Leigh Crestohl and Stephanie Limaco examine US efforts to “snapback” sanctions on Iran in Law360

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

Leigh Crestohl, Partner

Stephanie Limaco, Foreign Lawyer

US efforts to “snapback” sanctions on Iran:
Uncertain lies the future for UK/EU-Iran trade relations

Despite having withdrawn from the "Iran nuclear deal" in May 2018, the US Trump Administration attempted last month to trigger its dispute resolution mechanism, colloquially known as snapback, designed to cause the UN Security Council to restore UN sanctions against Iran to the pre-2015 position.  This was resoundingly rejected by the Security Council, a further setback for the US after having failed to extend the arms embargo on Iran which under the deal is set to be lifted in October 2020.

These are significant developments in the realm of diplomacy and International relations.  However, the threat of a return to a multilateral Iran sanctions regime potentially raises important and serious issues for businesses trading with Iran, or seeking to do so.  The EU has been one of Iran’s largest global trading partners, and the continuing US pressure on Iran has had a big impact on EU / UK trade with Iran.  Given the global uncertainty this causes, and the effective control that the US has through its currency on the global payments system, EU and UK companies stand to be severely curtailed in their ability and willingness to do business with Iran.  

Companies, investors and their legal advisors, need to have a basic understanding of these issues and the legal, regulatory and compliance issues associated with economic sanctions, trade restrictions and export controls. The small measure of stability introduced by the multilateral and transnational process of the Iran Nuclear Deal in 2015 is jeopardised and potentially undermined by a new wave of US unilateralism. Fears that the US may bring diplomatic, trade and other pressure to bear on its European allies to expand sanctions against Iran is further a cause for concern and increased uncertainty, which is highly detrimental to international trade.

The Joint Comprehensive Plan of Action

The snapback procedure forms part of the Iran Nuclear Deal – formally known as the Joint Comprehensive Plan of Action (“JCPOA”) – signed in July 2015 by the US, the UK, France, Germany, China, Russia, the High Representative of the European Union for Foreign Affairs and Security Policy and Iran. By this deal, Iran agreed to limit its nuclear activities and not to seek, develop or acquire nuclear weapons. In exchange, UN Security Council sanctions as well as multilateral and national sanctions against Iran were to be lifted.

The JCPOA was endorsed by UN Security Council Resolution No 2231 dated 20 July 2015,[1] and includes a provision that the arms embargo on Iran would expire on 18 October 2020 (five years after the JCPOA Adoption Day).

Under the snapback procedure (JCPOA, Arts.  36 and 37), it is open to a JCPOA “participant State”, to allege a significant non-performance, and to request that the UN Security Council re-impose sanctions.  The ability of the US to trigger the snapback procedure is not free from doubt given that its withdrawal in May 2018 from the JCPOA would suggest on a plain reading that the US no longer qualifies as a “participant state”.  This is an issue presciently identified by Harold Hongju Koh, a former Dean of Yale Law School and a previous Legal Adviser at the US Department of State, in a book written in 2018.[2]  Significantly, the UK, France and Germany (known as the “E3”) adopt a similar view.[3]

US pressure on the European JCPOA participating parties

The attempt by the US to activate a snapback of sanctions, in the face of an obvious lack of support amongst Security Council members, demonstrates its resolve to exert maximum pressure on Iran. This has resulted in some diplomatic clashes and strong rhetoric directed at the European JCPOA parties (the “E3”), which continue to support the nuclear deal.

