An Uncertain Future: The US Pulls Out Of the Iran Deal

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By Zia UllahMark D. HerlachJames Lindop and Victoria Turner

Reprinted with permission from Eversheds Sutherland.

President Trump announced last week that the US will withdraw from the Iran nuclear deal and will begin re-imposing those sanctions which were lifted as part of the Joint Comprehensive Plan of Action (“JCPOA”).  In a move which former President Obama has described as “misguided” and a “serious mistake”, President Trump signed a National Security Presidential Memorandum directing relevant US agencies (including the Treasury) to take actions necessary to start re-imposing sanctions, meaning that secondary sanctions, which impact on non-US persons, will come back into effect.  President Trump’s announcement also leaves open the possibility for new and additional sanctions to be imposed in the future.

Last week’s announcement confirmed that there will be wind-down periods before sanctions are fully re-imposed.

Background

On 14 July 2015, the so-called “P5+1” (China, France, the UK, Russia, the US and Germany) and the Islamic Republic of Iran reached an agreement on a JCPOA, the implementation of which aimed to ensure the exclusively peaceful nature of Iran’s nuclear program in exchange for significant sanctions relief for Iran.

Implementation Day took place on 16 January 2016 following verification by the International Atomic Energy Agency (“IAEA”) that Iran had implemented the nuclear-related measures contained in the JCPOA.  This resulted in the termination of UN Security Council Resolutions on the Iranian nuclear program, the lifting of all EU economic and financial sanctions taken in connection with the Iranian nuclear program (including the removal of most (but not all) of the Iranian or Iran-related persons and entities who were listed as being subject to an asset freeze) and the lifting of certain US nuclear-related sanctions including “secondary sanctions”, i.e. sanctions that were applicable only to non-US persons and entities.

US primary sanctions have continued to apply and in order to clarify the position in respect of US owned or controlled entities operating outside the US, the Treasury’s Office of Foreign Assets Control (“OFAC”) issued General Licence H which permitted US-owned or controlled foreign entities to engage in certain transactions involving Iran that would otherwise be prohibited, bringing the US position in line with that adopted by the EU.  A number of businesses rely on General Licence H for their current operations in respect of Iran.

In order to implement the JCPOA President Obama issued a number of US sanctions waivers in respect of the relevant secondary sanctions.  These waivers have to be renewed periodically and are currently due for renewal on 12 May 2018.

Effect of President Trump’s announcement

Back in January 2018 President Trump expressed his dissatisfaction with the JCPOA and indicated that he would not renew the waivers in May 2018 if the Iran deal was not renegotiated.  His announcement has followed through on his threat to withdraw from the US’s JCPOA commitments if his demands were not met and means that the US secondary sanctions, which were previously removed, will automatically be re-imposed.  In addition, President Trump has stated that new sanctions will be implemented.

FAQs in respect of the re-imposition of sanctions were issued by OFAC and confirm the scope of “snap back” and the timetable which will apply.  US secondary sanctions will be re-imposed and will be in full force by no later than 5 November 2018, with other sanctions back in place by 6 August 2018. This will include:

  • the reinstatement of sanctions on the Iranian automotive sector (by 6 August 2018);
  • the reinstatement of sanctions on petroleum related transactions (by 4 November 2018);
  • sanctions on transactions by foreign financial institutions with the Central Bank of Iran and other designated Iranian institutions (by 4 November 2018);; and
  • General Licence H being revoked effective 5 November 2018.

Further detail of the sanctions which will be re-imposed can be found at Annex 1.

Whilst individuals and entities currently on the 13599 List (pursuant to Executive Order 13599) are not immediately reinstated as SDNs, they will be reinstated as such by no later than 5 November 2018.  The FAQs confirm that secondary sanctions can be imposed on non-US persons and that the US advises non-US persons to use the time between now and 6 August 2018/5 November 2018 to wind-down their activities involving Iran.  The FAQs confirm that transactions conducted during the wind-down periods involving persons who were previously removed from the SDN List on Implementation Day could be sanctionable if they fall outside of the scope of the wind-down waivers.

Somewhat helpfully, the FAQs confirm that where a non-US person is owed payment after the conclusion of the wind-down periods, for goods or services provided prior to those dates to an Iranian counterparty, or in respect of loans or credits extended to an Iranian counterparty, the US Government will allow the non-US person to receive payment (as long as no US person is involved in the transaction and the transaction was pursuant to a written agreement entered into prior to 8 May 2018).

