What Iran Sanctions Relief Can be Expected on "Implementation Day"?
With last Thursday's Democratic filibuster of the Republican-sponsored Senate resolution disapproving the agreement reached between the so-called P5+1 countries (i.e., the United States, United Kingdom, Germany, France, Russia, and China) and Iran (the Joint Comprehensive Plan of Action (JCPOA)), the agreement has cleared the last remaining hurdle to implementation.1 On September 17, the Obama Administration took the first public step towards implementation by announcing the appointment of a senior State Department official to oversee implementation by Iran, the United States, and other parties to the agreement.2
The JCPOA, which was finalized on July 14, will be formally "adopted" on October 18, 2015, which is 90 days after the U.N. Security Council endorsed the agreement on July 20, unless the parties agree on an earlier date. At that point, the ten-year timeline on which the plan is structured will begin. Sanctions relief under the JCPOA will then be phased in as Iran takes verifiable steps to fulfill its commitments with respect to its nuclear program.
The U.S. will not begin to lift additional sanctions on Iran until "Implementation Day," which is the date on which the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures described in the JCPOA. Implementation Day (and hence the lifting of additional U.S. sanctions) is not expected to occur until Spring 2016.
Even if Iran satisfies its commitments and the U.S. grants the sanctions relief provided under the JCPOA, however, not all sanctions will be lifted. While most sanctions applicable to non-U.S. persons will be lifted, the sanctions will generally remain in place with respect to U.S. persons, who will generally remain prohibited from engaging in any economic activity involving Iranian persons or entities. The U.S. will also continue to fully enforce sanctions that have been imposed on Iran for its support of terrorism and its human rights abuses. Moreover, if Iran violates the terms of the JCPOA at some point in the future, there is the potential that sanctions could be re-imposed, or "snapped back". Thus, companies (whether bound by existing US- or EU-imposed sanctions programs) considering doing business in Iran after Implementation Day should proceed cautiously-both because ambiguities remain under the JCPOA and because the sanctions will not necessarily be permanently lifted and may "snap back" with little notice.
The following is a guide to the expected suspension of sanctions by the U.S. and the EU on Implementation Day.
In short, Implementation Day will and will not affect current U.S. and EU sanctions in the following ways:
- The U.S. and EU Will Largely Suspend Sanctions on Certain Activities by Non-U.S. Persons in the Following Sectors:
- energy and petrochemical;
- shipping, shipbuilding, and ports;
- gold and other precious metals;
- software; and
- financial institutions and insurance.
- The U.S. Embargo on Iran Will Remain. Sanctions will remain in effect for U.S. persons. The U.S. prohibition on virtually any transactions involving Iran will remain in place, as applied to U.S. persons. That has potential consequences even for non-U.S. persons. Because the U.S. banking system will continue to enforce the sanctions regime for U.S. persons, even non-U.S. companies no longer subject to the sanctions after Implement Day may nonetheless risk having transaction payments blocked if they are denominated in U.S. dollars and pass through the U.S. banking system-unless specifically authorized by the U.S. government.
- U.S. Sanctions Involving the Following Activities by Non-U.S. Persons, Among Others, Will Remain In Effect on Implementation Day:
- transfers of certain weapons-related technology;
- transactions involving Specially Designated Nationals (SDNs), including the Islamic Revolutionary Guard Corps. (IRGC) and entities it owns or controls; and
- facilitating or supporting transactions involving certain human rights abuses in Iran or international terrorism.
- The U.S. and EU Will Delist a Number of Iranian Individuals and Entities. Both the U.S. and EU have committed to removing a number of Iranian persons from their respective sanctions lists. Those persons subject to delisting are set forth in the attachments to Annex II or the JCPOA.3
The following elaborates in detail the impact of the JCPOA come Implementation Day. Part I discusses the sanctions that will remain in place after Implementation Day for U.S. persons; Part II describes the U.S. sanctions landscape for non-U.S. persons after Implementation Day; and Part III describes the impact of Implementation Day on EU sanctions.
