After months of wrangling, a deal has finally been reached allowing Iran to develop a peaceful domestic nuclear programme with the lifting of economic and financial sanctions.This is on the strict proviso that Iran does not seek, develop or acquire any nuclear weapons.
What steps are required to bring the deal into force?
There are a number of steps to be taken before any UN, EU or US sanctions are lifted, including a new UN Security Council (UNSC) resolution and International Atomic Energy Agency (IAEA) verification of Iran's compliance. The US Congress must also approve the deal. The final agreement contains strong dispute resolution provisions and preserves the possible 'snap back' of full sanctions if Iran breaches its commitments.
To take effect, the Joint Comprehensive Plan of Action (the JCPOA) requires the endorsement of the E3/EU+3 (the Russian Federation, China and the US/the EU, UK, France and Germany) and Iran. Promptly following this, a resolution will be proposed before the UNSC. This resolution would terminate previous UNSC resolutions (Numbers 1696 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1835 (2008), 1929 (2010) and 2224 (2015)) and set a 10-year timeline for the conclusion of the UNSC's consideration of the nuclear issue.
Following the issuance of the UNSC resolution, the JCPOA calls for the phased lifting of sanctions structured around four key dates. The first, known as Adoption Day, would occur 90 days after the UNSC has issued its resolution regarding the JCPOA, or earlier by agreement. At this stage, the JCPOA participants must begin the legal and administrative steps necessary to implement their commitments.
The second date, known as Implementation Day, is a critical step in the process. It will occur when Iran has taken certain, specific nuclear-related measures and these measures have been verified by the IAEA. At this point, relief of a substantial array of sanctions discussed below is scheduled to take effect. Press reports suggest that this date is likely to occur early in 2016.
The third event, Transition Day, is set for the earlier of either eight years from Adoption Day or a conclusion by the IAEA that “all nuclear material in Iran remains in peaceful activities.” Additional sanctions would be abolished on this date, including the removal of a number of designated persons set out in attachments to the JCPOA.
The fourth event, the so-called Termination Day, occurs at the end of the 10-year period set forth by the UNSC and would end the UN’s involvement on this issue.
Which sanctions are being lifted?
A high level summary of the EU and US sanctions to be lifted on Implementation Day is provided below.
EU Sanctions
Under the agreement, the EU will terminate all those provisions of Council Regulation (EU) No 267/2012 (as amended) (the EU Regulation) implementing nuclear-related economic and financial sanctions plus related designations concerning:
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Transfers of funds between EU and Iranian persons and entities;
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Banking activities (including the opening of new branches and subsidiaries of Iranian banks in the EU);
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The provision of insurance and reinsurance;
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The supply of specialised financial messaging services (including SWIFT);
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Financial support for trade with Iran (export credit, guarantees or insurance);
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Commitments for grants, financial assistance and concessional loans to the Government of Iran (the GOI);
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Transactions in public or public-guaranteed bonds;
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The import and transportation of Iranian oil, petroleum products, gas and petrochemical products;
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The export of key equipment or technology for the oil, gas and petrochemical sectors;
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The export of key naval equipment and technology;
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The design and construction of cargo vessels and oil tankers;
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Flagging and classification services;
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Access to EU airports of Iranian cargo flights;
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Export of gold, precious metals and diamonds;
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Delivery of Iranian bank notes and coinage;
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Export of graphite, raw or semi-finished metals and export of software for integrating industrial processes;
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The freezing of certain assets and visa bans.
This essentially means that the key restrictions in the EU Regulation will be lifted. The EU has committed not to introduce new sanctions or re-impose the lifted sanctions absent a failure by Iran to comply with the terms of the JCPOA.
In the meantime, the European Council has extended the suspension of certain existing sanctions until 14 January 2016 (Decision (CSFP) 2015/1148).
US Sanctions
For the interim period between Adoption Date and Implementation Date, the US Department of the Treasury, Office of Foreign Assets Control (OFAC) has extended: (i) all temporary relief from US secondary sanctions provided for in the Joint Plan of Action (JPOA) of November 24, 2013 as extended, and (ii) the validity of all specific licenses issued by OFAC pursuant to its Second Amended Statement of Licensing Policy on Activities Related to the Safety of Iran’s Civil Aviation Industry.
