Landmark Sanctions Relief For Iran Takes Effect - Export Controls & Trade & Investment Sanctions

As you may well have seen from the extensive media coverage this weekend, following certification by the International Atomic Energy Agency (IAEA) that the Government of Iran had met its obligations under the P5+1 Nuclear Agreement, the United States and European Union have now relaxed substantial portions of their sanctions regimes against Iran. The central components of the Joint Comprehensive Plan of Action (JCPOA) are the roll-back of sanctions against the Iranian petroleum, petrochemical, oil and natural gas sectors, restoration of financial ties to certain Iranian banks (including the Central Bank of Iran), and the elimination of the vast majority of US extra-territorial sanctions imposed after 2012.

As regards the EU and UK, most of the nuclear sanctions targeting Iran's energy, mining, financial and shipping sectors have been removed. Technical assistance, financial assistance, brokerage services and insurance related to these sectors is also now permitted. However, some sanctions remain, particularly in the military sector and telecommunications sector.

As a consequence of the actions taken by the US Government on Saturday, the most crippling aspects of Iranian sanctions - those that imposed limitations on foreign companies who sought to conduct business in Iran - have been virtually rescinded in their entirety. In addition, under guidance and licenses issued yesterday by the US Treasury's Office of Foreign Assets Control (OFAC), foreign affiliates and subsidiaries of US companies may also engage in commercial activities involving Iran, provided that adequate controls are in place.

For those who only need a short summary of the key impacts of sanctions relief, we have prepared a bullet point summary below. For those wanting more detail, we have prepared further information on EU and US sanctions relaxations below that.

As you know, Dentons maintains a broad and comprehensive team in the US, EU, and globally to advise on developments in this space. Our team is currently developing regional analyses around the impact of the JCPOA in international markets, given the varying impacts of the JCPOA in markets stretching from the US to Europe, the Middle East and Asia - as well as the specific impacts for companies that are involved in the energy, financial services, insurance and manufacturing sectors where the impacts may well be the most significant.

Key Points on Sanction Relief

EU persons and companies can now engage in trade with Iran in the following sectors: financial, banking and insurance sectors, the oil, gas and petrochemicals sectors, shipping, shipbuilding and transport sectors, gold and other precious metals.
Even though permitted under EU sanctions relaxations, certain activities may still require a license or trigger end-use control requirements.
EU nuclear proliferation and human rights sanctions against Iran remain in place. Certain of these prohibited activities are licensable.
EU persons, indeed all non-US persons, are no longer subject to extra-territorial US sanctions against Iran.
Most US sanctions against Iran remain in place for US persons, with the exception of certain activities in the aviation sector and the importation of Iranian goods.
Foreign affiliates and subsidiaries of US companies may also engage in commercial activities involving Iran, but their US parents and affiliates must remain vigilant regarding the significant constraints on such commercial activities to which they remain subject.
To date, Canada has not eased or modified its very broad unilateral sanctions against Iran, which prohibit all but a very narrow range of commerce with Iran by persons in Canada or Canadians outside Canada.
Following the announcements by the US and EU, Canada's Minister of Foreign Affairs stated that Canada is actively considering relaxing its Iran sanctions. Our Canadian team continues to monitor developments closely.

Overview of EU Sanctions Relief

Consistent with Council Regulation 1861 of 2015 issued in October last year, most of the nuclear sanctions targeting Iran's energy, mining, financial and shipping sectors have been removed. This means it is now permitted for EU persons and their overseas subsidiaries to:

Transfer funds between EU and Iranian persons;
Open representative offices, subsidiaries, joint ventures or bank accounts in Iran;
Provide insurance and reinsurance to Iranian persons as well as the Iranian government;
Trade in Iranian crude oil and petroleum products, natural gas and petrochemical products, as well as engage in related financing;
Supply and transfer equipment and technology, as well as provide technical assistance, in respect of oil and petroleum products, natural gas and petrochemical products;
Grant loans or credit to, and participate in joint ventures with, Iranian persons engaged in the oil, gas and petrochemical sectors in Iran or elsewhere;
Sell, supply, transfer or export graphite and raw or semi-finished metals (such as aluminium and steel) to any Iranian person in connection with activities not prohibited by the JCPOA;
Sell, supply, transfer or export naval equipment and technology for shipbuilding, maintenance or refit;
Trade in gold and other precious metals, as well as diamonds; and
Provide to the Central Bank of Iran of newly printed, minted or unissued Iranian denominated banknotes and coinage.

UK Trade and Investment (UKTI) and the UK Department for Business, Innovation and Skills (BIS) are both actively supporting and recommending expanded trade relations with Iran. To this end, UK Export Finance will be recommencing overseas investment insurance coverage for Iranian investments and will be publishing coverage levels and terms shortly. The UK Foreign Secretary Philip Hammond said yesterday that, "I hope British businesses seize the opportunities available to them through the phased lifting of sanctions on Iran. The future is as important as the landmark we've reached today".

