Executive Summary
 

  • Effective May 8, 2018, the US Government withdrew from the Joint Comprehensive Plan of Action (“JCPOA”).
  • The US Government will re-instate the sanctions that were lifted or waived following the implementation of the JCPOA.
  • This action has a greater impact on non-US persons because most of the lifted or waived sanctions were secondary sanctions targeting activities of non-US companies occurring outside of US jurisdiction.
  • The sanctions will be re-instated on August 7, 2018, and November 5, 2018, following the end of 90-day and 180-day “wind-down” periods.
  • Importantly, US Persons and non-US entities owned or controlled by US Persons engaged in activities authorized under General License H will need to wind down such activities by November 4, 2018.
  • Non-US persons can also take advantage of the wind-down periods to cease engaging in the sanctionable activities described below; otherwise they face the risk of US secondary sanctions for engaging in such sanctionable activities past the wind-down periods.
  • Thus, all persons, but especially non-US persons should carefully consider, without limitation:
    • the scope of their activities implicating Iran;
    • whether such activities, if continued following the wind-down periods, could present a risk of US secondary sanctions;
    • the extent to which such activities should be wound down, based on the foregoing risk assessment;
    • what activities are permissible as a part of wind down; and
    • practical impact on financial transactions involving Iran or Iranian banks, even assuming no secondary sanctions risk.

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):

  • Sanctions on the purchase or acquisition of US 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 aluminum 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.

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:

  • The importation into the United States of Iranian-origin carpets, foodstuffs, and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (“ITSR”);
  • Activities undertaken pursuant to specific licenses issued in connection with 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 (“JCPOA SLP”); and
  • Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.

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):

  • Sanctions on Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines, South Shipping Line Iran, or their affiliates;
  • Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company, Naftiran Intertrade Company, and National Iranian Tanker Company, 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 of the National Defense Authorization Act for Fiscal Year 2012;
  • Sanctions on the provision of specialized 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;
  • Sanctions on the provision of underwriting services, insurance, or reinsurance; and
  • Sanctions on Iran’s energy sector.

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.

Sanctions Designations

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.

Practical Considerations

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.

Financial Sector

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.
In addition, there are reports that the EU is considering revamping its blocking regulation (Council Regulation No 2271/96) with a view to considering introducing blocking against the re-instated US sanctions.

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Author

Paul Amberg is a partner in Baker McKenzie’s Amsterdam office, where he handles international trade and compliance issues. He advises multinational companies on export controls, trade sanctions, antiboycott rules, customs laws, anticorruption laws, and commercial law matters. Paul helps clients assess and address compliance risks presented by export controls, trade sanctions, antiboycott rules, customs laws, and anticorruption laws. His practice especially focuses on internal reviews, voluntary disclosure filings, and enforcement actions brought by, the US Government in relation to the Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), trade and economic sanctions programs, and US customs laws.

Author

Ms Stafford Powell advises on all aspects of outbound trade compliance, including compliance planning, risk assessments, licensing, regulatory interpretations, voluntary disclosures, enforcement actions, internal investigations and audits, mergers and acquisitions and other cross-border activities. She develops compliance training, codes of conduct, compliance procedures and policies. She has particular experience in the financial services, technology/IT services, travel/hospitality, telecommunications, and manufacturing sectors.

Author

Inessa Owens is an associate in the Washington, D.C. office and member of the Firm’s International Trade practice group. She focuses on outbound trade compliance issues, including compliance with the Export Administration Regulations, anti-boycott rules, and economic sanctions administered by the US Treasury Department’s Office of Foreign Assets Control, including those targeting Cuba, Iran, North Korea, Syria, and Russia. She has worked with clients in diverse industries that include finance, pharmaceuticals, and energy.