Despite US Ambassador Kelly Craft’s strong statement that they “now find themselves standing in the company of terrorists”,[4] the E3 participants have maintained a joint strategy that diverges from the more extreme American position.  Their view is that incidents of non-performance or breach should be addressed through international dialogue within the existing JCPOA framework, while nevertheless expressing concern about the impending end of the arms embargo whilst such issues remain unresolved.[5]  The UK’s position is that, together with France and Germany, it is “taking forward the JCPoA’s Dispute Resolution Mechanism negotiations, with the desire to bring Iran back into compliance with the agreement”.[6]

One can only speculate as to how matters may evolve, and what diplomatic discussions and negotiations might be taking place in the background.  The UK now finds itself in an invidious position given that it is trying to reach a post-Brexit trade deal with the EU on the one hand, and a trade deal with the US on the other. The US can potentially exert considerable “behind the scenes” influence in these matters. Former US National Security Advisor John Bolton in his recent memoirs revealed that the UK’s foreign secretary at meetings in Washington in 2018 was apparently happy to assist the Trump Administration in its policy on Venezuela, including by freezing assets in the Bank of England.[7]

Legal and Commercial Impact on UK / EU companies trading with Iran

Despite these pressures, the JCPOA has remained in place, although the situation is fragile, and the US withdrawal from the arrangement has undoubtedly had serious trade-related implications.  Not only has the US re-imposed Iran sanctions domestically on US-based parties, it has also imposed “secondary sanctions” which target and penalise parties extraterritorially for trading with Iran in a wide gamut of sectors, ranging from: energy, shipping, aviation, shipbuilding, to petroleum, petroleum products, iron, steel, aluminium and copper. Executive Order 13902, signed by President Trump on 10 January 2020, expanded this list to include construction, manufacturing, textiles and mining.

UK and EU businesses looking to do business with Iran must thus navigate a wide range of measures that may be applied against them, quite apart from the fact that any funds passing through the US payments system may be frozen. Even where no immediate sanctions-related issue arises, many European banks remain reluctant to process payments either to or from Iran. The dominance of the US in global payments, coupled with the heightened risk and compliance culture prevalent in contemporary banking practice, has the potential effectively to create de facto barriers to trade even in jurisdictions that encourage trade with Iran.

Extraterritorial measures of this kind have from the outset been a serious concern of the EU, which has adopted various measures to protect European companies doing business with Iran, including:

• Updating the EU “Blocking Statute”, to mitigate the impact of US secondary sanctions on EU operators doing legitimate business in and with Iran.[8]
• Creating a Special Purpose Vehicle, INSTEX, in order to ensure that EU companies could continue to trade with Iran notwithstanding US secondary sanctions. It allows transactions with Iran without involving a direct transfer of money.[9]

The UK has supported the EU attempts to avoid the impact of US sanctions on EU companies doing business with or in Iran, and the Government has stated that it encourages “expanding [its] trade relationship with Iran”.[10]  However, despite the efforts, these mechanisms have not worked effectively and their impact has been minor.  EU trade with Iran, which increased substantially in 2016 and 2017 (after the JCPOA), decreased in 2018 and 2019 (after the re-imposition of US sanctions).[11]  Whereas in 2017, EU imports from Iran increased by 84.9% and exports increased by 31.2%,[12] in 2019, EU imports decreased more than 90% and exports to Iran dropped 50%.[13]  Numerous EU and UK companies have stopped trading and investing with Iran in recent years, in order to avoid US sanctions, compliance issue, or quite simply a desire not to be shut out of the larger US marketplace.  The number of companies turning their sights away from Iran is likely to rise due to the uncertainty generated by the increasing pressure on Iran by the US.

Conclusion

Companies considering doing business in or with Iran, as well as Iranian companies and investors doing business or investing in the UK and EU, will need to remain mindful of the compliance issues associated with economic sanctions, trade restrictions and export controls.

As the above discussion has highlighted, there are risks involved in undertaking commercial transactions and investing in Iran, including the possibility that some or all sanctions could be re-imposed.  A detailed due diligence exercise before embarking on a transaction is highly recommended, considering the potential application of sanctions, but also considering practical issues, such as how payments will be made and/or received.

The events of last August of course bring even more uncertainty to an already increasingly difficult commercial landscape.  Diplomatic posturing of this kind on the international scene may ultimately prove harmful to efforts to change behaviours targeted by sanctions regimes generally, because it undermines the credibility of multilateral agreements.  Moreover, unless carefully managed, the US policy on Iran may lead to difficult trade relations between the US and its European allies.