Iran: further advice on re-imposition of secondary sanctions

US law firm Freehill Hogan & Mahar has published a client alert for West of England Club and UK Club concerning the re-imposition of US secondary sanctions against Iran. WoE noted that the sanctions concerning financial transactions involving petroleum and petroleum products “will only apply if the President determines that there is a sufficient supply of such commodities from countries other than Iran to permit a significant reduction in the amount of petroleum and petroleum products purchased from Iran.”

Freehill said there was a possibility for some countries to be granted a waiver under the National Defense Authorization Act (NDAA) of 2012, allowing them to continue buying Iranian oil as long as there was evidence that there was not a sufficient supply on the world market to replace their Iranian supply.

When secondary sanctions were previously in place, prior to January 2016, six countries – China, India, Japan, the Republic of Korea, Taiwan, and Turkey – held such a waiver.

However, Freehill noted that there was no current indication from the US administration whether any countries would be granted a similar waiver under the re-imposed sanctions. WoE said that “members should therefore assume until informed otherwise that the prohibitions on the purchase and carriage of Iranian crude oil, petroleum products and petrochemicals apply in full and without waiver”.

Freehill further said that, “since the US has not been joined by the EU, Russia and China in re-imposing the pre-JCPOA sanctions, it seems likely that, in order to exert maximum pressure, OFAC will apply a strict interpretation of the sanctions and will enforce them with renewed vigour”.

WoE advised that any parties trading with Iran should now exercise caution and carefully review the status of the US secondary sanctions against Iran to determine whether their activities might expose them to penalties.”

UK Club advised that Companies that had resumed trading with Iran will need to reassess whether their trading activities are sanctionable by the US or will become so after November 4th 2018.

Brief JCPOA timeline

President Trump announced on May 8th 2018 that the US was withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and would re-impose the US secondary sanctions against Iran, which had been suspended upon the commencement of the JCPOA.

On August 6th 2018 the President issued EO 13846, which re-imposed the secondary sanctions. However, for certain categories of transactions, including those relating to Iranian petroleum and petroleum products, a previously established wind-down period would be in effect until November 4th 2018.

The re-imposition harks back to the fact that the JCPOA implementation in January 2016 was not as clear-cut as it many people thought. Secondary sanctions against Iran were not completely terminated, but were to be waived for successive six-month periods. At the same time, various EOs which included sanctions were revoked.

Therefore, when the US withdrew from the JCPOA on May 8th this year, the State Department revoked the statutory waivers which had implemented the JCPOA and, at the same time, issued the necessary statutory sanctions waivers to permit the winding down of Iranian transactions which had been commenced before May 8th.

At that point in time the prior EOs which contained sanctions were not re-imposed. However, as of August 7th 2018 those prior EOs came back into effect.

Therefore, except for the one wind-down period which expires on November 4th, the US secondary sanctions against Iran have now returned to their pre-JCPOA status, with some expansion of the sanctions.

Two separate wind-down periods were established on May 8th 2018, one for 90 days and the other for 180 days. The 90-day wind-down period expired on August 6th, meaning that the following activities became sanctionable from August 7 onward:

  • The purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
  • Iran’s trade in gold or precious metals;
  • The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes;
  • Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  • The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  • Transactions with Iran’s automotive sector.

The sale, supply or transfer to or from Iran of graphite, raw or semi-finished metals, etc is not sanctionable under all circumstances, but only if:

  • Iran is using any materials as a medium for barter, swap or any other exchange transaction; or
  • Iran is listing any of the materials as assets of the Government of Iran for purposes of the national balance sheet; or
  • The material is to be used in connection with the energy, shipping, or shipbuilding sectors of Iran or any sector of the Iranian economy controlled directly or indirectly by Iran’s Revolutionary Guard Corps; or
  • The material is sold, supplied or transferred to or from an Iranian person on the SDN List; or
  • The material is to be used in the nuclear, military or ballistic missile programs of Iran.

OFAC has recently expressed strong reservations regarding the transparency of Iranian transactions, questioning whether it was possible to be confident in the identity of the suppliers, shippers, receivers or end-users of cargoes shipped to and from Iran. Consequently, OFAC has suggested that non-US entities engaged in the shipment of IFCA Section 1245 materials to or from Iran should use “extreme caution” to ensure that they are not engaged in a sanctionable activity.

On November 4th 2018 sanctions will be re-imposed on:

  • Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  • Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
  • The provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
  • The provision of underwriting services, insurance, or reinsurance; and
  • Iran’s energy sector.

Freehill said that a question which frequently arose was whether, after November 4th, all dealings with Iranian Port operators would be sanctionable.

OFAC issued a FAQ dealing with this issue on August 6th, FAQ 315.

“However, to the extent that a shipping company transacts with port operators in Iran that have been identified as such under IFCA but not otherwise designated, and as long as such payments are limited strictly to routine fees including port dues, docking fees, or cargo handling fees, paid for the loading and unloading of non-sanctioned goods at Iranian ports, we anticipate that such transactions would not be considered significant transactions for the purposes of IFCA”, the law firm said.

But, nonroutine and/or large payments or fees that materially exceeded standard industry rates could expose a person to sanctions.

Similarly, providing any port operator in Iran with any significant financial, material, technological, or other support could expose a person to sanctions.

Freehill concluded that “it appears that routine payments to a port operator relating to the loading or discharging of non-sanctioned cargoes in Iran will not be a sanctionable activity”.

The EU Blocking Statute

In an effort to counteract the re-imposition of US secondary sanctions, the EU has updated the so-called Blocking Statute, which was first enacted in 1996 to protect European operators from the US sanctions against Cuba, Libya and Iran. The Blocking Statute applies to all EU operators and has been updated to include all US sanctions against Iran from 1996 to the present.

The Blocking Statute attempts to protect EU operators from the effects of the U.S. secondary sanctions by providing the following relief:

  • It nullifies in the EU the effect of any foreign decision, including court rulings and arbitration awards, based on the sanctions listed under the blocking statute.
  • It allows EU operators to recover damages caused by the application of the sanctions from “the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.
  • It allows EU operators to seek an authorization to comply with the sanctions, if failing to do so would cause serious harm to their interests.

The Blocking Statute does not require EU operators to deal with Iran, but rather seeks to create an environment in which an operator can make a free decision as to whether to trade with Iran or not, without being pressured by the US secondary sanctions.

Freehill said that it remained to be seen whether the Blocking Statute passed by the EU, effective as of August 7th, would counteract the US secondary sanctions. The law firm observed that there did not appear to be any way for the blocking statute to protect EU operators from the ultimate US penalties, that is, a blocking of the operator’s property in the US and loss of access to the U.S. financial system. “That being the case, the extent to which the Blocking Statute will counteract the US secondary sanctions is questionable”, said Freehill.