President Issues New Iran EO, Broadening Secondary Sanctions Triggers, and E3 Trigger JCPOA Dispute Resolution Mechanism

On the same day, the US Department of Treasury's Office of Foreign Assets Control ("OFAC") designated over 25 individuals and entities as specially designated nationals or "SDNs."  Most of these designations were made on the basis that the sanctioned persons were operating in the Iranian iron, steel, aluminium, or copper sectors, rendering them subject to sanctions under existing EOs imposing secondary sanctions on those sectors. OFAC has since issued new guidance announcing a 90-day wind-down period from the date of the EO, during which persons engaged in transactions that could be sanctioned under the EO with respect to the construction, mining, manufacturing, and textiles sectors of the Iranian economy may wind down their operations. However, the guidance warns that "entering into new business" during the 90-day period is prohibited and may be subject to sanctions. The wind-down period ends on April 6, 2020.

The new EO and recent designations indicate that the Trump Administration and OFAC will attempt to tighten the already-extensive US sanctions on Iran by broadening the scope and increasing the use of secondary sanctions (i.e., the designation of non-US persons as SDNs on the basis of their dealings with a sanctioned jurisdiction or person). Non-US firms continuing to do business in or with Iran accordingly face significant and increasing US sanctions risks, because of the number of Iranian economic sectors now subject to secondary sanctions and the substantial number of SDNs in Iran, dealings with whom may also trigger secondary sanctions. Such firms should evaluate their position urgently in light of the new developments.

EO of January 10, 2020

The new EO blocks all property and interests in property—that are in the United States, come within the United States, or are or come within the possession or control of any US person—of persons or entities determined by the Secretary of Treasury (in consultation with the Secretary of State):

• To operate in the construction, mining, manufacturing, or textiles sectors of the Iranian economy, or any other sector of the Iranian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State;
• To have knowingly engaged in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with a sector of the Iranian economy specified above or later identified.  Whether a transaction is "significant" depends on an open-ended, multi-factor inquiry, in which OFAC retains broad discretion;
• To have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the EO; or
• To be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the EO.

Similarly, the sanctions described above may be imposed on foreign financial institutions if they have knowingly conducted or facilitated any significant financial transaction:

• For the sale, supply, or transfer to or from Iran of significant goods or services used in connection with a sector of the Iranian economy identified above or later identified; or
• For or on behalf of any person whose property and interests in property are blocked pursuant to the EO.

With respect to foreign financial institutions, the Secretary of the Treasury may also prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account by such foreign financial institution.

Consistent with general licenses under the Iran sanctions regime, the new EO does not apply with respect to any person who conducts or facilitates a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.

US persons will be largely unable to deal, directly or indirectly, with persons, entities, or foreign financial institutions blocked pursuant to the new EO; violations will carry severe civil and criminal penalties, including imprisonment (for individuals).  Likewise, persons or entities that cause US persons to violate these restrictions (e.g., by using USD in connection in support of a transaction with an entity blocked under the new EO) may also face civil and criminal penalties.  Moreover, persons or entities that engage in significant transactions in the economic sectors identified above, or that materially assist persons or entities blocked pursuant to the new EO, may themselves be subject to designation as an SDN.

Designations under EO 13871

Like the new EO, previously enacted EO 13871 authorizes the imposition of blocking sanctions as a result of dealings in certain sectors of the Iranian economy. EO 13871 effectively prohibits US persons from dealing, directly or indirectly, with persons, entities, or foreign financial institutions blocked under it; persons or entities that cause US persons to violate these restrictions may also face civil and criminal penalties; and persons or entities that engage in significant transactions in the economic sectors identified below, or that materially assist persons or entities blocked pursuant to EO 13871, may themselves be subject to designation as an SDN. Specifically, EO 13761 authorizes blocking sanctions for persons or entities that:

• Operate in the iron, steel, aluminium, or copper sectors of Iran, or persons or entities that own or operate entities in those sectors;
• Knowingly engage in significant transactions for the sale, supply, or transfer to Iran of significant goods or services used in connection with the sectors identified above;
• Materially assist, sponsor, or provide financial, material, or technological support for, or goods or services in support of any person or entity blocked pursuant to EO 13871; or
• Are owned or controlled by, or are acting on behalf of, directly or indirectly, any person or entity blocked pursuant to EO 13871.

EO 13871 authorizes similar sanctions for foreign financial institutions.

Pursuant to EO 13871, OFAC designated approximately 20 entities as SDNs, including several major Iranian metals companies.  OFAC specifically labelled the designated entities as "Subject to Secondary Sanctions"—meaning that significant dealings with these entities may lead to designation as an SDN.

