Snapback Begins: Re-Imposition Of Iran Sanctions - Export Controls & Trade & Investment Sanctions

On August 6, 2018, President Trump signed an executive order ("New Iran E.O.") directing the Secretaries of State and the Treasury to re-impose sweeping sanctions on Iran, effecting the policy announced on May 8, 2018, to terminate the United States' participation in the Joint Comprehensive Plan of Action (JCPOA), commonly referred to as the "Iran nuclear deal." The New Iran E.O. "snaps back" the powerful secondary sanctions — meaning sanctions against non-U.S. persons for activity outside the United States — that the United States had imposed prior to the Iran nuclear deal against significant industry sectors, companies, and individuals in Iran.

The key takeaways are:

The New Iran E.O. and the snap back of the Iran sanctions take effect in two phases: on August 7, 2018 (90 days after the President's May 8 announcement) and on November 5 (180 days after).
The sanctions snap back overwhelmingly targets European, Asian, and other companies via the threat of secondary sanctions against non-U.S. persons (individuals and entities) that continue to engage in most trade with Iran. U.S. persons already were prohibited from most dealings with Iran, even under the Iran nuclear deal.
The first phase of the snapback targets Iran's trade in gold and precious and other metals, certain U.S. dollar or Iranian rial transactions, dealings in Iranian sovereign debt, and Iran's automotive sector.
The second phase of the snapback in November will represent by far the most powerful phase, as it targets Iran's financial sector, including its Central Bank and leading state banks; its energy sector, including oil exports; and its port operators and shipping and shipbuilding sectors.
The November phase of the snapback also will prohibit U.S.-owned or -controlled subsidiaries in other countries from most dealings with Iran — which will cause conflicts for businesses around that world in jurisdictions that support such trade, particularly in Asia and the European Union, the latter of which has updated its "blocking statute" to combat the U.S. sanctions. This second phase also is expected to return hundreds of powerful Iranian individuals and entities onto the U.S. Government's blacklist — maintained by the Treasury Department's Office of Foreign Assets Control (OFAC) — meaning that third-country companies risk sanctions or other significant penalties if they deal with anyone on that list.
The Trump Administration has vowed to strictly enforce the sanctions, raising the specter of hefty fines, cutoffs from the U.S. market, and other penalties for companies worldwide that run afoul of the sanctions.

The first phase of the snapback outlined in the New Iran E.O., which took effect on August 7, covers sanctions related to Iran's trade in gold and precious metals; the sale or transfer of certain metals; transactions involving the sale or purchase of rials; the issuance of Iranian sovereign debt; the purchase or acquisition of U.S. dollars by Iran; and Iran's automotive sector. The second phase of the New Iran E.O. provides for the November 5, 2018 snapback of the remaining sanctions that were lifted under the JCPOA regarding Iran's oil exports and energy sector; financial institutions conducting transactions with Central Bank of Iran; Iran's port operators and shipping and shipbuilding sectors; insurance; and financial messaging involving Iranian banks.

The New Iran E.O. has significant implications for non-U.S. persons and entities that engage in certain activities with Iran. As President Trump tweeted on August 6 with the first set of snapback sanctions: "Anyone doing business with Iran will NOT be doing business with the United States." This has caused the European Union (EU) to update its so-called blocking statute to prohibit individuals and entities within its jurisdiction from complying with the new U.S. sanctions, resulting in a complex conflicts of law landscape for businesses that fall within the scope of both the EU blocking statute and the U.S. secondary sanctions re-imposed by the New Iran E.O.

Background

Under the JCPOA implemented on January 16, 2016 ("JCPOA Implementation Day"), the United States waived numerous secondary sanctions targeting Iran's nuclear development activities, and also allowed foreign subsidiaries of U.S. companies to engage in Iran-related transactions under certain conditions. (For background on the JCPOA, see our prior client alert.) Unlike OFAC's primary sanctions that are potentially applicable when there is a U.S. nexus to a transaction (e.g., export of U.S.-origin goods or use of the U.S. financial system), secondary sanctions target conduct outside the United States without any U.S. nexus.

In conjunction with the JCPOA termination announcement on May 8, the President issued a National Security Presidential Memorandum (NSPM) directing the Secretaries of State and the Treasury to prepare immediately for the re-imposition of all U.S. sanctions lifted or waived in connection with the JCPOA. To fulfill the NSPM, wind-down periods of 90- and 180-days were instituted, after which the United States would authorize sanctions for any continued Iran-related transactions by non-U.S. persons. The 90-day wind-down period ended on August 6, 2018, and the 180-day period ends November 4, 2018, meaning that any relevant transactions with the relevant Iranian industries or companies after those periods would be sanctionable.

