May 18, 2018/Brown Rudnick / Mondo
On May 8, 2018, President Trump announced that the United States would cease implementing the Joint Comprehensive Plan of Action (“JCPOA”), triggering a re-imposition of certain previously suspended sanctions on Iran. Much of the immediate impact of this change in U.S. policy will be on non-U.S. companies that will now need to be concerned with the re-imposition of secondary sanctions applicable to non-U.S. persons. Significantly, this change in U.S. policy returns U.S. and non-U.S. companies doing business globally back to the challenging compliance environment beginning in 2010 – after U.S. and EU trade restrictions on doing business in Iran diverged markedly – a period marked by large enforcement actions by the United States against a number of EU banks for Iran-related activities.
We expect that EU-based companies, in particular, will face serious challenges in their business planning in the medium term, assessing whether to continue activities in Iran that may be permissible under EU trade policies, but which are prohibited under the re-instituted U.S. secondary sanctions. Already some companies are making public announcements of their intentions to curtail or abandon activities in Iran that were planned or underway.
Snap Back and Wind-Down
President Trump’s decision to suspend participation in the JCPOA was quickly followed by more detailed guidance from the U.S. Office of Foreign Assets Control (“OFAC”) at the Department of the Treasury on the immediate impact of the “snap back” of U.S. sanctions. According to OFAC, following a wind-down period, the narrow subset of U.S. sanctions against Iran that had been suspended under the JCPOA will be re-imposed by, at the latest, November 4, 2018.
Until November 4, the U.S. Government has authorized two parallel wind-down periods that will allow companies that had entered into business in and with Iran to take the steps necessary to exit from those operations. Some sanctions suspended under the JCPOA will be reinstituted within 90 days and the remainder within a 180 day wind-down period. We have briefly summarized the two wind-down periods at the end of this alert. Once each wind-down period ends, all U.S. sanctions against Iran that had been in place prior to the JCPOA will reapply in full force, including those applicable to entities outside the U.S. that are “owned or controlled” by a U.S. person.
Advisable to Review All Business That May Touch Iran
During the wind-down period, companies with current commercial interests in Iran should carefully review the impact of the U.S. announcement on their existing contracts and other legal obligations. Already, the U.S. Government is expressing intent to take actions against non-U.S. companies that continue to do business with Iran. For example, John Bolton, White House National Security Advisor, has indicated publicly that the U.S. will consider applying sanctions on European companies that continue business dealings with Iran after the end of the wind-down period. Likewise, OFAC has signaled increased pressure on Iranian entities through additional blocking actions, including sanctions on key officials of Iran’s Central Bank. It is safe to assume that OFAC’s latest action should be read as a warning to non-U.S. companies against doing any business involving Iran’s financial sector.
Companies engaging in transactions potentially prohibited by the new sanctions are now faced by the following options:
(1) prepare to wind down those activities altogether;
(2) consider seeking a license from OFAC to extend the wind-down period; or
(3) in a more limited sub-set of circumstances, to continue performing work.
At present, it is difficult to assess whether OFAC will consider licensing additional activities associated with winding down. However, recent experience with sanctions imposed on Russian entities earlier this year suggests that there may be willingness to soften the blow for some affected sectors or companies when the sanctions are likely to have a broader effect outside the sanctioned country.
What Sanctions Will Snap Back?
Under the JCPOA, implemented in 2015, the U.S. had loosened sanctions that applied primarily to non-U.S. persons and to the foreign subsidiaries of U.S. companies. These sanctions applied to transactions involving, for example, the purchase or acquisition of U.S. dollar bank notes, trade in Iranian precious metals, and the purchase of Iranian sovereign debt. Additionally, OFAC has indicated that it expects to re-list a number of persons associated with the Iranian government or financial institutions on the Specially Designated Nationals and Blocked Persons List.
This means that trade with these companies or individuals will be prohibited under U.S. sanctions, to the extent these persons were not already blocked by OFAC for other reasons. The secondary sanctions will also expand to again include Iranian shipping and port operation, petroleum-related transactions, and the Iranian energy sector.
OFAC has indicated that it will make certain allowances for transactions agreed to before the JCPOA was terminated. According to OFAC’s Frequently Asked Questions, U.S. persons and their “owned or controlled” foreign affiliates will be authorized to receive payments according to the terms of a written contract or agreement that was entered into before May 8, 2018. It remains unclear, however, whether parties would be permitted to enter into new business contracts during the wind-down period, even if the transaction is one that could be completed within the 180-day wind-down period.
Given the risk of exposure to sanctions enforcement, companies subject to U.S. jurisdiction should carefully review the OFAC risks associated with commencing any new business during the wind-down period and, in many instances, proceed to consult OFAC until such time as it provides greater clarity through further guidance on this point.
How is the International Community Responding?
Companies with multi-national operations and EU companies should note that France, the UK and Germany, along with the European Union collectively, have indicated that they remain committed to the JCPOA, and that they will not re-impose sanctions on Iran that were lifted in 2016.
There have been discussions within the EU leadership about taking measures to shield European companies from U.S. enforcement, although past efforts by the EU along these lines have had limited effects on companies that are highly dependent on access to the U.S. financial system.
Given the broad scope of secondary sanctions, multi-national companies are well advised to conduct a thorough review of their transactions with Iran regardless of where the business unit is located to determine whether there may be a risk of violating the U.S. sanctions.
In summary, the withdrawal of the U.S. from the JCPOA will have significant implications for companies that either (1) undertake activities in Iran themselves or (2) do business with third parties in Iran. Companies should consider undertaking a compliance review of the activities of their subsidiaries and affiliates to assess their risks.