or resulting there from, shall be recognized or be enforceable in the EU in any manner. This is the main blocking measure.
Third, no EU person shall comply, whether directly or through a subsidiary or 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 measures specified in the Annex or from actions based thereon or resulting therefrom. EU persons may be authorized, in accordance with the procedures provided in Articles 7 and 8, to comply fully or partially to the extent that non-compliance would seriously damage their interests or those of the Community.
Finally, an EU person shall be entitled to recover any damages, including legal costs, caused to that person by the application of the measures specified in the Annex or by actions based thereon or resulting therefrom. This is sometimes referred as the “clawback” measure.
What is the process now being undertaken?
Based on a 2014 amendment to Regulation 2271/96, the Commission now has power, delegated to it from the Council, to add measures to the Annex of 2271/96. The process by which it is to do this is as follows:
As soon as it adopts a delegated act, the Commission notifies it to the European Parliament and to the Council. That delegated act can only enter into force only if:
- no objection has been expressed either by the European Parliament or the Council within a period of two months of notification of that act to the European Parliament and to the Council; or
- before the expiry of that period, the European Parliament and the Council have both informed the Commission that they will not object.
The two month period shall be extended by four months at the initiative of the European Parliament or of the Council.
We assume that the Commission has notified the Parliament and Council of the measures to be added to the Annex, and unless either party objects, or both agree to the proposal sooner, the additions will take effect after 2 months
What is the practical implication of the Blocking Regulation?
The reinvigoration of the Blocking Regulation is an unwelcome development as it is intended to put EU businesses between a rock and hard place. Unfortunately, the US rock is far more compelling than the EU hard place, and very few EU businesses will rely on the Blocking Regulation to guarantee their ability to keep doing business in the US and Iran.
The Blocking Regulation was of very little use in curtailing US policy on Cuba, and almost certainly will not curtail US policy on Iran. The US financial system is now so important to global and EU businesses that it cannot easily be avoided. Even during the US adherence to the JCPOA, all Western banks were reluctant to do business with Iran, because of the risks posed under US law. This reluctance has now turned into positive dislike.
As noted above, the US is also stressing the possibility of secondary sanctions, which in principle force non-US businesses to choose between doing business in the US and doing business in Iran. The revivification of the Blocking Regulation will not affect that choice.
HR/VP Federica Mogherini met with the Foreign Ministers of France (Jean-Yves Le Drian), Germany (Heiko Maas), the United Kingdom (Boris Johnson) and of the Islamic Republic of Iran (Mohammad Javad Zarif) on 15 May 2018, in two separate meetings, to discuss our common lines and the work ahead of us, following the announcement made by the United States of its withdrawal from the Joint Comprehensive Plan of Action (JCPOA), the Iran nuclear deal.
They recalled their commitment to the continued, full and effective implementation of the Iran nuclear deal that was unanimously endorsed by the UN Security Council Resolution 2231, as a key element of the global nuclear non-proliferation architecture and a significant diplomatic achievement.
They, together, regretted the withdrawal of the United States from the Iran nuclear deal and they recognised that the lifting of nuclear-related sanctions and the normalisation of trade and economic relations with Iran constitute essential parts of the agreement.
They stressed the commitment they all share to ensure that this will continue to be delivered and they agreed to this end to deepen their dialogue at all levels.
In particular, they undertook to launch intensive expert discussions – which have been started – with Iran, addressing the following issues with a view to arriving at practical solutions in the next few weeks:
- Maintaining and deepening economic relations with Iran;
- The continued sale of Iran’s oil and gas condensate petroleum products and petrochemicals and related transfers;
- Effective banking transactions with Iran;
- Continued sea, land, air and rail transportation relations with Iran;
- The further provision of export credit and development of special purpose vehicles in financial banking, insurance and trade areas, with the aim of facilitating economic and financial cooperation, including by offering practical support for trade and investment;
- The further development and implementation of Memoranda of Understanding and contracts between European companies and Iranian counterparts;
- Further investments in Iran;
- The protection of European Union economic operators and ensuring legal certainty; and
- Further development of a transparent, rules-based business environment in Iran.
They reaffirmed together their resolve to continue to implement the nuclear deal in all its parts, in good faith, and in a constructive atmosphere, and they agreed to continue to consult intensively at all levels and also with other remaining participants of the Joint Commission to the JCPOA.
