Expanded Sanctions on Iran: US, EU, and UK Actions
On January 10, 2020, the US State Department announced that, in response to Iran’s alleged actions against US interests, the United States was taking steps to deprive the Iranian regime of revenue from its metals, construction, mining, manufacturing, and textiles industries. To achieve these aims, the President issued a new Executive Order (E.O. 13902) authorizing additional secondary sanctions on Iran targeting certain sectors, and, the US Treasury Department’s Office of Foreign Assets Control (OFAC) added a number of entities involved in the Iranian metals and mining industries to the US Specially Designated Nationals List (SDN list).
A few days later, on January 14, Iran’s stated intent to stop abiding by its commitments under the Joint Comprehensive Plan of Action (JCPOA) led France, Germany, and the United Kingdom (E3) to announce their initiation of the JCPOA’s dispute resolution mechanism, which can be triggered if a signatory to the JCPOA believes that agreed commitments have not been fulfilled (the Dispute Resolution Mechanism). This could lead to the re-imposition of UN, EU, and UK sanctions against Iran.
New US Sanctions Against Iran – What Does E.O. 13902 Target?
Under the new Executive Order, the Secretaries of Treasury and State are authorized, after making the requisite determination, to add individuals and entities in the following categories to the SDN list:
- Persons who 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;
- Persons who have knowingly engaged (on or after January 10) in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with any such sector of the Iranian economy;
- Persons who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person blocked (i.e., added to the SDN list) under this Executive Order; or
- Persons who are owned or controlled by or act on behalf of such person on the SDN list.
US persons are generally prohibited from engaging in any dealings with SDNs and must block the property or interests in property of SDNs.
E.O. 13902 also authorizes OFAC to impose sanctions on foreign financial institutions OFAC determines 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 any sector of the Iranian economy covered by the Executive Order; or
- for or on behalf of any person on the SDN list (or 50% or greater owned by any person on the SDN list) designated pursuant to the Executive Order.
Sanctions can be imposed even where the financial transaction has no connection to the United States. As a consequence, non-US banking transactions related to the construction, mining, manufacturing, and textiles sectors in Iran could become even more challenging.
Who Is at Risk of Being Sanctioned Under E.O. 13902?
As the Administration has emphasized in public statements, these are secondary sanctions, so non-US companies can be targeted under the sanctions, even if they have no connection to the United States. Accordingly, any company that “operates” in Iran in the sectors listed in this Executive Order could be at risk, as well as any company that sells, supplies, or transfers “significant” goods or services relating to these sectors.
OFAC typically uses a multifactor test to determine whether transactions are “significant” for the purpose of Iran secondary sanctions. This test affords OFAC considerable discretion. The factors include, for example: (a) the size, number, and frequency of the transactions; (b) the nature of the transactions, including their type, complexity, and commercial purpose; (c) the level of awareness of management and whether the transactions are part of a pattern of conduct; (d) the nexus of the transactions and any blocked persons; and (e) the impact of the transactions on US statutory/policy objectives.
The secondary sanctions under E.O. 13902 follow a similar model to the sanctions previously imposed on Iranian metals industries (see E.O. 13871). Additionally, OFAC is authorized to name other sectors of the Iranian economy to be similarly targeted by these sanctions.
The sectors named in E.O. 13902 are not defined or explained, which could lead to potentially broad application, as it concerns, for example, the “manufacturing” and “construction” sectors of Iran. As of the date of this publication, OFAC has not yet issued guidance regarding the scope of the listed sectors.
Winding Down Business in Iran’s Construction, Mining, Manufacturing, and Textiles Sectors
On January 16, OFAC published an FAQ providing for a 90-day wind-down period for persons engaged in transactions that would otherwise be targeted by sanctions under the Executive Order – i.e., transactions relating to the Iranian construction, mining, manufacturing, or textiles sectors. The wind-down period, which applies only to transactions entered into before E.O. 13902’s issuance on January 10, expires on April 9, 2020.
Conclusions on the New US Sanctions
As mentioned above, OFAC may provide additional guidance, including on how OFAC plans to define and interpret the listed sectors. In the meantime, companies will need to assess their potential exposure absent such guidance. The Executive Order makes it clear that the sanctions will not apply to persons engaged in the provision of agricultural commodities, food, medicine, or medical devices.
