1. Background in brief
The JCPOA Agreement was signed in 2015 by the parties known as P5+1 consisting of the permanent members of the UN Security Council (China, France, Russia, The UK and the US) and Germany. In short, the Agreement obliged Iran to cease all attempts to develop nuclear weapons in exchange for the lifting of a significant part of the stifling trade sanctions imposed on the country. The JCPOA took effect on 'Implementation Day', 16 January 2016, from which date the majority of UN and EU sanctions on Iran were lifted as well as a more limited part of the US sanctions.
2. Re-imposed US sanctions
Since his election campaign, President Trump has been a strong opposer of the JCPOA. His 8 May withdrawal announcement and the corresponding National Security Presidential Memorandum ('NSPM') direct the Secretary of State and the Secretary of Treasury to take immediate steps to re-impose all sanctions lifted or waived under the JCPOA. Accordingly, after a designated transition period (see below) the US sanctions regime on Iran will be back in full pre-JCPOA force.
The US sanctions on Iran can be divided into two categories, depending on their target: 'primary' sanctions and 'secondary' sanctions. Primary sanctions are restrictions that follow from the US domestic trade ban on Iran and mainly target actions that fall within the jurisdiction of the US and/or is conducted by US persons. "US persons" is an extensive and broad definition that covers:
- all companies organized under US laws, including their non-US branches and subsidiaries
- any United States citizen or permanent resident alien, or green card holder wherever physically located
- any person physically located in the United States
While a US branch of a foreign financial institution would be considered a US person, a foreign financial institution located outside the United States would generally not. However, the primary sanctions imply that non-US financial institutions still cannot facilitate transactions related to Iran in US dollars. Many international companies, including global financial institutions, can be directly subject to US sanctions because their business organization qualifies them as a US person.
The secondary sanctions are a much more limited set of restrictions designed to target non-US persons and companies for specified conduct that occurs entirely outside the US and does not involve US persons. In other words: these sanctions can be applied extraterritorially to Danish and European businesses (including financial institutions) even for transactions without US nexus. However, companies with a US presence or connection have a higher risk of exposure.
The US sanctions re-imposed on 8 May are secondary sanctions previously lifted under the JCPOA. The primary sanctions have not changed. The re-imposed sanctions are relevant to European entities that do business with individuals, countries, regimes, and organizations in sectors related to Iran's nuclear capabilities (see the lists of affected sectors below). Put very generally, the re-imposed sanctions make business difficult but not impossible in every instance, depending also on what level of commercial risk a non-US business is willing to accept.
The US will implement the re-imposing of sanctions by means of a 90-day and a 180-day wind-down period (counted from 8 May). According to the NSPM, this means that persons and companies engaging in activity with Iran must take the steps necessary to wind down their activities by either of these deadlines, as applicable, to avoid exposure to US sanctions.
After a 90-day wind-down period the following sanctions will be re-imposed:
- Sanctions on the purchase or acquisition of US dollar banknotes by the Government of Iran
- Sanctions on Iran's trade in gold or precious metals
- Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals (aluminum and steel, coal, etc.) and related software
- 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
- Sanctions on the purchase, subscription to, or facilitate of the issuance of Iranian sovereign debt, and
- Sanctions on Iran's automotive sector.
Also after 90 days the US Government will revoke authorizations allowing import of Iranian carpets and certain foodstuffs to the US, as well as licenses granted for export of commercial passenger aircrafts and related parts and services. Persons and companies engaged in any of these activities, including associated services, must take steps to wind them down before 6 August 2018.
After a 180-day wind-down period the following sanctions will be re-imposed:
- Sanctions on Iran’s port operators, shipping and shipbuilding sectors
- Sanctions on petroleum-related transactions, including the purchase of petroleum, petroleum products, or petrochemical products from Iran
- Sanctions on transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions
- Sanctions on the provision of specialized financial messaging services (SWIFT) to the Central Bank of Iran and other Iranian financial institutions
- Sanctions on the provision of underwriting services, insurance, or reinsurance, and
- Sanctions on Iran’s energy sector.
Also after 180 days the US will revoke General License H and with that the authorization for US majority-owned or controlled foreign entities to do certain business with Iran. Finally, the more than 400 Iranian individuals and entities that were removed from the US' Specially Designated Individuals List ("SDN-List") under the JCPOA, will be put back on the list as of 4 November. Persons and companies engaged in any of these activities, including associated services, or in business relationships with any of the soon-to-be re-listed individuals or entities, must take steps to wind them down before 4 November 2018.
The term 'wind-down period' is to be interpreted quite literally as a period for business to close down their operations in Iran. No new business should be initiated or undertaken in the time between 8 May and 6 August or 4 November, as applicable, only payments for goods/services delivered/provided and repayments of loans/credits extended before 8 May are allowed after the applicable deadline and provided they are consistent with US sanctions (i.e. do not involve US persons, banks or US dollars). According to the new Frequently Asked Questions on JCPOA issued by the US Department of Treasury's Office of Foreign Assets Control ('OFAC'), the assessment of compliance efforts will be thorough, as OFAC 'will evaluate efforts and steps taken to wind down activities' and 'assess whether any new business was entered into' in potential post-'wind-down' cases involving sanctions violations.
3. EU's 'Blocking Statute'
On 18 May, ten days after President Trump's announcement, the European Commission announced
its plan to launch the formal process to activate the so-called 'Blocking Statute' in an effort to try to ensure the survival of the JCPOA. The Blocking Statute prohibits EU companies from complying with specific US extraterritorial sanctions (currently this includes US sanctions on investments in Iranian petroleum resources). By updating the statute's list of prohibited US sanctions, the re-imposed US sanctions on Iran can be brought within the Statute's scope in whole or in part, thus making compliance with them illegal. It will also make it possible to nullify foreign court judgements based on the re-imposed sanctions in the EU, and EU companies will be allowed to recover damages arising from such sanctions from the person causing them.
