U.S. Sanctions on Iran Set to Return: A Simple Explainer

This client note was prepared by the German trade compliance team at Dentons Europe. It is republished here with permission. 

On 8 May 2018, U.S. President Trump announced that the United States “will withdraw from the Iran nuclear deal” and that the United States “will be instituting the highest level of economic sanctions”. At the same time, U.S. authorities announced that U.S. sanctions would be re-instated, at the latest by 4 November 2018. What does this mean for companies who have ties to Iran or who do business in Iran?

In January 2016, the U.S. and the EU lifted some of the sanctions that they had imposed on Iran. This was based on an international agreement, the so-called Joint Comprehensive Plan of Action (“JCPOA”). Since 2016, many European companies engaged in business activities in Iran or extended their activities. Transactions with Iran will now meet with severe difficulties, and many companies will be forced to cease and wind down their operations.

In the following, we summarize the most important developments and applicable rules.

U.S. Companies and Their Subsidiaries

Applicable U.S. laws generally prohibit U.S. companies from engaging in any business activities with a relation to Iran. This prohibition also applies to non-U.S. subsidiaries of U.S. companies. Based on the JCPOA, the U.S. had issued General License H. This General License broadly allowed non-U.S. subsidiaries of U.S. companies to engage in business activities with Iran.

General License H will be revoked “as soon as feasible”. It will then be replaced with a “new” General License H; this new General License will, however, only authorize the wind down of existing transactions and operations that had been made possible by the “old” General License H. Wind-down operations must be completed by 4 November 2018.

Adding Parties to the U.S. List of Blocked Parties

The U.S. Government has imposed prohibitions a number of individuals, entities and groups (“Specially Designated Nationals” – “SDN”). Any dealings with SDN are prohibited. In addition, all dealings with a company in which an SDN owns at least 50% of the interest are also prohibited.

Not only U.S. nationals and U.S. companies (amongst others) must comply with this prohibition. Any party must comply with these prohibitions when that party is involved in a transaction that is made in US Dollars or when a U.S. bank or U.S. company is also involved in that transaction.

In 2016, a large number of companies and individuals were removed from the SDN List of the U.S. These parties will be added to the SDN List again. It is currently unclear when that will happen, but at the latest on 5 November 2018. Amongst these parties are Iranian banks as well as the National Iranian Oil Company, and also companies and banks established outside of Iran, e.g. in the EU.

U.S. Measures Targeting Specific Industry Sectors

Before 2016, the U.S. had adopted numerous regulations to deter also non-U.S. companies from doing business with Iran. These regulations, so-called Secondary Sanctions, threaten that the U.S. Government can impose severe measures on non-U.S. companies who enter into transactions with certain industry sectors and with certain entities and individuals in Iran.

These measures can amount to a complete exclusion of the non-U.S. company from the U.S. market and from transactions with all U.S. companies worldwide. This can also mean that companies are designated as SDN. Companies which are faced with the risk of Secondary Sanctions should carefully analyze the risks for continuing their activities. U.S. authorities have stated that they want to enforce Secondary Sanctions in the future.

These measures had been waived or lifted under the JCPOA. They will now be re-instated by 6 August 2018 and by 4 November 2018. Until then, companies engaged in the industry sectors concerned must wind down their operations if they want to avoid Secondary Sanctions.

The most important Secondary Sanctions concern the following activities:

• Wind-down by 6 August 2018
  • Transactions with the automotive sector;
  • Sale or purchase of graphite, raw or semi-finished metals such as aluminum and steel, and coal;
  • Provision of software for integrating industrial processes.
• Wind-down by 4 November 2018
  • Transactions involving ports, shipping and shipbuilding, including Iranian shipping lines;
  • Petroleum-related transactions;
  • Transactions with the petrochemical sector;
  • Investments in the development of oil resources;
  • Transactions by non-U.S. banks with certain Iranian banks, including the Iranian Central Bank;
  • Forwarding of “SWIFT” messages to Iranian banks.

