As reported in our Client Alert of December 2013, the "Joint Plan of Action" reached between the United Kingdom ("UK"), the United States ("U.S."), Germany, France, Russia and China (collectively known as the "E3+3") and Iran in November 2013 envisaged a two-step process in relation to relief from international trade sanctions against Iran.
On 12 January 2014, it was announced that the first step, the interim deal (with a time limit of six months renewable by mutual consent) between the E3+3 and Iran, would begin to run on 20 January 20141 and Council Regulation 42/2014 amending Regulation 267/2012 concerning restrictive measures against Iran followed on 20 January 2014.
The specific changes are set out in more detail below. However, two key points to be aware of:
The European Union ("EU") and U.S. positions are not entirely in line so caution must be exercised as although the intended business may be clear from an EU perspective it may remain subject to U.S. sanctions e.g. if payments are made in U.S. dollars.
The easing of restrictions is for an initial period of six months only. Guidance on the U.S. position from the U.S. Department of Treasury clearly states that transactions under the eased restrictions must occur and be completed by 20 July 2014. Similarly, under the EU Regulations all relevant contracts would have to be executed by 20 July 2014. In our view, prudence dictates "executed" should be read to mean "occur and be completed" by 20 July 2014.
The following amendments to the EU Iran sanctions regime came into force on 20 January 2014.
Crude Oil and Petroleum Products
In respect of crude and petroleum products, specified in Annex I to Regulation 42/2014 as "petroleum oils and oils obtained from bitumous minerals, crude" with HS Code 2709 00, it is no longer prohibited to:
a. transport them if they originate in Iran, or are being exported from Iran to any other country; and
b. provide, directly or indirectly, financing or financial assistance, including financial derivatives, as well as insurance and reinsurance, related to their import, purchase or transport.
Please note, however, that it is still prohibited to import these products into the EU if they originate in or have been exported from Iran, and to purchase such products which are located in or which originated in Iran. Further, the full range of prohibitions still apply to all crude oil and petroleum products not specifically listed in Annex I to Regulation 42/2014, which are numerous and include those with HS Codes 2710, 2712, 2713, 2714 and 2715 00 00.
2. Petrochemical Products
The full range of prohibitions in respect of petrochemical products have been suspended. This means that parties subject to EU jurisdiction are permitted to import, purchase and transport petrochemicals originating or located in Iran. The prohibitions on associated services, including insurance and re-insurance, have also been suspended.
Cargos which fall within the EU’s definition of "petrochemical products" are listed in Annex V to Regulation 267/2012.
It is important to remember that there have been no amendments to the EU’s asset freeze provisions. As such, a transaction in respect of petrochemical products may still trigger sanctions if a designated party is involved.
3. Gold, precious metals and diamonds
The full range of prohibitions have been suspended in respect of the cargos specified in Annex II to Regulation 42/2014. It is now no longer prohibited to sell, supply, transfer, export, purchase, import or transport those specified products either to or from Iran or Iranian entities.
Prohibitions on associated services, including technical assistance and brokering services, have also been suspended.
4. Derogations to Asset Freeze Provisions
Regulation 42/2014 adds a further derogation to the existing asset freeze provisions. Member State authorities may authorise the release of economic resources, or the making available of funds or economic resources, to the Ministry of Petroleum.
Authorisation may only be given once the Member State in question has determined that the funds or economic resources are required for the execution of contracts for the import or purchase of petrochemical products.
5. Financial Transfers: Increase in Authorisation Thresholds
EU authorisation thresholds for non-sanctioned trade will be increased tenfold to the following:
a. Transfers of funds (whether individual transfers or a series of linked transfers) to or from an Iranian Person must be processed as follows:
(i) Less than €100,000 (or equivalent) – such transfer of funds payments do not require prior notification or authorization
(ii) Less than €400,000 (or equivalent) but more than €100,000 or equivalent – such transfers of funds must be notified in advance to the competent authority of the relevant Member State
(iii) €400,000 or more (or equivalent) – such transfer of funds must be authorised by the competent authority of the relevant Member State in advance of the transfer being made.
b. In relation to transfers due on transactions regarding foodstuffs, healthcare, medical equipment or for humanitarian purposes, the following limits apply:
(i) For those transfers which involve an Iranian bank, the competent authority of the relevant Member State must be notified in advance where the amount is €100,000 or more but less than €1,000,000. Where the transfer is €1,000,000 or more it will require prior authorisation from the competent authority of the relevant Member State.
