Following heightened tensions in recent months between Washington and Iran, President Trump has now ended speculation over his stance towards the Joint Comprehensive Plan of Action (JCPOA) (the international deal reached on 15 July 2015 by which Iran agreed to limit its nuclear programme in return for the easing of economic sanctions (as discussed in further detail in our previous article).
JCPOA – US Position
On 13 October 2017, President Trump declined to certify that Iran is complying with its obligations under the JCPOA. This is the third time during his administration that President Trump has had to confront this decision: the deal has to be certified every 90 days and each of the previous two times he has done so with overt reluctance. Against the backdrop of the criticism that has been levelled by President Trump at the JCPOA in calling it an “embarrassment” and “one of the worst and most one-sided transactions” he has ever seen in his speech to the UN General Assembly last month, this decision to “decertify” the agreement is unsurprising.
Reports had initially suggested that the US would use decertification as an opportunity to impose a raft of new sanctions on Iran to address (i) what the US administration refers to as its ‘destabilising behaviour’ in the Middle East, by which Iran constitutes a threat to the US and its allies (via its alleged sponsorship of various militias and terrorist groups in the region), and (ii) its ballistic missile programme – both of which do not technically fall within the scope of the JCPOA hence President Trump’s repeated complaint that Iran’s conduct has contravened the spirit of the deal. Whilst, in seeking to address the former, President Trump has announced that sanctions will be imposed on Iran’s Islamic Revolutionary Guard Corps, the deal has now been passed to Congress which has 60 days to decide whether or not to reimpose any economic sanctions on Iran. Rex Tillerson, the US Secretary of State has clarified that he and the President are not seeking to reimpose sanctions that could result in the deal collapsing. However, Mr Trump’s statement following his announcement on Friday that he would be willing to abandon the agreement if Congress do not come up with satisfactory proposals to help fix the “flaws” in the agreement in a “very short” period of time, is palpably clear. On the day of President Trump’s announcement the Office of the Press Secretary to the White House issued a “New Strategy” document on Iran which highlights (amongst other things) countering “threats to the United States” and its allies “from ballistic missiles and other asymmetric weapons” and denying “the Iranian regime all paths to a nuclear weapon” as the core elements of the New Strategy. How exactly the US will seek to implement this strategy remains to be seen.
In the run up to President Trump’s announcement on Friday, EU leaders had signalled a strong willingness to preserve the deal and had urged the US President not to abandon the JCPOA. Not only is there a general view that the agreement is working in preventing Iran from acquiring nuclear weapons but there is also arguably an economic motivation that has developed as a result of the deal (with EU business leaders having recently expressed their readiness to do everything they can to maintain existing arrangements under the JCPOA, highlighting the economic benefits in Iran-Europe trade and reporting a 94% increase in the first half of 2017 from the same period in 2016).
Following President Trump’s decertification of Iran’s compliance with the JCPOA, a joint declaration was issued on behalf of the Heads of State and Government of France, Germany and the UK in which they highlighted their concerns at the implications of this decision. They also asserted their continued commitment to the deal and its full implementation whilst acknowledging “Iran’s ballistic missile programme and regional activities” as a “shared concern” in relation to European security interests and stated that their respective Foreign Ministers “will consider with the US how to take these issues forward”.
JCPOA – Iranian Position
Ahead of the announcement, the messages from Iran had been somewhat mixed. President Hassan Rouhani had stated only last month that Iran would respond to US decertification “decisively and resolutely” (without providing any further detail on this assertion). Iran’s Foreign Minister Mohammad Javed Zarif had called upon leaders in Europe, Russia and China to stand up to the US as their role becomes all the more important in light of Iran’s indication that, if they step in, Iran might be persuaded to continue to observe the restrictions on its nuclear programme. Additionally, there had been indications from other Iranian officials that Iran would remain faithful to the deal so long as the US does not obstruct European investments. On Friday, President Rouhani indicated that Iran would “continue to honour its commitments under the deal” but would abandon it the moment it no longer serves the country’s interests.
Tehran views the US’ behaviour since the agreement was reached as a major violation of the JCPOA. US banking restrictions have prevented Iran from completely normalising its economic ties with the international community.
Nevertheless, the benefits of the deal to Iran (and, accordingly, any motivation to abandon the agreement) are obvious: the arrangements under the JCPOA put an end to Iran’s isolation from the international community and reignited its economy without having to significantly undo its nuclear set-up. Added to this is the substantial cash flow injection Iran received in January 2016 when sanctions were lifted and $150 billion in Iranian assets which were unfrozen.
EU Sanctions – Reminder
As set out in our previous article, a number of economic and financial sanctions against Iran were lifted following the IAEA’s certification of Iran’s compliance with the JCPOA in January 2016. However, some restrictions remain in place and it is important for UK individuals and businesses to fully understand these.
UK individuals/businesses should know that the JCPOA does not currently grant them free rein to transact with Iran, and that restrictions remain in place.
Prior to engaging in any of the transactions set out below, authorisation in the form of a licence should be obtained from the relevant Member State authority:
- transfers of certain nuclear proliferation sensitive goods and technology;
(b) sale, supply, transfer or export to of certain graphite and raw or semi-finished metals;
(c) restriction on the sale, supply, transfer or export of certain software for use in the nuclear and military; and
(d) sale, supply, transfer or export to of dual-use equipment.
The following restrictions remain in place as regards Iran:
- arms embargo and missile technology sanctions.
- a ban on exports to Iran of equipment which might be used for internal repression and of equipment for monitoring telecommunications.
- a travel ban and an asset freeze against a number of natural and legal persons, entities and bodies.
It is worthwhile also considering the following practical tips:
- Ensure due diligence screening covers ownership structures and associated parties, particularly entities from the Gulf region which have been known to form vehicles for Iranian interests.
- Negotiate suitable warranties and indemnities into contracts with parties close to high risk jurisdictions.
- Incorporate specific sanctions provisions into termination/force majeure clauses in the event that counterparties or the sector in which you are dealing become the subject of a designation or restrictions – particularly in light of the JCPOA “snap back” provisions.
- Consider obtaining a licence for certain activities which are not ostensibly covered by the relevant regulations. Whilst most UK banks continue to be wary of dealing with any Iranian related transactions, even with the blessing of a HM Treasury licence, some smaller European banks are beginning to show more flexibility. Indeed, Iran’s central bank has confirmed that ‘two hundred small and medium-sized international banks’ have engaged in Iranian business since the JCPOA was implemented. It is understood that the openness of some of the smaller, regional European banks to provide financial services to Iran in contrast with the reluctance of their global counterparts to do so, is owing to their not being constrained (as many of the larger institutions are) by the need to protect their business with the US and they therefore consider themselves to be less exposed legally to US financial penalties as a result of transacting with Iran.
- Ensure you have a robust internal compliance programme in the event you become embroiled in a sanctions violation.