Is the End to Iranian Sanctions in Sight?
01 Dec 2015

On July 14, 2015, the U.S., the UK, Russia, China, France, Germany and Iran announced a Joint Comprehensive Plan of Action (“JCPOA”) designed to ensure that Iran’s nuclear program will be exclusively peaceful. The JCPOA will provide Iran with phased sanctions relief upon international verification that Iran has implemented key nuclear commitments outlined in the JCPOA.  Much of the media discourse has focused on what this means for the U.S. as a matter of foreign policy, and whether the deal is a positive development in containing Iran’s nuclear capabilities.   But of course it will have significant commercial implications.   Below we address several key considerations for businesses that may be considering investments in Iran.

Businesses have time to plan for future investment.

No sanctions are being lifted immediately.   This is likely to be a process that could last between six months to a year, or even longer.   What this means is that every business considering investment in Iran has time to obtain legal advice, insurance and to otherwise plan for an orderly investment process.

Under the terms of JCPOA, sanctions relief is conditional on the completion of several stages and approvals.  The deal has passed procedural hurdles in the U.S., the EU, and the UN and it is anticipated that October 18 will be “Adoption Day,” the day when all parties will formally adopt the deal.

Once “Adoption Day” arrives, the onus passes to Iran to begin the dismantling of its nuclear program as required by the deal.  None of the sanctions relief will go into effect until the International Atomic Energy Agency holds inspections and certifies that Iran has implemented the threshold nuclear-related measures described in the JCPOA.  Only upon issuance of that positive report will the parties have reached “Implementation Day,” the name given for the day the sanctions relief will go into effect.   According to a member of the UK negotiating delegation, Iran estimates it will be able to achieve the threshold conditions for Implementation Day in a period of two to three months, but the other parties anticipate a time period closer to four to six months.  Implementation Day is ultimately expected in Q1 or Q2 of 2016 at the earliest.

U.S. Perspective: Iran is still closed to U.S. business. 

The U.S. still considers Iran to be a state sponsor of terrorism.  Accordingly, U.S. sanctions (both primary and secondary) that were imposed in response to concerns about Iran’s funding of terrorism and its human rights violations will remain in place.  In addition, with the very narrow exceptions discussed below, all of the U.S. primary sanctions against Iran will remain in effect.  This means that U.S. companies will continue to be barred from direct investment or commerce with Iran, and Iranian companies will still be denied access to the U.S. financial system.  In addition, any financial transactions involving Iran that are not exempt or permitted by a general or specific government license from the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) will be barred from the U.S. financial system.  OFAC has stated publicly that it will continue its “vigorous” enforcement of sanctions not subject to sanctions relief.

Primary v. Secondary Sanctions

Primary sanctions are those that prohibit the Iranian government, as well as its banks, businesses, and persons from doing any business with U.S. persons or businesses.  They are aimed directly at Iran and prohibit most commercial dealings between the United States and Iran. They derive from the presence in a transaction of some direct U.S. nexus – they either involve a U.S. person or business, or they occur in or through the geographic territory of the United States.  Notwithstanding the JCPOA, U.S. primary sanctions will largely remain in effect, meaning that with very narrow exceptions (discussed below) the U.S. will remain closed to Iranian business. This prohibition extends to the use of U.S. banks to clear U.S. dollar transactions involving Iranian businesses.   In sum, because of primary sanctions, from the perspective of U.S. businesses and people, Iran is still “off limits.”

Secondary sanctions are different.  They do not necessarily involve a U.S. person or company, or a U.S. bank, or the geographic territory of the United States. Secondary sanctions are purely an extension of U.S. foreign policy.  In essence, secondary sanctions gave foreign banks and countries a choice between doing certain kinds of business with Iran, and having access to the U.S. financial system.  This was particularly forceful in the secondary sanctions targeting the Iranian oil sector.  The United States essentially gave other countries an ultimatum: if you continue to buy Iranian oil, your country will be cut off from the U.S. financial system.