(ii) For those transfers of funds to or from an Iranian person, entity or body (which do not involve an Iranian bank) the competent authority of the relevant Member State must be notified in advance where the amount is €100,000 or more.
6. Making vessels available
The prohibition on "making available vessels designed for the transport or storage of oil and petrochemical products" has been suspended.
This prohibition extended to chartering vessels for the transport of such products, where Owners did not take sufficient precautions to ensure that the vessel in question would not be used to carry or store oil or petrochemical products originating in or exported from Iran.
The U.S. Position
The U.S. government has issued guidance detailing its steps to suspend temporarily certain sanctions involving Iran’s purchase and sale of gold and other precious metals, Iran’s export of petrochemical products, Iran’s automotive industry, and certain associated services. Details of the U.S. measures are available here. .
As with the EU, these measures are put in place for an initial period of six months only.
The U.S. is also establishing financial channels to facilitate Iran’s import of certain humanitarian goods, payment of medical expenses incurred by Iranians abroad, payments of Iran’s UN obligations, and payments of $400 million in governmental tuition assistance for Iranian students abroad.
The U.S. also published a permissive licensing policy regarding certain transactions related to the safety of Iran’s civil aviation industry.
As previously reported, the U.S. has committed to pausing efforts to further reduce Iran’s crude oil exports and to enable Iran to access $4.2 billion in Restricted Funds in installments over the course of the six-month period beginning 20 January 2014 and ending 20 July 2014.
The loosening of U.S. sanctions primarily involves the "secondary" U.S. sanctions impacting non-U.S. persons. For the most part, U.S. persons (including U.S. financial institutions, reinsurers, banks and U.S. branches of EU banks) continue to be barred from most Iran trade. This means that even if a trade is now permitted under the latest EU measures, payments in U.S. dollars will be caught.
Further, the relief announced does not authorise transactions with persons on the U.S. Treasury Department’s Office of Foreign Assets Control’s (OFAC) List of Specially Designated Nationals and Blocked Persons (the SDN List). One notable exception, however, is in the petrochemical area; the U.S. has published a white list "Annex" (available here) of SDN-listed petrochemical companies with which trade will be permitted without sanctions exposure during this six month period.
In the petrochemical area, care must be taken to ensure any trade takes place entirely within the six-month time period covered by the deal2, and that the risk of delays or re-imposition of sanctions by the U.S. is accounted for. The relief announced includes a specific definition of petrochemicals (which does not align exactly with the EU regulations) so each set of regulations must be closely reviewed before undertaking any petrochemical trading.
What is the effect of these latest measures?
The measures introduced by both the EU and the U.S. are very specific. Parties cannot now take the position that it is legal to conduct any and all business with Iran. It is still essential to investigate thoroughly all trades and transactions.
As said above, the measures put in place by the EU and U.S. are not entirely in allignment and so it is important that both regimes are considered. Crucially, U.S. dollar payments in respect of trades now permitted by the EU may be caught, as U.S. banks (and U.S. branches of EU banks) are still barred from the majority of Iran trade.
Further, only cargoes specifically identified are covered by the suspensions. There have been no amendments to the EU asset freeze lists, and so the list of designated parties, with whom it is effectively prohibited to do business, remains intact.
These relaxed measures are only due to be in place for an initial period of six months, i.e. until 20 July 2014. From an EU perspective, all contracts entered into in respect of any of the relaxed measures must be executed by that date. In our view, taking a cautious approach, "executed" should be read as the performance of the contract being completed by 20 July 2014, especially since the previous sanctions could be reinstated either in whole or in part at the end of that period.
In short, whilst these latest measures represent a positive step forward in commercial relations with Iran, they by no means permit all Iranian business and there is still a need for caution.
1. The second step, on which we understand negotiations will begin in the next few weeks, is aimed at a longer-term solution which envisages the
petrochemical products, Iran’s automotive and civil aviation industries, and certain associated services.
2. This six-month period also applies to transactions involving Iran’s purchase and sale of gold and other precious metals, Iran’s export of petrochemical products, Iran’s automotive and civil aviation industries, and certain associated services.