Out-Law Analysis 5 min. read

Iran sanctions after US withdrawal from nuclear agreement


ANALYSIS: Now that the US has withdrawn from the Iran nuclear deal, companies should not enter into any new contracts related to Iran business without first obtaining legal advice, even if the contracts are due to be concluded by the end of the wind-down period of sanctions relief.

US president Donald Trump announced yesterday that the US would pull out of an international deal to lift trade sanctions on Iran in return for controls on its nuclear arms programme. The US will begin the process of re-imposing sanctions on Iran and any company doing business there.

As well as not starting new contracts, businesses should take legal advice on any existing contracts about the steps that can be taken to protect their interests in the event that the US position does not change. These might be under the contract's force majeure provision, a sanctions clause or a termination clause.

The Joint Comprehensive Plan of Action (JCPoA) was agreed in 2015 suspended sanctions from 16 January 2016. Sanctions will now be re-imposed in two stages, on 6 August and 4 November this year.

Sanctions had continued to apply to US companies and people throughout this period. The sanctions being re-imposed are 'secondary' sanctions, applying to non-US businesses and people for non-US dealings that occur entirely outside of the US>

The US will implement wind-down periods so that currently-lawful activities and contractual commitments can be brought to an end.

Sanctions to be re-imposed by 6 August relate to:

  • trade in gold and precious metals
  • sale and transfer to and from Iran of graphite, raw, or semi-finished metals
  • sales or transfer from Iran of software for integrating industrial processes
  • transactions and accounts related to Iranian's rials or Iranian sovereign debt
  • automotive and aircraft sector sanctions
  • import into the US of Iranian-origin carpets and foodstuffs.

Sanctions to be re-imposed by 4 November relate to:

  • the energy sector, including the oil and gas related prohibitions
  • petroleum-related transactions with, amongst others, National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO) and National Iranian Tanker Company (NITC). The US's view is likely to be that this prohibition extends to NIOC's subsidiaries, such as NISOC
  • port operators, shipping and shipbuilding sectors, including dealings with particular shipping lines
  • transactions by financial institutions with designated Iranian financial institutions
  • financial messaging
  • underwriting and insurance
  • redesignation of thousands of persons and companies as Specially Designated Nationals;

The wind-down period allows for contractual obligations to be fulfilled by non-US businesses and people before whichever of the 6 August or 4 November deadlines applies. The US government has said that the period is for the winding-down of activities rather than for the entering of new contractual arrangements. If any contractual obligations extend beyond the deadline, enforcement action is more likely if the contract was entered into after 8 May 2018;

Payments due on contracts for goods or services entered into prior to 8 May where the goods or services were fully provided or delivered before the deadline are permitted.

Enforcement action for breaching the secondary sanctions include: loss of eligibility to receive export licences; being blocked from US financing and the financial system, and having property and assets in the US blocked.  

What will Iran do?

The JCPoA has a dispute resolution procedure which ultimately leads to the UN Security Council, which would vote on whether to continue the lifting of sanctions. Given the role of the US on the Security Council the dispute resolution procedure is unlikely to result in any change in policy.

Iran may consider referring the case to the International Court of Justice but neither Iran nor the US has declared that it follows decisions of the Court and therefore any decision would only be advisory in nature.

What will the EU do?

In a joint statement the leaders of the UK, France and Germany have emphasised their continued commitment to the JCPoA.  

The EU could consider extending an EU 'blocking' regulation from 1996 to prohibit EU businesses, people and courts from complying with the US secondary sanctions. The regulation would require EU businesses to inform the European Commission if their business activities are affected by the US secondary sanctions. It would require that they not comply with the US sanctions unless authorised to do so by an authority in their country because non-compliance would seriously damage the company's economic interests.

A blocking regulation is likely to only be effective if EU countries passed laws to impose significant financial penalties for non-compliance, and that seems unlikely. Practical issues may remain in terms of EU banks accepting funds originating in Iran or processing any funds connected to Iranian business activity. At best, a blocking regulation may serve to temper the risk of US enforcement against EU companies which inadvertently fail to comply with the US secondary sanctions.   

The EU, the UK, France, Germany, China and Russia may also consider a complaint to the World Trade Organization. However, the WTO has questionable jurisdiction given the US sanctions are a response to security concerns and the WTO dispute resolution processes can take several years.

While the EU does not have a silver bullet to protect EU businesses from the US secondary sanctions, the implementation of blocking legislation and a complaint to the WTO may serve to apply pressure on the US to extend the wind-down provisions pending a re-negotiation of the JCPoA with Iran which is ultimately the US end-game.

What about Russia and China?

Russia and China have denounced the US action, and Russian and Chinese companies will be encouraged to ignore the US sanctions. Russian and Chinese companies may decide that the risk of repercussions in Russia and China is such that Iran-related business should continue. China has the financial and manufacturing might to set up a separate financial, insurance and supply chain to support Iran-related business that does not touch on the US and which would serve to encourage Chinese and non-US activity in Iran.

Nevertheless, despite the rhetoric from the respective foreign ministers, larger Russian and Chinese companies, particularly those which rely on US exports and access the US financial markets, will have to consider the long reach of the US sanctions. Just last month the US Commerce Department barred US companies from exporting to Chinese telecom equipment maker ZTE for seven years, saying the company had violated a previous settlement of criminal and civil charges for making illegal shipments to Iran and North Korea. Under the terms of a 2017 settlement ZTE agreed to pay the US $1.19 billion in fines and punish the employees involved in breaching US sanctions by shipping telecommunications equipment to Iran and North Korea.

From a practical level, there are steps that the Chinese can take to dilute the impact of the US action but, given the integrated nature of the financial markets and supply chains, a significant amount of trade with Iran will cease unless a political resolution is found.

Some businesses may await any action by the EU, Russia and China and other likely developments and the potential shifting of the US position over the next few days and weeks, potentially via the detail of the US executive orders that are being drafted,  before deciding how to proceed.

Tom Stocker is a regulatory expert at Pinsent Masons, the law firm behind Out-Law.com

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