The decision to launch the procedure was adopted unanimously by the EU Heads of State or Government, but even so the Parliament and/or Council may still object to the measures before they enter into force. If the Statute is amended as proposed – the aim is that this happens before the first US transition deadline of 6 August (as described above) – EU companies doing business with Iran will be left in the frustrating situation of having to choose which set of rules to breach: the US sanctions or the EU Blocking Statute.
Violation of the Statute is penalized at the national level, and the severity of consequences for non-compliance varies between Member States from a spectrum of no penalty, over administrative penalties to criminal liability. In Denmark, violation is considered a criminal offence and punishable by fine, but no company has ever been convicted or prosecuted. In comparison to the infamous fines issued under the US sanctions regime, not to mention the threat of a ban from the US financial system, non-compliance with the EU Statute would appear to be the lesser evil.
The EU Commission is also working to actively support European companies' business in Iran by making it easier for the European Investment Bank to finance activities in Iran and by strengthening ongoing sectoral cooperation and assistance. The effect of these measures remains to be seen.
4. How to ensure compliance?
4.1 Compliance with the Re-imposed US sanctions
As mentioned above, the majority of the re-imposed US sanctions on Iran can apply directly to non-US persons and companies engaged in the (re-)sanctioned sectors and carry a very real threat of severe, perhaps even fatal, consequences for companies with a global footprint. The US withdrawal and transitional approach leave little room for compromise and, unsurprisingly, several global companies doing business in Iran have already announced their decision to pull out, including Danish shipping giant Maersk.
When considering which approach to take, companies should keep in mind that, in general, the US sanctions are enforced against entities that knowingly engage in significant transactions. It is up to the US authorities to interpret and apply those criteria as they see fit. According to their practice, 'knowingly' means that an entity or individual actually knew or should have known (had they done proper due diligence) something, for example that a business partner was on the SDN List. When determining a transaction's significance, OFAC considers the totality of the facts and circumstances, including things like: the size, number, and frequency of the transaction(s); the nature of the transaction; whether the transaction(s) are part of a pattern of conduct; the nexus to the listed person/entity; the impact on US statutory objectives; the involvement of deceptive practices; and any other factor considered relevant for the case. Put simply, companies with few and small(ish) transactions are less likely to be subjected to sanctions. The risk decreases further if the company has limited or no connection to the US, as explained above.
In cases were sanctions apply, it is possible for companies to apply for specific waivers from OFAC and thereby obtain permission to conduct their business without fear of US repercussions. This is the approach taken by French energy giant Total. It remains to be seen if a waiver will be granted. Considering the Trump Administration's aggressive withdrawal from the JCPOA and the most recent statement by Secretary of State Mike Pompeo, it seems questionable. For the same reasons it cannot be ruled out that the US may choose to impose new and additional sanctions on Iran – and with short notice. Companies engaged in Iran in non-sanctioned sectors should therefore also be prepared for a changing landscape and take appropriate measures to mitigate potential legal and commercial risks.
In sum, Danish and European companies doing business with Iran should consider both whether and how to exit. The timing and documentation of a potential exit should also be carefully considered. In addition, companies should review their contractual commitments and general compliance policies on Iran. Kromann Reumert recommends that companies take the following actions as soon as possible:
- Assess the specific legal and financial risks associated with any ongoing or planned business in Iran and evaluate risk against commercial interests;
- Initiate process to close down high-risk business engagements in/with Iran and/or Iranian nationals, including by activation of previously inserted 'snap-back' provisions in relevant contracts (see our January 2017 Insight);
- Carefully plan their close-down in accordance with the applicable deadline (6 August or 4 November) and maintain documentation of all steps taken to achieve this;
- Ensure that no new business in Iran is undertaken, including relinquishment of any plans, deals or contracts initiated/negotiated but not entered into before 8 May;
- Ensure that any payments or re-payments for services/goods/loans/credits agreed before but delivered after 8 May 2018 are processed as speedily as possible to minimize amounts payable after the applicable transition deadline, and maintain records of all action taken in this regard;
- Review the scope of sanctions clauses in relevant Iran contracts to prevent loss of business relations, economic losses or other commercial losses in the event of further tightening of the sanctions;
- Updating of company compliance policies, including particularly:
– procedures to detect and halt potential engagement in re-sanctioned activities/sectors;
– procedures for screening of customers and business partners to reflect the updated SDN List as per 4 November 2018; and
– close monitoring of any further tightening of US sanctions.
4.2 Compliance with the EU Blocking Statute
At this point in time it remains uncertain if and to what extent the EU Commission will be successful in its efforts to widen the scope of the Blocking Statute. Kromann Reumert recommends that companies monitor the developments closely, including any action taken by national authorities to amend or strengthen domestic enforcement legislation, and assess the commercial and legal risk of non-compliance with the EU Statute on an ongoing basis. In the event that conflict between the US and EU rules becomes unavoidable, cost-benefit analyses should be done on individual company basis.
5. Kromann Reumert international trade team
Our team specializing in international trade, sanctions and export control monitors the development on Iran closely and will continue to keep you updated on the latest news.
If your company needs assessment of or advise on trade or business, directly or indirectly, to/from Iran or with Iranian parties, we are at your service. Our team has extensive experience investigating potential sanctions violations and mitigating risks and fines. We also have an extensive network of experienced US attorneys that can assist assessing risk under the US sanctions.
Kromann Reumert can also assist in ensuring compliance with relevant regimes and international trade legislation, e.g. conducting contract reviews, amending financial agreements, performing business relationship/customer screenings, assessing and applying for export approvals, etc.