Further guidance from OFAC on the Iranian nuclear deal

Summary

The Office of Foreign Assets Control (OFAC) of the USA Department of the Treasury, which administers and enforces economic and trade sanctions based on USA foreign policy and national security goals, published new guidance on 15 December 2016 on its approach to undertakings conducting business in Iran in circumstances where the Iran nuclear-related sanctions “snapback” following a breach of the Joint Comprehensive Plan of Action (the JCPOA), the official name of the Iran nuclear deal.

A key clarification in the recent update is that the USA Government would permit non-US, non-Iran persons a period of up to 180 days to wind down operations in or business involving Iran that was compliant with the JCPOA and pursuant to a written contract or written agreement entered into prior to the “snapback”.

The OFAC guidance also sets out that the wind down would permit receipt of payment for goods and services already provided and amounts outstanding under loans or credit extended to an Iranian counterparty by a non-USA, non-Iranian person prior to the occurrence of a “snapback” event. Conversely, further additional deliveries of goods and services, or further advances of loans or credit would be prohibited after a “snapback” occurrence irrespective of any wind down period that may be available, unless such activities are exempt from regulation, authorised by OFAC, or otherwise not sanctionable.

Guidance

In light of the additional guidance from OFAC, commercial parties should ensure that dealings with Iranian counterparties are conducted by way of a written contract or written agreement so as to avail themselves of any wind down provisions that are authorised by OFAC. Such contracts should ensure that adequate provisions are contained so as to properly address, amongst other things, the occurrence of a “snapback” event or the imposition of new Iran-related sanctions in the future.

Background

Historically, Iran has been the subject of various sanctions from bodies such as the UN, EU and/or USA since 1979. The extent and scope of the sanctions significantly increased from 2010, reflecting the international community’s concerns that Iran’s nuclear technology was being developed for the proliferation of nuclear weapons, in breach of its international obligations.

Developments between 2013 and 2015 brought to fruition a road map towards the lifting of nuclear-related sanctions imposed on Iran in the form of the JCPOA, signed on 14 July 2015. The signatories of the JCPOA were Iran and the E3/EU+3 (China, France, Germany, the Russian Federation, the United Kingdom, the United States, and the European Union). The JCPOA was then endorsed by the United Nations Security Council (UNSC) in Resolution 2231 (2015) on 20 July 2015. On or by 18 October 2015 (Adoption Day), all of the JCPOA’s signatories had adopted the agreement’s provisions within domestic legislation provisionally, being contingent on the International Atomic Energy Agency (IAEA) confirming that Iran had fulfilled its commitments under the JCPOA. On 16 January 2016, the IAEA issued its report confirming that Iran had fulfilled its first round of commitments under the JCPOA. This marked "Implementation Day" on the JCPOA's timeline, which enabled legislation passed on or by Adoption Day to become "live", lifting nuclear-related sanctions on Iran.

Under the JCPOA, should Iran (or any other signatory) fail to fulfil its commitments, a special dispute resolution mechanism, could be triggered which could potentially reinitiate (or snapback) the nuclear-related sanctions on Iran that the JCPOA lifted.

How does “snapback” work?

Should any of the JCPOA participants feel that the agreement is not being adhered to, they can raise any such issue with the JCPOA’s "Joint Commission" (consisting of representatives from the E3/EU+3 and Iran). A dispute resolution mechanism, which is set out in the JCPOA, would then follow with the issue being elevated to the highest levels of government amongst the JCPOA signatories, alongside a detailed technical review prepared by an advisory board. The tiered process could last up to 65 days in total, following which, should there still be no resolution, the matter would be brought before the UNSC to consider whether the JCPOA should be reversed.

The “snapback” provisions in the JCPOA do create a level of uncertainty for commercial parties who wish to engage in business in Iran or with Iranian counterparties; neither the US (until recently) or the EU had indicated in any great detail as to whether, and for how long, they would authorise a wind down period to allow parties to disengage from such Iran related business activities. As such, OFAC’s guidance is welcomed for clarifying a key concern for commercial parties involved in Iran related business.