Commercial Aircraft and Related Services

As a result of the close global cooperation in the aircraft industry, any commercial aircraft will include material parts with U.S. origin. As a consequence, commercial aircraft and most spare parts for commercial aircraft can only be supplied to Iran with a license from U.S. authorities. Similarly, even non-U.S. companies require licenses from U.S. authorities for maintenance and other services for commercial aircraft.

Under the JCPOA, U.S. authorities granted such licenses to both U.S. and non-U.S. companies. All these licenses will be revoked. U.S. and non-U.S. companies must wind down their activities under these licenses by 6 August 2018.

The Meaning of Wind-Down

Where a wind-down of operations or business relations is required, deliveries and supplies can be made, and services can be provided, until the wind-down date, but only if the contract has been concluded before 8 May 2018.

Business activities and operations must end by the applicable wind-down date. In order to end business operations, companies are allowed to “engage in all transactions ordinarily incident and necessary to wind down” the activities. This may be necessary, for example, where contracts specify delivery dates that are later than the wind-down date.

Non-Iranian companies can receive payments even after the wind-down date, if the following two conditions are fulfilled: The contract has been concluded before 8 May 2018, and all deliveries have been made by the wind-down date. This also applies to loans or credits granted by non-Iranian banks. By contrast, Iranian banks and companies may not receive any payments after the wind-down date.

Activities that Remain Permitted

Even before 2016, U.S. authorities had issued General Licenses which permit certain business activities in Iran. The most important General Licenses are a General License that permits the export to Iran of food, foodstuffs, agricultural items, pharmaceutical products (drugs) and medical devices (often referred to as the “AgriMed” General License). In addition, U.S. authorities had issued a General License that permits the export to Iran of many standard IT items and software, if these products could be acquired without restrictions on the general market (General License D-1).

Based on information that is currently available, these General Licenses will not be revoked, and exports under these General Licenses remain permitted. These General Licenses cannot only be used by U.S. companies, but by companies from other countries as well.

EU Companies: Existing EU Sanctions Still Apply

The EU has not changed or amended the respective EU sanctions. For EU companies who have business operations in or with Iran, the EU sanctions and embargo apply in addition to the U.S. measures. The most important restrictions under EU sanctions and embargos are the following.

Sanctioned Parties and “Financial” Sanctions

The EU has imposed prohibitions to enter into business transactions with a number of individuals, entities and groups in Iran (so-called “Designated Parties”). EU companies may not make any payments and any deliveries to Designated Parties. There are also restrictions for dealing with companies which are owned or controlled by Designated Parties. These range from increased due diligence requirements to prohibitions on dealing with such subsidiary.

Export Prohibitions

The EU has adopted several lists of items which may not be supplied to Iran. It is also prohibited to conclude sales contracts for these items, to provide technical support services or the provision of export financing for these products. These prohibitions apply, e.g., for military items (arms embargo) and for certain items that could be used in a nuclear program.

Export Licensing Requirements

In addition, licenses are required to supply certain items to Iran. The items concerned are also included in several lists adopted by the EU. As with the export prohibitions, licensing requirements do not only apply for the actual export of these items, but in addition for the conclusion of the respective sales contract, the provision of technical support services for these items or for the provision of export financing of these products. Licensing requirements apply, for example, for the supply of items for the interception of telecommunication, of less important items that could be used in a nuclear program or for graphite, raw or semi-finished metals such as aluminum and steel. Depending on the product in question, licensing procedures may be quite complex, because some licenses must be reviewed by a special committee established under the JCPOA before they are granted.

Restrictions for Investments in Iran

In accordance with the EU sanctions and embargo, establishing companies in Iran or investing in companies in Iran may be prohibited or may require a license. These restrictions apply to companies which engage in certain business activities in Iran (e.g. in activities linked to the nuclear sector). The same restrictions apply for providing financing to companies in Iran.

