Iran Series Part 3: Sanctions roll-back and the impact of Brexit – what sanctions risks should you be aware of? (August 2016)

In the Iran Series Part 2 we explored the emerging sectors following the lifting of sanctions by the EU and the US. In Part 3, we explore what sanctions are remaining and the consequences of Brexit on the trade relationship between Britain and Iran.

Brexit impact on the EU and the Joint Comprehensive Plan of Action (JCPOA)

The EU trades with Iran under a custom-made export and import regime, subject to which the EU imports key components of its energy supply from Iran, including oil, gas and petrochemicals. Likewise, the EU exports to Iran include machinery, transport equipment and chemicals. Before 2005, the EU was one of the main trading partners of Iran but the relationship was strained over a decade as a result of the international dispute over Iran’s nuclear program.

On ‘Implementation Day’ of the JCPOA, 16 January 2016, the EU lifted the majority of the economic and financial sanctions against Iranian persons and companies welcoming further areas of cooperation in energy, transport and science.

As part of the EU, Britain like other member states, has been bound by EU regulations, directives and decisions, including economic sanctions against Iran. Following the British vote to leave the EU, ‘Brexit’, Britain could eventually trade with Iran outside the scope of the EU’s export and import regime. A Britain outside of the single market could freely focus its trade and investment with Iran in the most desired sectors such as the energy sector including crude oil and natural gas.

Whilst the first step in the process of Brexit is for Britain to formally invoke Article 50 of the Treaty on the European Union, it appears likely that this will not take place until 2017. Once Article 50 is triggered, from that moment on, negotiations for Britain’s withdrawal will take place with 27 member states, and withdrawal takes place two years after notification to leave has been triggered. That period may be extended with the consent of the European Council.

Until Britain formally withdraws from the EU, it is still bound by its obligations as an EU member state, including the JCPOA giving effect to the sanctions lifting on Iran.

Brexit and Iran

In the light of Brexit, there is a great deal of uncertainty about how Britain will apply the existing EU sanctions against Iran when it leaves the UK, and what kind of potential replacement measures it might decide to impose. On leaving the EU, the UK could potentially decide not to wait until ‘Transition Day’ by 2024 to lift the remaining sanctions on trade with Iran, subject to the approval of the IAEA.

There is always a risk that Britain may also freely implement new domestic legislation for new economic, trade and financial restrictions against Iran. The consequence of this for individuals and international businesses with a UK connection, wishing to do business with Iran, would be that they would need to comply with three sets of sanctions – those imposed by the EU, US and Britain. Any individual or company with an interest in investing or doing business with Iran will require extensive due diligence and internal compliance programmes to avoid a more complex sanctions landscape.

The effect of Brexit on US sanctions

As a party to the JCPOA, the US agreed to lift secondary sanctions targeting foreign individuals and companies. US primary sanctions aimed that US citizens and companies still remain, and they cannot trade with Iran apart from limited exceptions. Specific licenses may be granted on a case-by-case review in order to facilitate trade and investment with Iran. In the absence of obtaining the necessary authorisation, the consequence of breaching the rules is heavy fines.

Once Britain leaves the EU, (and depending on any sanctions Britain may decide to impose) UK individuals and companies need to ensure that any investment deals or transactions with Iran do not involve US citizens, US companies and US financial institutions. EU individuals and companies must continue complying with US sanctions still in force.

On 21 June 2016, Iran and the US reached a landmark agreement whereby the US sold 100 Boeing aircrafts to Iran Air, an Iranian airline company, for a total value of 25 million USD. The deal is part of Iran’s plan to modernise its airline infrastructure. The agreement is conditional upon obtaining the necessary US licence approval, which is expected to go through, and is an example of the US and Iranian business relationship under the JCPOA.

Sanctions remaining

As of ‘Implementation Day’ 16 January 2016, US primary sanctions remain, as well as certain EU restrictions and the UN list of prohibited individuals. It is also anticipated that other jurisdictions with their own autonomous sanctions regime against Iran will also gradually lift those sanctions in accordance with their domestic legislation. International, European and Asian businesses should ensure they are compliant with all remaining sanctions.

In the circumstances where Iranian persons and entities have been released from EU sanctions, they may still be subject to indirect sanctions if they are shareholders in US or EU companies owned by US persons or entities that are subject to sanctions. According to guidance produced by the US Office of Foreign Assets Control (OFAC), if a blocked person owns 50% or more shares, directly or indirectly, in an entity through another entity or entities, that person remains blocked.

Dispute resolution and ‘Snap-back’ mechanism

If a party to the JCPOA believes that another party is in breach of its obligations under the agreement, the parties to the JCPOA can enter into dispute resolution proceedings to try to narrow the issues in dispute with a view to settlement. If no agreement can be reached, the complaining party can notify the UN Security Council in relation to its concerns of significant non-performance.

In the event of a significant non-performance by Iran of its commitments under the JCPOA and after failing to settle the issue under the JCPOA’s dispute resolution mechanism, the EU and the US will re-impose their sanctions under the ‘snap back’ mechanism. The clause in the JCPOA agreement is not intended to deter future foreign business with Iran, but is rather a last resort in the event of a breach and after the dispute resolution mechanism has been exhausted.

The extent and reach of these sanctions can make potential investors in Iran nervous particularly as there is no certainty as to when they will be relaxed or whether further sanctions may be added. It is very important for investors to carry out their proper due diligence and seek legal advice to ensure that they are considering and making contingencies for all possible consequences. However, as at the time of writing (August 2016) it seems that the potential benefits and rewards may well outweigh the uncertainties.

Should you have any questions about this article, please contact our Iran Desk..

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