Iran sanctions: US pulls out of the Joint Comprehensive Plan of Action

On 8 May 2018, President Trump announced that the US would no longer be a party to the Joint Comprehensive Plan of Action (the "JCPOA") concluded on 14 July 2015 in relation to Iran's nuclear programme.  As a consequence, the US will begin re-imposing the nuclear-related sanctions against Iran it had waived.

We consider below the legal and practical implications of this decision, as well as potential options available to the EU to take steps to reduce the effect of the impending US sanctions.

What is the JCPOA?

The JCPOA is a long-term deal in relation to Iran's nuclear programme agreed by the EU, China, France, Germany, Russia, the UK, the US and Iran.  Its purpose was to ensure the exclusively peaceful nature of Iran's nuclear programme.  In return, Iran received relief from the extensive sanctions imposed by the US, EU and UN over a number of years.  

On 16 January 2016 the JCPOA became binding on all parties (known as "Implementation Day").  As a result, UN, EU and some (but not all) US nuclear-related sanctions were substantially lifted, thus opening up Iran's economy to international investors.   

In respect of the US, sanctions relief was generally limited to "secondary sanctions" – that is, sanctions that sought to prevent non-US persons and entities with an interest in the US trading with Iran by threatening exclusion from US markets if they continued to do so.  US primary sanctions – those binding on US persons or entities - largely remained in place (subject to certain licensed exceptions).  The US also continued to list a large number of individuals and entities on OFAC's List of Specially Designated Nationals ("SDNs") with whom dealings are prohibited.

What happened on 8 May 2018?

Despite the frequent criticism of the JCPOA by President Trump prior to and since his inauguration, his administration had continued to certify to Congress that Iran was in compliance with its obligations under the JCPOA, which it was required to do every 90 days in order to keep the JCPOA alive.  

However, on 8 May 2018, President Trump announced his decision to cease the US's participation in the JCPOA.  As a result, after a wind-down period of either 90 or 180 days, those US nuclear-related sanctions that were suspended under the JCPOA will be re-imposed.  It is expected that all sanctions will be re-imposed by 5 November 2018 at the latest.

The cessation of US participation in the JCPOA takes the form of revocation of various waivers of US sanctions on Iran put into effect by President Obama's administration.  

1. What are the legal implications?

In broad terms, US sanctions will revert back to the position pre-JCPOA.  The sanctions¹ will be re-imposed in two waves after a wind-down period of either 90 days (i.e. prior to 6 August 2018) or 180 days (i.e. prior to 4 November 2018).  Persons engaging in sanctioned activities will be permitted to wind down sanctionable activities during the relevant period, but should not enter into new agreements. 

After the 90 day wind-down period – by 6 August 2018 – US sanctions on activities related to the following areas will be re-imposed:

1. the purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
2. Iran's trade in gold or precious metals;
3. the direct or indirect 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 processes;
4. 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;
5. the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
6. Iran's automotive sector.

By 6 August 2018, the US will also revoke various authorisations granted under US primary sanctions, including in relation to trade in Iranian-origin carpets and foodstuffs, the export to Iran of commercial passenger aircraft and related parts and services, and related activities undertaken pursuant to General License I (which provides for US persons to conduct activities related to certain commercial passenger aircraft transactions with Iran).

After the 180 day wind-down period – by 4 November 2018 - the sanctions on activities related to the following areas will be re-imposed:

1. Iran's port operators, and shipping and shipbuilding sectors;
2. petroleum-related transactions with certain entities, including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
3. transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions²;
4. the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions³;
5. the provision of underwriting services, insurance, or reinsurance; and
6. Iran's energy sector.

In addition, by 5 November 2018, the US will also revoke authorisations granted to US owned or controlled foreign entities under General Licence H (which permitted entities owned by US persons to conduct transactions in Iran in certain circumstances), as well as reinstating those persons to OFAC's SDN list who were removed as a result of the JCPOA on 16 January 2016.

At the end of the 90 or 180 day wind-down periods, the activities described above with or involving Iran will become sanctionable under US law. Affected persons are encouraged  by the US to use these periods to wind down any operations which would become sanctionable thereafter.  Guidance published by the US Treasury's Office of Foreign Assets Control ("OFAC") states that if non-US and/or non-Iranian persons are owed payments for goods, services, loans or credit after the end of the relevant wind-down period, such payment will be permitted only if the goods/services or credit/loans were fully delivered or extended prior to the end of the wind-down period under an agreement entered into prior to 8 May 2018. 

2. What are the practical implications?

Since 16 January 2016, as a result of the sanctions relief under the JCPOA, non-US companies have been able to engage in legitimate business deals with or involving Iran which would previously have placed them at risk of US secondary sanctions.  The actions taken by President Trump on 8 May 2018 will mean that the future of those deals is now very uncertain.  

Practically, even before 8 May 2018, international banks and insurers were reluctant to deal with Iranian counterparties or process payments which originate from, or are destined for, Iran.  This trend is likely to be even more marked going forward.  President Trump's actions will, therefore, have the practical effect of shutting off the international banking system to anyone wanting to do business in Iran.