Trading With Iran in the Future

These new unilateral U.S. measures will severely impact doing business with Iran and doing business in Iran. In addition to the prohibitions and other restrictions that apply to certain business activities directly, the U.S. measures will have a severe “chilling” effect. Companies will refrain from business activities involving Iran, and banks will refuse to provide financing for business activities in Iran.

As a result of the Secondary Sanctions threatened for sending SWIFT messages to Iranian banks, there is a risk that it will become impossible (again) to make electronic transfers of funds to and from Iranian banks. In addition, banks will now be even more reluctant with processing payments to and from Iran. EU companies will face the problem again that they may have perfectly legal business activities in Iran but will not be able to find a bank where they can receive payments.

It remains to be seen if European leaders manage to find a unified response to the new measures adopted unilaterally by the U.S.

Photo Credit: REX/Shutterstock

As the Iran Deal Approaches its D-Day, Uncertainty Only Set to Increase

The Joint Comprehensive Plan of Action (JCPOA) was, like many complex pieces of international diplomacy, a necessarily imperfect creation born out of compromise.

The deal is dependent for its survival on continued waivers of US secondary sanctions by the US President (a function of the congressional approval of the deal in the first place). It is also limited—quite deliberately—in the scope of its ambition: it did not seek to settle disputes concerning Iranian intervention in regional conflicts, Iran's human rights record or its ballistic missile program. And, much to the chagrin of Iran hawks in the US and elsewhere, the sunset clauses place no restriction on Iran's uranium enrichment after the first 15 years of the deal, though other aspects of the deal will be in force in perpetuity. From the Iranian side, whilst it provided relief against EU sanctions and US extraterritorial secondary sanctions, the JCPOA offered Iran no access to the US economy or, crucially, the US dollar denominated financial system.

But, imperfect as it was, it did result in the destruction of Iran's stockpile of enriched uranium and afforded the International Atomic Energy Association (IAEA) access to Iran's nuclear sites to verify continued Iranian compliance. And it has allowed Iran access to major European investment in Iran, including high profile deals struck with Airbus and French oil major Total.  

In any event, some of the lingering congenital defects would not have mattered as much, or at all, were it not for other extraneous events. For example, it was always intended by the Obama administration that the JCPOA would be a starting point for further discussions and deals on other areas of difference once the nuclear boil was lanced; negotiating the nuclear settlement was lengthy enough without complicating the negotiations further by involving issues such as Syria and ballistic missiles. And continued sanctions waivers were never thought to be seriously in doubt, even as the Trump campaign gained momentum throughout 2016. The State and Treasury Department reach out sessions following Implementation Day emphasized that the political consequences of a US lead snapback would be so serious that the next President would balk at tearing it up, even if that President was a candidate who described the deal as the "worst ever."

Fix It or Nix It

Even after further criticism of the deal from the newly inaugurated President Trump, that conclusion seemed to hold good. Early forays into extending sanctions against Iran with SDN designations in February 2017 were limited in scope. They did not designate Iranian financial institutions or state owned enterprises. Indeed, they were no different in character to some of the late Obama administration's post Implementation Day Iran designations.  Many concluded that moderate voices within the administration had managed to constrain the President's more hawkish impulses.  

But recent personnel changes amongst the President's close advisors, and the lack of much perceived benefit from the deal in Iran, mean that the defects matter much more now. The appointment of two key Iran skeptics, John Bolton (national security advisor) and Mike Pompeo (Secretary of State) mean that President Trump now has core of foreign policy advisors in place who share his dim view of Iran deal. The President is now determined to either "fix" the perceived failings of the Iran deal or "nix" it.

There is, therefore, a very real fear that President Trump will refuse to renew the next set of waivers that are due to expire on 12 May 2018. Those waivers apply to the secondary sanctions contained in the National Defence Authorization Act (NDAA) 2012 which provides for penalties against foreign financial institutions that engage in significant financial transactions with Iran's central bank. Further secondary sanctions on the provision of significant support to Iran's energy, shipping, shipbuilding sectors or the provision of insurance and reinsurance or refined petroleum products to Iran, which apply under other congressional acts, are due to expire in July 2018 unless the waivers are renewed.