Sanctions After Implementation Day
I. U.S. Sanctions Affecting U.S. Persons
The lifting of sanctions on Implementation Day will have little impact on the ability of U.S. persons to do business with Iran. The U.S. embargo on Iran will remain in place and the U.S. will continue to enforce stringent controls on Iran-related transactions by U.S. persons (wherever located), foreign entities owned or controlled by a U.S. person, and foreign persons located in the United States. The Iranian Transactions and Sanctions Regulations (ITSR) still prohibit the export, sale, or supply, directly or indirectly, from the United States or by a U.S. person, wherever located, of any goods, technology, or services to Iran. The ITSR also generally prohibits the import of goods and services from Iran into the U.S.
Authorization from the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) is required before persons subject to U.S. jurisdiction can engage in most exports or imports from Iran. Annex II to the JCPOA specifically states that "[t]he sanctions that the United States will cease to apply, and subsequently terminate… are those directed towards non-U.S. persons….U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to this JCPOA, unless authorised to do so by" OFAC.
Even prior to the recent agreement with Iran, OFAC had issued general licenses[nn:Unlike a specific license, a general license does not require submission of an application to OFAC, nor does OFAC need to affirmatively approve the activities in question. Instead, the individual or entity using the general license simply needs to meet the relevant criteria for the general license as specified in OFAC's regulations.]] authorizing, among other things, Iran-related transactions in the following areas:
- export of medicine, basic medical supplies, and replacement parts for certain medical devices;
- export of certain food items;
- export of certain services, software, and hardware incident to personal communications and export of certain services and software over the Internet;
- certain academic exchanges and the exportation or importation of certain educational services;4
- certain services in support of nongovernmental organizations (NGOs) in Iran;
- certain services in support of professional and amateur sports activities and exchanges involving the United States and Iran;
- personal remittances;
- telecommunications and mail transactions authorized under Section 560.508 of the ITSR; and
- journalistic activities and establishment of news bureaus in Iran under Section 560.519 of the ITSR.
There are also certain exceptions under Section 516 of the ITSR for:
- travel to Iran and transactions "ordinarily incident to" such travel; and
- information and informational materials.5
All of the authorizations discussed above were available prior to the JCPOA, although some, such as General License G regarding educational exchanges and General License D-1 regarding personal communications, were issued during the negotiations after all parties agreed to the JPOA on November 24, 2013.
If IAEA verifies that Iran has fulfilled its nuclear commitments under the JCPOA, U.S. persons will be able to engage in certain limited additional imports and exports from/to Iran after Implementation Day, including:
- exports of commercial passenger aircraft and related spare parts and associated services to Iran; and
- imports of certain food, such as pistachios and caviar, and carpets from Iran.
As a result of the JCPOA, U.S. universities may also face fewer restrictions on their ability to enroll Iranian students in academic courses related to the energy sector and nuclear engineering, and nuclear science. Currently, the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) requires that the State Department deny visas to citizens of Iran who seek to enter the United States to participate in coursework at an institution of higher education to prepare for a "career in the energy sector of Iran or in nuclear science or nuclear engineering or a related field in Iran." After Implementation Day, the U.S. committed to cease the application of the ITRSHRA's "exclusion of Iranian citizens from higher education coursework related to careers in nuclear science, nuclear engineering, or the energy sector," and to seek legislative action, as appropriate, to terminate such ITRSHRA requirements. Pursuant to Section 505 of the ITSR, students from Iranian universities who are otherwise qualified for a non-immigrant visa are authorized to carry out in the United States those activities for which such a visa has been granted by the U.S. State Department.
