Framework Agreement with Iran Unclear as to When and Which Sanctions Will be Lifted; Stepped Up Enforcement to Continue After Record Sanctions Fines

In what may represent a sea change in US-Iran relations, on April 2, 2015, Iran and the United States, along with the United Kingdom, France, Russia, China, and Germany, announced the key parameters of a Joint Comprehensive Plan of Action (JCPOA) to limit Iran's nuclear program in exchange for lifting US and international sanctions.¹  However, many challenges remain, including whether these parameters -- which leave many details still to be negotiated by the June 30th deadline for completion of the JCPOA -- will be successfully converted into a deal.  Even if a deal is reached, it will have to overcome political opposition from members of the US Congress who have introduced legislation that would mandate congressional review and approval of any agreement with Iran, and from close US allies, such as Israel and Saudi Arabia. 

There are many open questions regarding the framework and its potential impact.  What is clear is that Iran is not yet fully open for business by persons subject to US jurisdiction or who trade in US-origin goods and services.  US authorities can be expected to continue to increase enforcement of the Iran-related trade sanctions and export controls that remain in place, as discussed below. 

Open Questions About Sanctions Relief

Uncertainty remains in three important areas: 

1.    Scope: It is unclear which sanctions will be lifted.  The Obama Administration probably will support a United Nations Security Council Resolution under Chapter VII of the UN Charter that suspends or lifts UN sanctions, subject to verification of Iran's compliance with conditions to be set forth in the Resolution.  Any new Resolution, however, would likely re-establish core provisions from previous Resolutions regarding the transfer of sensitive technologies and create additional obligations, including certain trade restrictions.  

President Obama also probably will suspend US sanctions that have been imposed pursuant to Executive Orders, but there are a number of sanctions that have been imposed by statute, as discussed below.  The sanctions under the relevant Executive Orders include US sanctions currently suspended as part of the negotiations with Iran, which relate to trade in petrochemicals, precious metals, and civil aviation and automotive parts, as well as certain related financial and insurance services.² 

The President may exercise his prerogative to invoke existing authority to waive statutory sanctions as well, but there are a variety of limitations on such waivers that require different standards to be met under the relevant laws.  The President may be able to use such waivers to lift a wider spectrum of sanctions relating to Iran's petroleum industry, certain financial dealings and banking services, imports and exports of goods and services, and certain sanctions targeting the insurance industry, including the insurance of refined petroleum and other exports to Iran. 

Some US sanctions will remain in place regardless of whether a final agreement is reached, including those related to terrorism, human rights abuses, and ballistic missiles. 

2.    Timing: There are questions as to when the sanctions will be lifted.  Iran's Foreign Minister said that the United Nations Security Council Resolutions related to Iran's nuclear program will be lifted "immediately" when a final deal is agreed.³  Iran's Supreme Leader, Ayatollah Ali Khamenei, also emphasized that the sanctions "should be lifted all together on the same day of the agreement, not six months or one year later."⁴  By contrast, President Obama said that sanctions relief will be "phased" based on the steps Iran takes to adhere to the deal.  The White House fact sheet says that past UN sanctions "will be lifted simultaneous with the completion, by Iran, of nuclear-related actions addressing all key concerns" and it refers to lifting other sanctions "after" the International Atomic Energy Agency (IAEA) has verified that Iran has taken all of its key nuclear-related steps.⁵  If Iran only receives sanctions relief after taking verifiable steps, it could take a fairly long time to lift the relevant sanctions. 

3.    Duration: The duration of such relief is also in question because President Obama has said that sanctions will be "snapped back into place" if Iran violates the terms of any final agreement.  Although precisely how such a snap-back would work remains unclear, the White House fact sheet states that the deal allows for snap-back "in the event of significant non-performance" and it also provides for a dispute resolution process to resolve disagreements about performance of Iran's commitments.  Companies that do business in Iran may be put in a difficult position if Iran does not honor its commitments and the sanctions snap back into place, which could preclude such companies from fulfilling their contractual obligations.

