On July 14, 2015, the so-called P5+1 countries (United States, United Kingdom, Germany, France, Russia and China) and Iran agreed on the Joint Comprehensive Plan of Action (the “JCPOA”) to lift certain sanctions on Iran in exchange for Iran’s assurance and commitment not to pursue certain weapons proliferations activities. On July 20, 2015, the United Nations Security Council unanimously endorsed the JCPOA.
What is the JCPOA?
The JCPOA provides a framework for the sanctions relief of international sanctions imposed against Iran. In exchange for sanctions relief, the JCPOA requires Iran to provide assurances regarding the peaceful and civilian nature of its nuclear program, commitments by Iran not to pursue certain weapons proliferations activities, and monitoring of Iran’s compliance with these activities. Specifically, the JCPOA will:
- Remove a wide range of sector-specific sanctions, targeting Iran’s energy, shipping, ship-building and automotive industries;
- Lift restrictions on Iranian crude oil and petrochemical sales;
- Allow Iranian banks, including the Central Bank of Iran, to re-connect to the SWIFT messaging system and to engage in financial commerce and currency exchanges;
- Authorize a wide range of “associated services” to facilitate newly-permitted transactions; and
- Strike entities and individuals from the US Specially Designated Nationals list and Foreign Sanctions Evaders list.
How will the JCPOA affect U.S. Companies and their Foreign Subsidiaries?
Although the JCPOA calls for wide sanctions relief, it is important to note that many restrictions to doing business with Iran will remain in place.
Currently, US Persons are prohibited from doing business with Iran. The term “US Person” includes US citizens, permanent residents, entities organized under US laws (including foreign branches), any person physically in the United States, as well as any entity owned or controlled by a US Person (which includes foreign subsidiaries). US parent companies of a foreign subsidiary can be held liable for activities that the subsidiaries conduct with Iran to the same extent as if the US parent company conducted such activities with Iran. As such, US companies should not currently do business with Iran, and US parent companies should be vigilant that their subsidiaries are not conducting business with Iran.
Once the JCPOA is implemented, U.S. entities, citizens and residents will continue to be generally prohibited from conducting business with Iran. The US commits under the JCPOA, however, to license overseas subsidiaries of US entities for activities “consistent with the JCPOA”. No guidance has been provided yet on what these activities would be and on the licensing process.
The US has also committed to terminate certain nuclear-related sanctions. Many other sanctions that target non-nuclear-related activities will, however, remain in place. For example, sanctions that target foreign financial institutions and non-US persons who engage in business with individuals on the Specially Designated Nations and Blocked Persons List (the “SDN List”) and sanctions relating to counter-terrorism, human-rights related abuses and missile activities will remain in place. The US embargo on Iran will also remain in place, with a few minor exceptions.
If at any point Iran materially breaches its obligations under the JCPOA, the US can re-implement any sanctions that it removes. In the event of such re-implementation, the US will not “grandfather” any contracts that were entered into pursuant to the JCPOA relief. As such, parties considering business in Iran once the JCPOA is implemented should understand that sanctions could be re-imposed.
When will the JCPOA be Implemented?
The timeline for the entire plan to take effect will take several years, currently estimated at about ten years from Adoption Day (as defined below). The JCPOA outlines a step-by-step process under which the US and its European partners will relieve nuclear-related sanctions only at such time as the International Atomic Energy Agency (the “IAEA”) verifies that Iran has completed certain key steps to limit and roll-back elements of its nuclear program.
Below is a summary of the status of the JCPOA with respect to the Iran sanctions:
- Adoption Day: Once the JCPOA is formally approved by the US government and all other relevant parties (likely in mid-October) (“Adoption Day”), the US government will begin putting together sanctions relief regulations that will only be put into effect on Implementation Day (as defined below), Iran will begin implementing the commitments made with respect to nuclear activities, and a joint commission will be established to monitor the implementation of the JCPOA. Iran and the P5+1 are not required to start implementing their commitments under the JCPOA until Adoption Day.
- Implementation Day: Once Iran implements all necessary nuclear-related measures described in the JCPOA, the IAEA will need to verify that all such measures are satisfactory. Sanctions relief will be implemented on the day on which IAEA verifies that Iran is in full compliance with all such measures (“Implementation Day”). Implementation Day is expected to be in the first half of 2016.
- Transition Day: By October 2023, there will be a UN termination of restrictions on ballistics and an EU termination/suspension of remaining sector-specific sanctions.
- Termination Day: By October 2025, the UN plans for the UNSC to end its consideration of the Iranian nuclear issue, and the EU will terminate all remaining sanctions provisions.
Can U.S. Companies do Business with Iran Prior to Implementation Day?
Restrictions on US persons and foreign subsidiaries of US entities will remain fully in place until the JCPOA is implemented in early 2016.
Can U.S. Companies Plan to do Business with Iran After Implementation Day?
Once the JCPOA is implemented in early 2016 (assuming that all criteria will be met by Iran), restrictions on US companies will continue to remain in place. However, foreign subsidiaries may potentially be able to do business with Iran after Implementation Day if: (1) the sanctions regulations that will be issued by OFAC deem the subsidiary’s activities to be consistent with the JCPOA, and (2) the subsidiary obtains a license from OFAC. The US government will issue detailed guidance related to the JCPOA in the next months that will shed more light on this question. We will keep you posted on issued guidance.