On Monday 5 November 2018, the US extraterritorial sanctions on Iran relating to banking, shipping, insurance and the petroleum and energy sector came back into force. Below is an overview of the Iranian Sanctions, and our accompanying Handy Guide provides more in-depth analysis of Iranian sanctions developments in 2018 and how they could impact your business.
This was the second tranche of Iranian sanctions to be reinstated by the US this year. They were reinstated after President Trump announced in May the US’s withdrawal from the Joint Comprehensive Plan of Action (also known as the “Iran Deal”) which aimed to limit Iran’s nuclear capabilities through mutual agreement based on quid pro quo.
The US secondary sanctions (“secondary sanctions” is the US term for extraterritorial sanctions which are sanctions that can apply worldwide to all persons, not just to US persons or within the US) on Iran apply to persons (corporate or individuals) who do not have any links with the US. They target activity that is not within US jurisdiction by threatening to apply penalties to any persons who engage in the targeted activity. In particular, the secondary sanctions targeting the banking sector have a significant impact on the global economy and on most industries beyond banking due to the US influence in the international financial system. For many companies, the threat of significant US penalties is enough to deter them from any engagement with Iran or Iranian entities, regardless of their lack of connection with the US.
The US withdrawal from the deal has been strongly criticised and the EU has objected to the extraterritorial extension of the US secondary sanctions. The other signatories to the deal have not withdrawn and to date it remains in place.
In an attempt to limit the impact of the US sanctions, the EU has applied “blocking measures” to the extra-territorial sanctions. In brief, the effect of the blocking measures is that EU companies are not permitted to comply with the US extraterritorial sanctions and must report any effects on their economic or financial interests to the EU Commission within 30 days. In many EU member states there are criminal penalties applicable to those entities which breach the blocking regulation by complying with the extraterritorial sanctions (i.e. by ceasing or avoiding dealings with Iran due to the extraterritorial sanctions).
This puts EU entities in a very difficult position where, if they are affected by the extraterritorial sanctions, they must choose whether to be in breach of the EU blocking measures (which are rarely enforced and which would be difficult to prosecute due to the evidential hurdles involved) or in breach of the US extraterritorial sanctions (in practice the US will not prosecute every non-US entity who engages in the sanctioned activity).
Many EU entities have chosen to cease trade with Iran and there will be many others who have decided not to pursue opportunities in Iran. The reality is that not all trade with Iran is prohibited, even with the application of the US secondary sanctions. But any such trade will require a significant compliance effort involving detailed and on-going due diligence into counterparties, a US-free supply chain, a method of payment that does not involve the US financial system (almost impossible at present), no US personnel involvement and internal arrangements (contracts and credit facilities for example) which do not prohibit operations in breach of US law.
In an attempt to ease EU entities’ trade with Iran, the EU has attempted to create a Special Purpose Vehicle (“SPV”) which would enable its participants’ to carry out financial transactions involving Iran. However, at the time of writing the SPV is still not in place, missing its deadline of Monday 5th November. A key stumbling block appears to be that no EU country wants to host the payment vehicle, presumably in fear of the political ramifications of hosting a mechanism designed to assist entities in “avoiding” US sanctions. The US has already expressed its anger at the scheme. An insight in to loan agreements and the US extraterritorial sanctions can be found in our banking team’s blog.
If your business is affected by these changes, if you currently trade with Iran and want to check your position, or if you are considering reporting to the EU Commission under the blocking regulations, please do get in touch with Fran Hutchison, Paul Marshall or your usual Brodies contact.
On November 16, 2018