UN, EU, and UK Sanctions Snapback May Be on the Horizon
The triggering of the Dispute Resolution Mechanism by the E3 this week came as a surprise after the EU Foreign Ministers decided not to take any action in an emergency meeting held a few days earlier. In a joint statement, the Foreign Ministers of the E3 stressed that they “do this in good faith with the overarching objective of preserving the JCPOA and in the sincere hope of finding a way forward to resolve the impasse through constructive diplomatic dialogue while preserving the agreement and remaining within its framework.” The process could nevertheless lead to a re-imposition of UN and EU sanctions against Iran.
Dispute Resolution Mechanism and Possible Re-introduction of UN Sanctions
The Dispute Resolution Mechanism operates as follows:
- A Joint Commission consisting of the remaining JCPOA parties (E3, China, Russia, Iran, and the EU High Representative for Foreign Affairs) has 15 days to resolve the issue in dispute. This time period can be extended by consensus. In the event the dispute is not resolved by the Joint Commission, any remaining JCPOA signatory can refer the issue to the Ministers of Foreign Affairs, who have a further 15 days to resolve the dispute, unless the period is extended. The matter can alternatively (or in parallel) be submitted to an Advisory Board, which has 15 days to provide a non-binding opinion. If the issue remains unresolved, the Joint Commission has 5 days to review the opinion of the Advisory Board.
- If the dispute is still unresolved after that initial 35-day period, the complainant is entitled to stop fulfilling its obligations under the JCPOA and notify the UN Security Council.
- The UN Security Council then has 30 days to adopt a resolution to continue the sanctions relaxation introduced in January 2016. If the Security Council is unable to adopt such a resolution within this period, the provisions of the UN Security Council’s previous sanctions regime would be re-introduced (snapback).
Because a UN Security Council resolution can be adopted only if none of the Council’s permanent members (i.e., China, France, Russia, the United Kingdom, the United States) puts forward a veto, it appears likely that, once this stage is reached, the snapback of UN sanctions would move forward. The Dispute Resolution Mechanism process can, however, be extended and suspended at several points before it reaches the UN Security Council.
Some European diplomats have emphasized that the Dispute Resolution Mechanism was triggered in order to save the JCPOA, and hopes were expressed that the negotiations would continue until the US presidential election in November, which could bring about a change in US relations with Iran.
The EU High Representative for Foreign Affairs, Josep Borell, who will oversee the Dispute Resolution Mechanism as coordinator of the Joint Commission, has stated that the Mechanism “requires intensive efforts in good faith by all.” It remains to be seen whether a diplomatic solution without a snapback of the UN Security Council sanctions will be found.
Potential Re-introduction of EU Sanctions
In the event of a snapback of UN sanctions, the EU could re-impose the full range of sanctions on Iran that were suspended or terminated in January 2016, following the implementation of the JCPOA. Any re-introduction would need to follow the formal EU legislative process. Because this is a highly political process, it remains unclear at this point whether all or only certain EU sanctions would be re-imposed (or, although less likely, no EU sanctions would be reimposed). This will likely depend on the outcome of the Dispute Resolution Mechanism and any further political developments in Iran.
EU sanctions in place prior to January 2016 covered most of Iran’s crucial business sectors:
- Financial, banking and insurance sectors
- Energy sectors (oil, gas, and petrochemical)
- Shipping, shipbuilding and transport sectors
- Gold, other precious metals, banknotes, and coinage
The re-imposition of EU sanctions would likely also lead to the re-designation of Iranian individuals and entities, including many Iranian financial institutions, that were de-listed in January 2016.
According to guidance issued by the EU in 2016 on a potential EU snapback, EU sanctions would not be applied with retroactive effect and companies would be given a grace period in order to wind down activities.
EU Blocking Regulation
After the US withdrawal from the JCPOA, the EU re-introduced the so-called “EU Blocking Regulation” to mitigate the impact of re-imposed US secondary sanctions, in effect prohibiting EU persons from complying with certain US secondary sanctions against Iran. It remains to be seen to what extent, if at all, that EU Blocking Regulation will stay in force in the event EU sanctions are re-introduced.