Generally, leaving aside the specific consequences under the JCPOA, President Trump's actions are likely to indicate an increasingly hostile attitude to Iran by the US.  The US has stated that it "will continue to make aggressive use of its authorities to target Iran’s malign behaviour".  This may result in additional sanctions or legal steps by the US against Iran.  

3. What next for Europe?

The future of the JCPOA is now uncertain.  President Trump's decision has been widely criticised by the other parties to the JCPOA.  A joint statement issued by Theresa May (Prime Minister of the UK), Angela Merkel (Chancellor of Germany) and Emmanuel Macron (President of France) expressed concern at Trump's decision and emphasised their continuing commitment to the JCPOA.  The Russian Foreign Ministry issued a statement in which it stated that it was deeply disappointed but it remained open to further cooperation with the remaining JCPOA participants.  Iran has also expressed a desire to keep the JCPOA alive, in some form.

Indeed EU leaders have urged Iran to continue to respect the terms of the JCPOA.  However, for the JCPOA to survive, the EU will need to consider ways in which it may mitigate the effects of US secondary sanctions.  A number of legal options have been suggested.

• EU blocking statute⁴: This is a law which prohibits EU companies from complying with certain US extraterritorial sanctions.  As a result, it is often described as Europe's most important tool in countering US extraterritorial sanctions.  These measures were devised, but not tested, in the 1990s in response to US extraterritorial sanctions against Iran, Libya and Cuba.  However, the statute's terms are vague and it is notoriously hard to enforce.  Further, the blocking statute leaves it up to individual member states to enforce its terms, and it is understood a number of member states have not enacted legislation which would allow them to do so. The EU's ambassador to the US has previously warned President Trump’s administration that the EU is prepared to block US sanctions on Iran and EU officials have been reported as saying that the statute is being updated to cover the current US sanctions on Iran.  However, it is largely seen as a political rather than legal tool, so its effectiveness remains to be seen.
• EU action against US secondary sanctions via the World Trade Organisation ("WTO"): This option was deployed in 1996 when the EU filed a complaint with the WTO against the US in relation to the implementation of extraterritorial sanctions on Cuba.  However, there are a number of difficulties with this route, including the effectiveness of any remedy, the length of time to get a decision, and the scope for the US to argue that it is acting in order to protect its "essential security interests" (a permissible carve-out).  WTO proceedings might be made more difficult by different views within the EU, although to date most EU countries have shown continued support for the JPCOA deal with Iran.
• Carve-outs for EU companies: It has been suggested that the EU could seek carve-outs from the US sanctions for EU companies, including grand-fathering measures for existing contracts and investments.  In 1996, in response to pressure from Europe, President Clinton granted waivers to EU companies of certain US extraterritorial sanctions against Cuba.  However, given President Trump's approach to date, this may be unlikely.

There are also practical steps such as the further extension of export credit finance to facilitate trade with Iran and other steps in relation to provision of financial support, perhaps involving the European Investment Bank.

It is not yet clear whether any of the above options will offer EU companies the protection and support they will need if they are to continue doing business with Iran.  The reliance of many companies and banks  on the international financial system (in particular US correspondent banks) may be a limiting factor.  

4. What next for other countries?

If the EU is unable to extract concessions or effectively mitigate the effects of US secondary sanctions, this may present opportunities for non-EU companies.  In this regard, companies from China, Russia, India and elsewhere in Asia may seek to fill voids left by EU investors.  The Chinese government has stated that it intends to continue to protect and execute the agreement fully.  Although recent steps by US enforcement authorities against a Chinese technology company found to have traded with Iran in breach of US sanctions and against Russian so-called oligarchs and companies illustrates the long arm of US economic power. 

5. Summary

Entities with interests in Iran should therefore be aware that:

1. President Trump's decision in relation to the JCPOA will materially increase the risks of trade with Iran for non-US companies.  The principal risk is of steps being taken by the US against such companies to restrict their access to US markets.
2. Practically dealing with Iran will likely become harder as financial institutions withdraw from any involvement with Iran, and the processing of transactions in relating to Iranian business.
3. US sanctions waivers under the JCPOA are not ineffective immediately, but will be wound down between now and November 2018.  Entities with interests in Iran should therefore consider carefully the terms of their contracts and steps which they can take to wind-down operations (if that is their decision) or otherwise to limit their exposure.
4. In the same way, entities with interests in Iran should take advice in relation to potential claims which they may face from Iranian counterparties if they seek to cease performing contracts due to US secondary sanctions.  The intersection between contractual obligations and secondary sanctions is complicated.
5. The situation is fast moving.  Attention should be paid to what steps the EU takes to seek to mitigate the effects of the re-imposition of US secondary sanctions, with the particular concern that EU companies may be obliged in the future to choose between breach of the EU blocking law and exposure to US secondary sanctions liability.

1. As set out in Executive Orders 13574, 13590, 13622, 13628, and 13645
2. Under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012
3. As described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010
4. Council Regulation (EC) No 2271/96 of 22 November 1996