Businesses Face Uncertainty in Sanctions Compliance Obligations After U.S. Withdraw from Iran Nuclear Deal

by Ryan Fayhee, Alan Kashdan, and Tyler Grove

On May 8, 2018, President Trump announced that the U.S. will no longer participate in the Joint Comprehensive Plan of Action (“JCPOA”). Although the move was long-anticipated, companies and financial institutions in the U.S. and abroad who entered into long-term arrangements involving Iran in reliance on the JCPOA are left wondering what’s next.

The U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) – the government agency responsible for implementing U.S. sanctions – has released guidance on the timing of when the Iran sanctions will “snapback” into effect, and the snapback sanctions will likely have a greater impact on non-U.S. parties than U.S. parties. However, much uncertainty remains regarding the scope of activities that will be allowed in winding down Iranian business, the potential for future additional U.S. sanctions, and the impact of possible foreign statutes designed to prohibit compliance with U.S. sanctions.

Timing of Sanctions Snapback

Immediately after President Trump’s announcement that the U.S. would exit the JCPOA, OFAC released initial guidance in the form of FAQs. These specified that the Iran sanctions lifted or waived as part of the JCPOA would be reactivated under two timelines -- of 90 days (to August 6, 2018) and 180 days (to November 4, 2018) respectively, depending on the activities involved -- to allow businesses that engaged in transactions involving Iran to wind-down their activities before the sanctions take full effect.

Under the 90-day wind-down period, on August 6, 2018, the U.S. government will re-impose sanctions related to the Iran government’s purchase of or trade in:

  • U.S. dollar banknotes
  • Iran’s trade in gold and precious metals
  • Transactions involving graphite and certain raw and semi-finished metals
  • Purchase, sale, or maintenance of funds in Iranian rials
  • Iran’s sovereign debt; and Iran’s automotive sector

Under the 180-day wind-down period, on November 4, 2018, the U.S. government will re-impose sanctions related to:

  • Iran’s energy, shipping and shipbuilding sectors
  • Iranian ports
  • Petroleum-related transactions
  • Transactions and specialized financial messaging services involving the Central Bank of Iran
  • Underwriting services, insurance, or reinsurance

Differing Effects on U.S. and Non-U.S. Persons

Before the JCPOA, U.S. companies and individuals were subject to a near total prohibition on almost all trade and activity with Iran. The JCPOA modified that only slightly in the form of two General Licenses, General License H (“GL H”) and General License I (“GL I”). GL H authorized non-U.S. businesses that were owned or controlled by U.S. persons to engage in many trade activities with Iran, subject to strict limitations on the role of the U.S. parent in such activities. GL I authorized the possibility for U.S. and non-U.S. companies (e.g., Boeing and Airbus) to obtain specific licenses for the sale civil aircraft and parts to Iran. These licenses will now be revoked and replaced with temporary authorizations to allow for wind-down activities. The wind-down period for activities under GL I will be 90 days, and under GL H, 180 days.

Additionally, authorizations for certain transactions related to imports into the U.S. of Iranian-origin carpets and foodstuffs will be terminated. OFAC has indicated that as soon as feasible, it will replace those authorizations with narrower authorizations limited to transactions ordinarily incident and necessary to wind-down activities that were previously authorized.

The impact of the JCPOA for non-U.S. persons was much more significant. Through a series of pre-JCPOA laws and presidential Executive Orders, the U.S. threatened to impose so-called secondary sanctions on non-U.S. persons who engaged in specifically described categories of trade with Iran, such as Iran’s petrochemical and automotive sectors, ports, shipping and shipbuilding. These were largely suspended as part of the JCPOA. Only a few of the pre-JCPOA secondary sanctions continued under the JCPOA – principally, engaging in transactions with Iranian persons on the OFAC Specially Designed Nationals (“SDN”) list, dealing with the Islamic Revolutionary Guard Corp (“IRGC”) and companies affiliated with it, and entering into transactions payable in U.S. dollars. All of the pre-JCPOA secondary sanctions that had been suspended or terminated will now snapback into place following the expiration of the relevant wind-down periods. In addition, OFAC also indicated that after November 4 it will re-designate as SDNs, “as appropriate,” individual Iranian nationals and entities that had been on the SDN list before the JCPOA, but that were taken off that list as part of the JCPOA. Notably, these individuals and entities, which were SDNs before the JCPOA but had that label removed to allow non-U.S. persons to deal with them without fear of secondary U.S. sanctions, were always blocked for U.S. persons and companies throughout the duration of the JCPOA. Thus, the effect of re-designating these persons as SDNs will be that non-U.S. persons subject to OFAC’s jurisdiction will no longer be able to transact with these parties.

Scope of Wind-Down Activities

Beyond the general timing of when certain sanctions will snapback, companies and financial institutions attempting to wind-down business activity involving Iran face a number of uncertainties. In particular, OFAC has not yet issued guidance on what activities involving Iran will be permissible, although it has promised that such guidance will be forthcoming. The scope of permissible activities should become clearer as OFAC begins the process of reissuing general licenses to permit certain wind-down activities.

However, businesses will continue to be able to be paid from Iranian counterparties for activities undertaken during the wind-down period. Non-U.S. parties that are owed payment from Iranian counterparts for services rendered, or are owed repayment from Iranian counterparts for loans or credits, may still receive those payments in accordance with the written contracts, even if the payments are made after the wind-down period. Of course, the payments must otherwise be consistent with U.S. sanctions policy (i.e., not involve U.S. persons or the U.S. financial systems without specific authorization).

