Iran sanctions relief: Implementation Day arrives

Implementation Day under the Joint Comprehensive Plan of Action

On 14 July 2015, the E3/EU+3¹ and the Islamic Republic of Iran agreed upon a Joint Comprehensive Plan of Action (JCPOA)² regarding Iran's nuclear programme.

On 16 January 2016 "Implementation Day" occurred under the JCPOA, following confirmation by the International Atomic Energy Agency (IAEA) that Iran had complied with its nuclear obligations.

Implementation Day means that many of the sanctions on Iran imposed by the UN, EU and US have been lifted. This briefing explains what sanctions relief has taken effect, which sanctions remain, and the continuing risks for corporates aiming to deal with Iran.

Sanctions previously imposed on Iran

Successive sanctions have been imposed on Iran over the years. These sanctions include those imposed by the UN, the EU and the US. They have taken the form of measures including an asset freeze on certain individuals and companies; a ban on the import, purchase and transport of Iranian crude oil, natural gas and petrochemical products; and a ban on any transactions with Iranian banks and financial institutions.

Joint Comprehensive Plan of Action

The JCPOA aims to ensure the exclusively peaceful nature of Iran's nuclear programme. The deal's supporters believe that it has the potential to redraw Iran's relations with the US, stop the spread of nuclear weapons and reconnect Iran's economy to the rest of the world.

What happened prior to Implementation Day?

Following the JCPOA coming into effect on 18 October 2015, Iran began complying with its obligations to start dismantling agreed elements of its nuclear infrastructure. For sanctions to be lifted, the IAEA had to verify that Iran had fulfilled its nuclear-related commitments. These included scaling back its nuclear enrichment activities; reducing its uranium stockpiles; re-designing the Arak heavy-water reactor so it cannot produce weapons-grade plutonium; and allowing UN inspectors to enter sites, including military sites, when the inspectors had grounds to believe undeclared nuclear activity was being carried out.

On 18 October 2015, the EU and US also published the legal instruments necessary to give effect to sanctions relief upon Implementation Day. In the case of the EU these were:

• Council Decision (CFSP) 2015/1863³
• Council Regulation (EU) 2015/1861⁴
• Council Implementing Regulation (EU) 2015/1862⁵

What happened on Implementation Day?

On Implementation Day, the EU and US announced that the sanctions relief set out in the JCPOA had taken effect.

EU and some US sanctions on the import and transportation of oil and gas and petrochemical products, energy sector investment and access to transport hubs and the export of gold and precious metals have therefore been removed.

In addition the EU and US published extensive guidance on sanctions relief:

• Information Note on EU Sanctions to be lifted under the JCPOA;⁶
• Guidance relating to the lifting of certain US sanctions pursuant to the Joint Comprehensive Plan of Action on Implementation Day;⁷ and
• Frequently asked questions relating to the lifting of certain US sanctions under the Joint Comprehensive Plan of Action on Implementation Day.⁸

What sanctions have been lifted?

The table on the next page summarises the sanctions lifted on Implementation Day.

The limited extent of US sanctions relief

It is important to recognise that the US sanctions that have been removed are mostly secondary sanctions, which seek to prevent non-US individuals and companies trading with Iran. US primary sanctions, dating back decades, will remain in place, significantly limiting the extent to which US individuals and companies can participate in any opening up of Iran's economy.

There are limited exceptions to the continuing US primary sanctions. These are:

• the US Treasury's Office of Foreign Assets Control (OFAC) may authorise transactions by US persons in relation to commercial aviation with Iran;
• the import into the US of Iranian carpets and foodstuffs is now permitted; and
• most significantly for commercial parties, the US has issued a general licence (General License H) authorising non-US persons that are owned or controlled by a US person to engage in certain activities in Iran that are consistent with the JCPOA. The US has produced extensive guidance explaining how General License H (and other US sanctions relief) is to be interpreted.⁹

It is important to note that, although the US has removed certain individuals and companies from OFAC's List of Specially Designated Nationals, with whom dealings are prohibited, many individuals and companies remain. The list includes the Islamic Revolutionary Guard Corps (IRGC), which have vast business interests in Iran. Companies wishing to do business in Iran will therefore need to conduct indepth due diligence to ensure that they do not fall foul of these provisions.

