US and EU Implement Limited Relaxation of Economic Sanctions Against Iran

January 22, 2014

On January 20, 2014, the United States and the European Union relaxed certain economic sanctions against Iran in order to implement the Joint Plan of Action (JPOA) agreement reached between Iran and the “P5+1” countries (consisting of the United States, the United Kingdom, France, China, Russia, and Germany) on November 24, 2013.  We have previously advised on the key provisions of the JPOA and its expected impact on existing sanctions.

The United States formally relaxed certain sanctions through the publication of guidance issued by the Department of Treasury, Office of Foreign Assets Control (OFAC).  The OFAC materials consist of guidance announcing the temporary relaxation of sanctions (OFAC Guidance); Frequently Asked Questions addressing certain interpretational issues (FAQs); and a Statement of Licensing Policy regarding safety-related activities in support of Iran’s civil aviation industry.  As expected, the OFAC Guidance provides that for a period of six months, the United States will not impose certain sanctions relating to Iran’s export of petrochemical products; Iran’s auto industry; the supply to Iran of gold and other precious metals; the supply to Iran of spare parts in support of the safe operation of Iran’s civil aircraft; Iran’s export of crude oil to certain countries; and TSRA-related trade activities.  The relaxation of sanctions will remain in effect from January 20, 2014 through July 20, 2014.

The European Union formally relaxed certain sanctions through the adoption of Council Regulation 2014/42/EU and of Council Decision 2014/21/CFSP, which are both dated January 20, 2014.  The amendment of existing legislation was necessary in order to give effect to the relaxation and to have it uniformly implemented by all the Member States. However, the European Union does not contemplate any additional form of guidance to facilitate its implementation. The new EU rules provide that for a period of six months, the European Union will suspend the prohibitions of (i) the provision of insurance and reinsurance and transport of Iranian crude oil; (ii) the import, purchase, or transport of Iranian petrochemical products and on the provision of related services; and (iii) the trade in gold and precious metals.  Furthermore, the European Union is increasing the authorization thresholds in relation to the transfers of funds to and from Iran.

US Sanctions Relaxation

The OFAC Guidance makes clear that the relaxation of sanctions applies only to the activities of non-US persons other than non-US entities that are owned or controlled by US persons.  US persons only see new relief in the area of civil aviation safety, as described below.  US persons, along with foreign entities that they own or control, remain subject to the restrictions set forth in the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR) and other applicable sanctions laws and regulations.  The ITSR essentially prohibit all dealings with Iran by US persons and their subsidiaries, with limited exceptions.

The OFAC Guidance further states that where sanctions are relaxed pursuant to the JPOA, not only is the covered activity authorized, but all “associated service” is authorized as well.  This term is defined as “necessary service – including any insurance, transportation, or financial service – ordinarily incident to the underlying activity.”  The OFAC Guidance states that unless otherwise noted, “associated service” may not involve persons listed as Specially Designated Nationals (SDNs).  Furthermore, the FAQs state that transactions with Tidewater Middle East Co., a major port operator designated for its proliferation activity, remain sanctionable.

Of paramount significance, the provisions described below only authorize activity (including payments) “initiated and completed entirely” within the six-month period that runs through July 20, 2014 (the JPOA Period).  The JPOA does not authorize any sanctionable activity that took place before January 20, 2014 or that takes place after July 20, 2014.  Furthermore, the FAQs state that any payments relating to pre-JPOA Period activity, or payments received for JPOA-authorized activity that are made after the period expires, could be sanctionable.

Iran’s Export of Petrochemical Products

The JPOA provides for the suspension of sanctions relating to the export of petrochemicals from Iran.  The OFAC Guidance provides that the following activity is authorized during the JPOA Period:

  • Engaging in “significant” transactions for the purchase, acquisition, sale, transport, or marketing of petrochemical products from Iran.  This was previously prohibited by Section 2(a)(ii) of Executive Order 13622 (EO 13622) as amended, on which we have previously advised, which provides for the imposition of sanctions under the Iran Sanctions Act (ISA) on sanctioned persons.
  • Materially assisting, sponsoring, or providing financial, material, or technological support  for, or goods or services in support of, Iranian petrochemical companies listed in the Annex to the OFAC Guidance.  This was previously prohibited by Section 2(a) of Executive Order 13645 (EO 13645), on which we have previously advised, which provides for the blocking of the property of sanctioned persons.
  • Conducting or facilitating “significant” financial transactions in support of the activity described above.  This was previously prohibited by Section 1(a)(iii) of EO 13622 as amended, Section 3(a)(i) of EO 13645, and sections 561.204(a) and 561.204(b)(3) of the Iranian Financial Sanctions Regulations, 31 C.F.R. part 561 (IFSR).  Sanctioned foreign financial institutions (FFIs) were subject to “strict conditions” on the maintenance of their US-based payable-through and correspondent accounts.