The U.S. also committed under the JCPOA to remove certain individuals and entities who have been designated in connection with nuclear-related sanctions from OFAC's SDN List and other U.S. sanctions lists. Removal of these entities will not occur until the IAEA verifies that Iran has fulfilled certain initial steps related to its nuclear program (i.e., Implementation Day). Removal from the SDN List could allow U.S. persons to engage with these entities if authorized under one of the OFAC general licenses discussed above.[[N:Such general licenses typically only authorize transactions prohibited under the ITSR and would not cover transactions with entities that have been separately designated for their involvement in weapons proliferation. Therefore, a U.S. person could not engage in a transaction with an entity on the SDN List with the [NPWMD] tag, even if authorized under the above OFAC general licenses.]] However, they remain subject to U.S. sanctions at this time and will likely remain so in the near term because it may be six to nine months before Implementation Day.
The largest JCPOA change related to U.S. persons might be regarding their foreign subsidiaries and joint ventures. Under Section 5.1.2 of Annex II to the JCPOA, the U.S. committed that after Implementation day it would "[l]icense non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA." This commitment will make some of the extraterritorial sanctions relief discussed in Section II below available to companies that are owned or controlled by a U.S. person if licensed by OFAC.
Granting such licenses would allow OFAC to mitigate some of the competitive disadvantage that U.S. companies and their subsidiaries will face after Implementation Day as a result of sanctions relief granted to their foreign competitors under the JCPOA that is not available to U.S. businesses.
II. U.S. Sanctions Affecting Non-U.S. Persons
By contrast, as described below, Implementation Day will greatly affect the landscape of U.S.-Iran sanctions that affect non-U.S. persons ("extraterritorial" or "secondary" sanctions).
A. Non-U.S. Person Activities That Will No Longer Be Sanctionable on Implementation Day
Below is a non-exhaustive list of non-U.S. person activities-in broad terms-that are expected to be sanctionable no longer by the United States on and after the Implementation Day. It is important to note that the below activities will no longer be sanctionable only to the extent that the activities are otherwise "consistent" with the JCPOA. For example, a non-U.S. person may be sanctioned on and after the Implementation Day for providing insurance services for the transportation of semi-finished metals for the benefit of an SDN (e.g., IRGC) or for Iran's sanctionable purposes-i.e., ballistic missile proliferation, human rights abuse, and/or or support for terrorism.
1. Energy, Petrochemical, Shipping, Shipbuilding, and Port Operating Sectors.
Non-U.S. persons will be able to do the following without any dollar limitation.
- Purchase, transport, and insure the transportation of petroleum, petroleum products, petrochemical products, and natural gas from Iran.
- Sell, transport, and insure the transportation of refined petroleum products to Iran.
- Sell, lease, or provide goods, services, technology, information, or support that could facilitate or contribute to
- the maintenance or enhancement of Iran's ability to develop its petroleum resources;
- the maintenance or expansion of Iran's domestic production of refined petroleum products, including construction, modernization, or repair of petroleum refineries or directly associated infrastructure;6
- the enhancement of Iran's ability to import refined petroleum products; or
- the maintenance or expansion of Iran's domestic production of petrochemical products.
- Make an investment7 that directly and significantly contributes to the enhancement of Iran's ability to develop petroleum resources.
- Participate in a joint venture with respect to the development of petroleum resources anywhere in the world where the Iranian government is a substantial partner or investor and could receive technological knowledge or equipment not previously available to Iran that could directly and significantly contribute to the enhancement of Iran's ability to develop its petroleum resources.
- Provide significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction in connection with the energy, shipping, or shipbuilding sectors of Iran, including to National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), National Iranian Tanker Company (NITC), and Islamic Republic of Iran Shipping Lines (IRISIL), South Shipping Line, and port operators of Bandar Abbas.
- Conduct "associated services"8 for each categories of activities above.
2. Automotive Sector
Non-U.S. persons will be able to-without any dollar limitation-sell, supply, or transfer to Iran goods or services used in connection with the automotive sector of Iran, and conduct "associated services."
