Kartik Mittal and Stephanie Limaco examine the US's potential return to the JCPOA and the impact across the UK and Europe in Law360

This article was originally published in Law360 and can be accessed here. 

Kartik Mittal, Partner

Stephanie Limaco, Solicitor

The US's potential return to the JCPOA: impact on financial services and the legal sector in the UK and Europe

During the last weeks, the United Kingdom, France, China, Russia and Germany have started talks to bring the US back into the Joint Comprehensive Plan of Action (“JCPOA”) or “Iran nuclear deal”. In fact, the US has recently indicated that it is prepared to take the steps necessary to return to compliance with the JCPOA, including by lifting sanctions that are inconsistent with the deal.[1]

The return of the US to the JCPOA would reduce the divergence in foreign policy relating to Iran between the US, and the EU and the UK, which could pave the way for UK and EU businesses to again commence their business activities in Iran and/or with Iranian entities.

Having said this, it is still not completely certain that the US and Iran would be able to reach an agreement – there are new presidential elections in Iran in June and the Biden administration may have to face domestic opposition – and what would be the extent of the sanctions relief to be provided by the US to Iran – there are differences regarding which sanctions both sides believe shall be lifted[2].

However, considering the potential of a deal, it is worth to preliminary assess what may be the impact of the potential return of the US to the JCPOA, in particular, on the financial services and the legal sectors.

The US and the JCPOA:

The US has had a convoluted relation with Iran. In July 2015, the Iran nuclear deal was reached in Vienna by then US President Barack Obama jointly with France, the United Kingdom, Germany, Russia, China and Iran. Pursuant to this deal, Iran agreed to limit its nuclear activities and not to seek, develop or acquire nuclear weapons. In return, the UN Security Council sanctions and multilateral and national sanctions against Iran were to be lifted.

In May 2018, the United States under then President Trump unilaterally withdrew from the JCPOA and reinstated US sanctions. The other parties – including the UK, France and Germany – remained parties of the JCPOA. The first set of such US sanctions came into effect on 7 August 2018 followed by a second set of sanctions which came into effect on 5 November 2018. These sanctions targeted critical sectors of Iran’s economy, including energy, shipping and shipbuilding, and the financial sectors.

The election of President Biden, who served as the Vice President of United States under President Obama, has paved the way for the United States return to the JCPOA.

Impact of the US departure from the JCPOA on EU and UK persons:

Although the JCPOA remained in place without the US after 2018, the US withdrawal from the deal had serious trade-related implications. This is because under the sanctions imposed by the US, not only are US persons prohibited from engaging in transactions with US sanctioned individuals and entities but foreign financial institutions that knowingly facilitate significant transactions for, or persons that provide material or certain other support to, the entities and/or persons designated by the US risk exposure to sanctions that could sever their access to the US financial system or block their property and interests in property under US jurisdiction. For that reason, multiple non-US companies and individuals have been included in the OFAC’s SDN List for alleged transactions with Iranian businesses.

The UK and the EU have taken the view that the JCPOA is “crucial” for the peace and security of Europe, the region and the World.[3] Therefore, in order to reduce the impact of US secondary sanctions, the European Union updated, in June 2018, the EU “Blocking Statute”, with the aim to mitigate the impact of US Secondary sanctions on EU operators doing legitimate businesses in and with Iran.[4] The UK has retained this Blocking Statute after Brexit by virtue of the European Union (Withdrawal) Act 2018 and the Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020. As consequence of the EU Blocking Statute, UK and EU operators are prohibited to comply with the US sanctions against Iran that are based on or resulting from the laws specified in its Annex.[5]

However, in reality, the impact of the Blocking Statute has been minor. Various EU companies, including Renault, Volkswagen, Total SA and Hapag-Lloyd had taken a commercial decision to suspend their business with Iran given their US exposure. The EU trade with Iran also decreased substantially in 2018 and 2019, after the re-imposition of US sanctions.

The potential impact of the return of the US to the JCPOA:

In compliance with the JCPOA, the US waived or terminated US sanctions on 16 January 2016.[6] Sanctions that were lifted included sanctions that were related to the energy sector, the financial sector and the sanctions on Iran’s auto sector and trading in rial.[7] Iranian banks were also readmitted to the SWIFT payment system.[8]

All these sanctions were re-imposed after the US withdrew from the JCPOA, and even SWIFT – a Belgian entity - decided to suspend certain Iranian banks to access to its system to avoid the risk of US sanctions.

The potential return of the US to the JCPOA could have important impact on UK and EU companies that are considering or could potentially have dealings with entities whose US sanctions could be removed.

For the financial sector

For the financial sector, the lifting of US secondary sanctions would mean that EU and UK financial institutions may be able to operate US dollar accounts and conduct transactions in US dollars with the (now) sanctioned entities, without the risk of being subject to US sanctions themselves. These transactions would probably have some limitations, as it was the case while the US was part of the JCPOA.[9]

European banks would reduce their reluctance to process payments to or from Iran, and to or from now sanctioned entities, as they would not face the risk of potential US sanctions anymore.

The US re-joining the JCPOA is also likely to lead to the re-admission of Iranian banks to – and the possibility to conduct transactions with Iranian entities through - the SWIFT electronic payment system. This would be very helpful from a practical point of view.

Lifting of US Secondary sanctions is also likely to simply compliance checks being conducted by UK financial institutions with US operations.

Furthermore, in some cases, financial entities would not be in the dilemma of complying with US sanctions (to avoid the risk to be included in the SDN list themselves) or to comply with the EU Blocking Statute (which prohibits them to comply with US secondary sanctions). Although financial entities are usually more fearful of US sanctions, they should be aware of the potential consequences of not complying with the EU Blocking Statute as well. For instance, in 2020 a group of Iranian customers filed a claim against Metro Bank because their accounts were closed without warning, arguing that this violated the EU Blocking Statute.[10]

It is worth noting that, as it has been mentioned, the extent of the sanctions relief to be provided by the US to Iran is still uncertain. The US and Iran have not agreed yet which sanctions imposed after the US withdrawal from the JCPOA should be lifted. It is likely that financial entities would still have to consider the US sanctions that may remain even if the US re-joins the JCPOA.

In a nutshell, it would be expected that the re-joining the JCPOA by the US should increase the financial transactions between the former sanctioned entities and the EU and the UK financial counterparties.

For the legal sector

Legal practitioners have dealt with several cases involving the interaction between the US secondary sanctions and the EU Blocking Regulation. An impact of the lifting of US secondary sanctions would mean that the number of such litigation cases will be reduced. In other words, it is likely that work for litigation lawyers, arising out of the interplay between the EU Blocking Statue and US Sanctions would decrease. However, an increase in business between the UK and Iran, is likely to result in an increase in the workflow of transactional/conveyancing lawyers as companies doing business with Iran are likely to need legal services. Further, some law firms opened offices in Iran or allied with Iran based firms after the JCPOA in 2015.[11] Other law firms may be interested in opening – or re-opening – offices in Iran if the US re-joins the JCPOA.

Final remarks:

The return of the US to the JCPOA not only would be welcome news for the United Kingdom and its European partners in order to eliminate the divergence in foreign policy relating to Iran, but also would pave the way for UK and EU businesses to again commence their business activities in Iran and to deal with sanctioned entities who could see their sanctions removed. It will remove the uncertainty for some businesses that have to deal with potential US secondary sanctions and, at the same time, the EU Blocking Statute.

However, as the position of the US has been changing with the different US administrations, the possibility that some or all sanctions could be re-imposed is always a risk.