Future U.S. Policy Towards Iran

Further complicating compliance obligations under U.S. sanctions is the uncertainty towards future Iran sanctions. As of now, the only sanctions that will be part of the snapback are those that were lifted or waived as part of the JCPOA. Iran sanctions relief that was not connected with the JCPOA – such as certain authorizations under the Trade Sanctions Reform and Export Enhancement Act of 2000 – will not be affected by the snapback.

Nevertheless, President Trump has adopted aggressive rhetoric towards Iran, promising in his May 8 press conference that “any country that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States.” OFAC’s FAQs also made clear that the agency would “target aggressively” Iranian nationals and entities who engage in sanctionable activity regardless of whether they were removed from the SDN list under the JCPOA or not. Companies and financial institutions with exposure to Iran should carefully monitor changes to U.S. policy to ensure they can remain in compliance. Even if specific authorizations are not removed as part of the snapback, new sanctions could affect how parties subject to U.S. jurisdiction may use those authorizations.

Although speculative, it is also possible that the U.S. engages in a new deal or compromise with Iran. President Trump stressed that he was “ready, willing and able” to negotiate a new deal, and the international consensus appears to be in favor of saving the JCPOA. If a new deal is able to be reached before the expiration of the wind-down periods (which seems somewhat unlikely), the sanctions might not ultimately snapback. Parties doing business with Iran that would be affect by snapback sanctions, however, would be prudent to begin planning and implementing their withdraw.

Potential Effect of EU Legislation

Following the U.S. withdraw announcement, EU officials quickly underscored their continuing commitment to the JCPOA, and announced several legislative responses they were pursuing in response. Perhaps the most notable legislative response would be to amend a decades-old European Union regulation that prohibits EU companies and nationals from complying with the extra-territorial application of certain laws of non-EU countries, known as the EU’s “Blocking Statute,” to require EU companies to ignore U.S. snapback sanctions.

The Blocking Statute, known formally as the EU Council Regulation (EC) No 2271/96 of 22 November 1996, protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, was first enacted in 1996 in response to two U.S. sanctions laws: the Cuban Liberty and Democratic Solidarity Act of 1996, and the Iran and Libya Sanctions Act of 1996. While the Blocking Statute does not itself prohibit compliance with any particular law, it has an Annex that identifies the laws it purports to block. In a press release from May 18, 2018, the European Commission announced that it had begun the formal process to amend the Blocking Statute’s Annex to add the U.S. legal provisions relating to the secondary sanctions that will reactivate under the wind-down timetables set out in OFAC’s FAQs. The European Commission made clear that its goal was to have the Blocking Statute in force before August 6, 2018, when the first U.S. sanctions against Iran would snapback into effect.

The move to amend the Blocking Statute is notable because many EU entities are subject to both U.S. and EU jurisdiction, including, for example, European subsidiaries of U.S. companies and European financial institutions that need access to U.S. markets and currency. On its face, the Blocking Statute would appear to require these companies to choose between complying with U.S. sanctions law or complying with the Blocking Statute.

Given that many EU companies are already deciding to terminate their business with Iran in the face of the threat to their much more important U.S. trade, and the unwillingness of banks to finance Iran trade, it is not clear whether the EU will actually go through with the amendments. Even if it does, there may be little practical effect. The Blocking Statute is largely untested, and lacks a strong enforcement mechanism. Each member country determines which cases to pursue and what penalties to impose for violating the blocking rules, and only one EU member – Austria, in 2007 – has ever initiated a Blocking Statute violation proceeding. Even that prosecution was dropped when the company obtained U.S. licenses necessary to satisfy both the U.S. sanctions laws and the EU Blocking Statute. In contrast, U.S. sanctions policies allow OFAC to take a variety of punitive actions for violating U.S. sanctions law, including civil monetary penalties or criminal referrals to the U.S. Department of Justice, and in some cases imposing a freeze on the assets of the violator.

It is possible that the EU could amend the text of the Blocking Statute, rather than just the Annex, to provide stricter penalties for its violation. Even so, the Blocking Statute provides a process for EU companies to obtain a waiver if they can show that non-compliance with U.S. law “would seriously damage their interests or those of the Community.” Unless EU member countries take a strong collective stance toward enforcing the Blocking Statute and limiting the waivers available, it is unlikely to significantly undermine U.S. sanctions prohibitions against Iran.

Companies subject to U.S. sanctions jurisdiction that have exposure to Iran face a critical compliance posture since the U.S. announced it would re-impose Iran sanctions lifted or waived under the JCPOA. While the timing of the sanctions snapback has been set, little else is known about the scope of permissible activities during the wind-down period. Companies with exposure to Iran should engage in enhanced compliance measures during the wind-down periods. The quickly changing landscape with respect to Iran sanctions in the U.S., EU, and elsewhere, demands close attention to new developments in sanctions policies. Until OFAC can further clarify its approach to the wind-down period, expect companies and financial institutions with exposure to Iran to react very conservatively.

Ryan Fayhee is partner, Alan Kashdan is counsel, and Tyler Grove is an associate at Hughes Hubbard & Reed LLP.