The OFAC Guidance provides that “petrochemicals” will carry the same meaning as “petrochemical products” under EO 13622, defined as “any aromatic, olefin, and synthesis gas, and any of their derivatives, including ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia, methanol, and urea.”  For detailed guidance on eligible products, the OFAC Guidance and FAQs encourage review of “State Department Sanctions Information and Guidance,” 77 Fed. Reg. 67,726 (Nov. 13, 2012).

Persons are authorized to engage in transactions with Iranian petrochemical companies listed in the Annex to the OFAC Guidance, as well as Iranian financial institutions designated solely pursuant to Executive Order 13599 (EO 13599, which designated all Iranian financial institutions as SDNs) and not due to terrorist or weapons proliferation activities.  Dealing with other Iranian SDNs remains prohibited.

Iran’s Auto Industry

The JPOA provides for the suspension of sanctions on Iran’s auto industry.  The OFAC Guidance states that during the JPOA Period, persons are authorized to engage in “significant” transactions for the supply to Iran of goods and services “used in connection with” the Iranian auto sector, and FFIs are authorized to engage in financial transactions relating to such activity.  The FAQs indicate that authorized goods include complete knock-down kits, and that authorized services include shipping, warranty, insurance, and maintenance services.  This activity had previously been restricted under Sections 3 and 5 of EO 13645, which provided for ISA sanctions on persons providing restricted goods and services, and “strict conditions” on FFIs engaging in sanctionable conduct.

The JPOA does not authorize persons to engage in transactions with Iranian SDNs, with the exception of Iranian financial institutions designated solely under EO 13599.

Gold and Other Precious Metals

The JPOA provides for the suspension of sanctions relating to the supply to Iran of gold and other precious metals.  During the JPOA Period, persons are authorized to materially assist, sponsor, or provide financial, material, or technological support for, or goods or services in support of, the purchase or acquisition of precious metals to or from Iran or by the Government of Iran (GOI).  This activity previously was restricted under Section 5(a) of EO 13622, Sections 2(a)(i)-(ii) and 3(a)(i) of EO 13645, and Section 560.211(c)(2) of the ITSR, which provided for blocking of sanctioned persons’ property and the imposition of “strict conditions” on FFIs.

The OFAC Guidance provides that persons are not authorized to engage in such activity with Iranian SDNs, other than any “political subdivision, agency, or instrumentality” of the GOI designated solely pursuant to Executive Order 13599, or Iranian financial institutions designated solely under EO 13599 and not for proliferation or terrorist activities.  We have previously advised on EO 13599, which blocks the property of the GOI, the Central Bank of Iran (CBI), and all Iranian financial institutions.

The OFAC Guidance and FAQs advise FFIs that the activity described above cannot involve the use of so-called “Restricted Funds,” defined as:

  • any existing and future revenues from the sale of Iranian petroleum or petroleum products, wherever they may be held, and
  • any CBI funds, with certain exceptions for non-petroleum CBI funds held at a foreign country’s central bank.

The FAQs provide detailed guidance regarding the types of metals that constitute “precious metals” in this context.

Civil Aviation

The JPOA provides for the temporary licensing of “the supply and installation in Iran of spare parts for safety of flight for Iranian civil aviation and associated services,” as well as “safety related inspections and repairs in Iran as well as associated services.”

The OFAC Guidance provides that US persons, non-US entities owned or controlled by US persons, and other non-US persons dealing in US-origin goods are not authorized to engage in the above activity in transactions with SDNs, other than Iran Air.  Activity with Iran Air previously had been sanctionable under the ITSR, Executive Order 13382, Sections 2 and 3 of EO 13645, and Section 544.201(a)(3) of the Weapons of the Mass Destruction Proliferators Sanctions Regulations (WMDPSR), 31 C.F.R. part 544.

Persons seeking to engage in the above activity must apply to OFAC for a license, which OFAC will consider on a case-by-case basis.  In furtherance of this, OFAC has issued a Statement of Licensing Policy (SLP) establishing a favorable licensing policy with regard to the export and reexport of goods and services including:

services related to the inspection of commercial aircraft and parts in Iran or a third country; services related to the repair or servicing of commercial aircraft in Iran or a third country; and goods or technology, including spare parts, to Iran or a third country.

The JPOA does not authorize transactions involving Iranian SDNs other than Iran Air, with the exception of financial institutions designated solely pursuant to EO 13599.

Iran’s Export of Crude Oil

The JPOA permits certain importers of Iranian crude oil that currently enjoy a “significant reduction” exception under the National Defense Authorization Act for Fiscal Year 2012 (NDAA 2012, on which we have previously advised)—but which have not reduced their imports to zero—to continue importing at their current levels.  The eligible countries are China, India, Japan, South Korea, Taiwan, and Turkey.  The JPOA further provides for the release to Iran, in certain installments, of $4.2 billion in oil revenue that is currently frozen.

