Extracted from Law360
Iran is shaping up as a corporate risk manager’s worst nightmare. Prospects for a reduction of international sanctions on Iran do not promise an open and transparent market. Instead, the combination of an only partial reduction in sanctions measures by the U.S. and the extraterritoriality of remaining U.S. sanctions will form a new kind of highly regulated market specific to Iran. Access is not guaranteed, securing payment will prove challenging and compliance issues may well be more complicated than in the recent past. While U.S. companies will remain prohibited from virtually all engagement with Iran for the foreseeable future, non-U.S. companies may soon wish for the days when Iran was simply at the top of global industry’s blacklist.
To Implementation Day: Maintaining the Status Quo and Managing Expectations
On July 14, 2015, the P5+1 powers (the United States, United Kingdom, France, China, Russia and Germany, facilitated by the European Union) and the Islamic Republic of Iran reached a Joint Comprehensive Plan of Action ("JCPOA") to limit Iran’s nuclear program. As part of the JCPOA, the U.S., U.N. and EU committed to a program of phased sanctions relief dependent on Iran’s adherence to key nuclear commitments. The EU, U.N. and, more recently, the U.S. have all ratified the JCPOA, which was set to take effect on Oct. 18, 2015 (Iran’s parliament was scheduled to vote on it on Oct. 11, 2015).
Oct. 18 was the date upon which Iran must begin to dismantle its nuclear programs to the extent specified in the JCPOA, but Oct. 18 does not mark the end of sanctions on Iran. Sanctions relief under the agreement will be delayed indefinitely until Iran’s compliance with its nuclear nonproliferation and decommissioning commitments have been officially verified by the International Atomic Energy Agency. Private and U.S. government analysts believe verification is unlikely to occur until mid-2016. That day, termed “Implementation Day” under the agreement, is the moment at which international sanctions on Iran may be reduced.
The current interim period remains governed by existing sanctions and the extremely limited relief provided by the P5+1 parties since November 2013, under the terms of the Joint Plan of Action ("JPOA"). While maintaining broad prohibitions for U.S. companies, the United States has provided under the JPOA partial relief of secondary sanctions on non-U.S. companies for certain licensed business in Iran’s petrochemical, automotive, civil aviation and precious metals industries. The JPOA program continues until Implementation Day.
The interim period has been complicated by the fact that Iranian leaders have rolled out the red carpet for foreign business leaders and welcomed exploratory talks and negotiations toward an Iran awaiting the day when it may once more be “open for business.” For many industries, that day may never realistically arrive.
Until Implementation Day, the United States categorically has not and will not provide new sanctions relief. Furthermore, the U.S. has steadily enforced the full slate of sanctions on Iran, with judgments and forfeitures against Western banks and payment processing firms totaling over $1 billion through the first eight months of the year. The chief U.S. sanctions enforcement agency, the Office of Foreign Assets Control of the U.S. Department of the Treasury, has also recently clarified that, in its view, even memoranda of understanding or executory contracts with sanctioned Iranian parties violate U.S. sanctions, even if those contracts are contingent upon Iran’s verified implementation of the JCPOA. Based on OFAC’s recent record of enforcement, both U.S. and non-U.S. companies pursuing new ties in Iran should proceed with caution. Regardless of flowery language promoting the restoration of the Iranian market and trips of high-profile business leaders to Iran, the country remains largely closed.
JCPOA and Sanctions: What’s in It for Business?
Sanctions relief provided following Implementation Day will create a patchwork quilt of differing regulations and risks for companies. Although the EU will lift almost all sanctions against Iran, the United States will maintain primary sanctions prohibiting U.S. companies from nearly all trade and investment with Iran. The United States will also only partially reduce its use of secondary sanctions against non-U.S. companies operating in Iran. In particular, the U.S. will maintain sanctions on Iran for a variety of reasons, including terrorism, human rights abuses, missile proliferation and the destabilization of countries such as Syria.
Companies worldwide seeking to do business in Iran will need to develop a new risk calculus based on several factors: their exposure to U.S. jurisdiction, either via the nationality of a company or its employees; the potential facilitation of work for U.S. partners that may be illegal under U.S. law; and their use of and exposure to the U.S. banking and financial system for which Iran will remain very much off limits.
Secondary Sanctions Continue
Even after Implementation Day, the U.S. will continue to subject over 200 Iranian entities to secondary sanctions. Secondary sanctions will also remain in force against non-U.S. persons who do business with Iranian entities identified as sponsors or supporters of terrorism, with the Iranian Revolutionary Guards Corps or with any entities affiliated with the IGRC. Complicating matters will be the IRGC’s significant ownership stakes in multiple sectors of the Iranian economy; all such entities will remain subject to U.S. sanctions. For corporate compliance officers of companies returning to the Iran market, “know your customer” will become a significant burden.
