On 8 May 2018, the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) relating to sanctions relief for Iran. This means that after wind-down periods of respectively 90 and 180 days for different types of sanctions, new US sanctions will be imposed against Iran. This “extra territorial” sanctions regime will affect non-US businesses, with consequences for entities with operations in Iran.
But what are sanctions? Why are sanctions an increasingly important business risk? And what potential impact will further US sanctions against Iran have on EU businesses?
What are sanctions?
Sanctions are economic or diplomatic instruments of international law imposed by a state or group of states to apply pressure on another state or an individual to change its policies or activities. For example, violations of human rights or international laws may prompt action by states through sanctions. The deployment of sanctions is therefore heavily politically charged and often forms part of wider foreign policy developments.
Although historically sanctions applied to entire states, now smart, targeted and sectoral sanctions are gaining increasing prominence. These measures are aimed at particular activities, industries and persons, allowing legitimate business which is not targeted by sanctions to continue without penalty.
Examples of economic sanctions include:
- restricting or preventing trade in certain goods with the target state;
- imposing travel bans (denying specific persons entry into particular states); and
- freezing an individual’s assets.
Why are sanctions increasingly important?
Sanctions enforcement has increased since 2014, and the penalties for breaching sanctions are rising. Fines and settlements by the US Office of Foreign Assets Control have reached an average of $23m per year since 2009. When foreign policy changes suddenly and drastically sanctions tend to take leading role.
Iran has been subject to varying sanctions since 1979. Recent years’ measures have been a response to its nuclear programme. From January 2016 under the JCPOA, the US, the UK, France, Germany, Russia and China agreed to reduce sanctions in return for Iran’s reduction in nuclear operations. However, on 8 May 2018 President Trump announced that the US would no longer participate in the JCPOA.
The resulting heightened US sanctions on Iran will pose challenges to businesses, particularly as the EU and Germany, France and the UK wish to continue the JCPOA to persuade Iran to stay within its terms.
What is the practical impact of heightened US sanctions against Iran?
The principal challenge for business is ensuring compliance with sanctions regimes. This is made more difficult by the “extra-territorial” reach of some US sanctions. There can be consequences for non-US citizens or entities, not on US territory, who knowingly violate sanctions or facilitate a significant transaction which violates sanctions. Although non-US entities are not subject to fines, they could face loss of access to the US or blocking of their property and bank accounts held in the US. Such consequences will probably be persuasive in motivating businesses to change their activities.
New extra-territorial US sanctions could cause EU trade with Iran to collapse. Multinational businesses that are strongly integrated into the US market will be hit most heavily. Following the US decision, French energy company, Total, warned that it will withdraw from a multibillion-dollar deal to develop Iran’s South Pars gas field if it cannot obtain a waiver from US authorities.
To complicate matters further, the European Commission plans to amend the “Blocking Regulation”, introduced in 1996 in respect of US Sanctions against Cuba and Iran, to cover the revised US sanctions. The regulation prohibits EU businesses from complying with specified US extra-territorial sanctions, whether by act or omission. It also prevents courts in the EU from enforcing the specified sanctions and allows persons affected by application of the specified sanctions to claim damages. The updated regulation is expected to enter into force at the beginning of August at the latest.
EU businesses dealing with Iran and the US appear to be pressed between a rock and hard place. They will be faced with the choice of exposure to US sanctions or potential criminal prosecution for breach of EU regulations. Any departure from Iran by EU businesses will free up the Iranian market for investors that are not so heavily dependent on trade with the US.
In these unpredictable times, the ultimate effects of the US JCPOA withdrawal remain to be seen.
Abigail Harvey is a trainee at Ashurst