But Iran has its own JCPOA hawks, and the risk is that an abrogation of the JCPOA by the US through a failure to renew the NDAA waivers in May will provide just the excuse they are waiting for to precipitate an Iranian reaction that effectively ends the JCPOA as a meaningful deal.

Caught in the Middle

That concerns the European Union greatly. The EU sees the JCPOA as the most effective way to stop Iran obtaining a nuclear weapon, and precipitating a nuclear arms race in the Middle East that will potentially involve Gulf Arab states, Turkey as well as Israel. As the EU points out, the IAEA has repeatedly confirmed substantial Iranian compliance with the terms of the deal. More immediately, however, it could see European companies that have chosen to engage with Iran since Implementation Day exposed to US secondary sanctions for the first time.

The US did not relax its own self-denying sanctions preventing US persons dealing with Iran after Implementation Day; only the secondary sanctions affecting non-US persons. By contrast the EU lifted most of its general restrictions on trade with Iran except for those on controlled good or remaining designated persons. As a result, European companies that have been able to find means of getting paid (not an easy task when US dollar transactions are still proscribed) have engaged with Iran more enthusiastically—a fact that is no doubt not lost on a President currently jostling with the EU over aluminum tariffs. Any unilateral re-imposition of US secondary sanctions could impact these European companies significantly. The recent application of US secondary sanctions against certain Russian companies and oligarchs illustrates some of the problems that this can cause.

Historically the threat of a divergence between the US and EU over Iran has never been a problem. The two have managed to proceed in concert with each other so that US sanctions which unilaterally sought to regulate or restrict trade and investment activities carried out by persons outside the US were mirrored by the EU's own regulations and restrictions on what EU persons are able to do. But there are earlier precedents for transatlantic fallings out over the extraterritoriality of US sanctions.

In the 1980s the US imposed sanctions on companies doing business on a Russian pipeline in Eastern Europe, provoking a diplomatic falling out. And in 1996 the Helms-Burton Act, which, amongst other things, imposed penalties upon non-US persons "trafficking" in Cuban property formerly owned by US persons, provoked a furious response from the EC which launched blocking legislation and a WTO panel investigation alleging that the extraterritorial restriction of trade between the EC and Cuba breached various provisions of the GATT and GATS. The US countered that it was prepared to rely on the rarely used national security exemption in the GATT. The dispute was only withdrawn after high level political compromise. 

But the prospect of a large scale transatlantic trade dispute over Iran occurring at the same time as a US-EU dispute over US aluminum tariffs and extraterritorial Russia sanctions is deeply concerning for the EU.

To that end the EU has even been looking at further potential sanctions against Iran for ballistic missile activities. The rather circular logic is that new sanctions might persuade President Trump that the EU is being tough enough on Iran to renew the waivers in May and may actually save the Iran deal. The EU recently renewed its existing human rights sanctions against Iran, which date back to 2011 and which impose asset freezes and bans on exports of equipment which might be used in internal repression.  However, a recent meeting of EU foreign ministers failed to reach any agreement on the imposition of new sanctions against Iran.  The clock continues ticking towards May 12.

The Dispute Settlement Process

So what would happen if the US failed to renew the waivers of the NDAA sanctions that expire in May? The JCPOA obliges the US not only to cease the application of its secondary sanctions program but to "continue to do so." A failure to renew the waivers could therefore in theory amount to a breach of the terms of the agreement. Iran could then refer the issue to the JCPOA dispute settlement mechanism, which is a largely consensual process.