They will also hold a Joint Commission meeting in Vienna next week at the level of Deputy Foreign Ministers or Political Directors – which is the usual level at which the Joint Commission meets – and will continue to work along these lines following the good exchanges we had today, during the day and during the evening.
They also decided that EU Member States – starting with the E3 but also other Member States – will work on complementary mechanisms and measures, not only so as to go at the European Union level but also at national level to, in particular, protect the economic operators of the EU Member States. HR/VP Mogherini will also have the opportunity to also brief the Heads of State or Government of the 28 EU Member States tomorrow evening at the leaders’ dinner that we will have in Sofia. The E3 leaders will also be present and HR/VP Mogherini believes that they will also have a first exchange with the other 25 Member States.
She stressed that the implementation of the JCPOA is also on the agenda of the next Foreign Affairs Council in some 10 days from now [on 28 May 2018]. So the Foreign Ministers of all the 28 Member States will have – at the latest at that stage – the possibility of working together on common work along these and similar lines.
For more details (including Q&A with HR/VP Mogherini), please see https://eeas.europa.eu/delegations/iran/44599/remarks-high-representativevice-president-federica-mogherini-press-conference-following_en
US Withdrawal from the JCPOA
On May 8, 2018, President Trump announced that the United States will be withdrawing from the JCPOA, culminating months of uncertainty around the fate of the Iran nuclear deal. The announcement came ahead of a May 12 deadline for the renewal of a key sanctions waiver. As described here, the last sanctions waiver occurred on January 12, 2018 amidst statements by President Trump that the waiver would be the last unless what President Trump considered “flaws” in the deal were fixed. In his May 8 speech, President Trump announced that the United States would re-impose nuclear sanctions against Iran.
Many of these sanctions, including so-called “secondary sanctions” that primarily target non-US companies engaging in business in or with Iran entirely outside US jurisdiction, were waived as part the US Government’s commitments under the JCPOA. By way of reminder, the sanctions relief under the JCPOA was mostly with respect to these secondary sanctions, whereas primary sanctions (applicable to US Persons) were left intact, with the exception of a few general licenses and favorable licensing policies (which themselves will be revoked as a result of today’s announcement).
Following the President’s announcement, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) released guidance, including new FAQs, regarding the implementation of the President’s decision. As described in this new guidance, the President’s announcement, as implemented by the US Treasury and State Departments, revokes any sanctions waivers issued to implement JCPOA sanctions relief and has replaced them with temporary waivers to provide for the wind down of previously-authorized activities in Iran in keeping with newly-established, 90-day (ending on August 6, 2018) and 180-day (ending on November 4, 2018) wind-down periods for activities involving Iran.
Sanctions Wind-Down Periods
OFAC’s guidance indicates that it will implement 90-day and 180-day wind-down periods for Iran-related activities that were authorized under the US JCPOA sanctions relief. During the wind-down periods, OFAC will take steps to allow US Persons to wind down previously-authorized operations or business in Iran and to receive payments under agreements entered into before May 8, 2018 until the end of the applicable wind-down period (i.e., until August 6, 2018 or November 4, 2018). Non-US persons wishing to avoid the risk of US secondary sanctions following the end of the applicable wind-down period can also take advantage of the wind-down periods to cease engaging in the sanctionable activities described below. OFAC has advised that it will consider whether any “new” Iran-related activities were engaged in during the wind-down periods when considering potential enforcement or secondary sanctions with respect to activities engaged in after the expiration of the wind-down periods, effectively cautioning parties about entering into “new” business after May 8, 2018.
90-Day Wind-down Period Ending on August 6, 2018
The following sanctions will be re-imposed after the 90-day wind-down period ends (i.e., on August 7, 2018):
After the 90-day wind-down period ends, the US Government will also revoke the following JCPOA-related authorizations under US primary sanctions targeting Iran:
180-Day Wind-down Period Ending on November 4, 2018
The following sanctions, which are largely those relating to Iran’s oil and energy sector, will be re-imposed after the 180-day wind-down period ends (i.e., on November 5, 2018):
General License H to be Revoked
OFAC’s guidance indicates that it will revoke General License H, authorizing US-owned or -controlled non-US entities to engage in certain Iran-related activities, as soon as administratively feasible. General License H will be replaced by a new general license authorizing the wind down of activities authorized under General License H (the “GL H Wind Down General License”). The GL H Wind Down General License will expire on November 4, 2018.