August 7, 2018, Sanctions Snapback

Effective August 7, 2018, the U.S. government re-imposed sanctions related to the following:

The purchase or acquisition of U.S. dollar banknotes or precious metals by the Government of Iran;
Iran's trade in gold and precious metals;
The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals, such as aluminum and steel, coal, and software for integrating industrial processes;
Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
Iran's automotive sector.

The U.S. government has also revoked the following JCPOA-related authorizations under U.S. primary sanctions regarding Iran:

Importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions; and
Activities undertaken pursuant to specific licenses issued with respect to the export of commercial passenger aircraft to Iran.

November 5, 2018 Snapback

Effective November 5, 2018, sanctions related to the following will be re-imposed:

Sanctions on Iran's port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, and their affiliates;
Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
The provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
The provision of underwriting services, insurance, or reinsurance; and
Iran's energy sector.

In addition, effective November 5, 2018, the U.S. Government will revoke the authorization for U.S.-owned or -controlled foreign entities to wind-down certain activities with the Government of Iran or persons subject to the jurisdiction of the Government of Iran that were previously authorized pursuant to General License H that allowed foreign subsidiaries of U.S. companies to engage in transactions with Iran (provided that such transactions did not have a U.S. nexus).

Furthermore, no later than November 5, 2018, OFAC will re-impose, as appropriate, the sanctions that applied to persons removed from the list of Specially Designated Nationals and Blocked Persons (SDNs) on JCPOA Implementation Day.

Enforcement

OFAC, the agency with primary U.S. sanctions enforcement authority, has emphasized that any person who engages in sanctionable activity will be targeted aggressively. OFAC has also advised that persons engaging in the activities that were subject to JCPOA waivers must take the steps necessary to avoid exposure to sanctions or an enforcement action under U.S. law. Specific sanctions that the United States can impose depend on the underlying conduct, but range from monetary penalties to designation as an SDN. Further, foreign financial institutions that engage in sanctionable conduct risk being excluded from access to correspondent banking accounts in the United States.

Payment for Transactions Completed Before Wind-Down

OFAC's guidance provides that persons can receive payment for a transaction fully completed before the end of the applicable wind-down period without risk of being subject to U.S. sanctions, provided that the transaction was: (i) undertaken pursuant to a written contract or written agreement entered into before May 8, 2018, and (ii) consistent with U.S. sanctions in effect at the time.

NDAA Implications for Foreign Financial Institutions

Section 1245 of the NDAA requires that the President block the property and interests in property subject to U.S. jurisdiction of all Iranian financial institutions, including the Central Bank of Iran ("CBI"). It also seeks to reduce Iranian oil revenue and discourage transactions with the CBI by providing for sanctions on foreign financial institutions that knowingly conduct or facilitate certain significant financial transactions with the CBI. Before waiver of the NDAA sanctions under the JCPOA, countries that purchased oil from Iran could receive a presidential waiver to continue purchasing oil from Iran based on a State Department determination that they had made efforts to significantly reduce imports of Iranian oil. Prior to JCPOA Implementation Day, the United States had granted waivers to various countries for significantly reducing their crude oil purchases from Iran, including ten EU member states and several Asian countries such as Japan, South Korea, India, and China. The NDAA waivers were valid for 120 days, subject to renewal.

The NDAA sanctions will be re-imposed on November 5, 2018, and the United States will again pursue efforts to reduce Iran's sales of oil under the NDAA. OFAC indicated in its guidance that the State Department "will evaluate and make determinations with respect to significant reduction exceptions ... at the end of the 180-day wind-down period. Countries seeking such exceptions are advised to reduce their volume of crude oil purchases from Iran during this wind-down period." The State Department will consider a variety of factors in making its determinations, including the quantity and percentage of the reduction in purchases of Iranian crude oil, the termination of contracts for future delivery of Iranian crude oil, and other actions that demonstrate a commitment to decrease substantially such purchases.

The European Reaction

Following the JCPOA Implementation Date, EU firms began investing in Iran, and these investments cumulatively totaled approximately €20 billion, according to media reports.¹ Many of these investments, such as those in the energy, shipping, and automotive sectors, are covered by the re-imposed sanctions. As a result, the investing companies, and foreign financial institutions financing such transactions, must now confront significant U.S. sanctions risk following sanctions snapback.

The New Iran E.O. was immediately countered by the European Union's so-called "blocking statute", i.e., the EU amended its existing Council Regulation (EC) No 2271/96 through the adoption of the EU Commission Delegated Regulation (EU) 2018/1100, which entered into force on August 7, 2018. The blocking statute in particular:

Forbids EU persons from complying with extraterritorial effects of the U.S. sanctions listed in the blocking statute's annex, which now contains the provisions that are the subject of the August 7 and November 5, 2018, snapback discussed above;
Blocks EU authorities and courts from recognizing and enforcing U.S. sanctions judgments; and
Allows for recovery of damages arising from violations of the blocking statute.