The entities also included two Chinese companies, and the owner of a Chinese vessel alleged to have transported steel slabs involving Iran.  The two Chinese companies were designated for knowingly engaging in a significant transaction for the purchase, acquisition, sale, transport, or marketing of iron, iron products, aluminium, aluminium products, steel, steel products, copper, or copper products from Iran; and, in the case of one of them, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or service in support of Khalagh Tadbir Pars Co., an Iranian trading firm

Triggering of the JCPOA dispute resolution mechanism

On January 14, 2020, the E3 (France, Germany and the United Kingdom) stated that they had triggered the dispute resolution mechanism under the Joint Comprehensive Plan of Action ("JCPOA") as a result of concerns that Iran is no longer meeting its commitments under the JCPOA. The E3 rejected Iran's claims that it was entitled to reduce compliance with the JCPOA as a result of US action and an alleged failure of the E3 and EU to comply with the terms of the agreement, noting that Iran has never triggered the dispute resolution mechanism itself and has no legal grounds to cease compliance with the JCPOA. Under the JCPOA, the EU agree to exhaust the dispute resolution mechanism within the treaty before re-introducing or re-imposing the sanctions that were terminated or suspended as a result of the JCPOA in 2016. In line with this mechanism, the E3's statement provides that they have referred their concerns to a Joint Commission (consisting of the E3/EU+3 and Iran) which has 15 days to resolve the issue. If the issue has not been satisfactorily resolved by the Joint Commission at the end of this period (and the period is not extended by consensus), the matter may be escalated to the Ministers of Foreign Affairs, who have a further 15 days to resolve the issue (which period may also be extended by consensus). In parallel to (or instead of) escalation to the Ministers of Foreign Affairs, either party to the dispute (in the current instance the E3 and Iran) can request that the issue be considered by an Advisory Board (consisting of two members appointed by each of the parties to the dispute and a third independent member), which will provide a non-binding opinion on the issue. If, after this 30 day process, the issue has not been resolved, the Joint Commission will consider the opinion on the Advisory Board for no more than five days.

Therefore, overall the Joint Committee, Ministers of Foreign Affairs and/or the Advisory Board have up to 35 days (unless extended by consensus) to seek to resolve the issues that have been referred to them. If a resolution has not been found by the end of this period, the E3, if they consider the issue to constitute significant non-performance under the JCPOA, may cease to perform their commitments under the JCPOA (i.e. may re-introduce the sanctions terminated or suspended in 2016 – for details on the sanctions lifted, please see our previous briefing here) and may notify the UN Security Council of the significant non-performance. If such a notification is made to the UN Security Council, it will be required to vote positively on a resolution to continue the termination of sanctions effected as a result of the JCPOA, and if this resolution is not adopted, UN sanctions will "snap-back" to the pre-JCPOA position, unless the UN Security Council decides otherwise. (The reintroduction of EU sanctions would not be automatic in the same way, as the EU would be required to pass further amending legislative acts to re-impose the sanctions terminated/suspended in line with the JCPOA.)

The UN and EU have stated that any sanctions re-introduced in this way will not apply with retroactive effect, and the EU has indicated that the execution of contracts concluded in accordance with the JCPOA while sanctions relief was in force will be permitted consistent with previous provisions when sanctions were originally imposed, in order to allow companies to wind down their activities. The details about this "wind-down" period will be specified in the relevant EU instruments.

If sanctions are re-introduced by the UN Security Council following the point at which EU law ceases to apply in the UK, the UK will be required to pass legislation to incorporate these into the new Iran (Sanctions) (Nuclear) (EU Exit) Regulations 2019. It is not clear whether the UK would follow the EU's stated approach in relation to, for instance, including a wind-down period for any re-introduced sanctions (although we would expect the UK to take a similar position to the EU in this regard).

We note that the circumstances described above call in question the likelihood of any serious enforcement action being taken in the short term in relation to potential breaches of the EU Blocking Statute. For more detail on the provisions of the EU Blocking Statute, please see our previous briefing here.

Takeaways

The new EO signals the Trump Administration's willingness to expand the scope of secondary sanctions targeting particular economic sectors, as a means of tightening sanctions on Iran.Because the US "primary" sanctions applicable to US person dealings with Iran involve a near-total embargo, secondary sanctions are the primary option available to a US administration seeking to increase sanctions pressure on Iran.

As a result, non-US companies that have operations which may touch on the Iranian economic sectors identified above should carefully assess their sanctions risk. And all non-US companies should continue to monitor US sanctions developments in Iran and elsewhere.

Although the E3 have stated that they remain committed to the JCPOA, and it currently seems unlikely that the E3 and the EU would withdraw from the agreement altogether, there is a possibility that the parties may not be able to resolve their issues through the dispute resolution mechanism which would result in the re-introduction of sanctions. All persons with dealings with Iran should continue to monitor developments.

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We continue to monitor developments in this area. Please contact the authors or your usual Herbert Smith Freehills contact for more information.