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A brief primer on U.S. sanctions relief under the Iran nuclear agreement

Posted on 17 July 2015 by Tim McCarthy

The agreement is unquestionably historic, and will certainly open the door to very substantial business between the countries presently observing the international sanctions regime and Iran. However, those doors will not open immediately, and when opened, will still be framed by remaining sanctions and restrictions, particularly in the United States. While those interested in doing business with Iran should begin planning now, that process should be undertaken in a measured way and with an eye on both the process of sanctions relief implementation, and the limitations that will prevail even after the sanctions relief provided for in the July 14 agreement has been implemented.

First, sanctions relief will not happen immediately. The agreement provides for a process whereby the P5+1 will undertake to lift United Nations sanctions on Iran, Iran will then undertake certain substantial steps toward implementation of the restrictions upon its nuclear research and development program, and the P5+1 will then carry out deeper sanctions relief measures. The P5+1 will first submit a resolution to the UN Security Council seeking its endorsement of the agreement. Once endorsed, the parties will take preliminary steps in anticipation of “Adoption Day,” a benchmark date that will ensue 90 days after endorsement.

On Adoption Day, Iran will begin to comply with a prescribed set of procedures pertaining to its past nuclear activities, in cooperation with the International Atomic Energy Agency. Then, on the date when the IAEA certifies that Iran has complied with these procedures – known in the agreement as Implementation Day – the UN, EU and US will lift their respective nuclear-related sanctions. The United States has estimated that it will take between six months and a year to reach Implementation Day. Thus, sanctions relief under the agreement likely will not take place until sometime in 2016.

Second, the US will lift secondary sanctions, but for the most part, not primary sanctions. “Secondary” sanctions are the sanctions imposed in recent years by the United States upon non-U.S. businesses and persons who might seek to conduct business with Iran in certain business sectors, including the petrochemicals sector, the automotive sector, financial services, shipping and mining. The agreement provides that these sanctions will be lifted on Legal1us.286255.2 2 Implementation Day (and indeed, many of these sanctions have already been suspended in the course of the last two years’ negotiations).

By contrast, the “primary” sanctions imposed by the U.S. on Iran – that is, the sanctions prohibiting U.S. businesses and persons from doing business in or with Iran – will for the most part remain in place even after Implementation Day. Accordingly, with few exceptions as discussed below – and with one potentially substantial exception – U.S. businesses and persons will remain unable to conduct most sorts of business directly with Iran for an indefinite period of time to come.

From the text of the agreement, it appears that the most substantial measure of relief from U.S. primary sanctions will have to do with foreign subsidiaries of U.S. companies, which may be able to undertake certain sorts of business with Iran after Implementation Day. The agreement provides that the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) will “[l]icense non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with” the agreement. It further provides that such entities “will continue to be generally prohibited from conducting transactions of the type permitted pursuant to” the agreement. In other words, and within parameters that remain unknown, OFAC will license U.S.-owned foreign entities to participate in some categories of transactions with Iranian businesses and persons. Such structures may prove unwieldy, as compared to direct transactions not involving foreign subsidiaries, and the scope of the licensing relief that will be extended by OFAC remains uncertain. However, prior to 2012 such subsidiaries were permitted to trade with Iran (albeit subject to other meaningful restrictions), and so this provision of the agreement might re-open a door to substantial business between the U.S. and Iran via foreign subsidiaries.

Finally, European and other non-U.S. businesses will enjoy swifter and broader relief from sanctions on business with Iran than will U.S. businesses. While the political situation in the United States as it pertains to Iran will be uncertain for some time to come, this state of affairs will certainly not be very palatable to U.S. concerns who have interests in doing business with Iran. Thus, we expect that further relief for U.S. businesses might well ensue after 2016 brings both Implementation Day, and Election Day.

The precise scope of the U.S. sanctions relief that will ensue from the July 14 agreement will become clearer in the late autumn, when Adoption Day arrives and the U.S. will be required to issue certain waivers and terminate certain Executive Orders. However, the opportunities that will arise, and the limitations on those opportunities, can be seen in broad strokes even now. As the process of sanctions relief goes forward in the coming months and years, and as interest in U.S.-Iran business is translated more and more into action, the parameters of enforcement of sanctions by OFAC and related agencies will be in flux. Accordingly, parties on each side of the equation should take counsel regarding the applicability of U.S. sanctions to any plan of action before beginning to carry it out. Nevertheless, the July 14 agreement will very likely open a new era in Iran’s relations with the U.S. and the rest of the world, and even with the need for continuing sanctions compliance, the opportunities at hand will often prove to be worth both the effort, and the wait.