US withdraws from Iran Nuclear Deal

Having repeatedly threatened to tear it up for months, President Trump announced today, 8 May 2018, that the USA withdraws from the Joint Comprehensive Plan of Action (“JCPOA”) – a deal entered into by a number of countries aimed at curbing Iran’s nuclear capabilities. In his press conference at 2pm, the President strongly denounced the deal, signed by the previous US administration, and confirmed that he is signing a presidential memorandum to begin reinstating US nuclear sanctions on the Iranian regime. These were described by the President as the “highest level of economic sanction”. This US withdrawal from the JCPOA plainly has major consequences for sanctions.

For the international trading and shipping community, the re-imposition of sanctions with respect to commerce will likely be the most significant development, particularly the re-sanctioning of Iran’s port operations, shipping industry and petroleum trade, and the potential re-application of extraterritorial sanctions against non-US, non-Iranian persons who provide financial and insurance services incidental to commerce with Iran.

This note reviews the nature and relevant extent of these re-instated Iran sanctions following wind-down periods, and in briefly comparing the EU and US positions, it highlights what parties may now face.  Whilst navigating these new regulatory changes, interested parties will also be keeping an eye on Europe’s response and whether Iran seeks to negotiate a deal without the US.

General

Issued by national governments and supranational bodies such as the UN and the EU, sanctions ban or inhibit movement of natural persons, currencies, and goods in commerce. They seek to discourage the behaviour of the target nation and/or its elites, and can apply to specific individuals, selected companies, particular trades or entire countries. They are also often classified according to theme, as relating for instance to general matters such as nuclear activities, terrorism and human rights, or specifics like ballistic missiles.

In creating and also applying sanctions, countries do not speak with one voice. The EU nations target Tunisia but the US does not, and Venezuela has seen recent limited EU action alongside extensive US measures over several years. Most of the continuing US sanctions against Cuba conflict with EU counter legislation, and the US provisions against the Arab League boycott of Israel are far more extensive than those of the EU.

It is vital always to know who is affected by which provisions, where, and in what circumstances.

An entity’s ultimate beneficial ownership is often of central importance, and EU and US provisions define relevant ownership and control differently, the latter achieving wider reach by aggregation. Thus, a body that is not yet restricted (by being an SDN – a Specially Designated National) becomes so if 50% or more owned by other SDNs. More recent US provisions bite at 33%.

Some measures allow trade but curtail its means. Under the SSI listings developed following the Crimea and Ukraine upheaval, dealing with certain Russian and Ukrainian companies is lawful but permitting them more than (90, and now) 60 and in some cases (30, and now) 14 days credit is not. This has obvious implications for seeming routine matters like payment scheduling and invoice chasing.

In all cases breach can mean severe consequences, including heavy fines, commercial ostracism, reputational damage, and even jail. Defences are few and hard to establish, with mitigation largely forward-looking and based on embedded supervision and other corrective measures.

Different jurisdiction – and definition?

EU sanctions apply to nationals of member states and bodies incorporated under such laws – regardless of where something is done – and to activities by anyone within the EU, including its airspace, and on board ships and aircraft under member state jurisdiction.

The concept of “US persons” (or under more recent provisions a “United States person”) is key to the applicability of US sanctions.

Precise definition varies, but the essence is anyone in the US, all US citizens and permanent resident aliens wherever they are, all US incorporated bodies (including overseas branches), and any entity owned or controlled by a US person.

Under both regimes, the notions of facilitation of breach or circumvention offer wide extra-territorial scope.

The JCPOA

Under this landmark deal which was signed on 14 July 2015 and implemented on 16 January 2016, the US, five other countries and the EU agreed to remove all nuclear-related sanctions in return for related commitments by Iran. Many other restrictions, such as those concerning terrorism and human rights, remain in place.

Thus extensive sanctions still apply to Iran and many of its nationals and entities, and (seeking to restrict ballistic missile development and general access to weaponry) there have lately been additional measures by the US.

If any current sanctions apply, dealings (outright, or perhaps on certain terms) are unlawful. It is irrelevant that others have been discontinued.

If Iran was found guilty of material breach, sanctions would be reimposed under the “snap back” provisions. This phrase does not appear in the JCPOA, and while it suggests swift riposte, the procedure would mean many weeks between initial complaint and any resulting action. In the current climate it is very likely that additional measures would accompany any reinstatement.

The JCPOA explicitly does not apply to “US persons”, as defined (by reference to what is a “non-U.S. person”) in a detailed footnote to Annex II.

What now?

This is a very brief sketch of the current, extensive and complex landscape within which President Trump has now acted.  This withdrawal decision will certainly make that landscape more complex for the foreseeable future.

New economic sanctions will now be reinstated by the US on Iranian interests and activity.  The US Office of Foreign Assets Control issued an update on Iran Sanctions minutes after the President’s announcement was made.  OFAC confirmed the US will “begin re-imposing the US nuclear-related sanctions that were lifted to effectuate the JCPOA sanctions relief, following a winding-down period”.  At the end of the 90-day and 180-day wind-down periods the applicable sanctions will come back into full effect.  Below is a summary of the re-instated Iran Sanctions and more details can be found at: OFAC’s FAQs on re-imposition of Iran Sanctions

Re-instated Iran sanctions

After the 90-day wind down period ends on August 6, 2018, the US will re-impose:

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

And after 90 days, the US will revoke the following authorizations under US primary sanctions regarding Iran:

  1. The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR);
  2. 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
  3. Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.

Further, after 180 days, the US will re-impose the following sanctions that were lifted pursuant to the JCPOA, including sanctions on associated services related to these activities:

  1. Sanctions on Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  2. Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  3. 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 (NDAA);
  4. 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 (CISADA);
  5. Sanctions on the provision of underwriting services, insurance, or reinsurance; and
  6. Sanctions on Iran’s energy sector.

These wide ranging economic sanctions effectively wind the clock back on the US sanction regime to the position pre-JCPOA.  However, the wind-down periods, waivers for activities in the interim, and other factors mean that parties and their advisers will need to study these developments closely where:

  • What happens could be of continuing great significance for international trade, whether as regards sale contract or fixture counterparties, detailed terms or even ship operations;
  • Vital rigorous checks to avoid proscribed companies and individuals will only ever be as good as related due diligence in checking ownership and control;
  • Action may depend on first identifying who within an organisation is an EU national or a US person, and then perhaps sealing all such from any involvement; and especially;
  • Great care should be taken to pinpoint any material alteration in what might have become a perceived settled regulatory matrix.

If you would like to discuss anything arising from this commentary please contact Ed Floyd at ed.floyd@floydzad.com and +1 (917) 999 6914 or Luke Zadkovich at luke.zadkovich@floydzad.com and +1 (917) 868 1245 / +44 (20) 8068 6844.  This article is to be considered general commentary only and not to be relied upon as legal advice for any particular circumstances.

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