IS THE UNILATERAL WITHDRAWAL OF THE USA FROM THE JOINT AGREEMENT OVER IRAN A CASE OF THE BARK BEING WORSE THAN THE BITE?
Commentary by James Mullion
Much fretting by UK businesses involved in Iran has been happening on this side of the Atlantic since the US President’s formal announcement on the 8th May that the US would be unilaterally withdrawing from the Joint-Comprehensive Plan of Action (the JCPOA) over Iranian sanctions. Since the agreement was first reached in 2015 the EU investment in Iran has vastly exceeded that of our American cousins and Trump’s decision will have a far greater potential economic impact in this jurisdiction than in his own. We, non-US citizens of the world are clearly now seeing what it means to put “America First”.
Irrespective of the economic impact, those in the UK conducting business with Iran will most likely be asking themselves two questions:
- How likely is it that following the US-withdrawal the EU will pull out of the JCPOA?
- If the JCPOA remains intact minus American involvement, what legal force, if any will US sanctions have on those in the EU who continue to trade with Iran?
Likelihood of EU Withdrawal
So far, the EU has maintained that the US decision to withdraw from the JCPOA is a unilateral one and it will continue to honour its commitment to the agreement as long as Iran remains compliant with its own commitments.
The International Atomic Energy Agency, which monitors Iranian compliance, declared on 5th March that “Iran is implementing its nuclear-related commitments” and as long as this remains the case the EU is unlikely to join the US and withdraw from the JCPOA.
The other key parties to the agreement, notably China and Russia, have both signalled that they will continue to honour its terms.
Of course, continued Iranian compliance cannot be guaranteed, given that within the very terms of the JCPOA Iran will treat any re-introduction of sanctions by any of the parties as grounds to cease performing its own commitments in whole or in part. However, from a commercial viewpoint, Iran would have a great deal to lose by foregoing trade with the EU, China and Russia which perhaps makes it unlikely Iran will reciprocate over and above the loss of trade with the US.
It should be noted there is a dispute resolution process set out at paragraphs 36-37 of the JCPOA. In the event of non-compliance, a joint commission established under the agreement will need to decide if there has been significant non-performance by any of the parties. This process can take up to 35 days to resolve. If no resolution is reached, the issue is then referred to the UN Security Council who will then need to vote on a resolution as to whether to continue lifting UN sanctions that are currently eased. If such a resolution is not adopted within 30 days, the previous UN Security Council resolution sanctions snap-back.
In the event of a UN “snap-back” (or of course Iran withdrawal) the EU would begin the process of adopting measures and legislation to re-impose the previous sanctions regime. In such an event the EU has stated that it will issue its own guidance on how existing contracts involving the Iranian regime are to be wound down. Given that the current US-regime guidance stipulates a winding down period of 180 days, any similar EU provisions would reflect this period at a minimum.
The extra-territorial effect of US Sanctions
For European companies, the problem with the re-imposition of American sanctions lies in their extra-territoriality. The EU sanctions that were lifted under the JCPOA apply only to Europe’s companies and citizens; American ones though are different. They have a primary component that applies to American citizens and companies, and includes embargoes prohibiting trade, freezes of assets belonging to citizens of the designated country, and restrictions on the export of specific equipment. Then they often have a secondary, extra-territorial component restricting non-American individuals and companies.
This means that any company, wherever located, must comply with American sanctions if it uses dollars for its transactions, has a subsidiary in America or is controlled by Americans. The potential risk is that said company could lose the ability to obtain finance from US banks, face travel bans on its officers or even face asset freezes. Non-US citizens could be designated as “Specially Designated Nationals”, thus obliging any US national (i.e. a US bank) to freeze their assets.
In response the EU announced on 18th May that it has begun the process of reviving so-called “blocking regulations”, introduced in 1996 to circumvent US sanctions on Cuba and Iran. The EU has stated that it aims to have these measures in place by 6th August 2018. In addition the EU also announced that it has launched the formal process of removing obstacles for the European Investment Bank to finance activities outside the European Union, in Iran which could be useful in particular for small and medium-sized companies.
Regulation 2271/96 was passed at the time to counteract the effects of the extra-territorial application of US Sanctions under the Helms Burton Act (Cuba and Iran and Libya) Sanctions Act 1996. In respect of Iran the sanctions prevented investments that could increase their petroleum production capabilities and any person in breach could receive a money judgment in the US courts.
At the time, this penalty was relatively straightforward to counteract in that the EU blocking regulation simply prohibited the enforceability on EU citizens of US judgments under the Helms Burton Act, whilst also providing the right to claim damages arising out of any such claim and also prohibiting anyone within the EU from complying with any judgment or prohibition resulting from the legislation.
Step forward 20 years and the US sanctions regime has become more sophisticated with far-ranging penalties such as asset freezes. What is more, banks and other financial institutions face far more stringent compliance regimes that were in place in 1996, such that anyone wishing to conduct business in America may have to positively show that they do not conduct business in Iran or with any “SDN’s”.
As such, the blocking regulations may not entirely protect any entity conducting business with Iran that has, directly or indirectly, through principal or intermediaries, conducted (or indeed will conduct) any business activity in the United States or its jurisdiction. Given the centrality of the US to the world financial system this is likely to mean that a number of affected businesses face a stark choice between doing business with the United States or a country sanctioned by the United States.
This commentary sets out the position as 21st May 2018.
James Mullion is a Partner at Janes Solicitors