Increased Enforcement

To maximize its diplomatic leverage, the US government can be expected to increase its enforcement of the Iran-related trade sanctions and export controls that remain in place.  The Executive Branch is actively investigating violations by multinational companies and financial institutions, both in the United States and in other countries, of the US trade sanctions and export control laws relating to Iran administered by the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS).  Moreover, if the sanctions are lifted, there is a serious risk that the Executive Branch will continue to investigate any violations that may have taken place prior to the lifting of sanctions.

In this connection, the following are several examples of recent enforcement actions related to Iran. 

·        In a record setting case for the size of the fine, on March 25, 2015, Schlumberger Ltd., the world's largest oil-field services company, agreed to pay $232.7 million for willfully facilitating illegal transactions and engaging in trade with Iran and Sudan.  "Today's criminal guilty plea demonstrates the Commerce Department's commitment to aggressively prosecute multinational corporations for violations involving embargoed destinations," said BIS Under Secretary Eric L. Hirschhorn.  "We will continue to pursue violators wherever they are located and whatever their size."⁶  As part of the settlement, Schlumberger entered into a three-year period of corporate probation, which requires active cooperation with US authorities and hiring an independent consultant to review and report on the company's internal policies, procedures, and audits regarding sanctions compliance.     

·        On March 11, 2015, Commerzbank AG, an international financial institution based in Germany, agreed to a $1.45 billion civil and criminal settlement, wherein it admitted to transferring funds knowingly and willfully through the US financial system on behalf of sanctioned Iranian and Sudanese entities.  "Financial institutions must heed this message: banks that operate in the United States must comply with our laws, and banks that ignore the warnings of those charged with compliance will pay a very steep price," said Assistant Attorney General Leslie R. Caldwell.⁷  As part of its deferred prosecution agreement, Commerzbank agreed to implement thorough internal compliance controls.

Other recent enforcement actions regarding Iran include:

·        BNP Paribas, a French bank and financial services company, agreed to a $963 million settlement with OFAC in June 2014 for concealing and removing references to sanctioned parties in thousands of financial and trade transactions through banks in the United States.  The settlement agreement requires BNPP to put in place and maintain export compliance policies and procedures.

·        Weatherford International LTD, an international oil and natural gas service company, agreed to a $100 million settlement with OFAC in November 2013 for providing oilfield equipment and services through direct and indirect exportation of goods, technology, and services from the United States to Iran, Sudan, and Cuba.  In addition to the criminal penalty, Weatherford is prohibited from exporting any goods from the United States for 7 years and must undergo external audits of its sanctions compliance efforts for 3 years.

·        PayPal reached a settlement with OFAC on March 23, 2015 to pay $7.66 million for failing to employ adequate screening technology and procedures to identify the potential involvement of US sanctions targets when processing transactions totaling $44,000.  PayPal faced this steep penalty despite voluntarily disclosing its violations to OFAC.

·        Aviation Services International, B.V., a Dutch aviation services company, agreed to a $750,000 settlement with OFAC and BIS in March 2010 for unlicensed exports of aircraft parts and other goods through a third country to Iran.

Multinational companies, including insurance providers and financial institutions that may be involved in facilitation of transactions related to Iran, must maintain rigorous compliance programs to avoid violating US trade sanctions and export control laws.  A violation does not require actual knowledge if the company "should have known" of the violation, so compliance programs should be built around comprehensive policies and procedures, adequate training of employees, and robust monitoring and enforcement.  For example, Schlumberger paid steep fines for failing to train its employees despite having policies and procedures in place, and PayPal was fined for failing to screen transactions adequately. 

Even if a final agreement is reached with Iran by the June 30^th JCPOA deadline, compliance programs will remain critical to protect companies from sanctions and export control risks.  Companies will need to track developments carefully and seek legal advice as the ongoing diplomatic negotiations change the legal landscape because any sanctions relief is likely to be incremental and certain activities will remain prohibited.  Moreover, Iran is likely to remain a major enforcement priority for US authorities as the United States strives to ensure compliance with the commitments Iran makes under any final agreement.

*Emma K. Dinan contributed to this article. She is a Columbia Law School graduate employed at Arnold & Porter LLP.  Ms. Dinan is not admitted to the bar.