Upon Implementation Date, the JCPOA provides for the lifting of only nuclear-related, US secondary sanctions applicable to non-US persons. US persons[1] continue to be prohibited from engaging, directly or indirectly, in any transaction or dealing with Iran or Iranian persons, except to the extent authorized by OFAC. In addition, non-US persons that are owned or controlled by a US person (as defined in the JCPOA)[2] must obtain a license from OFAC (as discussed below) before engaging in any of the activities for which sanctions are lifted.
Subject to the limitations discussed above, the US agrees to take Executive action and seek legislative action to cease the application of nuclear-related sanctions in the following areas:
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Financial and banking activities that occur outside of US jurisdiction, including: (i) transactions with the Central Bank of Iran and specified Iranian financial institutions and GOI entities; (ii) transactions in Iranian rial; (iii) the provision of US bank notes to the GOI; (iv) bilateral trade limitations on Iranian revenues abroad; (v) the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds; and (v) financial messaging services to the Central Bank of Iran and specified Iranian financial institutions;
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Underwriting services, insurance, or reinsurance in connection with authorized activities;
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Iran’s energy and petrochemical sectors, including: (i) efforts to reduce Iran’s crude oil sales; (ii) investment, including participation in joint ventures, goods, services, information, technology and technical expertise and support for Iran’s oil, gas and petrochemical sectors; (iii) the purchase, acquisition, sale, transportation or marketing of petroleum, petrochemical products and natural gas from Iran; (iv) the export, sale or provision of refined petroleum products and petrochemical products to Iran; and (v) transactions with Iran’s energy sector;
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Transactions with Iran’s shipping and shipbuilding sectors and port operators;
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Trade in gold and other precious metals;
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Trade with Iran in graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
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The sale, supply or transfer of goods and services used in connection with Iran’s automotive sector; and
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Associated services (e.g. technical assistance, training, insurance, re-insurance, brokering, transportation or financial services) that are necessary and incidental to the authorized activities.
In addition to the cessation of these sanctions, the US commits to remove the persons set forth in Attachment 3 to Annex II of the JCPOA from the Specially Designated Nationals and Blocked Persons List (the SDN List), the Foreign Sanctions Evaders List (the FSE List), and the Non-SDN Iran Sanctions Act List, as applicable. To the extent that persons have been listed on the applicable US sanctions lists for reasons other than the activities now authorized by the JCPOA, transactions with these persons continue to be prohibited. In addition, activities authorized by the JCPOA may not involve persons who continue to be designated on US sanctions lists.
The US also commits to allow for other trade-related activities with Iran through a specific licensing regime, as discussed in more detail below.
The EU, its Member States and the US have explicitly agreed to issue guidance, in the form of guidelines and public statements, on the scope of sanctions being lifted under the JCPOA to ensure clarity and its effective implementation. This will be welcomed by potential investors.
How will sanctions be lifted?
The EU will prepare an implementing regulation to make the following changes (with effect from Implementation Day):
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Termination of provisions in the EU Regulation and suspension of corresponding provisions in Council Decision 2010/413/CFSP (the EU Decision) prohibiting: (i) financial transfers and sanctions on banking activities; (ii) insurance, (iii) financial support for trade, (iv) grants, financial assistance and loans, (v) Iran public-guaranteed bonds, (vi) sanctions targeting the oil, gas and petrochemical sectors, (vii) shipping, ship-building and transport, and (viii) gold, other precious metals, bank notes and coinage. Member States will terminate or amend relevant national legislation;
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Amendments to the provisions in the EU Regulation relating to sanctions on metals in line with activities consistent with the JCPOA;
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The removal of individuals and entities listed in an attachment to Annex II of the JCPOA from Annexes VIII and IX in the EU Regulation. The provisions of the EU Decision listing asset freezes and visa bans in relation to listed Iranian banks and financial institutions set out in Annex II will be suspended;
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Amendments to the EU Regulation and the EU Decision in relation to nuclear proliferation-sensitive activities (e.g. goods, technology, investment and training) and associated services.