3. Gold and other precious metals
Non-U.S. persons will be able to-without any dollar limitation-sell, supply, or transfer to or from Iran gold and other precious metals, and conduct "associated services."
4. Software and metals
Non-U.S. persons will be able to, without any dollar limitation,sell, supply, or transfer to or from Iran graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes, and conduct "associated services."
5. Transactions with Persons on the SDN List, FSE List, Non-SDN ISA Sanctions List
Non-U.S. persons will be able to conduct and/or facilitate transactions with Iranian individuals and entities set out in Attachment 3 to Annex 2 of the JCPOA. Attachment 3 includes specific Iranian financial institutions, NIOC, NICO, NITC, and other Iranian individuals and entities that are currently identified on, but that will be removed from, the SDN List as (1) an SDN, (2) a Foreign Sanctions Evader (e.g., Caucasus Energy), or (3) a non-SDN ISA sanctioned person (e.g., Zhuhai Zhenrong Company).
6. Financial Sectors (Including Insurance)
Non-U.S. financial institutions (Foreign Financial Institutions) will be able to do the following without any dollar limitation.
- Deal with Iranian rials, including
- conduct and/or facilitate transactions related to the purchase or sale of Iranian rials or a derivative whose value is based on the exchange rate of the Iranian rial; and
- maintain significant funds or accounts outside Iran denominated in the Iranian rial.
- Assist the Government of Iran in acquiring U.S. bank notes.
- Provide specialized financial messaging services to, or enable or facilitate direct or indirect access to such messaging services, for the Central Bank of Iran and other Iranian financial institutions listed in Attachment 3.
- Purchase, subscribe to, facilitate the issuance of Government of Iran sovereign debt, including governmental bonds.
- Conduct "associated services."
B. Non-U.S. Person Activities That Will Remain Sanctionable On and After Implementation Day
Below is a non-exhaustive list of non-U.S. person activities-in broad terms-that will remain sanctionable on and after Implementation Day. Some will no longer be sanctionable on and after Transition Day, which will occur eight years after the initial adoption of the JCPOA (90 days after July 20), while others will remain sanctionable on and after Transition Day.
1. Non-U.S. Person Activities That Will Remain Sanctionable On and After Implementation Day Until Transition Day.
Non-U.S. persons will continue to be prohibited from the following activities.
- Conducting and/or facilitating transactions with Iranian individuals and entities set out in Attachment 4 to Annex 2 of the JCPOA (Attachment 4 appears to include SDNs that have directly contributed to Iran's nuclear proliferation activities-e.g., Fulmen Group);
- Transferring to or acquiring from Iran equipment and technology (1) controlled under multilateral control lists (Missile Technology Control Regime, Australia Group, Chemical Weapons Convention, Nuclear Suppliers Group, Wassenaar Arrangement); (2) of the same kind as those on multilateral lists but falling below the control list parameters, when it is determined that such items have the potential to make a material contribution to WMD or cruise or ballistic missile systems; (3) with potential to make such a material contribution, when added through case-by-case decisions; and (4) on U.S. national control lists for WMD/missile reasons that are not on multilateral lists-consistent with the U.S. approach to other non-nuclear weapon states under the Treaty on the Non-Proliferation of Nuclear Weapons (NPT).
- Participating in specified types of joint ventures that involve any activity relating to the mining, production, or transportation of uranium.
2. Non-U.S. Person Activities That Will Remain Sanctionable Irrespective of the JCPOA (i.e., Activities That Will Remain Sanctionable on Implementation Day With no Suspension or Termination Contemplated Under the JCPOA).
Non-U.S. persons will continue to be prohibited from the following activities.
- Conducting transactions with Iranian entities and individuals on the SDN List (e.g., those that are not currently identified on Attachments 3 to Annex 2 of the JCPOA.
- Assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, the IRGC and its officials, agents, or affiliates the property and interest in property of which are blocked (collectively referred to herein as IRGC).
