what happens if the jcpoa collapses? · jcpoa continues in its current form final phase:...

Ross Denton (London), Anahita Thoms

(Dusseldorf), Ben Smith (London), and Inessa

Owens (Washington, DC)

Wednesday, 3 July 2019

What happens if the JCPOA collapses?

© 2019 Baker McKenzie

Speakers

Ross Denton

Moderator – London

Ross Denton is a partner in the Firm’s European Community, Competition & Trade

Department in London and member of the Baker McKenzie Japanese Practice Group.

He also served as coordinator of the Firm’s International Trade & WTO Practice Group.

Ross routinely advises US and Japanese multinationals on EU and UK competition

matters and international trade law issues. In addition to his practice, Ross contributes

to a number of publications, including Laws of the European Communities and

Encyclopedia of Information Technology. He is a member of the UK Customs

Practitioners Group and the World Trade Lawyers Association.

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Anahita Thoms

Speaker – Dusseldorf

Anahita Thoms heads Baker McKenzie's International Trade Practice in Germany. She

was appointed for the third consecutive term co-chair of the Export Controls and

Economic Sanctions Committee of the ABA after serving as vice-chair for three years.

Anahita is also the vice-chair of the ABA Privacy, E-Commerce & Data Security Steering

Committee.

Anahita has won various accolades for her work, including Rising Star 2016 by the New

York Law Journal, International Trade Lawyer (NY) at the ILO Client Choice Awards,

2017 Global Investigations Review's (GIR) 40 under 40, and the ABA Section of

International Law's Award for 2016 Outstanding CLE Committee Program. She has also

been recognized by JUVE, Legal 500 US and Who's Who Legal. Anahita is regularly

interviewed for example by CNBC, Reuters, CNN Money, Deutsche Welle, Handelsblatt,

Börsenzeitung and BBC Radio 4 and BBC World TV.


Speakers

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Ben Smith

Speaker – London

Ben Smith is a Senior Associate in the Baker McKenzie London office, specialising in EU

and UK sanctions, export controls, anti-bribery and corruption, and competition law. As well

as working in London, he has spent time in Baker McKenzie's San Francisco and Brussels

offices, as well as on secondment to the legal and compliance teams at Royal Dutch Shell,

British American Tobacco, and British Airways.

Ben advises clients in a number of sectors, including energy and energy services,

IT/Communications, pharmaceuticals, defence, transport and FMCG. Ben has significant

experience in advising clients on compliance with export controls, sanctions and anti-

corruption legislation; managing risk assessments and the roll out of compliance processes

and procedures; assisting with regulatory investigations, licence applications and

classification exercises; and the drafting and submission of voluntary disclosures to

government authorities.

Inessa Owens

Speaker – Washington, DC

Inessa Owens is an associate in Baker McKenzie's Washington, DC office and a member of

the International Trade Practice Group. She advises clients on US export controls and

international trade sanctions, including the Export Administration Regulations, anti-boycott

rules, and economic sanctions administered by the US Treasury Department’s Office of

Foreign Assets Control, including those targeting Cuba, Iran, North Korea, Syria, and Russia.

She has worked with clients in diverse industries that include finance, pharmaceuticals, and

energy. Inessa has experience preparing submissions such as license applications,

disclosures, and classification requests on behalf of clients to the US government. She also

provides sanctions compliance advice and counseling to clients in the context of cross-border

transactions, including mergers and acquisitions, financings, and distribution agreements.

1 JCPOA: Where are we now?


What is the JCPOA?

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Agreement reached between E3/EU+3 (China, France, Germany, Russia, UK,

US and EU) and Iran in July 2015.

Provided for the phased lifting of EU, US and UN nuclear-related sanctions

against Iran, in exchange for commitments by Iran relating to the conduct of

its nuclear programme.

Endorsed at UN level on 20 July 2015 by Security Council Resolution 2231

(2015), which urges full implementation on JCPOA timetable.

Relief began on 16 January 2016 (“Implementation Day”), following IAEA

inspections verifying that Iran had implemented its commitments.


Timeline

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Second phase: Transition Day in 2023, when further sanctions may be repealed if the JCPOA continues in its current form

Final phase: Termination Day in 2025, when the UN Security Council ceases to remain seized of Iran’s nuclear programme

Iran and the

UNSC+Germany

agreed Joint

Comprehensive

Plan of Action

("JCPOA")

14 July 2015

Adoption Day —

relevant EU and US

legislation

prepared/adopted

18 Oct 2015

Implementation Day

— EU and US lifted

certain sanctions,

though by no

means all

16 Jan 2016


Key features

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Political agreement — not a signed international treaty.