It is important that EU persons are aware of who they do business with in Iran (by undertaking counter-party due diligence) and that UK persons appropriately identify and manage UK Bribery Act compliance. While the UK government is recommending that its citizens and companies explore investment activities with Iran, this is not without risk. It is not easy to do business in Iran, with bureaucratic delays and a lack of investment infrastructure (though there are signs this is changing), and the Iranian Revolutionary Guard remains in control of large portions of the economy, particularly the energy sector. In addition, there remain limitations on the scope of the EU relief, specifically:

Only certain nuclear-related sanctions have been lifted by the EU, leaving in place prohibitions relating to military goods, technology and related services, as well as prohibitions on dealing with entities and individuals in Iran that were sanctioned under other Iran-related sanctions programs - including designations under the human rights program and designations for involvement under anti-terrorism programs. These other sanctions programs cover a number of government-affiliated entities in Iran, including certain Iranian banks. Accordingly, there will be practical challenges in distinguishing between legal and prohibited transactions (dealing in military or dual use goods; transacting with companies under the control of the Iranian government, etc.).
It is important to be aware that there may be differences in OFAC, EU, UK and UN sanctions lists, as well as other countries' sanctions regimes. Therefore, prompt updates to the lists of targeted persons/entities sanctions are crucial.
Pre-existing sanctions lists will have to be maintained to prepare for the possibility that the relevant snap-back provisions are triggered.

Overview of the US Sanctions Relief

Consistent with the JCPOA, the US has implemented sanctions relief across key sectors of the Iranian economy. This includes:

Comprehensive sanctions relief for non-US persons to conduct business with Iran's financial, banking, energy, petrochemical, shipping, shipbuilding, and automotive sectors;
Removal of significant sanctions against Iran's port operators;
Removal of extraterritorial sanctions to allow non-US persons to provide insurance, re-insurance and underwriting services in connection with activities that are consistent with the JCPOA;
The US removed a wide range of individuals and entities in Iran from OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List), Foreign Sanctions Evaders List (FSE List), and/or Non-SDN Iran Sanctions Act List (NS-ISA List), as appropriate;
Establishing a favorable licensing regime for the export, re-export, sale, lease or transfer of commercial passenger aircraft and related parts and services to Iran for exclusively civil, commercial passenger aviation end-use;
Issuing a new general license (General License H) for non-U.S. entities that are owned or controlled by a U.S. person ("U.S.-owned or -controlled foreign entities") to engage in activities consistent with the sanctions relief under the JCPOA; and
Issuing a new general license permitting the importation of Iranian-origin carpets and foodstuffs, and permitting brokering and processing of letters of credit for transactions authorized under this general license. While the license authorizing importation of foodstuffs has been often referred to in passing as allowing importation of caviar and pistachios, the authorization is broader and encompasses any items intended for human consumption identified in Chapters 2-23 of the Harmonized Tariff Schedule.

It is critical to note, that notwithstanding the expansive nature of this sanctions relief, but for three categories of activities (aviation, import of Iranian origin products, and foreign entities owned or controlled by US persons) none of the relief is intended to apply to US persons, and US persons, including US companies, continue to be broadly prohibited from engaging in transactions or dealings with Iran and the Government of Iran unless such activities are exempt from regulation or authorized by OFAC.

Nuances and Complexities of the US Guidance

Within the context of the sanctions relief now implemented under the JCPOA, there are several areas where the guidance requires careful attention for both US and non-US persons seeking to engage in commerce with Iran. These relate primarily to the following areas of focus:

The broad US trade embargo against Iran remains in place. Unless exempted from regulation or specifically permitted, US persons (including companies) continue to be generally prohibited from engaging in trade with Iran or the Government of Iran.
Only nuclear-related sanctions have been rolled back by the US Government, leaving in place prohibitions on dealing with entities and individuals in Iran that were sanctioned under other Iran-related sanctions programs - including designations under the human rights program and designations for involvement under anti-terrorism programs. This includes a number of government-affiliated entities in Iran, such as the IRGC, that remain substantially involved in the Iranian economy, including certain Iranian banks. Accordingly, for commercial activities in Iran, meaningful diligence on counterparties will still be needed to avoid inadvertent exposure to sanctions.
Under General License H, issued under the JCPOA, US-persons are permitted to participate in establishing internal controls, conducting training, and restructuring foreign operations of foreign affiliates to comply with the terms of the JCPOA. General License H also permits the use of "automated business systems" by foreign affiliates to conduct commercial business with Iran, even if those systems have a US nexus. The scope of this exception will require further analysis and explanation from OFAC.
While the banking and financial services sanctions relief is comprehensive in nature and allows certain Iranian banks to reconnect to SWIFT, the US has not approved the use of dollar clearing for transactions involving Iran, and has not restored the use of "U-turn" payments for commercial relationships with Iran. Accordingly, US-denominated transactions remain prohibited, and the use of correspondent accounts will remain subject to significant compliance oversight.
US technology remains subject to significant export restrictions, and dual licenses for aircraft components remains part of the sanctions and export control landscape.

In this environment, a multi-region approach will be critical to ensuring compliance and help to maximize commercial opportunities in this emerging market. Dentons will be developing a more comprehensive series of FAQs and guidance to support clients in this complex arena, and of course will be happy to answer specific questions about implementation, compliance, or structuring in this new landscape.

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