US-owned or -controlled non-US entities will be authorized to wind down operations or business in Iran conducted pursuant to General License H and to receive payments under contracts entered into before May 8, 2018. As above, OFAC effectively signaled caution with respect to “new” activities under General License H between May 8, 2018 and November 4, 2018.
In short, it appears that all parties who were designated on the Specially Designated National and Blocked Persons List (“SDN List”) under the Iran sanctions program prior to the implementation of the JCPOA will be re-designated as SDNs after November 5, 2018. OFAC expects to move parties identified as meeting the definition of the terms “Government of Iran” or “Iranian financial institution” (as those terms are defined in the ITSR) from the List of Persons Blocked Solely Pursuant to E.O. 13599 (which, as described here, was introduced as part of the JCPOA sanctions relief) to the SDN List. In addition, parties that were removed from the SDN List as part of the JCPOA sanctions relief will be re-listed on the SDN List by no later than November 5, 2018. As was the case prior to Implementation Day of the JCPOA, effective November 5, 2018, non-US persons engaging in transactions with these parties could be exposed to US secondary sanctions.
What Is Authorized During and After Wind Down?
A key consideration, of more importance to US Persons and US-owned or -controlled non-US entities than other non-US persons, given that they are directly subject to US jurisdiction and must rely on wind-down authorizations, is whether the activity being wound down is pursuant to a written contract or written agreement entered into prior to May 8, 2018. Questions may arise, and must be considered as to which activities and dealings can be related back to an existing pre-May 8, 2018, agreement, and which could possibly be deemed to be new business not authorized under the wind-down authorizations.
In the context of non-US, non-Iranian persons, the OFAC FAQs make clear that receipt of payments after the wind-down period (i) for goods or services fully performed or delivered to an Iranian counterparty prior to the expiration of the wind-down period, (ii) pursuant to a written contract or written agreement entered into prior to May 8, 2018, and (iii) that are otherwise consistent with US sanctions in place at the time of delivery or provision, would be allowed. Whether such post-wind-down payments are permitted as to US Persons and US-owned or -controlled non-US entities is not made clear in the OFAC FAQs, so we would expect OFAC to issue more guidance on this and other issues as questions arise.
As a result of the re-imposition of sanctions, financing and funds flows into/out of Iran will become extremely difficult, if not impossible. Iran will likely again be cut off from global financial messaging systems. Non-US banks should be expected to take a harder stand against processing Iran-related funds transfers, capital investments, dividend and royalty flows to/from Iran out of fear of losing their US corresponding banking relationships and falling foul of US enforcers. This may impact the ability for non-US companies to engage in lawful Iran-related business, even if such business is wholly outside US jurisdiction and does not trigger potential US secondary sanctions.
Impact on Non-US Persons Relying on General License H
Effective May 8, US-owned or -controlled non-US entities are to begin winding down any activities in Iran that are being undertaken pursuant to General License H with a view to completing such wind-down activities by November 5 (i.e., the end of the wind-down period for activities under General License H). Entering into “new” business (e.g., accepting new orders), even if consistent with General License H during the wind-down period could be viewed by OFAC as sanctionable following the end of the wind-down period.
Impact on General Licenses Issued Under Primary US Sanctions
General licenses issued under primary US sanctions, such as the Ag/Med General Licenses described here and General License D-1 related to the provision of certain services, software, and hardware incident to personal communications to Iran are not impacted by the United States’ withdrawal from the JCPOA as a legal matter and should remain in force.
No Impact on US Export and Reexport Controls
The US action has no impact on existing US export and reexport controls applicable to Iran, which apply independent of primary or secondary US sanctions, and with which both US and non-US persons must comply, to the extent they engage in exports or reexports involving items (commodities, software, or technology) subject to US jurisdiction.
Initial Reactions of Other P5+1 Countries
The UK, France, and Germany issued a joint statement, available here reaffirming their commitment to the JCPOA and confirming that they will remain parties to the JCPOA. Russia and China, have made similar statements, expressing disappointment with the US withdrawal and reaffirming their commitment and continued support for the JCPOA.
Iran, for its part, expressed continued commitment to the JCPOA, and, as of this writing, was engaged in talks with Russia, and planning to engage in talks with China, on the future of the JCPOA.
Despite such expressed commitment to the JCPOA, it remains to be seen whether the JCPOA will remain viable, especially to the extent that, as a practical matter, EU financial institutions are not willing to process transactions implicating Iran given the increased secondary sanctions risks.
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