24 May 2018

US pulls out of Iran deal: impact on EU companies

On 8 May 2018, US President Trump announced that the United States will withdraw from the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran Nuclear Deal. This did not come as a surprise: during his presidential campaign, and most recently in February 2018, President Trump threatened to discontinue US participation in the JCPOA if the deal was not amended (see In context of February 2018). US sanctions relief under the JCPOA primarily concerned “secondary sanctions”; most of the primary sanctions remained intact. For more information on the content of the JCPOA and its implications see In context of March 2017, In context of January 2016 and Legal Alert of July 2015).

US withdrawal from the JCPOA – Consequences for EU companies

Sanctions to be re-imposed

US withdrawal from the JCPOA will result in the re-imposition of US primary and secondary nuclear-related sanctions that had been lifted or waived under the JCPOA.

Primary sanctions apply to US companies and individuals, and any non-US entities they own or control. These sanctions also apply to non-US companies and individuals that carry out transactions that have a “nexus” or connection to the US, for example through involvement of US persons, export of US-origin goods or services, activities conducted in or through the US, or payments in US dollars (see our Client Alert of August 2017 on liability risks for non-US companies when making payments in USD). The re-imposition of primary sanctions notably includes the revocation of General License H, which provided a limited authorisation for non-US subsidiaries of US companies to do business with Iran without involving their US affiliates and employees.

In contrast, secondary sanctions primarily target non-US individuals and companies that carry out certain Iran-related activities or transactions, irrespective of whether they have a nexus with the US or not. Secondary sanctions will be reactivated after wind-down periods of either 90 or 180 days, depending on the type of sanctions. These wind-down periods are intended to allow companies to complete existing business during these periods, and provide for a limited possibility to receive certain payments after the ends of these periods.

Secondary sanctions that will be re-imposed as of 7 August 2018 include:

  1. sanctions related to graphite, raw or semi-finished metals, and
  2. sanctions on Iran’s automotive sector.

Secondary sanctions that will be re-imposed as of 5 November 2018 target, among other things, the following:

  1. Iran’s port operators and shipping and shipbuilding sectors
  2. petroleum-related transactions, including international transactions in Iranian crude oil, gas, petroleum and petrochemical products, the vessels that carry them and the facilities that store them
  3. financial or insurance services, and
  4. Iran’s energy sector, including transactions with the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO) and National Iranian Tanker Company (NITC).

For a list of all secondary sanctions that will be re-imposed, refer to par. 1.2 and 1.3 of the OFAC guidance.

Furthermore, secondary sanctions that applied to persons and entities before they were removed from the SDN List due to the implementation of the JCPOA on 16 January 2016, will be re-imposed no later than 5 November 2018.

Impact on EU companies

The re-imposed secondary sanctions will not prohibit non-US companies from conducting all business in Iran.

However, if EU companies conduct business covered by the secondary sanctions to be re-imposed, or if they enter into such business during the wind-down periods, they will face an increased risk of US penalties if they continue this business with Iran. The penalties involved are not criminal in nature, but are burdensome nonetheless, as companies face the risk of being cut off from access to US customers or US markets, and other adverse US government action. The relisting of several hundred parties on the SDN list will also result in an increased due diligence burden to verify that none of these parties are involved in any transactions that continue after the wind-down periods.

It is important to note that the imposition of penalties for non-compliance with secondary sanctions is not automatic, but depends on the determination of US authorities. In particular, the US government must determine that a transaction was done “knowingly”, and was “material” or “significant”. If a transaction or an activity falls within the scope of the US secondary sanctions, it is uncertain whether the US government will actually decide to enforce it. This uncertainty is amplified by the mixed messages senior representatives of the US government are currently sending out about the nature and extent of any intended enforcement against non-US companies.

EU sanctions against Iran

As long as the EU and Iran stay in the JCPOA, or an alternative arrangement is negotiated with the US and other parties, EU sanctions against Iran will continue to be lifted.

Immediate response of the EU to the US withdrawal

Immediately after the US announced its withdrawal from the JCPOA, the EU (as well as France, the United Kingdom and Germany) expressed their disappointment for the US President’s decision and made strong statements in support of the deal. The High Representative of the EU for Foreign Affairs and Security Policy, Federica Mogherini, declared the EU’s continued commitment to full implementation of the nuclear deal. Likewise, other European members of the deal jointly emphasised their continuing commitment to the JCPOA.

The EU’s response to the US withdrawal from the Iran Nuclear Deal boils down to two interrelated goals. On the one hand, the EU is trying to save the JCPOA and, on the other, it wants to protect European companies from US secondary sanctions. The latter is crucial not only to protect investments in Iran made by European companies since 2015, but also to ensure the continuation of the JCPOA in the first place by ensuring that EU companies stay in Iran and that Iran’s economic benefits derived from the deal are safeguarded.

Re-activation of the EU Blocking Regulation

On 18 May, following an informal meeting of EU heads of state or government, the European Commission announced several measures aimed at mitigating the impact of the re-imposed US secondary sanctions on EU companies. The most significant legal measure for European companies is the re-activation of the EU Blocking Regulation of 1996.

The EU Blocking Regulation was originally adopted to counter the extraterritorial effects of the US trade embargoes against Cuba, Iran and Libya. It is expected that, once updated, the EU Blocking Regulation will inter alia prohibit European companies from complying with the US secondary sanctions relating to Iran targeted by this regulation and render any foreign court judgments based on secondary sanctions unenforceable in the EU. The Commission aims to have this measure in place by 6 August – the final day of the wind-down period for the first batch of US sanctions. To this end, the Commission must first update the scope of the EU Blocking Regulation and introduce a formal proposal to the European Parliament and the Council. The Commission has not published a proposal of an updated EU Blocking Regulation so far.

The EU Blocking Regulation, once adopted, will not effectively block the US from applying any re-imposed sanctions to European companies. Caught between the prohibition on complying with US secondary sanctions on the EU side, and the threat of US secondary sanctions themselves on the US side, EU companies will face a challenging compliance dilemma. It is therefore at least questionable whether the updated Blocking Regulation will be effective in protecting the economic interests of EU companies in Iran.

Nevertheless, the Blocking Regulation would at least give individual companies a formal legal argument for refusing to comply with US secondary sanctions. In addition, implementation of the updated Regulation may serve as a geopolitical instrument of the EU to try to arrange a form of mitigation for EU companies’ exposure to US secondary sanctions.

Practical considerations for EU companies

Following the US government’s decision, EU companies should carefully review their Iran-related business transactions, and assess whether these transactions could potentially fall within the scope of the re-imposed US sanctions against Iran. This should include due diligence on whether or not current Iranian business partners were subject to secondary sanctions before the JCPOA came into force.

Until there is sufficient clarity on the EU’s actions in general, and the design of the updated Blocking Regulation in particular, EU companies need to tread carefully when engaging in any new Iran-related transactions.

Even if current or contemplated transactions are not covered by the re-imposed US sanctions, it is still important to be mindful of the increased reluctance of other non-US business parties, especially banks, to engage or continue their participation in Iran-related activities.

We recommend closely monitoring developments regarding the EU response to the US withdrawal from the JCPOA. We will keep you informed of any important developments and their consequences for organisations doing business in Iran.