The USA's approach

In January 2016, pursuant to its implementation of the JCPOA, the USA lifted a number of secondary sanctions, which sought to prevent non-USA individuals and companies trading with Iran. Subject to very limited exceptions, the primary US sanctions, imposed on Iran over the years, still remain in place.

In the context of the USA, were there to be a “snapback” of sanctions, this would mean the re-imposition of secondary sanctions on Iran, as well as the withdrawal of OFAC’s General Licence H, which provides authorisation for companies "owned or controlled" by a USA person (ie non-USA subsidiaries of USA companies) to generally engage in business in Iran within a particular framework.

The recent guidance published by OFAC on “snapback” (M5 of the JCPOA FAQs) provides additional clarity on the following key areas:

• the existence of a grace period for a wind down of operations to disengage from Iran
• payment for goods or services delivered/performed prior to the triggering of snap back, and
• repayment for credits/loans extended prior to the triggering of snap back.

Grace period for wind down

In the event of a JCPOA “snapback”, OFAC has stated that the USA government would provide non-USA, non-Iranian persons a 180-day grace period to wind down operations in or business involving Iran that was consistent with the JCPOA and undertaken pursuant to a written contract/agreement entered into prior to snapback.

Payment for Goods or Services

In the event that a non-USA, non-Iranian party is owed payment after a JCPOA “snapback” of sanctions, provided that such payment is:

• for goods or services fully provided or delivered to an Iranian counterparty prior to such “snapback”
• pursuant to a written contract/agreement entered into prior to the “snapback”, and
• in relation to activities that were permissible prior to the “snapback” (ie when the JCPOA was "live").

OFAC had stated that the USA government would allow the non USA, non-Iranian party to receive payment for such goods or services according to the terms of its existing written contract/agreement with its Iranian counterparty.

As OFAC does not allow grandfathering, it would not allow the provision of additional goods or services, including credit, to an Iranian counterparty after snapback, even if pursuant to a pre-snapback contract, except if “necessary to wind down” the business during the 180-day period. In any event, payments would need to be completed within 180 days.

Repayment for credit/loans

Similarly, if a non-USA, non-Iranian party is owed repayment for loans or credits extended to an Iranian counterparty prior to “snapback” pursuant to a written contract/agreement entered into prior to a “snapback” occurrence, and provided that such activities were consistent with the JCPOA whilst the JCPOA was in place, OFAC has stated that the USA government would allow the non-US, non-Iranian party to receive repayment of the related debt or obligation (according to the terms of the pre-existing written contract/agreement).

The EU’s approach

The EU has clarified that the re-introduction of EU sanctions will not apply retroactively. EU Council Regulation 1861/2015 of 18 October 2015, which lifted the EU’s nuclear related sanctions on Iran provisionally ahead of the IAEA report, states in its preamble that in case of a JCPOA “snapback”:

“…adequate protection for the execution of contracts concluded in accordance with the JCPOA while sanctions relief was in force will be provided consistent with previous provisions when sanctions were originally imposed”.

Unfortunately, no exact time frame has been indicated by the EU, though it is likely this will be specified in the legal instrument re-establishing the EU sanctions lifted from Iran under the JCPOA. However, in light of the EU’s continued general support of the JCPOA, it is envisioned that a grace period would be provided for. Whilst we are not aware of any grace periods provided for under other EU sanction regimes, under EU Council Regulation 208/2014 of 05 March 2014 with regards to Ukraine and Russia/Crimea-related sanctions, provisions are contained to enable payment from an EU blocked person provided a contract was in place with such a person prior to that entity being designated as "blocked", subject to obtaining a license from the relevant competent authority within the relevant EU Member State. EU Council Regulation 208/2014 also provides that payments can be made from frozen funds to satisfy judicial decisions. As such, there is precedence in the EU for a level of “adequate protections” in similar situations to a JCPOA “snapback” occurrence.