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Legal Update

US to Reimpose Secondary Sanctions Against Iran Amid EU Opposition

9 May 2018
Mayer Brown Legal Update

On May 8, 2018, President Trump announced his decision to terminate US participation in the Joint Comprehensive Plan of Action (“JCPOA”)—the multilateral legal framework for addressing Iran’s nuclear program—and to reimpose US sanctions on Iran despite the concerns of EU leaders. Following the US announcement, the leaders of France, Germany and the United Kingdom issued a joint press release expressing their commitment to the agreement and to working “to ensure the continued economic benefit to the Iranian people that are linked to the agreement.”

Yesterday’s action is directed at reinstating the secondary sanctions against non-US Persons that were lifted under the JCPOA and has broad implications for the international community.  This Legal Update provides a brief summary of President Trump’s announcement and its implications for non-US entities involved in or facilitating trade relations with Iran.

US Withdrawal and Phased Reimposition of Sanctions

After months of signaling a possible US withdrawal from the JCPOA, yesterday’s announcement reflects the Trump administration’s decision to cease participation in the deal and to reimpose the US sanctions framework that was lifted as a key part of the agreement. Under the agreement, the United States had lifted most “secondary” sanctions targeting non-US Person dealings relating to Iran. Those sanctions will be reimposed under a phased approach announced yesterday. Primary sanctions (those targeting dealings by a US Person or otherwise involving a US nexus) generally continued in force following the JCPOA.  

Further to President Trump’s announcement, the US Department of the Treasury, Office of Foreign Assets Control (OFAC) and the US Department of State announced two “wind-down” periods during which secondary sanctions will continue to be waived:

(i)      180-day period until November 4, 2018:  This waiver period covers secondary sanctions targeting certain energy, financial, insurance and shipping-related activity, including secondary sanctions on transactions involving Iran’s energy sector; sanctions on transactions by foreign financial institutions with the Central Bank of Iran and financial institutions for which sanctions were lifted under the JCPOA; sanctions on insurance, reinsurance and underwriting services; and sanctions on Iran’s shipping sector and port operators.  

(ii)      90-day period until August 6, 2018:  This waiver period is intended to cover remaining sanctions, including transactions relating to Iran’s automotive sector, industrial and raw materials, trade in gold and precious metals, the government of Iran’s purchase or acquisition of US dollar banknotes, the purchase or sale of Iranian rials, and Iranian sovereign debt.  In addition, the United States will revoke JCPOA-related general and specific licenses involving the export and re-export of commercial passenger aircraft and related parts and services and general licenses relating to the importation of certain Iranian products.

The government of Iran and various persons and entities removed from OFAC’s List of Specially Designated Nationals (SDN List) pursuant to the JCPOA will also be re-added to the list.  Both Treasury and State have indicated that following the 90- day and 180-day periods, the United States will reimpose the corresponding secondary sanctions lifted under the JCPOA in the categories above.  The waiver period only provides a temporary extension of sanctions relief for sanctions that were lifted under the JCPOA. Iran-related activities in the sectors above that remained subject to restrictions that remained unaffected by the JCPOA (including dealings with Iranian SDNs or activities subject to US export control licensing requirements) are not authorized by the waiver period.   

US Treasury and State have also indicated that, while they will extend JCPOA sanctions relief during the waiver period, affected persons should take the necessary steps to wind down their activities before November 4, 2018, in order to avoid potential sanctions consequences and enforcement actions.

EU Response

In recent weeks, leaders of France, Germany, the United Kingdom and other countries have attempted to persuade President Trump not to withdraw from the deal. Following President Trump’s announcement, Prime Minister May, Chancellor Merkel and President Macron issued a joint statement confirming their countries’ commitment to continued participation in the agreement. Notably, the statement also suggested that the three European countries would also work with the “remaining parties” to ensure the agreement remains intact and called on the United States to “avoid taking action which obstructs its full implementation by all other parties to the deal.”

These statements have potentially significant implications for the US position and the shape that the US sanctions framework may take in the coming weeks and months. Without explicitly addressing EU opposition to secondary sanctions, the joint statement reflects a challenging political environment for the United States in seeking to secure multilateral support (including by other members of the UN Security Council) in applying pressure to Iran. It also highlights the possibility of EU blocking legislation to counter US efforts to impose sanctions against EU companies and companies in the European Union by prohibiting compliance and imposing associated reporting requirements. Such legislation has been used successfully by the European Union in the past to secure a political agreement with Washington on extra-territorial sanctions enforcement. While the current circumstances are unique, EU officials in Brussels are already reportedly considering such blocking legislation, as well as other options to preserve the ability of EU companies to engage in trade with Iran.

Notably, in addressing press inquiries yesterday, US State Department officials were non-committal and somewhat vague on questions regarding whether they expect EU cooperation and, more pointedly, whether they would be prepared to impose secondary sanctions against European entities. Both US and EU officials have confirmed they are in discussions with one another, but it is also apparent that those discussions reflect fundamentally diverging views of the JCPOA.

The position of the other parties to the agreement (including the European Union, Russia and China) may create further legal and political complexity.  A number of potential factors may impact the US strategy, including the extent to which the European Union considers any potential blocking legislation or other efforts to preserve economic ties with Iran, domestic political considerations and Iran’s own response. In addition, related developments involving Yemen, Syria and North Korea have the potential to impact both the US and EU strategies in relation to this issue.  

As a practical matter, the announcement has several implications for non-US entities that have entered into contractual agreements involving Iran on the basis of the JCPOA, as well as third parties who would otherwise be involved in Iran trade.  Companies that have already made investments or entered into Iran-related contractual commitments must carefully assess their position in light of the considerations above. Yesterday’s announcement contains no amnesty or exemption for non-US entities that have pre-existing contractual agreements to continue beyond the waiver period.  Even assuming non-US companies are otherwise willing to engage in transactions involving Iran that have no US nexus, yesterday’s announcement means they are likely to face not only heightened risks but also significantly heightened practical challenges in doing so. It is likely that many third parties, including financial institutions, insurers and logistics companies, may be unwilling to participate in such transactions in light of the US position.  

Finally, while US officials have initially signaled a firm position by pledging to reinstate the full sanctions architecture that was in place at the height of the sanctions against Iran, it remains to be seen whether there will be room for companies and allies to moderate that position, depending on the practical challenges faced by the Trump administration in implementing its vision (as has been the case in other areas). In the meantime, it will be important in the coming weeks and months for non-US entities and boards to carefully evaluate their risk exposure in light of these evolving developments.

Authors

  • Tamer A. Soliman
    T +1 202 263 3292
  • Paulette Vander Schueren
    T +32 2 551 5950
  • Ori Lev
    Partner
    T +1 202 263 3270
  • Thomas J. Delaney
    T +1 202 263 3216
  • Marc R. Cohen
    T +1 202 263 3206
  • Margaret-Rose Sales
    T +1 202 263 3414
  • Gretel Echarte Morales
    T +1 202 263 3426
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