In order to facilitate this, the US Government is authorizing the following activity:

  • Materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services in support of, exports of petroleum and petroleum products from Iran to China, India, Japan, South Korea, Taiwan, or Turkey, and associated insurance and transportation services.  This activity was previously restricted under EO 13382; Section 5(a) of EO 13622; Sections 2(a)(i)-(ii) of EO 13645; Section 544.201(a)(3) of the WMDPSR; and Section 560.211(c)(2) of the ITSR.  Sanctioned persons were subject to blocking.
  • Engaging in “significant” transactions for the purchase, acquisition, sale, transport, or marketing of petroleum and petroleum products from Iran to China, India, Japan, South Korea, Taiwan, or Turkey.  This was previously restricted under Section 2(a) of EO 13622, as amended, and sanctioned persons were subject to ISA sanctions.
  • Conducting or facilitating “significant” financial transactions relating to the above activity.  This previously was sanctionable under Sections 1(a) of EO 13622, as amended; Section 3(a) of EO 13645; and Sections 561.201(a)(5), 561.204(a), and 561.204(b)(1)-(2) of the IFSR.

The OFAC Guidance provides that with respect to the above activity, persons may engage in transactions with the National Iranian Oil Company (NIOC) or the National Iranian Tanker Company (NITC).  Transactions with other Iranian SDNs, except for financial institutions designated solely under EO 13599, are not permitted.

Neither the OFAC Guidance nor the FAQs define the term “petroleum products.”  Section 10(l) of EO 13622 defines the term to include:

oils, liquefied petroleum gases, pentanes plus, aviation gasoline, motor gasoline, naphtha-type jet fuel, kerosene-type jet fuel, kerosene, distillate fuel oil, residual fuel oil, petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt, road oil, still gas, and miscellaneous products obtained from the processing of: crude oil (including lease condensate), natural gas, and other hydrocarbon compounds. The term does not include natural gas, liquefied natural gas, biofuels, methanol, and other non-petroleum fuels.

Regarding the release to Iran of $4.2 billion in frozen oil revenue, the FAQs provide that the US Government is working with FFIs to implement the process.  FFIs should not release any funds absent written notification from the US Government.

Humanitarian and Certain Other Transactions

The JPOA provides for the establishment of a “financial channel” facilitating transactions involving food and agricultural products, medicine, medical devices, medical expenses incurred by Iranians abroad, payment of Iran’s UN obligations, and direct tuition payments to universities and colleges for Iranian students studying abroad. 

The OFAC Guidance and FAQs note that the “financial channel” will only apply to transactions involving Iran’s UN payments, medical expenses for Iranians abroad, and tuition payments for Iranian students studying abroad.  The US Government will contact FFIs where Iran seeks their involvement in such transactions.

The FAQs further note that transactions relating to food, agricultural products, medicine, and medical devices already generally are authorized under existing US sanctions laws, and no new mechanism is necessary to facilitate such transactions.

EU Sanctions Relaxation

It is important to note that the suspension by the EU is in effect for the six-month JPOA Period that runs until July 20, 2014, “during which the contracts would have to be executed”.  This means that any activity would need be initiated and completed during the six-month period.

Iran’s Export of Crude oil

The new rules maintain the existing import prohibition of Iranian crude oil into the EU.  The relaxation only concerns the transport of crude oil by EU shipowners which are incorporated, domiciled, or regulated within a Member State, as well as vessels registered in and/or flying the flag of a Member State.  In practice, the transport in question can only concern imports of Iranian crude oil by the six countries which already benefit from a reduction exception under the NDAA 2012, but have not reduced their imports to zero: China, India, Japan, South Korea, Taiwan, and Turkey.

The new rules also suspend the prohibition by EU-domiciled (re)insurers to provide coverage in relation to the import, purchase or transport of crude oil by and to a third country – in practice the six countries listed above.  This will allow previously active EU (re)insurers – including the International Group of P & I Clubs – to resume coverage for which there were hardly any alternative by other non-EU carriers. We have previously advised on the consequences of the termination of (re)insurance coverage for crude oil and petroleum products.

Iran’s Export of Petrochemical Products

The relaxation allows the resumption of the import, purchase, or transport of Iranian petrochemical products in the EU as well as the related provision of (re)insurance coverage. The relaxation does not extend to the supply of key equipment and technology for the Iranian petrochemical industry which remains prohibited under the applicable sanctions.

Gold and Other Precious Metals

The new EU regime suspends the prohibition relating to the sale, supply, transfer, or export to Iran of gold and certain precious metals which are identified in a new Annex.  Likewise, the purchase, import, or transport from Iran of the same items is also covered under the suspension. It is also allowed to provide technical assistance and financial assistance – including the provision of (re)insurance – in relation to such transactions.