The question of US compliance would first be considered by the Joint Commission established under Annex IV of the JCPOA, which consists of the participants from each JCPOA signatory (including Russia and China). The Joint Commission must make decisions by consensus, which would presumably mean that no decision would be made confirming US non-compliance (or no decision would be made within the mandated 15 days). This would then presumably precipitate an escalation to the next level; an Iranian referral of the question of US compliance to a three person advisory board. The board would consist of one person appointed by each of the US and Iran and a third independent person appointed by the first two.

The advisory board can issue a non-binding opinion on the compliance issue and must do so within 15 days. The Joint Commission will then consider the non-binding opinion for a further 5 days to try to resolve the dispute by consensus again. If the dispute has not been resolved to Iran's satisfaction, and if Iran deems the refusal to renew the NDAA waivers as "significant" non-performance, Iran could at that point treat the unresolved issue as grounds to cease performing its commitments under the JCPOA in whole or in part and/or notify the UN Security Council that it believes the issue constitutes significant non-performance.

A referral to the UN Security Council would mean that it must vote on whether to continue the sanctions relief provided by UN Security Council Resolution 2231 (2015) which endorsed the JCPOA and disapplied six previous UN resolutions imposing sanctions against Iran. Under the JCPOA dispute resolution mechanism and Resolution 2231 itself, unless the UN Security Council votes in favor of continuing the sanctions relief, the six former UN resolutions will "snap back" into force automatically. As a veto wielding permanent member of the UN Security Council, the US could, therefore, force the snap back of previous UN sanctions simply by exercising its veto.

Diplomatic Manoeuvres

There are clearly options and opportunities throughout this process for diplomacy and deal making to vary the procedure above. Whilst Iran has already hinted, most recently through its Foreign Minister Javad Zarif, that it would probably react by restarting production of enriched Uranium, it might nonetheless choose to use the fact that some of the waivers expire in May and others in July to bide its time before actually withdrawing from the deal.

It could perhaps choose to take the process through the Joint Commission and advisory board stages, until it reached a point at which it could claim that the unresolved dispute was US non-performance. That point would be reached in mid to late June. It could then refrain from referring the dispute to the Security Council and perhaps even confirm its continued performance (for the time being) despite the lapse of US waivers in May. That would avoid an automatic "snap back" of UN sanctions, or the risk that the US could treat an Iranian abrogation as non-performance and refer the matter to the Security Council itself.

Iran could then utilize the remaining weeks before the next US waivers expire to rally support from concerned EU signatories, perhaps even relying on a potentially positive advisory board opinion, to garner diplomatic sympathy for its position. It would then have a further opportunity to go through the JCPOA dispute resolution process in July if those diplomatic efforts failed and the other waivers were not renewed.

Of course, it is equally possible that Iran's own hardliners gratefully accept any failure to renew waivers in May as the excuse that they have been waiting for to finally tear up the deal. No-one can rule out a last gasp left-field intervention from the US President himself that changes everyone's calculations.

No doubt such diplomatic brinksmanship will cause investors and exporters to Iran to be reaching for their contracts and examining any "snapback" provisions. Would a limited US re-imposition of NDAA secondary sanctions, in the absence of any other secondary sanction re-imposition—let alone any EU sanctions or UN sanctions—constitute a "snapback?" The answer, of course, will depend on what sort of trading relationship is concerned and how the actual clause is drafted. Some are drafted very mechanically requiring specific events to occur; others are more subjective and only require one party to reasonably consider their position is affected by unspecified sanctions. As ever, close attention is required before making any decisions about terminating contracts.

But it is clear that the coming weeks and months will be a rollercoaster ride for all affected.

Photo Credit: Wikicommons

Trump Stance on JCPOA Nuclear Deal Poses Legal Dilemmas for Iran

With the May 12 deadline for the issuing of key sanctions waivers as part of the Iran nuclear deal fast approaching, what could be the impact of the collapse of the 2015 agreement? While Donald Trump's conditions for the review of the current arrangement have yet to be met and Iran's clear rejection of any amendments to the plan, the breakdown of the Joint Comprehensive Plan of Action (JCPOA) seems inevitable.