Moreover, if a non-U.S. company enters into a contract with Iran after Implementation Day and sanctions “snap back” because of noncompliance by Iran with the JCPOA, that contract will not be grandfathered, so there is a risk of losing the contract (although the Treasury Department has stated that it will not enforce sanctions retroactively under such circumstances).
Getting Paid Will Be a Problem
Financial and payment matters involving Iran will also be difficult under the JCPOA sanctions regime. Not all Iranian banks will be removed from U.S. sanctions, including Bank Saderat, Mehr Bank and Ansar Bank. Despite the fact that many Iranian banks will be removed from the principal U.S. sanctions list (i.e., the SDN List), U.S. sanctions will remain in place under the Iran Transactions and Sanctions Regulations, effectively blocking the government of Iran itself as well as Iranian financial institutions more generally from connections with the U.S. financial industry. The Treasury Department has no plans to allow the return of the so-called dollar U-turn exemption, and this will prevent U.S. banks from engaging in correspondent bank activity with any foreign bank engaged in processing dollar-denominated transactions with Iran.
So long as the dollar remains the primary currency of international trade, these prohibitions by the United States are highly likely to have a ripple effect through the European and Asian banking industries, where access to the American market remains important. This particular feature of U.S. sanctions may allow for greater inroads into Iran by domestic Chinese and Russian companies with less exposure or sensitivity to the U.S. financial system. Expect this issue to rise prominently in EU-U.S. diplomacy as well, as Brussels will likely view this unintended consequence of U.S. policy as a severe deterrent to European industry seeking to reclaim market share in Iran.
Extraterritoriality, at Home and Abroad
Global companies have U.S. employees, and American companies have foreign subsidiaries. The structure of U.S. sanctions law ensures that these two factors will continue to complicate the ability of global firms to approach the Iranian market well after Implementation Day.
The U.S. prohibitions on Iran apply to U.S. companies, citizens and green card holders wherever they may be located worldwide. For foreign companies planning a foray into the Iranian market, this means that U.S. employees may not participate in Iran-related matters, but may only receive information passively on developments. Similarly, U.S. employees may not facilitate business in Iran, including referring such business, to non-U.S. parties if the business in question is prohibited to U.S. persons. These restrictions may impact management and sales team structures as well as other human resources considerations.
Foreign subsidiaries of U.S. companies remain, for the time being, also subject to all U.S. prohibitions regarding Iran. The Treasury Department has signaled its intent to eventually issue a general license authorizing foreign subsidiaries of U.S. companies to engage in certain transactions allowed under the JCPOA and consistent with other, remaining U.S. sanctions on Iran. This general license will not be issued until after Implementation Day, and even licensed foreign subsidiaries of U.S. companies will remain subject to the diverse array of remaining U.S. sanctions on Iran. To be clear, U.S. parent companies and employees will remain prohibited from principally all business in or with Iran, regardless of the license for overseas subsidiaries. Considering these factors, the license may in actuality present a narrow window of opportunity for U.S.-owned foreign subsidiaries, as well as a significant management challenge depending on the degree of involvement of U.S. employees in any business unit or decision related to an Iranian transaction.
Looking Ahead: Don’t Hope on Divine (or Congressional) Intervention
So long as the various underlying U.S. laws forming sanctions on Iran exist, the risk premium for Western business in Iran will remain high. Implementing the sanctions reductions obligations contained in the JCPOA will tax the Obama administration to the limits of its executive authority. The alphabet soup of U.S. sanctions laws targeting Iran, including prominently the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, the Iran Threat Reduction and Syria Human Rights Act of 2012, the Iran Freedom and Counter-Proliferation Act of 2012 and the National Defense Authorization Act of Fiscal Year 2012, ensure that many sanctions on Iran will remain in place indefinitely. Only the U.S. Congress may nullify these laws by virtue of passing sweeping new legislation.
The current Congress, meanwhile, narrowly avoided disapproval of the JCPOA itself, and current pieces of legislation contain poison pill amendments seeking to prevent President Obama from carrying out any sanctions relief until Iran meets new conditions, such as compensating U.S. victims of Iranian-sponsored acts of terrorism or providing a full accounting for past weapons of mass destruction development efforts at Parchin and other sites. While such legislation is unlikely to meet majority approval in the full Congress, these continued initiatives by foes of the JCPOA indicate that the national legislature is many years away from a full reconciliation with Tehran. Until then, intrepid business leaders focused on the potential of Iran’s “new” market are advised to proceed with extreme caution.
 “The Guards currently dominate most sectors of the economy, from energy to construction, telecommunication to auto making, and even banking and finance. Khatam al Anabia (the Seal of the Prophets), the Guards’ construction headquarters, is involved in much of the Guards’ official economic activities. But the IRGC is also linked to dozens, perhaps even hundreds, of companies that appear to be private in nature but are run by IRGC veterans” http://iranprimer.usip.org/resource/revolutionary-guards