Voluntary US/EU commitments:

Delistings of designated persons

EU

Lifting of product restrictions (including oil and gas)

Lifting of financial services restrictions

Lifting of funds transfer controls

US — suspension of secondary sanctions

Iran committed to limitations on its nuclear programme and IAEA monitoring, including:

eliminating its stockpile of medium-enriched uranium, cutting its stockpile of low-

enriched uranium by 98%, and reducing its number of gas centrifuges by 2/3 for 13

years

Only enrich uranium up to 3.67% and refrain from building heavy-water facilities for

the next 15 years

Submit to IAEA monitoring of all nuclear facilities

Mechanism for UN sanctions to “snapback” if any party fails to meet commitments


What next for the JCPOA?

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May 2019:

Iran threatened to step up uranium enrichment if EU did not step up to preserve the JCPOA

EU expressed grave concerns, rejected this ultimatum, but stressed its commitment to the JCPOA

June 2019:

Further Iranian threat to breach the terms of the JCPOA

Major incidents involving oil tankers and US drone

US imposes sanctions against Ayatollah Ali Khamenei and other senior officials

INSTEX becomes operational

July 2019

The International Atomic Energy Agency said its inspectors had verified the 300kg (660lb) cap had been exceeded

Could the JCPOA unravel?

UN snapback mechanism in play?

EU remains committed to the JCPOA, but has said it would re-impose EU sanctions if the deal fails


US Withdrawal from JCPOA

The United States withdrew from the JCPOA on May 8, 2018.

Secondary sanctions lifted or waived as part of the United States’ commitments under the JCPOA were re-instated on August 7, 2018 or November 5, 2018.

Reminder: the “primary” sanctions (i.e., the embargo) remained mostly

intact during the JCPOA and remain so now.

General License H revoked: impact on non-US subsidiaries of US companies.

Re-designation of many Iranian entities on List of Specially Designated Nationals and Blocked Persons (e.g., Central Bank of Iran and numerous Iranian banks, IRISL, NIOC, many others).

Impact: dealings with these parties are once against subject to secondary

sanctions

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Reimposition of US Secondary Sanctions

Activities targeted under US secondary sanctions include:

Sanctions on the purchase or acquisition of US dollar banknotes by the

Government of Iran.

Providing significant financial, material, technological, or other support to,

or goods or services in support of parties in Iranian energy, shipping,

shipbuilding sectors.

Engaging in significant transactions in connection with Iranian automotive

sector.

Providing underwriting services, insurance, or reinsurance for certain Iran-

related activities.

Sanctions on foreign financial institutions conducting or facilitating certain

significant Iran-related financial transactions.

…and more

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Reimposition of US Secondary Sanctions cont’d

Significant Reduction Exceptions not renewed after May 2, 2019

Enabled parties in eight countries to import Iranian oil without risk of

secondary sanctions as long as continued to reduce purchases

Puts additional economic pressure on Iran by driving Iran’s oil exports

down

“Our firm policy is to completely zero out purchases of Iranian oil –

period. Any new purchases of oil initiated after the expiration of the

SREs on May 2 will be subject to U.S. sanctions, even if a country had

not met its previously negotiated purchase caps during the SRE

period from November to May 2.” Brian Hook, US Special Rep. for Iran,

May 30, 2019

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Instex

INSTEX/STFI is a joint EU/Iranian response to US withdrawal, and matches EU sellers with EU debtors, and Iranian buyers with Iranian creditors so no funds are exchanged across borders.

There is still very little clarity on what the expectation for INSTEX is moving forward.

Challenge will be sustaining it as a trade vehicle if not enough companies are using it.

There are four potential outcomes for INSTEX: (i) collapse (unlikely); (ii) it continues as an EU-only mechanism for humanitarian goods (most likely); (iii) EU mechanism extended to non-humanitarian goods; and (iv) it becomes an international instrument.

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EU Blocking Regulation: Overview

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EU Blocking Regulation first introduced in 1996 to counter extraterritorial effects of US sanctions.

Primary purpose to act as political signal and protective shield for EU companies, rather than enforcement tool.

Following US decision to reimpose sanctions against Iran and withdraw from JCPOA, European Commission began process to update the Regulation on 6 June 2018.

Revised Annex restricts compliance with the following US Iran sanctions:

US primary sanctions against Iran;

US secondary sanctions against Iran;

US prohibition on causing a violation of US sanctions;

US re-export controls applicable to Iran;

…or any extraterritorial act of law including judgments based on them.

