Iran sanctions applicable to EU-based companies

The partial lifting of EU and U.S. sanctions against Iran in January has received much publicity. For EU companies the restrictions are now much lighter than previously, while for their U.S. competitors Iran remains largely off-limits. However even for EU companies, some EU sanctions remain, and the long-arm of U.S. sanctions still needs to be considered. This note sets out the key considerations for EU companies and persons. 

What happened to the Iran sanctions on January 16, 2016? 

On January 16, 2016, Iran was deemed to have met its commitment to take certain steps to decommission its nuclear weapons program. This triggered the easing of sanctions against Iran by the EU, U.S. and UN, marking major step in unwinding Iran’s decade-long economic isolation from the international community. 

Despite the reduction in sanctions restrictions, both the EU and U.S. still have sanctions against Iran and, companies and individuals, should continue to exercise caution with respect to any dealings involving Iran; the road is not clear yet! 

Could Sanctions “Snap-Back”? 

Snap-back is a possibility although our current view is that it is unlikely to be applied. The JCPOA (the deal struck with Iran in July 2015) provides that, should Iran engage in behavior which another participant to the deal believes amounts to “significant non-performance of its obligations”, there is a “Snap Back” clause which would see the UN (and the U.S. and EU) reinstate sanctions against Iran¹. While this eventuality cannot be excluded, especially with both Iran and the U.S. holding elections this year with the possibility of a change in the position of the governments of those countries, the political implications of this are such that it would be unlikely to be invoked in anything short of extreme default by Iran. 

The JCPOA itself does not contain any grandfathering provisions. However the EU Decision has provided that “in case of the reintroduction of Union sanctions, adequate protection for the execution of contracts concluded while sanctions relief was in force will be provided”. The White House, by contrast, has explicitly stated that “there is no grandfather clause in the JCPOA…there are no exemptions from our sanctions for long-term contracts”² . 

EU sanctions: what prohibitions still apply? 

Under EU law, remaining prohibited activities include trading with Iranian entities and individuals in items (for use in Iran) related to (i) military goods and technology³; (ii) military or missile-related dual-use items⁴ (or manufacture thereof); and (iii) items which may be used for repression. It is prohibited to make funds or other economic resources available to listed persons and entities (or entities owned or controlled by them) who remain subject to an EU asset freeze. The list of asset-freeze targets is much reduced, but still substantial. EU sanctions: when do you need a license? Additionally, certain activities require approval from the UN and/or from the relevant EU member state authority. 

UN approval is generally concerned with the more “high profile” activities such as the trade of items on the Nuclear Suppliers Group List⁵ (“NSG List”) which includes all items specifically designed for use, or with potential use, in the nuclear fuel cycle. (Applications to the UN have to be made by national authorities if they receive an application concerning such items, and should not be made directly by exporters). 

EU Member State licenses (which are also required for the trade of any items on the NSG List) are required for the trade of certain items, including but not limited to: (i) other items with potential use in the nuclear fuel cycle⁶; (ii) Enterprise Resource Planning software designed for use in nuclear and military industries⁷; (iii) graphite and certain raw and semi-finished metal; (iv) items which might be used for monitoring or interception of Internet or telephone communications; (v) items which may be used for WMD, military or Iranian Revolutionary Guard Corps purposes; and (vi) in most EU Member States, marine vessels, aircraft and their components. 

In addition, all exports of Dual-Use items from the EU, previously prohibited by sanctions, now require a license (as they would to any other destination). 

In certain circumstances, EU Member State authorities may also grant licenses allowing for transactions with listed persons or entities. 

U.S. sanctions on Iran – still there, and still relevant to EU companies 

U.S. “primary” sanctions (i.e., those that apply to U.S. persons and U.S. companies) have not changed very much: they continue to broadly prohibit U.S. companies and nationals from most transactions with Iranian entities and persons, although a few specific derogations have been issued. 

These sanctions may still be relevant to non-U.S. companies who: 

• transact in U.S. Dollars (since such transactions will be cleared via a U.S. correspondent bank to whom U.S. law applies); 
• export U.S. origin goods, or goods incorporating over 10% U.S.-origin controlled components, to Iran; or 
• employ U.S. persons (strictly U.S. law applies to such persons, but that in turn has implications for the employers of such persons). 

U.S. “secondary sanctions” (i.e., laws by which U.S. can essentially penalize non-U.S. persons or entities for dealing with Iran, even where there is no U.S. connection) have been reduced, but still exist. In particular, an EU entity who transacts with an Iranian Designated Persons (“DP”) and Specially Designated National (“SDN”) may still be subject to sanctions. 

EU companies with a U.S. parent 

While U.S. sanctions continue to prohibit U.S. nationals and U.S. persons from dealing in Iran, non-U.S. subsidiaries of U.S. companies are now authorized, by virtue of “General License H” to engage in most Iranian Activities provided that certain conditions are met such as setting up a firewall. 

The “upflow” of dividends/profits from such an arrangement is permitted provided that the activities which the non-U.S. subsidiary engages in are permitted under General License H. 

OFAC aims to permit U.S. persons to be involved in the initial determination to engage in activities with Iran, but not in the Iran-related day-to-day operations of their non-U.S. subsidiaries including “approving, financing, facilitating or guaranteeing any such transaction by the subsidiary”. 

How Dechert can help 

Dechert’s International Trade team is available to advise on all aspects of international sanctions. We are based primarily in our London and Washington D.C. offices, but with experts in many of our other offices, including most EU offices. In addition to offering high quality commercially focused legal advice, many of our team have worked previously in sanctions development, negotiation, licensing and enforcement in various bodies, including the European Commission, HM Treasury and OFAC in the United States, and bring that practical understanding and experience to our clients. 

We advise on all aspects of sanctions, including helping clients to develop compliance policies, advising on structuring specific transactions to ensure sanctions compliance, engaging with national sanctions authorities, conducting internal investigations, and defending enforcement actions. 

Footnotes

_{1) JCPOA Annex V, p.2-5
2) P.14 of “The Iran Nuclear Deal: What you need to know about the JCPOA”.
3) All items in the EU Common Military List.
4) Listed in Annex III of Council Regulation 267/2012. This contains the full list of controlled items established by the Missile Technology Control Regime.
5) The Nuclear Suppliers Group list of controlled items is reproduced in full in Annex I of Council Regulation 267/2012.
6) Listed in Annex II of Council Regulation 267/2012
7) Listed in Annex VIIA of Council Regulation 267/2012.}