- Assisting, sponsoring, or providing material, or technical support for, or goods or services to or in support of
- Iran's military or ballistic missile program;
- Iran's support for international terrorism; or
- Iran's human rights abuses.
III. The Effect of the Joint Comprehensive Plan of Action in the European Union
The consequence of lifting the EU's economic sanctions against Iran will mean that on Implementation Day the vast majority of previously sanctioned activities and their associated services will be permitted for non-U.S. persons. However, on Implementation Day financial sanctions concerning financial messaging9 will remain in place as will provisions concerning Nuclear Proliferation10 and Arms11-these will not be removed entirely until Transition Day, which is due to occur eight years after adoption.
From Implementation Day, the following activities will be permitted between EU Member States and Iran:
A. Financial, Banking, and Insurance
- The transfers of funds between EU persons, entities, or bodies (including EU financial and credit institutions) and Iranian persons, entities, or bodies (including Iranian financial and credit institutions) without the requirement for authorization or notification.
- The opening of new branches, subsidiaries, or representative offices of Iranian banks in the territories of EU Member States; and the establishment of new joint ventures, or the taking of an ownership interest or the establishment of new correspondent banking relationships by Iranian banks with EU banks; and opening by EU persons (including EU financial and credit institutions) of representative offices, subsidiaries, joint ventures, or bank accounts in Iran.
- The provision of insurance or reinsurance to Iran or the Government of Iran, an Iranian legal person, entity, or body, or a natural person or a legal person, entity, or body acting on their behalf or at their direction.
- The supply of specialized financial messaging services to any Iranian natural or legal persons, entities, or bodies, including those listed in Attachment 1 Annex II of the JCPOA.12
- Entering into commitments by EU Member States to provide financial support for trade with Iran, including the granting of export credits, guarantees, or insurance; and into commitments for grants, financial assistance, and concessional loans to the Government of Iran.
- The sale or purchase of public or public-guaranteed bonds to and from Iran, the Government of Iran, the Central Bank of Iran, or Iranian banks and financial institutions or persons acting on their behalf.
B. Oil, Gas, and Petrochemical Sectors
- The import, purchase, swap, or transport of Iranian crude oil and petroleum products, natural gas, or petrochemical products and related financing.
- The sale, supply, transfer, or export of equipment or technology, technical assistance, including training, used in the sectors of the oil, gas, and petrochemical industries in Iran covering exploration, production, and refining of oil and natural gas, including liquefaction of natural gas, to any Iranian person, in or outside Iran, or for use in Iran.
- The grant of any financial loan or credit to, the acquisition or extension of a participation in, and the creation of any joint venture with any Iranian person that is engaged in the oil, gas, and petrochemical sectors in Iran or outside Iran.
C. Shipping, Shipbuilding, and Transport Sectors
- The sale, supply, transfer, or export of naval equipment and technology for ship building, maintenance, or refit to Iran or to any Iranian persons engaged in this sector; the design, construction, or the participation in the design or construction of cargo vessels and oil tankers for Iran or for Iranian persons; the provision of vessels designed or used for the transport or storage of oil and petrochemical products to Iranian persons, entities, or bodies; and the provision of flagging and classification services, including those pertaining to technical specification, registration, and identification numbers of any kind to Iranian oil tankers and cargo vessels.
- Access to the airports under the jurisdiction of EU Member States of all cargo flights operated by Iranian carriers or originating from Iran.
- Cessation of inspection, seizure, and disposal by EU Member States of cargoes to and from Iran in their territories with regard to items which are no longer prohibited.
- Provision of bunkering or ship supply services, or any other servicing of vessels, to Iranian-owned or Iranian-contracted vessels not carrying prohibited items; and the provision of fuel, engineering, and maintenance services to Iranian cargo aircraft not carrying prohibited items.
