On 16 January 2016, all EU economic and financial sanctions made in connection with the Iranian nuclear programme were lifted. Certain US nuclear-related financial and economic sanctions were also suspended. The much talked-about “Implementation Day” had arrived.
This development is a result of the Joint Comprehensive Plan of Action (JCPOA) between the UK, France, Germany, US, Russia, China and Iran (see our previous article). Once the International Atomic Energy Agency (IAEA) confirmed on 16 January 2016 that Iran had implemented the nuclear-related material measures prescribed in the JCPOA, the sanctions were lifted.
But, as ever, businesses need to be aware of where risks may remain. What does the lifting of sanctions mean in practice and is Iran really ‘open for business’?
Does this mean that all EU sanctions have been lifted?
No, although this is a major step forward.
By Council Decision 2015/1863, the EU terminated its nuclear-related economic and financial sanctions, effective as of “Implementation Day”. The EU has now confirmed this date to be 16 January 2016.
However, sanctions relating to, in particular, human rights, nuclear proliferation, and support for terrorism remain in place. Although the number of individuals and entities subject to asset freezing measures has reduced considerably, many still remain. Sanctions due diligence will still be required as businesses will still need to check whether (for example) a particular transaction might be caught and how and to whom payments will be made.
What activities are now permitted?
The Department for Business, Innovation & Skills on 18 January 2016 published a Notice to UK exporters setting out in broad terms the business activities that are now permitted. In summary, the following activities are amongst those now permitted:
- the transfer of funds between EU and Iranian persons;
- provision of insurance and reinsurance to Iranian persons as well as to the Iranian government;
- trade in Iranian crude oil and petroleum products; and
- trade in gold and other precious metals, as well as diamonds.
There are also certain items, such as nuclear-related goods, that are no longer prohibited from sale to an Iranian person but are now subject to a UK export licence.
The result of these sanctions being lifted is the removal of the de facto prohibition on EU businesses from trading in or with Iranian markets, in circumstances where prior to Implementation Day, financial restrictions made such trade impossible.
What about US sanctions?
When it comes to the US, despite the press coverage and celebration, there is an important caveat. It is only so-called ‘secondary sanctions’ that have been lifted.
Secondary sanctions are generally directed towards non-US persons for specified conduct involving Iran that occurs entirely outside the US jurisdiction. According to Office of Foreign Assets Control (OFAC) guidance, an entity that is owned or controlled by a US person and established or maintained outside the US is eligible to participate in specific transactions or activities under the JCPOA only to the extent that such entity is authorised by OFAC.
The US domestic trade embargo with Iran will continue to remain in force. With limited exceptions, US persons continue to be broadly prohibited from engaging in transactions or dealings with Iran or its government. There is also a continuation of the US block on dollar transactions which means that foreign financial institutions need to ensure they do not clear US dollar denominated transactions involving Iran through US financial institutions. Such transactions risk being frozen by US correspondent banks.
Secondary sanctions will also continue to attach to non-US persons who knowingly facilitate significant transactions with entities on OFAC’s “Specially Designated Nationals” list.
The continuation of the US trade embargo could potentially be an advantage to EU companies in unlocking trade with Iran ahead of their US counterparts. However, EU entities with a substantial US nexus will be cautious before entering the market and will be best advised to take US advice.
Will the sanctions return?
Although you cannot rule this out, the JCPOA is designed to make this difficult.
There are provisions in the JCPOA to ensure that Iran is incentivised to abide by the terms of the agreement going forward. However, there is a ‘snapback’ mechanism in place if they do not.
The snapback mechanism is intended to be used only where all else fails. The snapback of sanctions for non-compliance by Iran will only be considered when the dispute resolution mechanism in the JCPOA has been exhausted.
That said, the implementation by the US of new sanctions on Iran in respect of ballistic missile tests only a day after Implementation Day serves as a reminder of how quickly the sanctions regime can change.
Businesses entering into contractual arrangements with Iranian counterparts may well want to ensure that a snapback of sanctions is adequately covered in contracts. This might involve defining such event as a “force majeure” or drafting specific clauses that provide a mechanism for the winding-up of a transaction where snapback takes place.
What are the next steps for doing business in Iran?
As we say above, despite many of the restrictions now being lifted, businesses still need to ensure that their proposed activity with Iranian parties complies with remaining restrictions. Sanctions due diligence will remain an important step to be taken.
But that is not going to be the end of the compliance story. Iran will offer challenges as well as opportunity. It will be important to ensure that all transactions and relationships comply with existing bribery and corruption and human rights legislation and other regulatory regimes. With civil enforcement likely to be challenging, counterparty risk may also be relatively high. Potential investors will also be dusting off the lists of bilateral investment treaties between Iran and other states as they think about investment treaty structuring.
Iran may be opening for business, but the hard work on due diligence and risk management for its investors and future trade partners is just about to begin.