pdf

The Iran Nuclear Deal: Setting the Path Forward to Lift International Economic Sanctions

July 15, 2015

 

On July 14, 2015, Iran and the E3/EU+3 (United States, Russia, China, European Union, United Kingdom, France, Germany) announced a final comprehensive agreement intended to restrain Iran’s nuclear weapons program in exchange for the lifting of economic sanctions. The Joint Comprehensive Plan of Action (JCPOA) follows closely the Lausanne framework agreement announced last April, as described in our alert of April 15, 2015, while providing a surprising amount of detail regarding the specific undertakings of the parties. The JCPOA, for example, largely eliminates uncertainty concerning what U.S. sanctions are considered “nuclear-related” and therefore may be terminated.

While the JCPOA does not specify precise dates by which the UN, EU, and US must act, the agreement lays out milestones and a work program that, as a practical matter, mean that sanctions will not be lifted before the end of 2015 at the earliest; more likely, assuming Iran satisfies its commitments, sanctions relief will not commence until the first quarter of 2016. Meanwhile, interim sanctions relief first afforded by the E3/EU+3 in November 2013 has been extended again, while Congress initiates an intense period of review. The projected timetable for the next six months is shown in a table below.

For U.S. and foreign businesses, the key takeaway is that the JCPOA cements an asymmetric structure of economic normalization with Iran: U.S. nationals and companies will remain largely prohibited from doing business with Iran, while non-U.S. persons (particularly EU companies, which since 2010 have been subject to substantial restrictions) will neither be subject to home country limitations nor the threat of secondary U.S. sanctions. Notably, however, the United States commits to licensing foreign subsidiaries of U.S. entities to engage in activities consistent with the JCPOA.

Importantly, broad unilateral non-nuclear U.S. sanctions will remain in force. These sanctions were adopted in response to Iranian support for international terrorism, weapons proliferation, human rights abuses, and similar conduct that the JCPOA does not address. There is no current prospect that the US will ease these sanctions.

The Context

Current U.S. unilateral economic sanctions targeting Iran date back to 1984. Beginning in 2006, international concern over Iran’s pursuit of nuclear weapons and ballistic missile delivery capability precipitated a series of far-reaching international sanctions adopted by the United Nations and the EU, in addition to increasingly broad U.S. measures. The UN Security Council adopted six resolutions between 2006 and 2010 targeting numerous Iranian persons and business entities, and prohibiting trade with Iran that might support Iran’s nuclear and major conventional weapons programs. From 2007 through 2012, the EU Council adopted several Decisions in line with U.S. sanctions programs that targeted Iran’s energy and financial services industries, including an embargo on importing Iranian crude oil and denying Iranian banks access to the SWIFT clearance system.

The United States not only barred U.S. persons from engaging in virtually any non-humanitarian trade or investment involving Iran, it adopted “secondary” sanctions that threatened to deny non-U.S. persons access to the U.S. market for engaging in certain energy and financial services transactions that were prohibited as to U.S. persons. In addition, the United States threatened secondary sanctions against countries that did not reduce their levels of Iranian oil imports, and it largely blocked Iranian access to the international banking system, through such measures as designating Iran as a jurisdiction of “primary money laundering concern.” Congress mandated many measures through legislation while permitting the President in some cases, but not all, to waive the sanctions.

The combination of multilateral measures severely impacted Iran’s economy, leading to the negotiations that resulted in the JCPOA. The length of the document – approximately 160 pages – attests to the intricate detail by which the E3/EU+3 sought to pin down Iran’s nuclear activities, and Iran sought to ensure that the UN, EU and US would substantially terminate the effective economic embargo.

In sum, over a 15-year period, Iran is committed to accept limitations on the enrichment of uranium, limitations on heavy water reactors, and, most importantly, to allow the IAEA to monitor Iran’s compliance with the Agreement. These measures include:

  • Reducing the number of uranium enriching centrifuges at Natanz and refraining from any uranium enrichment at Fordow.
  • Converting the Fordow facility into a nuclear, physics, and technology center.
  • Redesigning and rebuilding a modernized heavy water research reactor at Arak.
  • Permitting a long-term IAEA presence in Iran, including monitoring and surveillance.

