Ross Denton (London), Anahita Thoms (Dusseldorf), Ben Smith (London), and Inessa Owens (Washington, DC) Wednesday, 3 July 2019 What happens if the JCPOA collapses?
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.
© 2019 Baker McKenzie
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?
© 2019 Baker McKenzie
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.
© 2019 Baker McKenzie
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
© 2019 Baker McKenzie
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
© 2019 Baker McKenzie
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
© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
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
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EU Blocking Regulation: Application
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EU Blocking Regulation
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
© 2019 Baker McKenzie
Framework and Key Provisions (1)
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EU Blocking Regulation
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)
© 2019 Baker McKenzie
Framework and Key Provisions (2)
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EU Blocking Regulation
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).
© 2019 Baker McKenzie
Framework and Key Provisions (3)
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EU Blocking Regulation
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).
© 2019 Baker McKenzie
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
© 2019 Baker McKenzie
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?
© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
“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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© 2019 Baker McKenzie
“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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© 2019 Baker McKenzie
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)
© 2019 Baker McKenzie
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?
© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
EU Blocking Regulation
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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© 2019 Baker McKenzie
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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© 2019 Baker McKenzie
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
Ross L. Denton
Baker McKenzie
100 New Bridge Street
London EC4V 6JA
United Kingdom
T + 44 20 7919 1978
F + 44 20 7919 1999
Ben Smith
Baker McKenzie
100 New Bridge Street
London EC4V 6JA
United Kingdom
T + 44 20 7919 1088
F + 44 20 7919 1999
Inessa Owens
Baker McKenzie
815 Connecticut Avenue, NW
Washington, DC 20006
T +1 202 835 6222
F +1 202 416 7222
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