This article was originally published in Law.com International and can be accessed here.
Kartik Mittal, Partner
Stephanie Limaco, Solicitor
The US Could Re-enter the Iran Nuclear Agreement and Lift Sanctions Against Iran: What Does This Mean for the UK and Europe?
The UK, France, China, Russia and Germany recently began talks to bring the US back into the Joint Comprehensive Plan of Action (JCPOA) or “Iran nuclear deal”. The US has indicated that it is prepared to re-embrace the JCPOA, including lifting sanctions that are inconsistent with the deal.
Such a move would reduce the foreign policy divergence between the US and its European allies over Iran, potentially paving the way for European businesses to restart their Iranian activities.
But an agreement remains uncertain. There are presidential elections in Iran, the Biden administration faces domestic opposition, and differences persist about which sanctions will be lifted.
Should a deal emerge, it is worth assessing the potential impact on the financial and legal sectors.
Iran nuclear deal
The US and Iran have a complex relationship. In July 2015, the Iran nuclear deal was agreed by President Obama together with France, the UK, Germany, Russia, and China. Iran agreed to limit its nuclear activities and not to develop or acquire nuclear weapons. In return, UN, multilateral and national sanctions were lifted.
In May 2018, President Trump unilaterally withdrew from the JCPOA and reinstated sanctions. Other parties – including the UK, France and Germany – stuck with it. The first US sanctions came into effect in August 2018 followed by more in November 2018, targeting critical sectors of Iran’s economy, including energy, shipping and financial services.
President Biden is seeking a US return to the JCPOA.
Impact of US departure
Although the JCPOA remained in place, the US withdrawal had serious trade-related implications. Under US sanctions, not only are US citizens prohibited from engaging in transactions with US sanctioned individuals and entities, but foreign financial institutions that knowingly facilitate significant transactions, or persons that provide material or other support to designated entities or individuals can also face sanctions. Accordingly, multiple non-US companies and individuals have been included in the OFAC’s SDN List for alleged transactions with Iranian businesses.
The UK and the EU took the view that the JCPOA is “crucial” for global security. To reduce the impact of US secondary sanctions, the EU updated the “Blocking Statute” in June 2018 with the aim of mitigating their effect on EU operators doing legitimate business with Iran. The UK has retained the Blocking Statute post Brexit. Under its terms, UK and EU operators are prohibited from complying with US sanctions against Iran that are based on, or resulting from, the laws specified in its Annex.
But in reality, it has only had a minor impact. Various EU companies, including Renault, Volkswagen, Total and Hapag-Lloyd took a commercial decision to suspend their business with Iran given their US exposure. EU trade with Iran also decreased substantially after sanctions were re-imposed.
Impact of US return
In compliance with the JCPOA, the US waived or terminated sanctions in January 2016. they were lifted in the energy, financial services and auto sectors as well as in Iranian rial trading. Iranian banks were also readmitted to SWIFT.
Sanctions were then re-imposed after the US withdrew from the JCPOA. Even SWIFT decided to suspend some Iranian banks to avoid the risk of penalties.
A potential US return to the JCPOA could be important for UK and EU companies considering doing business with entities whose sanctions are removed.
The financial sector
If sanctions were lifted, EU and UK financial institutions could operate accounts and conduct transactions in US dollars with currently sanctioned entities without any risk - although these transactions would probably have limitations, as when the US was part of the JCPOA.
Without the risk of sanctions, European banks would be less reluctant to process payments to and from Iran, or sanctioned entities.
The US re-joining the JCPOA would probably lead to Iranian banks being re-admitted to SWIFT, through which Iranian entities could potentially conduct transactions.
The lifting of sanctions is also likely to simplify compliance checks by UK financial institutions with US operations.
Financial entities would not face the dilemma of complying with US sanctions (to avoid being included on the SDN list) or to comply with the EU Blocking Statute (which prohibits them from complying with US secondary sanctions). Although financial entities are usually more fearful of US sanctions, they must be aware of the potential consequences of not complying with the Blocking Statute. In 2020, several Iranian customers filed a claim against Metro Bank because their accounts were closed without warning, arguing that this violated the Blocking Statute.
In the event the US re-joins the JCPOA, financial entities will probably have to consider sanctions that may remain, as it is likely that some sanctions will remain even if the US re-joins the JCPOA.
If the US did re-join, financial transactions between formerly sanctioned entities and their EU and UK financial counterparties should increase.
Lawyers have dealt with several cases concerning the interaction between US sanctions and the EU Blocking Regulation. The lifting of sanctions would reduce litigation: work arising from conflict between the two would decrease. However, an uptick in UK-Iran business would increase transactional/conveyancing work: companies doing business with Iran would need legal advice. Post-JCPOA, some law firms opened offices in Iran or allied with local firms; others may be interested in opening – or re-opening – if the US re-joins.
A US return to the JCPOA would be welcomed in Europe, eliminating the divergence in foreign policy over Iran. It would also enable European businesses to recommence activities in Iran and deal with previously sanctioned entities, removing uncertainty in compliance with US secondary sanctions and the EU Blocking Statute.
However, as the US position has changed under different administrations, the risk remains that sanctions could always be re-imposed.