Impact of Iran Accord on International Business

HIGHLIGHTS:

• On July 14, 2015, the United States, France, China, Russia, the United Kingdom, Germany and the European Union entered into the Joint Comprehensive Plan of Action with Iran after years of difficult negotiations.
• Actual implementation of sanctions changes are likely several months away. However, even after implementation, most of the prohibitions on U.S. companies doing business directly or indirectly with Iran and Iranian entities will remain in place.

On July 14, 2015, the United States, France, China, Russia, the United Kingdom, Germany and the European Union (EU) entered into the Joint Comprehensive Plan of Action (JCPOA) with Iran after years of difficult negotiations. Iran agreed to a number of restrictions and oversight on its nuclear activities in return for the rollback of certain United Nations (U.N.), EU, and U.S. sanctions. Companies in a range of industries are eager to understand the implications of the JCPOA. While there is little information beyond the JCPOA document itself out yet, this alert summarizes and interprets the JCPOA’s sanctions provisions by answering the following questions:

When do the JCPOA sanctions changes take effect?

Actual implementation of sanctions changes are likely several months away, as a number of implementation steps must occur. In particular, the International Atomic Energy Agency (IAEA) must verify that Iran has met certain nuclear-related commitments. For the U.S. to implement the JCPOA, in addition to the 60-day U.S. congressional review period, the Obama Administration will need to issue implementing orders/regulations.

What rules apply in the interim?

All U.S. sanctions will remain effective, including the suspensions under the current interim Joint Plan of Action (JPOA). The JPOA suspensions will continue until the JCPOA implementation.

Will U.S. companies be able to do business with Iran?

Even after implementation, most prohibitions on U.S. companies doing business directly or indirectly with Iran and Iranian entities will remain in place (e.g., those relating to terrorism, human rights violations and ballistic missile development). However, U.S. companies will be allowed to apply for licenses to sell or lease U.S. civil aircraft, parts and support to Iranian passenger aviation. U.S. companies also will be permitted to obtain licenses for the import of carpets and foodstuffs (including pistachios and caviar) from Iran.

Are restrictions on foreign subsidiaries of U.S. companies being lifted?

This is unclear. Non-U.S. companies owned or controlled by U.S. persons remain subject to U.S. sanctions. However, the JCPOA provides that the U.S. government may license such foreign subsidiaries of U.S. companies to engage in activities with Iran "that are consistent" with the JCPOA.

What is the impact for non-U.S. (non-U.S. owned) companies?

The U.S. has agreed to remove most of the "secondary" sanctions imposed on non-U.S. companies, not owned or controlled by U.S. persons, for engaging in certain transactions with Iran or certain Iranian entities regardless of U.S. nexus. For example, secondary sanctions relating to trade in oil, petrochemicals and precious metals as well as sanctions on the energy, shipping, shipbuilding and port sectors of Iran would be removed. Significantly, the restrictions on ownership and investment in Iran’s petroleum sector first implemented by the Iran-Libya Sanctions Act will be lifted. In addition, secondary sanctions on foreign financial institutions and foreign insurers for engaging in or insuring, certain activities related to Iran will be largely lifted. This, in conjunction with lifting of EU sanctions, will likely lead to increased trade with Iran by non-U.S. companies.

Will U.S. dollar (USD) clearing transactions be allowed?

While there was some speculation that the U.S. would allow U.S. banks to clear transactions between third-country entities and Iran, the JCPOA does not directly address this issue. Further, although 10 years ago U.S. banks may have been comfortable with such dollar clearing transactions, the compliance landscape for banks has changed dramatically.

Is EU’s sanctions removal broader than the U.S.?

Yes. The EU is removing many of the sanctions that significantly impacted Iran, including in the energy, financial and insurance sectors. Hence, in many, or even most sectors, EU companies will be able to engage in trade with Iran upon implementation of the JCPOA.

What is the impact of removing Iranian entities from blacklists?

The U.S. and EU have both agreed to remove many Iranian entities designated on sanctions lists. In particular, the U.S. removal of the Central Bank of Iran and many other Iranian banks from the Specially Designated Nationals List (SDN) will allow Iranian banks to process transactions and issue letters of credit, etc., for most international transactions (except those involving U.S. dollars and U.S. banks).

When will the U.S. government issue more guidance?

While we expect the U.S. government will provide some informal information over the next few months, we do not expect to see details regarding implementation of the sanctions changes until near the date of implementation – at which time we expect to see a new Executive Order and guidance from the U.S. Treasury Office of Foreign Assets Control (OFAC).

What is the "snap back" provision to which President Obama referred?

The JCPOA establishes a dispute resolution mechanism that sets an aggressive timeline for resolution of an alleged failure of a party to meet its commitments. If not resolved to the satisfaction of the complaining party, the complaining party could cease performing its commitments in whole or part and/or refer the matter to the U.N. Security Council. Hence, sanctions could rapidly be re-imposed. There is a "contract sanctity" provision for contracts entered into with Iran in accordance with the JCPOA. However, it is unclear whether this applies only to the U.N. Security Council resolutions, or whether it also would be binding on U.S. unilateral action.

What are the practical concerns in re-engaging with Iranian entities?

There are a number of practical issues and potential risks in potential transactions with Iranian entities. For example, third-party agreements such as loans, leases and supply agreements may prohibit transactions with Iran. As we have seen with Cuba, banks may be reluctant to re-engage with Iran, even in authorized transactions because of the compliance costs and risks.