The nuclear deal is the most important multilateral agreement reached in the global nuclear non-proliferation system in the last decade. It is now at risk of collapse.  There are three options for Iran should the US withdraw from the JCPOA.

First, Iran could exit the deal immediately and continue to fulfill the obligations under NPT and to the IAEA based only on the safeguard agreements with the agency. This is seen as the worst case scenario by the EU, E3 and the IAEA.

Second, Iran could exit the deal immediately, but continue to fulfill its commitments to the International Atomic Energy Agency (IAEA) based on both safeguard agreements with the IAEA agreed as part of the JCPOA and its preceding agreement, the Joint Plan of Action (JPOA). Under these safeguards Iran has suspended enrichment of uranium to 20 percent.  

Third, Iran could opt to remain  in the deal on the basis that the European Union and E3 (UK, France and Germany) will provide additional  benefits to Iran to compensate for the negative effects of US withdrawal.Iran’s deputy foreign minister, Abbas Araghchi, one of the key architects of the JCPOA, has stated that as long as Iran continues to benefit from a removal of sanctions, it will remain committed to the deal, but has expressed doubts that the France, Germany and the UK will be able to guarantee Iran’s interests in the absence of the United States.

Regardless of which route Iran takes, the withdrawal of the United States from the JCPOA will have a legal impact on its parties. Any possible change in the partnership or the provisions of the agreement will be reflected within the domain of international law.

The Threat of Snapback

Trump has threatened not to issue the crucial waivers that have suspended US secondary sanctions on Iran. On May 12, Iran may find itself in a position not of its own making. Despite unprecedented international monitoring and scrutiny of its nuclear program, and despite the IAEA's approval of its commitments without the slightest deviation for military purposes, it may once again face significant economic sanctions, even over the vital sale of its oil. However, snapback of US secondary sanctions could actually preclude snapback of UN sanctions, if the deal remains intact following Trump’s withdrawal.

One of the provisions of the JCPOA, unprecedented in the 70-year history of the Security Council, is the decision-making process of the partners required to resume sanctions. According to Article 37 of the JCPOA, if the dispute resolving mechanism is unsuccessful, the UN Security Council will vote on a resolution to continue the lifting of sanctions.

In such a case, the United Nations Security Council would vote for a resolution to suspend sanctions. As described in a recent report by Stephen Mulligan, an attorney with the Congressional Research Service:

The ‘snapback’ mechanism thus places the onus on the Security Council to vote affirmatively to continue to lift its sanctions by stating that those sanctions will be implemented automatically unless the Security Council votes otherwise. As a permanent member of the Security Council, the United States would possess the power to veto any such vote and effectively force the reinstatement of the Security Council’s sanctions on Iran.

In this process, the vote of all five permanent members of the Council is critical. If one of these members does not agree with the suspension of sanctions, it alone can easily restore a series of Council sanctions under Article 41 and Chapter 7 of the United Nations Charter (threats to global peace and security).

However, if the United States pulls out of the JCPOA, triggering the snapback of its secondary sanctions against Iran, it may lose the ability to use the UN sanctions snapback threat which is articulated with Article 37 under JCPOA. In other words, only parties to the Iran deal are able to trigger the UN nuclear sanctions snapback procedure. If the US withdraws from the deal, it loses the ability to trigger this mechanism.

This would be a reprieve for Iran, but there are further legal pathways that should be considered in order to prevent more damages by the US to the non-proliferation regime and international law.

Recourse to the International Court of Justice

The IAEA has verified in eleven reports that Iran has fully complied with its commitments under the nuclear agreement. On this basis, Iran feels it is facing punishment without justification.

Iran can, on the basis of Clause 2 of Article 21 of the Treaty of Amity, Economic Relations, and Consular Rights (1955), file a complaint with the International Court of Justice (ICJ) against the United States on the basis that it has had a detrimental effect on its business and trade with other countries. 