Updates entered into force on 7 August 2018.

EU Blocking Regulation


EU Blocking Regulation: Application

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Non-EU subsidiaries of EU entities are not required to comply

EU entities

EU residents

EU nationals based outside the EU

Other persons located within the EU and acting in a professional capacity


Framework and Key Provisions (1)

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Blocked US measures

Iran Sanctions Act of 1996

Iran Freedom and Counter-Proliferation Act of 2012

National Defense Authorization Act for Fiscal Year 2012

Iran Threat Reduction and Syria Human Rights Act of 2012

Iranian Transactions and Sanctions Regulations

NB - does not block e.g. EAR, Patriot Act and certain types of SDN

(SDNGT and WMD)



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Prohibition on compliance (Article 5)

Prohibition on compliance directly or indirectly (including through third

parties) with the listed US measures (or requirements resulting

therefrom).

Entitlement to claim damages (Article 6)

Entitlement for EU parties to claim damages resulting from loss caused

by the listed US measures.

Requirement to notify (Article 2)

Requirement to notify Commission within 30 days where interests are

directly/indirectly affected by the listed US measures (or

actions/requirements based thereon).



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Authorisation (Article 5, paragraph 2)

Ability to seek an exceptional authorization from the Commission

permitting compliance with the listed US measures – where risk that

“non-compliance would seriously damage their interests or those of the

Community”.

Implementing Regulation (EU) 2018/1101 sets out certain non-

cumulative criteria to be considered by the Commission, including:

Existence of ongoing administrative or judicial investigation against

the applicant from, or prior settlement agreement with, the relevant

third country.

Existence of a substantial connecting link with third country (e.g.

parent companies or subsidiaries).


The Problem of the Iran Blocking Statute

Risks

Regulatory risk

Contractual risk – i.e. that sanctions clauses in relation to Iran will be

unenforceable

Penalties vary per Member State (e.g. criminal in UK); enforcement

historically low

Possible solutions:

Continue to accept risk

Rely on UK Aegis case

Anti-boycott provision

FATF clause


The Problem of the Iran Blocking Statute

Conflicts between EU and US laws

EU persons in the US; US persons in the EU

US owned/controlled entities incorporated in EU

Application of US sanctions to EU persons/entities outside EU

Navigating a path

EU parties complying with US sanctions? Prohibited

EU parties making commercial/financial decisions? Permitted

EU parties complying with EU sanctions/other laws (ABC, AML etc)?

Permitted

EU parties deferring decisions to US parent, complying with global

policies? Mitigates risk

2 How Can UN Sanctions Be Reimposed?


Overview of “Snapback” Mechanism

No party required to follow UN process, but EU seems to be committed to doing so. UNSCR 2231 "encourages" the JCPOA participants to resolve any issues arising with respect to implementation of commitments through JCPOA.

Iran's withdrawal from its commitments would not automatically result in the re-imposition of UN and EU sanctions.

Issue would need to be raised by a party to the JCPOA (no third party rights). Who will that be?

Does not need to be “significant non-performance” to start with.

Period of discussion which can be extended.

Vote in UNSCR has to be unanimous to continue JCPOA.

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“Snapback”: the process I

Reference by a party to Joint Commission - “significant non-compliance” does not need to be invoked.

Joint Commission would have 15 days to resolve the issue (although period could be extended by consensus).

After Joint Commission consideration, any party (i.e. the complaining party or Iran) could refer the issue to Ministers of Foreign Affairs, if it believed the issue had not been resolved.

Ministers would have 15 days to resolve the issue (again unless period extended).

After Joint Commission consideration, either the complaining party or Iran could request that the issue be considered by an Advisory Board, of 3 members (one each appointed by the participants in the dispute and a third independent member). The Advisory Board should provide a non-binding opinion on the issue within 15 days.

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“Snapback”: the process II

If issue is not resolved, Joint Commission would consider the opinion of the Advisory Board for no more than 5 days. If it still has not been resolved, and complaining party deems the issue to constitute "significant non-performance", then complaining party can cease performing its commitments under this JCPOA in whole or in part and/or notify the UN Security Council that it believes the issue constitutes significant non-performance’.

When UNSCR receives notification, it shall vote on a resolution to continue sanctions relief under the JCPOA. If UNSCR resolution has not been adopted within 30 days of notification being received by the UN Security Council, then UN sanctions will "snapback" unless the UN Security Council decides otherwise. UNSCR resolution is adopted if:

9 of the 15 Security Council members vote for the resolution; and

no veto is received from any of the five permanent members (United States, United

Kingdom, France, Russia, and China).

