17 January 2016

Implementation Day Occurs - Iranian Sanctions Lifted

In July 2015 an historic agreement was reached in Vienna by the "E3/EU+3" countries (China, France, Germany, the Russian Federation, the UK and the US) and Iran, the Joint Comprehensive Plan of Action ("JCPOA"). Under the terms of the JCPOA, a phased conditional lifting of sanctions was agreed and, in exchange, Iran agreed to halt its nuclear weapons programmes, and to submit to regular inspections by the International Atomic Energy Agency (the "IAEA").

IAEA Report – 16 January 2016

On 16 January 2016, the IAEA Director General released a report certifying Iran's compliance with the JCPOA, and specifically the implementation by Iran of certain nuclear related measures. The report was issued after the IAEA inspectors on the ground verified that Iran has carried out all measures required under the JCPOA to enable Implementation Day to occur. The IAEA report was released to the IAEA Board of Governors and to the United Nations Security Council.  

Implementation Day

The release of the IAEA report has triggered the next JCPOA milestone, Implementation Day. Under the terms of the JCPOA, there is to be an immediate lifting of a significant proportion of Iranian sanctions. This key milestone represents a watershed moment for Iran, as it emerges from economic isolation.

Opportunity and risk in the immediate future

There are significant opportunities for businesses looking to engage with Iran.  In particular, across manufacturing, retail, energy, consumer goods, food/drink, and financial services.  A number of businesses will now be looking to finalise deals as soon as possible so that they can be the first to market.

The immediate focus will likely be Iran's natural gas reserves which are considered among the biggest in the world and its oil reserves, which are larger than those in Iraq, Kuwait, and the UAE. It is no surprise that BP, Shell, Total, Statoil and Lukoil are all reported to have shown concrete interest and/or signed memoranda of understanding in recent weeks.  

However, the process of reconnecting Iran with the global economy after years of isolation as a result of sanctions will not take place overnight.  Indeed, a number of businesses have been adopting a "wait and see" approach in recent months and it is likely that at least some of the business community will continue to exercise caution in the short/medium term. Instances of "over compliance" by corporates and financial institutions (a feature of business restrictions arising under the sanctions regime) seem likely to continue, pending greater certainty as to the legal and political landscape.   

The sanctions relief

Following the IAEA report, the EU took immediate steps to lift all nuclear-related economic and financial sanctions.  By Council Decision 2016/37 of 16 January 2016, the Council adopted the earlier Decision 2015/1863 of 18 October 2015, by which it was agreed to terminate all EU nuclear related economic and financial sanctions, simultaneously with the IAEA verified implementation by Iran of agreed nuclear related measures.

Accordingly, the nuclear related and economic and financial sanctions terminated by the EU include those applying to: financial transfers, banking, insurance and reinsurance, the SWIFT system, trade financing, oil and gas, petroleum and petrochemical products and related technology, naval equipment and technology, design and construction of cargo vessels and oil tankers, trade in precious metals, as well as other areas. 

However, it is important to note that despite this important development in relation to EU sanctions, most sanctions involving US persons remain in place. Non-US companies and banks dealing with Iran will no longer be punished by the US, but US companies themselves will still have to grapple with various terrorism, human rights and ballistic missile-related sanctions that remain in place and business with Iran will be subject to a licencing regime. US banks remain prohibited from direct or indirect trade with Iran. The US Treasury Department has confirmed that foreign subsidiaries of US companies will be allowed to do business with Iran.

With regard to the UN, all sanctions resolutions passed between 2006 and 2010 are terminated. However, the 20 July 2015 resolution continues some UN restrictions. Iran is called upon to refrain from work on ballistic missiles designed to deliver nuclear weapons; the supply of ballistic missiles and heavy weapons to Iran is subject to Security Council approval; and prohibitions on the transfer to Iran of nuclear technology for peaceful purposes remain in place.

The sanctions relief remains subject to "snap back" provisions, by which sanctions can automatically be reintroduced if Iran fails to comply with the JCPOA deal. The 20 July 2015 Security Council resolution provides for sanctions to be re-imposed if Iran breaches the deal in the next 10 years.  If the Council receive a complaint of a breach, it will require a resolution within 30 days in order to continue / extend sanctions relief. If the Council fails to pass such a resolution, the sanctions will automatically be re-imposed.

Practical steps

Iran remains a high-risk jurisdiction. A large number of entities remain on sanctions "blacklists" both in the EU and the US, ownership structures are often opaque and a significant proportion of assets are state owned and/or managed through intermediaries. Going forward, all businesses looking to re-engage with Iran should, amongst other things, be considering the following:

  • Counterparty risk and due diligence – whilst the lifting of sanctions will see around $100 billion of assets released from asset freezes, a number of entities remain blacklisted by the US and the EU (despite the lifting of the wider sectoral measures). To ensure compliance, it will still be necessary to screen/check all counterparties/intermediaries. In addition, it will be necessary to conduct detailed counterparty due diligence extending up and down the ownership chain which may not always be straight-forward in circumstances where complex ownership structures are in play.
  • Contractual protection - full and robust contractual protections should be negotiated to address the residual sanctions risk, as well as the risk of sanctions "snapback". This should include detailed representations/warranties, sanctions termination rights and sanctions conditions precedent.
  • Sanctions policies and procedures – to protect against the remaining sanctions risks, these are likely to be a contractual condition in many commercial deals.
  • US companies/operations - the position in the US means that US businesses and global businesses with US operations will have to consider carefully the extent of their new obligations.
  • Finance - banks and other financial institutions have spent recent years "de-risking" and stopping all business with high-risk/sanctioned countries including Iran.  At least in the short term, they are likely to remain reluctant to handle Iran-related transactions. Even where finance is granted, financial institutions are likely to insist on extensive sanctions protections – these should be subject to careful negotiation.
  • Wider compliance risks – many of Iran's key businesses and assets are subject to state control and the use of intermediaries is common place.  This means that the corruption risk (e.g. UK Bribery Act/US Foreign and Corrupt Practices Act) in Iran remains significant.  Businesses should remain vigilant and ensure proper procedures are followed.

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