Over recent months, UK Finance has written on the escalating transatlantic divergence in sanctions policy and the impact for our members in assessing their sanctions compliance posture and risk exposure. The impact of last night’s US withdrawal from the international nuclear deal, commonly known as the Joint Comprehensive Plan of Action (JCPOA), should not be underestimated.
The United States was one of eight signatories party to the international agreement which was struck during President Barack Obama’s administration in 2015. Aside from the US and Iran, the other signatories are China, France, Germany, Russia, the UK and the EU. The deal itself was painstakingly negotiated over 12 years and enshrined in UN Resolution 2231 (2015).
The decision of the US Administration to withdraw from the deal and to re-impose American sanctions on Iran has been met with dismay across European capitals. As the UK Foreign Secretary indicated this afternoon in the House of Commons “under the agreement, Iran has relinquished 95 per cent of its low-enriched uranium, placed two thirds of its centrifuges in storage, removed the core of its heavy water reactor – thus closing off the plutonium route to a bomb, and allowed the International Atomic Energy Agency to mount the most intrusive and rigorous inspection regime ever devised, an obligation on Iran that lasts until 2040.”
The declaration by the EU High Representative further stated this afternoon that the lifting of nuclear-related sanctions is an essential part of the agreement and stressed that the EU remains determined to work with the international community to preserve the deal.
Now that the Trump Administration has left the JCPOA, EU governments are looking to Washington to set out how they intend to create a ‘Plan B’ and build a negotiated solution to shared concerns. A solution which by necessity will need to include Iran, China and Russia as well as countries in the region.
At a practical level, there is a fair amount of ambiguity about how the US will implement their new policy. The guidance issued by the Treasury Department last night offers at best partial answers for European governments to decide on how to respond and for third country actors to decide how (or whether) to comply. We can assume significant further guidance will be forthcoming.
Broadly speaking, the US Administration is offering three different ‘wind down’ periods for different types of transactions. For most trade and commerce, there is a 90-day wind down. Whilst for most energy transactions there is a six-month wind down. However, due to the complexity of the secondary sanctions threat levelled against Iranian oil consumers, licit transactions will continue long past that point.
We can expect that by the end of the 180-day wind down period, the US Treasury will re-list Iranian companies removed from the US SDN list as part of the JCPOA and return companies currently on the ‘EO 13599’ list to the SDN list. Once returned, non-US companies engaging with those on the SDN list will face potential US secondary sanctions for engaging in ‘significant transactions’. In short, substantially all secondary sanctions suspended as part of the JCPOA are expected to be back in force.
For countries importing Iranian oil, the impact is considerable. The US Treasury Department FAQs issued last night indicate that countries are expected to begin reducing purchases immediately in order to qualify for significant reduction exceptions following the 180-day wind down period.
Additionally, the Treasury Department has indicated that it plans to cancel the JCPOA authorisation of the import of Iranian carpets and foodstuffs into the US as well as most licences related to sales to Iran’s aviation sector. US General Licenses unrelated to the JCPOA appear likely to remain in place.
Finally, in accordance with guidance provided in December 2016, firms can continue to receive payments due from Iranian entities per the original contract terms more-or-less in perpetuity, though there are of course some restrictions on this permission.
During these wind-down periods, key US and non-US government actors will continue to make policy decisions that will matter a great deal to financial institutions and wider commercial operators.
First, the US will need to decide how forcefully it intends to enforce the re-imposed sanctions and whether to impose any new sanctions on Iran (though with the JCPOA sanctions back in place, Iran will be so thoroughly sanctioned that new measures would be largely symbolic).
Similarly, the US has so far indicated that it will not attempt to use the JCPOA dispute and UN ‘snap back’ mechanisms which would theoretically allow the US to move unilaterally to re-impose Security Council sanctions. This would put the EU and its Member States into a very uncomfortable position of either defying binding UN sanctions or re-imposing sanctions on Iran against their own strong policy preferences. Over time, there is likely to be pressure from Iran hawks in Washington to use this tool.
Moreover, theoretically ‘snap back’ in this context is a new and untested procedure. There have been claims that the US can no longer use the dispute procedure and thus snap back because it has ‘withdrawn’ from the deal. In truth, there just remains too much uncertainty. The provision was drafted with the view of Iranian non-compliance and not a US withdrawal. That said, if Iran at some point in the future were to withdraw from the deal and resume enrichment, political EU–Iranian tensions would escalate and snap back would be far more likely.
Second, Iran has announced that it will keep to the nuclear restrictions in the deal for now in order to see what the EU, China, and Russia can offer to make up for the benefits the US has withdrawn. European leaders have signalled that they will engage in this conversation with Iran and the other remaining JCPOA participants. This could set up a show down over US secondary sanctions as European governments seek to protect their firms from the US, posing difficult issues for European companies.
Third, other countries, including China, Russia and India, will need to decide to what extent they comply with US sanctions threats or, alternatively, approach this as an opportunity to further strengthen their commercial positions in Iran.
Despite the vast amount of political uncertainty, what we can be sure of is that the geopolitical context has entered unchartered territory. EU leaders are now strategising on how to ensure EU companies can continue to engage with Iran and what, if any, protections can be given against US secondary sanctions.
Equally, Iran has articulated that their continual commitment to the deal will depend on France, Germany and the UK ensuring meaningful benefits and access to EU financial markets. How EU governments ensure this will involve concerted collective action and a response along the lines which we have not seen before. Furthermore, past efforts to insulate EU companies from US sanctions, such as the widely referred to ‘blocking statute’ have been widely viewed as ineffective and will be unlikely to offer any real protection against US sanctions.
UK Finance members, along with the wider financial and business sector, will be well advised to monitor closely this rapidly evolving situation and to carefully monitor the legal, political and diplomatic context. In support of this, our UK Finance Sanctions Panel will work closely with all relevant stakeholders to ensure our members have a clear picture of risk exposure. This will include: a) preparing a paper for EU governments on the impact of secondary sanctions and practical implication of what is meant by ‘significant transactions’; b) hosting a webinar detailing implications of a US withdrawal; and c) working with EU and US governments authorities to ensure members are kept abreast of key policy decisions.
It remains to be seen whether the Iran deal will hold together without the US. For now, as long as Iran continues to implement its nuclear-related commitments, the ball is very much in the EU’s court to find new ways of ensuring sanctions relief.