D. Concerning Gold, Other Precious Metals, Banknotes, and Coinage
- The sale, supply, purchase, export, transfer, or transport of gold and precious metals, as well as diamonds, and provision of related brokering, financing, and security services to, from, or for the Government of Iran, its public bodies, corporations, and agencies, or the Central Bank of Iran.
- Delivery of newly printed or minted or unissued Iranian denominated banknotes and coinage to, or for the benefit of, the Central Bank of Iran.
E. Other Metals
- The sale, supply, transfer, or export of graphite and raw or semi-finished metals, such as aluminum and steel to any Iranian person, entity, or body, or for use in Iran, in connection with activities consistent with the JCPOA.
- The sale, supply, transfer, or export of software for integrating industrial processes, including updates to any Iranian person, entity, or body, or for use in Iran, in connection with activities consistent with the JCPOA.
G. Listing of Persons, Entities, and Bodies (Asset Freeze and Visa Ban)
- As a result of delisting as specified in Annex II to the JCPOA, the release of all funds and economic resources which belong to, and making available funds or economic resources to, the persons, entities, and bodies, including Iranian banks and financial institutions, the Central Bank of Iran, listed in Attachment 1 to Annex II to the JCPOA.
- As a result of delisting as specified, entry into, or transit through the territories of EU Member States of individuals listed in Attachment 1 to Annex II to the JCPOA.
While the JCPOA provides an overview of the sanctions that will be suspended on Implementation Day and beyond, the precise operation of the suspensions has not been fully developed. The U.S. government has indicated that OFAC will issue guidance on the mechanics of the suspensions, and it is likely that other agencies will issue additional guidance as well. What does seem certain is that the sanctions, if lifted, will be lifted for non-U.S. persons, but for the most part will remain in effect for U.S. persons. Companies (whether bound by existing U.S.- or EU-imposed sanctions programs) considering doing business in Iran after Implementation Day should proceed cautiously, both because ambiguities remain under the JCPOA and because the sanctions will not necessarily be permanently lifted and may "snap back" with little notice.
Congress would normally not be asked, or have the power, to approve the JCPOA because it is not a treaty subject to the advice and consent of the Senate. In May, however, Congress passed, and the President signed, the Iran Nuclear Agreement Review Act of 2015, which gave Congress a role in reviewing the deal. The law barred the President from taking action to provide relief from sanctions under the JCPOA until Congress had 60 days to review it.
Appointment of Ambassador Stephen D. Mull as Lead Coordinator for Iran Nuclear Implementation, http://www.state.gov/secretary/remarks/2015/09/247006.htm.
Section 538 of the ITSR separately authorizes certain Iran-related publishing activities, including with persons from academic and research institutions. Subject to certain limitations, U.S. persons are authorized to engage in all transactions necessary and ordinarily incident to the publishing and marketing of manuscripts, books, journals, and newspapers in paper or electronic format (collectively, written publications).
Under Section 210(c) of the ITSR, the term "information and informational materials" is defined to include publications, films, posters, phonograph records, photographs, microfilm, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds. However, under the informational materials exception, there are limitations on the ability of U.S. persons to make substantive enhancements to information and informational materials sent to Iran. The information and informational materials exemption does not apply to the substantive or artistic alteration or enhancement of informational materials, or to the provision of marketing and business consulting services. Nor does the exemption apply to transactions related to information and informational materials that are not fully created and in existence at the date of the transaction.
For purposes of the JCPOA and this memorandum, the term "associated services" means any service-including technical assistance, training, insurance, re-insurance, brokering, transportation, or financial service-necessary and ordinarily incident to the underlying activity for which sanctions have been lifted pursuant to the JCPOA.
Namely (Articles 1(1) (a), (b), (d), (e), (2), (3) and (4), 2, 3, 5, 14 and 21 of Council Decision 2010/413/CFSP; Articles 2, 3, 4, 5, 6, 7, 17(1) and (2)(a), 18, 19 and 22, and Annexes I, II and III of Council Regulation (EU) No 267/2012).