Finally, the retention of US primary sanctions mean that transactions involving Iran using US dollar clearing banks cannot occur. Parties will need to use other currencies.

What else does the JCPOA not cover?

Although sanctions relief under the JCPOA is extensive, certain EU and US sanctions on Iran do remain in place.

In addition to US primary sanctions, US and EU sanctions on Iran for terrorism and human rights abuses remain in place.

These predate the more extensive nuclear-related sanctions, and impose asset freezes and prohibit the export to Iran of certain materiel.

Even within the framework of the JCPOA, certain sanctions have not been lifted and will remain in place until October 2023 (Transition Day), or such earlier date on which the IAEA concludes that all nuclear materiel in Iran remains in place for the conduct of peaceful activities. The remaining sanctions relate to the supply to Iran of nuclear and arms-related items, and restrictions on the supply to Iran of graphite, certain raw or semi-finished metals and software with a nuclear or military application. In addition, a number of asset freezes remain in place for named individuals and companies (including Iranian banks such as Ansar Bank, Bank Saderat Iran, Bank Saderat plc and Mehr Bank).

Does Implementation Day mean that the previous sanctions imposed on Iran cannot be brought back?

No. An agreed dispute resolution procedure is included in the deal to handle cases of suspected noncompliance with the JCPOA. If a violation is identified and not resolved under the procedure specified in the JCPOA, the matter will be referred to the UN Security Council. The UN Security Council then has 30 days to adopt a resolution to continue the sanctions lifting. If it does not, the previous UN resolutions against Iran will "snap back" into place automatically.

Any such occurrence would likely see EU and US sanctions reimposed swiftly. The EU's Information Note in relation to sanctions relief states that "In the event of the reintroduction of EU sanctions, the execution of contracts concluded in accordance with the JCPOA while sanctions relief was in force will be permitted consistent with previous provisions when sanctions were originally imposed, in order to allow companies to wind down their activities. Details about the period of time allowed for the execution of prior contracts will be specified in the legal acts providing for the reintroduction of EU sanctions".¹⁰

The "snap back" provisions will not give rise to retroactive liability for contracts which are entered into between Implementation Day and any "snap back" occurring. However, continued performance of longterm contracts would not be possible, and parties should give consideration to how the risk of "snap back" can be mitigated in drafting, for instance by including force majeure or specific "snap back" provisions.

What does this mean for potential investors in Iran?

The lifting of sanctions could open up Iran's significant oil resources to the rest of the world, and the expectation that this will occur has been blamed, in part, for the continuing fall in oil prices. In theory, the lifting of sanctions will allow Iran to rapidly increase its crude oil production.

Sanctions relief will also reconnect Iran's banks and companies to the international banking system, leading to investment opportunities.

However, given the survival of the US primary sanctions, and the ongoing complex regulatory burden associated with dealing with Iran, it is expected that some companies, in particular European banks, will continue to be wary. It is therefore likely to take some time before the effects of the so-called "big bang" of Implementation Day are fully felt.

Conclusion: three key takeaway points

The JCPOA sanctions relief is complicated and advice should be sought before seeking to deal with Iran. However, three key takeaway points are:

• Not all sanctions have been lifted: parties need to understand the extent of sanctions relief, and what remains in place.
• Sanctions on Iran could "snap back" into place at relatively short notice: parties need to consider how to mitigate the effects of this.
• Parties should ensure that careful due diligence is undertaken before any dealings with Iran are implemented.

_Notes

_{^1. China, France, Germany, the Russian Federation, the United Kingdom and the United States
^2. http://eeas.europa.eu/statements-eeas/2015/150714_01_en.htm
^3. http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32015D1863
^4. http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32015R1861
^5. http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32015R1862
^6. http://eeas.europa.eu/top_stories/pdf/iran_implementation/information_note_eu_sanctions_jcpoa_en.pdf
^7. https://www.treasury.gov/resourcecenter/sanctions/Programs/Documents/implement_guide_jcpoa.pdf
^8. https://www.treasury.gov/resourcecenter/sanctions/Programs/Documents/jcpoa_faqs.pdf
^9. https://www.treasury.gov/resourcecenter/sanctions/Programs/Documents/iran_glh.pdf
^10. http://eeas.europa.eu/top_stories/pdf/iran_implementation/information_note_eu_sanctions_jcpoa_en.pdf}