Upon Implementation Day, the US will lift US secondary sanctions applicable to non-US persons through Executive action and such additional legislative action as is appropriate, including to:
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Terminate the following Executive Orders (EOs or EO) in their entirety: (i) EO 13574 of May 23, 2011; (ii) EO 13590 of November 20, 2011; (iii) EO 13622 of July 30, 2012; and (iv) EO 13645 of July 1, 2013;
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Terminate sections 5 through 7 and 15 of EO 13628 of October 9, 2012;
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Amend or modify relevant provisions in US legislation, including the Iran Sanctions Act of 1996, 50 U.S.C. §§ 1701-1706; the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), P.L. 111-195; the National Defense Authorization Act for Fiscal Year 2012, P.L. 112-81; the Iran Threat Reduction and Syria Human Rights Act of 2012 H.R. 1905, P.L. 112-158, and the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA), P.L. 112-239, all as amended;
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Remove the individuals and entities set forth in Attachment 3 to Annex II of the JCPOA from the SDN List, the FSE List, and/or the Non-SDN Iran Sanctions Act List, as applicable,[3] and unblock all property and interests in property of these persons within US jurisdiction;
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License the following: (i) the sale of commercial passenger aircraft and related parts and services to Iran, exclusively for civil aviation end use; (ii) non-US entities that are owned or controlled by a US person to engage in activities with Iran that are consistent with the JCPOA; and (iii) the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.
Disputes and the re-imposition of sanctions
The JCPOA has a robust dispute resolution mechanism in the event that a party is considered not to be meeting its commitments under the plan. The complaints procedure can be initiated by any JCPOA party. Ultimately, if no resolution can be reached, there exists the possibility that the sanctions will 'snap back', i.e. will be re-imposed.
The dispute resolution process begins with a referral of a dispute to a specially-established Joint Commission, which has 15 days to resolve the issue (unless extended by consensus). The Joint Commission is comprised of representatives from the JCPOA participants. If the issue is not then settled, participants can refer the matter to a three-member Advisory Board or to the Foreign Ministers, or both. The process would extend an additional 15 days in either case, with the Joint Commission having another five days to consider an opinion issued by the Advisory Board. If, upon conclusion of this process, the complaining participant still does not believe that the matter has been satisfactorily resolved and deems it a case of “significant non-performance,” then the participant may either notify the UNSC or treat the issue as grounds to cease performing its own commitments under the JCPOA, in whole or in part.
Once a matter is notified to the UNSC, its members have 30 days to vote on a resolution to continue the sanctions lifting. If no resolution is adopted within 30 days, the pre-agreement UNSC resolutions would 'snap back', unless the UNSC decides otherwise.
One limitation is that the 'snap back' provisions would not have retroactive effect. As a result, contracts between any party and Iran (or Iranian persons or entities) executed during the interim period would remain valid and we anticipate that any EU legislation implementing the ‘snap back’ would contain a similar grandfathering clause. The UNSC has expressed an intention to prevent the 'snap back' if the issue giving rise to the notification is resolved during this period. However, Iran has stated that it will treat any partial or total re-instatement of sanctions as grounds to cease performing its commitments under the JCPOA.
US Congressional approval
Political roadblocks remain, particularly given the vocal concern of many in the US Congress regarding the proposed deal. The Iran Nuclear Agreement Review Act (the Act) passed in May of this year gives the President five days to “transmit” the agreement to Congress, following which Congress has 60 days to review the agreement and during which time the President is prohibited from granting relief of statutory sanctions.
The Act then gives Congress the power to issue a “joint resolution of disapproval” to block relief of sanctions. Although President Obama reaffirmed on July 14, 2015, that he would “veto any legislation that prevents the successful implementation of this deal,” the Act raises the possibility of a conflict between the executive and legislative branches. Anticipating this, the JCPOA requires the US to make “best efforts. . . to prevent interference” with the realization of sanctions relief. It specifies that “the US Administration, acting consistent with the respective roles of the President and the Congress, will refrain from re-introducing or re-imposing the sanctions . . . that it has ceased applying under this JCPOA” and “from imposing new nuclear-related sanctions.” As in other contexts noted above, Iran will treat re-imposition of sanctions as “grounds to cease performing its own commitments.”
[1] Under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560, the term “U.S. person” means: “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”
[2] Under the JCPOA, a “non-U.S. person” means “any individual or entity, excluding (i) any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States, and (ii) any entity owned or controlled by a U.S. person.” Under the JCPOA, “an entity is ‘owned or controlled’ by a U.S. person if the U.S. person: (i) holds a 50 percent or greater equity interest by vote or value in the entity; (ii) holds a majority of seats on the board of directors of the entity; or (iii) otherwise controls the actions, policies, or personnel decisions of the entity.”
[3] The removal of the National Iranian Oil Company (NIOC) from the SDN List will include resolution of related designations and determinations.