Civil Aviation

The JPOA contemplates a relaxation for the supply and installation in Iran of spare parts for safety of flight for Iranian civil aviation and associated services. Similarly, safety-related inspections and repairs in Iran are to be allowed.  This relief does not have a direct impact in the European Union, since the current EU sanctions only target maintenance services to cargo aircrafts used for the transport of military goods.

Facilitation of Humanitarian Trade

Transactions relating to food, agricultural products and medicine and other medical devices have not been targeted by EU sanctions as long as they do not benefit listed individuals and entities. Furthermore, transfers of funds to and from an Iranian person, entity or body can be carried out for humanitarian purposes under a notification process if above € 100 000 now increased to € 1 million (see below). The new EU regime does not contemplate further measures to facilitate the establishment of a “financial channel” to facilitate humanitarian trade for Iran’s domestic needs.   It remains to be seen whether such facilitation will effectively take place without the possibility of reconnecting the Iranian financial sector notably by allowing the supply of specialized messaging services such as those provided by the SWIFT international network.

Freezing of Funds and Economic Resources

As an exception to the general freezing of funds and economic resources held by Iranian listed persons and entities, the new EU regime allows the Member States to authorize – under the conditions they deem appropriate – the release of economic resources or to make available funds or economic resources to the Iranian Ministry of Petroleum.  This relief will be allowed after having determined that those funds or economic resources are necessary for the execution of contracts for the import and purchase of petrochemical products that originate from Iran or imported from Iran.

Transfers of Funds

The European Union has agreed in the JPOA to increase the EU authorization thresholds for non-sanctioned trade to an agreed amount. Accordingly, the European Union increases a number of authorization thresholds by tenfold in relation to transfers to and from Iran. The new regime provides that for transfers above € 100 000 (previously € 10 000) involving an EU financial or credit institution and an Iranian financial credit institutions, a prior national authorization is needed.  However, a prior authorization will only be needed for transfers involving a personal remittance exceeding € 400 000 (previously € 40 000); and for foodstuffs, healthcare, medical equipment, agricultural or humanitarian purposes exceeding € 1 million (previously € 100 000).  

For transfers involving an Iranian person, entity, or body without the involvement of an Iranian bank, a prior authorization will be needed where the amount exceeds € 400 000  (previously € 40 000) if the transfer is for purpose other than food, healthcare, medical equipment, agricultural or humanitarian purposes. 

It remains to be seen whether the relaxation of the authorization thresholds will facilitate trade with Iran.  In practice, it is less the authorization thresholds than the unwillingness of the European financial sector to carry out transfers which have impeded trade with Iran.

Conclusion

Overall, the sanctions relaxation described above is relatively narrow.  It is limited strictly to the activities described above, and with the exception of the aviation safety provisions, does not apply to US persons or US-owned or -controlled companies located abroad.  Other non-US companies, primarily in the energy, petrochemical, and automotive industries, may have more opportunities.  However, it is essential to note that all authorized activities—including payments— are to be initiated and completed before July 20, 2014 under the current interim arrangement.

Persons wishing to engage in activity newly authorized by the United States should consult all interpretative materials that OFAC has made available, including the OFAC Guidance, the FAQs, and the SLP.  The European Union, by comparison, has issued only Council Regulation 2014/42/EU and Council Decision 2014/21/CFSP, and does not contemplate issuing additional interpretative guidance. 

Finally, it should be noted that the continuing effect of the relief described above is subject to political and diplomatic developments that are difficult to predict.  Many members of the US Congress continue to call for the imposition of new sanctions against Iran—which Iran has indicated would scuttle the JPOA—although it appears that the Obama Administration has forestalled these efforts for the time being.  The Government of Iran has its different constituent elements.  Presumably, there needs to be a sense that the quid pro quo of interim sanctions relief is meaningful to engender continued cooperation in reaching an acceptable final agreement on Iran’s nuclear program.  In terms of timing, it is not clear whether Iran and the P5+1 countries will reach a final, mutually-acceptable agreement before July 20, 2014, or alternatively, if the parties will reach another interim agreement or no agreement at all.  At least two of these outcomes would likely have a significant effect on US and EU sanctions against Iran.

We will continue to keep you apprised of developments relating to Iran sanctions.  If you have any questions about these developments, please contact Ed Krauland at 202.429.8083, Meredith Rathbone at 202.429.6437, Jack Hayes at 202.429.6491, or Anthony Rapa at 202.429.8120 in our Washington office, Rich Battaglia in our Chicago office at 312.577.1232, Guy Soussan at +32.2.626.0535 in our Brussels office, or Jeff Cottle at +44.20.7367.8002 or Maury Shenk at +44.20.7367.8050 in our London office, or Andy Irwin at 202.429.8177 in our Washington and Century City offices.