The Exceptions:  What Sanctions Will Be Lifted

Certain sanctions – those imposed specifically in response to Iran’s nuclear program – will be lifted.  These include the following:

  • Secondary sanctions imposed on foreign companies and countries that buy or transport Iranian oil or relating to gold, precious metals, and the automotive industry will be lifted (however, those industries will still not be able to access the U.S. financial system to execute U.S. dollar payments underlying those transactions);
    • American companies will be able to acquire licenses from OFAC to sell civilian aircraft and aviation parts to Iran;
    • Foreign subsidiaries of American-owned companies will be permitted to conduct business with Iran with a license from OFAC to do business “consistent with the JCPOA,” whatever that means.   The number and scope of such licenses remains to be seen; and
    • Exports from Iran to the United States of Persian carpets and certain foodstuffs, like pistachios and caviar, will be permitted.

The U.S. government has promised detailed guidance on the sanctions relief prior to Implementation Day.

Sanctions that have been lifted may “snapback” automatically if Iran violates the terms of the JCPOA.

Investors in Iran need to be aware that even sanctions that are lifted may be re-imposed at any time if Iran violates the terms of the JCPOA.   Thus, any business thinking of investing in Iran would be well advised to take precautions, including possibly seeking insurance coverage to protect against potentially catastrophic loss in the event that sanctions “snapback” – that is, are re-imposed – without a wind-down period.  In such a case, new complications could arise as assets and bank accounts get “stuck” in Iran, and ongoing financial transactions are stopped mid-stream.

Discrepancies between U.S. sanctions and international sanctions will present new challenges for global businesses and international financial institutions.

The markets are likely to see a retreat to the status quo ante, when the U.S. was maintaining strong sanctions against Iran, while the EU and other countries permitted much more trade.  The fading of the present global consensus on sanctions means that the sanctions picture is about to become more complicated for everyone, and that U.S. companies will once again be uniquely prohibited from trade with Iran.  The varying sanctions levels will mean that the U.S. banking industry will need to continue its vigilance for international transactions that are globally compliant but violate U.S. law.  Thus, the need for U.S.-centric due diligence to detect and prevent prohibited transactions and the involvement of sanctioned Iranian entities will increase as global prohibitions dissipate.

Issues for U.S. and foreign companies will abound

In addition to the divergence between U.S. and non-U.S. sanctions, there are a number of other issues that will arise when and if the JCPOA reaches Implementation Day.   The revocation of U.S. secondary sanctions relating to the nuclear program means that the U.S. will no longer force other countries to choose between buying Iranian oil and accessing the U.S. financial system.  This will allow Iran to return to global oil markets, certainly the biggest benefit Iran derives from the deal.  However, while the handcuffs on Iran’s oil program have been removed, its oil sales will remained prohibited in the U.S. financial system.  This means that parties buying Iranian oil will either have to conduct transactions in an alternate currency, or employ some sort of barter system.  Second, although secondary sanctions targeting the Iranian oil, precious metal, and automotive sectors will be revoked, not all secondary sanctions will disappear under the JCPOA.  The United States views the Iranian Republican Guard Corps (“IRGC”) as a state sponsor of terrorism, and it appears that secondary sanctions will continue to exist for the IRGC.  Thus, non-U.S. banks that conduct business with or on behalf of the IRGC will face the prospect of being cut off from the U.S. financial system.  Because the IRGC owns and controls numerous businesses in Iran and in Iranian proxy states, banks and businesses will need to engage in extensive due diligence prior to entering into commercial agreements with any Iranian companies to ensure there is no IRGC involvement.

Finally, it is far from clear the extent to which the “foreign subsidiary” exception will lead OFAC to grant licenses for non-U.S. subsidiaries to engage in business with Iran.   The European business community is abuzz with rumors of French and German companies already in Iran, lining up potential opportunities.  There will certainly be an appetite in Iran for certain U.S. business relationships, perhaps most notably in U.S. technology to support the Iranian oil industry.  The allowance for foreign subsidiaries could provide a mechanism to permit some U.S. commercial interaction with Iran, initially on a limited basis.  However, it could easily become the exception that swallows the rule.  Companies should also note that the reporting requirements of section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 will continue to require U.S.-registered issuers of securities to disclose to the SEC certain Iran-related business activities.  This requirement applies to both U.S. public companies and non-U.S. issuers of securities.


The business community is well-advised to remember that economic sanctions are a political tool, and their implementation will reflect political concerns far removed from the concerns of any single enterprise, or even the business community as a whole.   The JCPOA provides a framework for phased relief of sanctions, but the extent of that relief remains to be seen, particularly for U.S. businesses.  A fair degree of caution should remain the watchword for the day.

Eric Lewis – Partner, Lewis Baach PLLC

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