What does the re-imposition of United States sanctions on Iran mean for business outside the US?
On one view, the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) changes very little.
Although it was agreed under the JCPOA and enshrined in UN Security Council Resolution 2231 (2015) that all UN, multilateral and national sanctions related to Iran’s nuclear programme would be removed by 16 January 2016, important US sanctions remained in place even after President Obama’s Executive Order of 16 January 2016 was passed to implement US obligations under the JCPOA.
The so-called ‘U-turn authorisation’, removed in November 2008, was never reinstated so it remained unlawful for correspondent banks based in the US to process US-dollar transactions in relation to trade with Iran. One explanation given for this was that OFAC, the
US Government agency responsible for sanctions, sat on its hands because of Trump’s denouncement of the JCPOA during his campaign and following his election on 8 November 2016.
According to the White House announcement of its withdrawal earlier this month, the ‘re-imposed sanctions will target critical sectors of Iran’s economy, such as its energy, petrochemical, and financial sectors’1 . Sanctions are to be re-imposed no later than 4 November 2018. There will be two wind-down periods (90 days or 180 days) for existing contracts to be wound down before sanctions take effect on them. Those who fail to wind down their business in Iran during the transitional period will risk ‘severe consequences’. Additional measures were announced by the US Secretary of State two weeks later on 21 May, to impose ‘unprecedented pressure on Iran’ that will leave it ‘battling to keep its economy alive’.
Past US sanctions
This is not the first time that the US has implemented unilateral sanctions with extraterritorial effect going well beyond those imposed by other States and by the UN Security Council. In 1996 the D’Amato and Helms-Burton Acts, imposing sanctions on Iran, Libya and Cuba provoked international outrage by including measures purporting to affect the business activities of foreigners outside the US. The EU responded with blocking legislation (Council Regulation (EC) No 2271/96). Blocking measures include prohibiting anyone within Member States from complying with third country sanctions listed in the Annex to the Regulation or recognising any judgment giving direct or indirect effect to them. Theresa May, Angela Merkel and Emmanuel Macron in their joint statement issued the same day as the White House announcement urged the US to avoid taking action which obstructs the JCPOA’s full implementation by all other parties to the deal. The EU Commission subsequently announced on 18 May a package of measures to counter US sanctions, including launching the formal processes to activate Council Regulation (EC) No 2271/96 and financing initiatives through the EIB.2
European foreign and finance ministers followed up with a joint letter to the US Administration on 4 May requesting the US to preserve the content of the JCPOA by granting or publicly affirming various exemptions, extending the wind-down periods and prolonging General License H.
Blocking legislation and other measures can only do so much. While it can be argued the US sanctions breach international law, that will not prevent the US enforcement authorities taking action against offenders that pass within its jurisdictional reach (e.g. US subsidiaries) or provide a useful defence.
US courts generally defer to the executive on sanctions matters. Business is well used to taking the pragmatic path and choosing between business with the US or with Iran. By way of example, Total has made it clear that it and its partner Petrochina will withdraw from the Iranian South Pars 11 project unless it is granted a specific project waiver by the US authorities.
It is of course possible that the US will agree with its international partners to exercise restraint in enforcing its sanctions against businesses based overseas, but this seems unlikely in view of the current hard-line stance.
What will the US’s re-imposition of its Iran sanctions and the EU’s response mean for the legal sector? No doubt, a general increase in sanctions legal advice required for businesses is imminent, although many uncertainties remain for the moment. However, the sectors most likely to be affected are energy, shipping, banking and insurance. We will revert with an update when the picture is clearer…
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the position of other members of 20 Essex Street. The authors have written from a UK perspective, and are not US qualified.
Sara Masters QC
Sara specialises in all areas of commercial law. She has a particular interest in jurisdictional disputes, including jurisdictional issues in arbitration and in private international law and conflicts of law. She also has extensive experience in insurance and reinsurance, sale of goods, shipping (including ship-building and ship sale disputes) and commodities, aviation, construction, energy and European Union law, particularly competition law and sanctions.
Read her online biography
Penelope is a specialist in public international law. Her practice focuses on disputes and transactional advice cutting across public international law, EU law, public law, human rights and commercial disputes raising questions of public international law and EU law. Her sanctions law experience includes working with government and commercial clients on advice and disputes. She has spoken frequently on the subject and contributed various book chapters on sanctions and commercial law, EU sanctions and use of force and sanctions.
Read her online biography
- For further details of the new sanctions regime see: www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf )
- For further details of the Commission’s response see http://europa.eu/rapid/press-release_IP-18-3861_en.htm