The FAQs, insofar as they apply to non-US persons, clearly put the US position in direct conflict with the EU position.

The EU position

The announcement means an uncertain future for the JCPOA and in particular what it means from an EU perspective.  Whilst the US cannot unilaterally dissolve the JCPOA, last week’s announcement undoubtedly means that changes will be required if the EU intends to keep the terms of the JCPOA alive.

Following President Trump’s announcement, Federica Mogherini (High Representative of the EU for Foreign Affairs and Security Policy) released a statement on the EU’s position regarding the JCPOA, confirming that the EU remains committed to the JCPOA as long as Iran continues to comply with its obligations.  In a show of support, Ms Mogherini confirmed that the EU “fully trusts the work, competence and autonomy of the IAEA”, which President Trump appears to have called into question.

Ms Mogherini also highlights concerns over the threat of new sanctions being imposed on Iran and stated that “the EU is determined to act in accordance with its security interests and to protect its economic investments”.  She also emphasised the EU’s expectation that the “international community do its part to guarantee [the Iran deal] for the sake of our collective security”.  What actions the EU may take remains to be seen and will undoubtedly take time to evolve, leaving EU businesses and financial institutions in a period of political and financial insecurity.

In a joint statement, Theresa May, Angela Merkel and Emmanuel Macron have also expressed regret at President Trump’s announcement and have urged “all sides to remain committed to [the JCPOA’s] full implementation and [encouraged all] to act in a spirit of responsibility”.  They confirmed that they remain parties to the JCPOA and remain committed to ensuring that its terms are upheld.  Whilst they acknowledge that other issues of concern in respect of Iran need to be addressed (including concerns regarding Iran’s ballistic missile programme as well as its destabilising activities in Yemen, Iraq and Syria) the European leaders urged the US not to take action which obstructs other parties from implementing the JCPOA.

Iranian position

Iranian President Hassan Rouhani said that his Government remains committed to the nuclear deal, despite the US’s decision to withdraw and he has directed his diplomats to work with the JCPOA’s remaining signatories.  He expressed the view that the nuclear agreement could survive without US involvement.

What is the impact?

President Trump’s confirmation that he will not renew the US waivers in place, does not automatically terminate the JCPOA.  The EU has reconfirmed its commitment to the deal and the EU is unlikely to fundamentally change its position simply because of the change in policy from the US, particularly when the IAEA has confirmed that Iran is complying with the terms of the JCPOA.  However, there is no doubt that the announcement from President Trump , will change the political, financial and business landscape for those non-US persons and entities who have been doing business with Iran since the JCPOA came into force.

The geopolitical ramifications of the actions of the US are likely to be felt for some time to come. Whilst President Trump was critical of his predecessor for entering into the JCPOA, his criticism of the US’s allies for having entered into the agreement will also create tensions and uncertainty, both politically and commercially.

Whether Germany, France, the UK, Russia and China will seek to enter into a new deal with Iran remains to be seen.  The EU could seek to impose blocking sanctions which prohibit EU persons from complying with US sanctions (as it has done with Cuba), however, the practical application of this is unlikely to have a significant effect.  The Cuba blocking sanctions have largely been ineffective, with businesses and financial institutions more concerned about the extra-territorial reach of the US and the consequences any US restrictions imposed on them could have if they fail to comply with US sanctions, and therefore we consider this to be an unlikely consequence.

President Trump’s announcement has been made at an interesting time; a time when he seeks to try and negotiate a deal with North Korea (a deal which he was keen to highlight in his announcement ).  Time will tell as to whether President Trump’s announcement in respect of Iran will have a negative impact on any potential deal with North Korea.

In a time of legal and geopolitical uncertainty what is clear is that non-US businesses and financial institutions who have re-entered commercial relationships that have any kind of Iranian nexus must now take steps to determine what action they need to take to ensure they do not fall foul of US sanctions.  Existing exposure to Iran must be analysed and decisions taken as to how to best proceed.  For the UK’s part, HM Treasury has indicated that how UK companies act is a matter for each company, however, the UK Government encourages businesses to continue to trade with Iran.

Annex 1