Punishing Iran with various economic sanctions, including the vital sale of its oil, may result in Iran’s withdrawal or limited implementation of its political commitments under JCPOA. Depending on whether Iran completely abandons JCPOA or suspends some of its commitments under the agreement, it means the end of the current inspections and the IAEA's ability to continue a complete and unprecedented monitoring of Iran's nuclear program. The result is the inability of a United Nations agency to carry out its mission.

The current situation has created a legal impediment, despite the wishes of Iran, for the IAEA and the members of its board of governors including the United Kingdom, France and Germany. According to the definition of the Vienna Convention on the Law of Treaties 1969, the JCPOA is not considered to a treaty, under which definition a violation would result in a case directly taken as a complaint to the International Court of Justice. 

However the IAEA is an agency authorised by the UN and if it cannot reciprocate with its obligations to a UN member state that has been in compliance with the nuclear agreement (Iran) due to the interference of a third country, the IAEA can, on the basis of Article 96 of the UN Charter, and Clause 1 of Article 65 of the Statute of the International Court of Justice, for the first time in its history, resort to the ICJ for an advisory opinion on the legal status of the JCPOA.

There is some precedent for such a request by an international organization like the IAEA. The World Health Organisation has taken a similar action on threats to the use of nuclear weapons in armed conflict, requesting a referral from the International Court of Justice. The ICJ’s response would not be legally binding but it would be a new source of international law, and may be considered by the other parties to the nuclear agreement as an official advisory about their treatment of deadlock with the United States.

The JCPOA is an improbable achievement, an agreement reached after Iran had been subjected to the harshest sanctions regime ever imposed. In political practice and in the domain of international law, the JCPOA provides a new way of resolving disputes in support of the nuclear non-proliferation regime.  the agreement collapses it would be, as in the words of Yukiya Amano, Director General of the IAEA, a “great loss for nuclear verification and for multilateralism” and in my view also for international law more generally. 

Photo Credit: Wikicommons

Can Blocking Regulations Help Europe Protect Its Iran Business From Trump?

In the last week, European business leaders and policymakers have grown more vocal about the possibility that the European Union would employ blocking regulations to protect European businesses from the reach of US secondary sanctions on Iran. These regulations would penalize European companies for complying with secondary sanctions, which may snapback if the Trump administration decides to withdraw from the Iran nuclear agreement.

Total CEO Patrick Pouyanné became the first high-profile European executive to publically call for such measures to be considered, disclosing that Total has been in discussions with French and European authorities about “means to protect investments already made in Iran, even in the case of the return of sanctions.”

Speaking at a conference in Paris last week, Denis Chaibi, head of the Iran Task Force of the European External Action Service, stated that the EU was “looking at a number of possibilities” regarding the regulations.” In his assessment, “it is not complicated to do it legally in that the legal instrument exists, but it doesn’t require a huge internal debate,”

These public statements come as European concerns grow regarding the Trump administration's ultimatum to “fix” the Joint Comprehensive Plan of Action. The critical deadline is May 12, when the United States will need to once again waive its secondary sanctions on Iran. Failure to do so would see secondary sanctions “snapback,” exposing European companies to extraterritorial penalties for their commercial activities in Iran.  

But even if the European Union finds the political will to reinstitute blocking regulations in the event of snapback, it is unclear whether they fully effective as a standalone measure to protect European trade and investment in Iran. Blocking regulations are a legal mechanism which seeks to mitigate the extraterritorial effects of sanctions under Public International Law (PIL), the body of law that governs relations between sovereign states and their unions, such as the European Union.

International trade attorney, Edward Borovikov, managing partner at the Brussels office of Dentons, a global law firm, notes that under international law “Sovereign states are expected to exercise moderation and restraint if their legal acts may affect vital economic and commercial interests of another state. But sometimes states violate the principle of restraint for their own national security considerations.” The snapback of secondary sanctions by the Trump administration would represent once such case. In such situations, “there is no efficient and universal legal avenue under PIL to challenge such non-compliance,” says Borovikov.