In exchange, upon the IAEA’s verification of Iran’s implementation of various nuclear-related commitments, the UN will terminate previous UN Security Council resolutions on the Iranian nuclear issues, the EU will terminate all nuclear-related economic and financial sanctions, including the release of all frozen Iranian funds and economic resources, and the U.S. will cease the application of sanctions specified in the Agreement to non-U.S. persons. Specifically, the JCPOA commits the United States to terminate or to modify a broad range of sanctions that impact third party business with Iran, including:

  • Financial and banking transactions with Iranian banks and financial institutions.
  • Efforts to reduce Iran’s crude oil sales.
  • Transactions with Iran’s energy sector.
  • Removal of certain individuals and entities from the Specially Designated Nationals and Blocked Persons List.

The Agreement also provides a dispute resolution mechanism, through which sanctions could be re-imposed in the event Iran is found not to be compliant with its obligations under the Agreement.

To be clear, U.S. sanctions relief will only be provided through the suspension and termination of nuclear-related secondary sanctions, which were applicable to non-U.S. persons. Thus, foreign companies that reengage in Iran’s energy sector, for example, would not face potential U.S. penalties impacting their U.S. business. Sanctions will remain in place with regard to activities by U.S. persons, which includes U.S. citizens, U.S. permanent residents, companies organized under the laws of the U.S. and their foreign branches, and any entity owned (50% or more) or “otherwise controlled” by a U.S. person.

Timing

The JCPOA provides for sequencing its implementation, as follows:

  • “Finalization Day”: Finalization Day is July 14, 2015, the date on which the Parties endorsed the Agreement. The Parties next will submit for “adoption without delay” a UN Security Council resolution endorsing the Agreement.
  • “Adoption Day”: Adoption Day is the day the Agreement comes into effect, which will occur 90 days after the UN Security Council’s endorsement of the Agreement, or on an earlier date mutually agreed upon by the Parties. Beginning on Adoption Day, the Parties will make necessary arrangements for the implementation of the commitments in the Agreement. Such measures will include the adoption of an EU regulation terminating the EU sanctions program and in the U.S., the issuance of Presidential waivers to the statutory nuclear-related sanctions, both to take effect simultaneously with the IAEA-verified implementation by Iran of agreed nuclear-related measures.
  • “Implementation Day”: Implementation Day is the date that the IAEA verifies Iran’s implementation of certain nuclear-related measures, as outlined in the Agreement. It is not clear what constitutes “verification” – presumably this milestone requires a clean report from the IAEA that is accepted by the UNSC as satisfying the JCPOA requirements. The nuclear measures include:
    • Not continuing construction of the original design of the Arak heavy water reactor.
    • Keeping enrichment capacity at no more than 5060 centrifuges.
    • Removing excess centrifuges.
    • Selling or blending down all enriched uranium hexafluoride in excess of 300 kg of 3.67% enrichment.

The JCPOA further establishes a process for winding down the agreement beginning with a “Transition Day” during 2023 and a “Termination Day” that would fall 10 years from the Adoption Day in 2025.

Congressional Consideration

The Iran Nuclear Agreement Review Act of 20151 prohibits the President from waiving or suspending any sanctions during a period established for Congressional review. Under the Act, the President must submit the Agreement and related materials to Congress by July 19 (assuming July 14 is the date of the Agreement). Congress then will have until approximately September 17 (60 calendar days) to review and to act on the Agreement. At this time, Congress is expected to be in recess from August 10 through September 7.

If during the review period Congress passes a joint resolution of disapproval, then the President may not waive or provide sanctions relief for an additional period of 12 calendar days after passage (September 29, at the latest). If the President vetoes such a joint resolution, then the President may not waive or provide sanctions relief for a further period of 10 calendar days following the veto. If Congress fails to override such a veto which is widely expected then October 9 appears to be the latest date by which the Act would prohibit Presidential waiver of sanctions. If, however, the President does not veto the joint resolution of disapproval or Congress overrides the veto, the President would be barred from taking any measure of statutory sanctions relief, including exercising waivers of the statutory sanctions to which the U.S. has committed in the JCPOA.

Implications for the Business Sector

The comprehensive lifting of UN and EU nuclear-related sanctions will, as of the date of the Agreement’s implementation, permit EU persons (EU nationals and EU incorporated entities) to engage in a wide range of business dealings with Iran. These include: (1) the opening of financial and credit institutions offices, subsidiaries, joint ventures and bank accounts in Iran; (2) the import of crude oil, petroleum products, natural gas, and petrochemicals into the EU; and (3) the provision of naval equipment and technology for ship building and transport.