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What Would “Snapback” Mean in Practical Terms?

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If Security Council is notified, snapback is likely to be automatic as continuing

sanctions relief must be approved by all permanent members, including the

US.

No other relief measures could be passed without US agreement.

Sanctions revert to position before the JCPOA — applicable to all UN

Member States, including Russia and China.

1696 (2006) 1737 (2006) 1747 (2007)

1803 (2008) 1835 (2008) 1929 (2010)


Impact of “Snapback” on US Position

Additional New Sanctions?

Recent new sanctions targeting Iran’s

iron, steel, aluminum, and copper

sectors (EO 13871 of May 8, 2019),

and the Ayatollah (EO 13876 of June

24, 2019)

Forthcoming sanctions on Iran’s foreign

minister

Changes in licensing policies?

Increased enforcement?

United States already committed to “maximum pressure” campaign against Iran balanced against Trump Administration’s interest in negotiating with Iran.

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3 How Can the EU Reimpose Sanctions?


How the EU Might Re-impose Sanctions - overview

EU funds transfer controls, oil and gas restrictions, financial services controls, product controls and

additional designations all likely to come back into force, effectively reverting to the situation before

the JCPOA.

Regulation 1861/2015 implementing the JCPOA, amends Regulation 267/2012, which was the “high

watermark” EU measure against Iran:

“The commitment to lift all Union nuclear-related restrictive measures in accordance with the

JCPOA is without prejudice to the dispute-resolution mechanism specified in the JCPOA and to

the reintroduction of Union restrictive measures in the event of significant non-performance by

Iran of its commitments under the JCPOA”.

If UN snapback, will EU re-impose sanctions in identical form to Regulation 267/2012? If so, all EU MS should\must vote in favour.

What if EU or Member States want to vary or amend EU unilateral sanctions that go beyond UN measures? Unanimity required, and so what does EU do about UN sanctions?

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What Would Reimposition of EU Sanctions Mean in Practical Terms?

Longer list of DPs including most banks

Product controls likely to be re-introduced which are longer than UN lists

Dual-use (e.g. encryption, lasers)

oil and gas sector

internal repression

proliferation-sensitive items

arms embargo

shipping sector

heightened customs controls

heightened WMD end-use controls

Services restrictions including;

funds transfer controls

restrictions on relationships between EU and Iranian banks

investment controls

insurance & financial services

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The EUBR is designed to deal with US extraterritorial application of its laws.

The EU has “called up” a limited number of US measures that seek to enforce US sanctions against EU entities.

Snapback will put EU and US in a similar position vis a vis Iran.

Does that necessarily lead that the EU removes the US measures on Iran from the JCPOA?

The US measures, which for most part go far beyond UN and EU sanctions, will still affect EU businesses, but now the EU businesses are much less likely to be doing business in or with Iran.

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Impact of Brexit

The UK is committed to the JCPOA, but will follow the EU.

If the UK leaves the EU with a structured deal (for example the Withdrawal Agreement), then the UK will directly follow the EU rules on Iran.

If the UK leaves the EU without a deal, the UK has in place sanctions against Iran that preserve the JCPOA position, and replicates the EUBR.

If the EU unilaterally ‘snaps back’, the UK will likely follow the EU.

If the snapback occurs at the UN level, the UK could proceed unilaterally,

but likely to follow the EU.

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General points to consider

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Status of transactions

Were counterparties delisted by the UN on Implementation Day?

Are transactions affected by any US secondary sanctions?

Do we benefit from US general or specific licenses?

Snapback language in contracts with Iranian nexus

— is existing force majeure/MAC language enough?

Consider lobbying government to preserve

sanctions relief or protect contracts.

Consider what protection may be afforded.

5 Contact Details

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For additional information, please contact:

Anahita Thoms

Baker & McKenzie

Neuer Zollhof 2

40221 Dusseldorf

Germany

T + 49 211 3 11 16 121

F + 49 211 3 11 16 199

[email protected]

Ross L. Denton

Baker McKenzie

100 New Bridge Street

London EC4V 6JA

United Kingdom

T + 44 20 7919 1978

F + 44 20 7919 1999

[email protected]

Ben Smith

Baker McKenzie

100 New Bridge Street

London EC4V 6JA

United Kingdom

T + 44 20 7919 1088

F + 44 20 7919 1999

[email protected]

Inessa Owens

Baker McKenzie

815 Connecticut Avenue, NW

Washington, DC 20006

T +1 202 835 6222

F +1 202 416 7222

[email protected]

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