Upon application and in exceptional cases only, the EU Commission may grant an authorization allowing the applicant to comply with the U.S. sanctions covered by the blocking statute. To obtain such an authorization, the EU person needs to demonstrate that its interests or those of the EU would be seriously damaged by not complying with specific provisions of the listed U.S. sanctions laws. The EU Commission has adopted Commission Implementing Regulation (EU) 2018/1101 which contains a non-exhaustive list of criteria it will consider in its assessment of whether the requested authorization may be granted, including:

Whether measures could be reasonably taken by the applicant to avoid or mitigate the damage;
Whether the applicant would face significant economic losses, which could, for example, threaten its viability or pose a serious risk of bankruptcy; or
The security of supply of strategic goods or services within or to the EU or a Member State and the impact of any shortage or disruption therein.

According to a guidance note published by the EU Commission, the blocking statute applies to EU subsidiaries of U.S. companies that are formed in accordance with the law of an EU Member State and have their registered office, central administration, or principal place of business within the EU. The EU Commission also notes that branches of U.S. companies are not subject to the blocking statute. The guidelines further indicate that applying to the United States for a license to obtain an exemption from the U.S. sanctions would already be a violation of the blocking statute, but that discussions with OFAC are allowed, for example, when undertaken to prepare an application for authorization with the EU Commission under the blocking statute. However, it is important to note that, while the guidance note issued by the EU Commission provides some clarification, only the text of the blocking statute is binding. The interpretation and enforcement of the blocking statute is left to the Member States' authorities and courts in the first place and, ultimately, to the European Court of Justice.

Separate from the blocking statute, but also on August 7, 2018, the EU expanded the European Investment Bank (EIB) mandate to enable the EU's independent development bank to foster investments in Iran (Commission Delegated Decision (EU) 2018/1102). Under the mandate, the EIB can provide financing that is specifically backed by an EU budget guarantee. This instrument is designed to allow in particular small and medium-sized companies to make investments in Iran. The expanded mandate, however, does not oblige the EIB to provide financing for Iran-related projects and it is unlikely that the EIB will do so in the short term. Rather, the bank emphasized that it cannot risk being excluded from raising money on U.S. markets.

Ultimately, the success of the EU counter-measures in shaping the behavior of EU companies remains less than clear and will particularly depend on how vigorously violation of the blocking statute will be pursued by Member State authorities and aggrieved persons. Given the little impact of the blocking statute since its initial adoption in 1996, EU companies may still be more concerned about U.S. sanctions risk than the requirements of the blocking statute. European officials are also likely to further pursue political options. In the short term, however, European companies face uncertainty and challenges in responding to the New Iran E.O. and, at the same time, complying with the requirements under the EU blocking statute.

Expanded Scope of Sanctions under August 6, 2018 Executive Order

The New Iran E.O. broadens the scope of sanctions in effect prior to the JCPOA. In addition to other sanctions that may be imposed on or after November 5, 2018 on persons who have knowingly engaged in certain transactions involving petroleum, petroleum products, or petrochemicals, the New Iran E.O. also allows the U.S. Government to: (1) deny visas to corporate officers, principals, or controlling shareholders of sanctioned persons, and (2) prohibit U.S. persons from investing in or purchasing "significant amounts" of equity or debt instruments from sanctioned persons.

Additionally, on top of the other restrictions that will snapback on U.S.-owned or -controlled foreign subsidiaries in November, the New Iran E.O. prohibits such subsidiaries from transacting with persons blocked for (1) providing material support for or goods and services in support of Iranian persons on OFAC's SDN List and certain other designated persons, or (2) being part of the energy, shipping, or shipbuilding sectors of Iran, or a port operator in Iran, or knowingly providing significant support to certain other blocked persons.

Other Considerations

Because the Trump Administration does not have the support of the other JCPOA participants (China, France, Russia, Germany, the United Kingdom, and the EU), it remains to be seen how vigorously these countries — particularly China and Russia — continue business with Iran, despite the threat of severe U.S. sanctions. It is also more than likely that additional U.S. sanctions against Iran may be imposed, either by the President or the Congress.

It is clear that the United States intends to aggressively enforce its Iran sanctions. Companies engaged in Iran-related activities must carefully evaluate their transactions and undertake appropriate measures to cease such activities or otherwise risk being subject to U.S. sanctions. In addition, companies that are also subject to the EU blocking statute need to address the conflicts of law issues arising from the counter-measures adopted by the EU.

Footnote

1 Reuters, EU considers Iran central bank transfers to beat U.S. sanction (May 18, 2018), available at https://www.reuters.com/article/us-iran-nuclear-europe/eu-considers-iran-central-bank-transfers-to-beat-u-s-sanctions-idUSKCN1IJ100.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.