The U.S. will delist hundreds of Iranian persons and entities currently named as “Specially Designated Nationals,” and the EU will take comparable action. These delistings will have the secondary effect of removing the persons and entities from watch lists used for compliance purposes by banks and other businesses worldwide, thus substantially easing business with them. Persons and entities listed as SDNs for non-nuclear reasons (e.g., terrorism) will remain listed. Notably, this will include the Iranian Revolutionary Guard Corps and its affiliates.

In contrast to actions by the EU, the U.S. economic sanctions relief is limited to non-U.S. persons, who without fear of U.S. secondary sanctions will be permitted to engage in (1) financial and banking transactions with the Iranian banks and financial institutions, (2) provide underwriting, insurance and re-insurance services, (3) engage in Iran’s energy and petrochemical sectors; (4) engage in the shipping sector; (5) trade in precious metals; and (6) conduct transactions in the automotive sector. These measures will allow Iran more ease of access to the broader world market for financial services.

U.S. persons, including foreign branches of U.S. companies and foreign subsidiaries owned or controlled by U.S. parent companies, will continue to be prohibited from engaging in any unlicensed business transactions in Iran. However, the U.S. has committed to licensing non-U.S. entities owned or controlled by U.S. persons to engage in activities in Iran consistent with the Agreement. This measure appears to be prompted in part by the recognition that the agreement ultimately disadvantages U.S. firms against their direct competitors in the European Union.

JCPOA: Projected Milestone Dates During 2015 - 2016

Projected Timeframe*

Milestone

Comment

July 14

Finalization Day

Day on which JCPOA is endorsed by E3/EU+3 and Iran. (Annex V.A)

July 14

Interim Relief Extended

The Parties agreed to further extend through Implementation Day the sanctions relief provided for in the Joint Plan of Action of November 24, 2013.

July 19

President submits JCPOA Package to Congress

Under the Iran Nuclear Agreement Review Act (INARA), the President must transmit the JCPOA to Congress within five calendar days.

July

Parties submit JCPOA to UN Security Council (UNSC)

“Promptly after the conclusion of the negotiations of this JCPOA, the proposed UN Security Council resolution referred to in Section 18 of this Annex will be submitted to the UN Security Council for adoption without delay.” (Annex V, Par. 3)

 

IAEA commences work on implementation

“Iran and the IAEA will start developing necessary arrangements to implement all
transparency measures provided for in this JCPOA so that such arrangements are completed, in place, and ready for implementation on Implementation Day.” (Annex V, Par. 5)

July - August 2015

UNSC Resolution

The UN Security Council will consider the JCPOA for adoption. 

September 17

60th day for Congressional Review of JCPOA

Congress has 60 days to review the JCPOA and to determine whether to approve, disapprove or take no action.

September 29

Last day for Presidential Veto of Joint Resolution of Disapproval

If Congress passes a Joint Resolution of Disapproval, the President has 12 days to consider the disapproval.

October 9

Last Day for Congressional Reconsideration of Presidential Veto

If the President vetoes the disapproval, Congress will then have 10 days to reconsider and vote to override the veto.

 

Adoption Day

“Adoption Day will occur 90 days after the endorsement of this JCPOA by the UN Security Council through the resolution referred to above, or at an earlier date by mutual consent of all JCPOA participants, at which point this JCPOA comes into effect.” (Annex V, Par. 6)

After Adoption Day

EU adopts regulation; President issues prospective waivers

EU will adopt a Regulation terminating all sanctions and the President will issue waivers to the statutory sanctions, both to take effect on Implementation Day. (Annex V, Par. 10-11).

December 2015/1Q2016

Implementation Day

“Implementation Day will occur upon the IAEA-verified implementation by Iran of the nuclear-related measures.” (Annex V, Par. 14)

 

IAEA verification

Annex V, Par. 15 enumerates extensive nuclear-related measures that must be verified by the IAEA. This process may extend well into 2016.

 

UN and EU terminate sanctions

 

 

US ceases application of secondary statutory nuclear-related sanctions and implements other sanctions obligations

 

*Specific dates are projected based on the assumption that July 14 is the “Finalization Day,” and may vary within a period of a few days.


[1] Pub. L. No. 114-17, 129 Stat. 201 (2015).


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O'Melveny partner licensed to practice law in the District of Columbia and Georgia, Greta Lichtenbaum, an O'Melveny partner licensed to practice law in the District of Columbia, and David Ribner, an O'Melveny associate licensed to practice law the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York's Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, Phone:+1-212-326-2000. © 2015 O'Melveny & Myers LLP. All Rights Reserved.