While the World Trade Organization (WTO), which was established under the authority of PIL, may seem a venue to challenge extraterritorial sanctions which restrict trade in goods and services, it is unlikely Europe would be able to successfully challenge the snapback of U.S. sanctions under the WTO’s legal authority.

Article XXI of the General Agreement on Tariffs and Trade (1994) declares that nothing in WTO rules will “prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” Borovikov explains that this exemption “means that member states can depart from WTO commitments on trade in goods and services” and points out that while there have been several attempts to bring to WTO adjudication disputes on the application of national security exemptions, “none of the cases ended with conclusive guidance.”

In 1996, the European Union began a dispute process against the United States with regard to extraterritorial sanctions against Cuba. This dispute reached the state of WTO consultations. But ultimately, the EU and US reached a political solution in which the US assured that its secondary sanctions would not be enforced upon European companies. The WTO case was suspended.  

The political solution was necessary for a simple reason. “Even if the WTO had found in the favor of the EU, deciding that the national security exemption did not apply, the United States was never going agree with a WTO’s interpretation of its national security requirements,” observes Borovikov. “The idea that the United States would comply with WTO recommendations in such a situation is hard to believe.”

Given the dead end presented by the WTO dispute avenue, the EU has sought legal mechanisms that rely on the legal authority of the union and its member states. The legal act is the 1996 EU Blocking Regulation. This regulation was established in response to US sanctions on Iran, Cuba, and Libya. The regulations prohibit EU entities and courts from complying with foreign legal acts, such as sanctions laws, listed in an annex. Borokivov explains that “in principle any new extraterritorial laws of any third country may be added to the Annex and indeed help EU persons to continue business with a sanctioned third country.” However, the past success of such regulations in enabling European companies to continue conducting business in these jurisdictions such as Iran was the result of political rather than legal influence.

Borovikov warns that these blocking regulations “cannot provide full protection from secondary sanctions because if the EU persons doing business in the US start economic activities in the Iran, they are at risk of being penalised under the US sanctions regime.” Even if the European Union seeks to penalize its companies for complying with US sanctions, “it is clear that a lot of EU companies would simply face a dilemma between doing business in the US or Iran and where to accept the penalty,” he says.

Given the fact that the US market both frequently offers more attractive economic opportunities and poses more severe penalties and consequences for non-compliance with US law, most companies are likely to wind down their Iran operations and pay any penalties that the EU or their national governments may levy under the blocking regulations.

However, the discussion about blocking regulations is nonetheless worthwhile. Borovikov notes that the prospect of such regulations has in the past played “an important role in bringing about an acceptable solution. The regulations are secondary to the political process between the US and EU and its member states that will hopefully lead to an understanding on Iran business.”

Ellie Geranmayeh of the European Council on Foreign Relations, echoes this assessment: "The threat of reviving the EU blocking regulation in itself can be a useful political tool for Europe to create a cost for the Trump administration and make it think twice about its actions." Moreover, while the blocking regulations may only be partially effective for major multinationals, they can "provide an avenue for smaller-medium sized companies in Europe and Asia that have little or no US exposure to continue conducting business in Iran in non-dollar currencies," says Geranmayeh. 

Multinational executives seem to agree. In a recent survey conducted by Bourse & Bazaar and commissioned by International Crisis Group, a substantial 54 percent of senior executives indicated that “assuming Iran remains committed to the nuclear deal,” blocking regulations, which would protect companies from U.S. penalties, would positively affect the “decision to invest in Iran.” 

Blocking regulations can serve an important role as part of the suite of political, legal, and commercial measures that can be employed by European governments to protect their businesses from the consequences of snapback. At a time when the economic quid-pro-quo that underpins the nuclear deal is under threat, each and every such measure ought to be considered. 

Photo Credit: WTO