Overview of the lifting of certain Iran-related sanctions, and the economy and business thereafter
Iran had long been a country that was unable to participate in the global economy and financial markets due to the imposition of an extremely stringent sanctions regime, most notably by the United States (the “US”). However, On 14 July 2015, the P5+1 (i.e. China, France, Russia, the United Kingdom and the US, plus Germany), the European Union, and Iran reached a Joint Comprehensive Plan of Action (the “JCPOA”) regarding the easing of such sanctions and to ensure that Iran’s nuclear program will be exclusively peaceful. Under the JCPOA, 18 October 2015 marked the “Adoption Day,” on which the JCPOA became effective and participants were to begin making the necessary preparations for implementation of their commitments under the JCPOA (the “Adoption Day”). Subsequently, on 16 January 2016, Implementation Day under the JCPOA occurred, which marked the beginning of steps being taken with regard to the lessening and/or lifting of sanctions as described in the JCPOA, once the International Atomic Energy Agency (the “IAEA”) verified that Iran has implemented key nuclear-related measures described in the JCPOA (the “Implementation Day”). This newsletter focuses on the lifting/easing of the sanctions on Iran, and the possibilities of conducting and engaging in business with Iran going forward.
BRIEF SUMMARY OF THE EASING OF SANCTIONS AGAINST IRAN
Following Implementation Day, the US as well as the EU have relaxed substantial sanctions that were in place against Iran; including those related to the petroleum, petrochemical, oil and gas sectors, and have started the restoration of financial ties to certain Iranian banks. The EU and the UK have also lifted the majority of the nuclear-related sanctions against Iran’s energy, mining, financial and shipping sectors; as a result, technical assistance, financial assistance, brokerage services and insurance activities related to these aforementioned sectors are now permitted. However, sanctions related to the military and telecommunications sectors still currently remain in place.
Subsequently, the Office of Foreign Assets Control (“OFAC”) published on its website guidance and information with respect to the lifting of certain sanctions under the JCPOA. However, it is important to note that the lifting of such sanctions is subject to a “snap-back” provision of such sanctions if Iran fails to continually meet its obligations under the deal.
US SANCTIONS RELIEF
The US has implemented sanctions relief with regard to key sectors of the Iranian economy, including but not limited to the following:
- Significant sanctions relief for non-US persons to conduct business with Iran’s financial, banking, energy, petrochemical, shipping, shipbuilding, and automotive sectors (as described further in the following sections);
- Removal of extraterritorial sanctions to allow non-US persons to provide insurance, reinsurance and underwriting services in connection with certain permitted activities under the JCPOA; and
- The US removed several individuals and entities from the OFAC List of Specially Designated Nationals and Blocked Persons (the “SDN List”), the Foreign Sanctions Evaders List (the “FSE List”) and/or the Non-SDN Iran Sanctions Act List (the “NS-ISA List”).
Foreign affiliates and subsidiaries of US companies may now engage in commercial activities involving Iran, however the US parent company and affiliates must remain cautious and aware regarding any limitations that are imposed on such commercial activities.
Additionally, US persons may now also apply to OFAC for a license for the sale, lease or servicing of commercial passenger aircraft relating to Iran.
US Primary Sanctions Still in Place
Despite the vast range of sanctions relief being implemented, it is extremely important to note that, with the exceptions of aviation, import of Iranian products, and foreign entities owned or controlled by US persons, US persons (including US companies) are still broadly prohibited from engaging in any transactions or dealing with Iran and the Government of Iran, unless such activities are exempt from regulation or authorized by OFAC (“US Primary Sanctions”). Thus, US persons may still be sanctioned for engaging in any of the sanctionable activities in spite of Implementation
Day occurring and certain sanctions being lessened or lifted in accordance with the JCPOA.
US Secondary Sanctions Related to Financial Services
Notwithstanding the above, the US and OFAC have rolled back ‘secondary sanctions,’ which are sanctions against non-US persons for engaging in specific conduct with Iran occurring outside the US (“US Secondary Sanctions”).
Furthermore, the US implemented the relief of US Secondary Sanctions with regard to financial and banking activities, and as such, sanctions will no longer apply to non-US persons who engage in:
- Financial and banking transactions with individuals and entities removed from the SDN List, FSE List and/or NS-ISA List, including sanctions on opening and maintaining correspondent and payable-through accounts, investments, foreign exchange transactions and letters of credit. Individuals and entities that were removed from these Lists include the Central Bank of Iran and several other financial institutions;
- Transactions and other activity in relation to the Iranian Rial;
- Provision of US bank notes to the Government of Iran;
- Purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds; and
Provision of financial messaging services to the Central Bank of Iran and other Iranian financial institutions removed from the SDN List.
Therefore, foreign financial institutions are now able to conduct or facilitate financial transactions with Iranian nationals, so long as such transactions do not involve persons on the SDN List,, including transactions by foreign financial institutions that have branches in the US, provided that the branches in the US are not directly or indirectly involved in the transactions and such transactions may not transit the US financial system. Additionally, foreign financial institutions are also able to open or maintain correspondent accounts for Iranian financial institutions.
However, it should still be noted that US persons are still generally prohibited from involvement in the activities described above, and moreover, the above mentioned activities are prohibited from transiting the US financial system.
EU SANCTIONS RELIEF
With regard to EU sanctions against Iran, most of the nuclear-related sanctions with regard to the energy, mining, financial and shipping sectors have been removed.
EU persons and companies may now engage in trade with Iran in the following sectors:
- Banking and insurance;
- Oil, gas and petrochemicals;
- Shipping, shipbuilding and transport; and
- Gold and precious metals.
Furthermore, EU persons and their overseas subsidiaries are now allowed to engage in previously restricted activities, including but not limited to the following:
- Transfer funds between EU and Iranian persons;
- Open representative offices, subsidiaries, joint ventures or bank accounts in Iran;
- Provide insurance to Iranian persons;
- Trade in oil, petroleum and petrochemical products and engage in related financing; and
- Trade in gold and precious metals, as well as diamonds.
However, sanctions on certain individuals and entities under the JCPOA still remain in place, so transactions involving a person on the European SDN list require individual licenses from the relevant authorities. Therefore, EU persons must still remain aware of the persons with whom they do business in Iran, specifically by undertaking counter-party due diligence.
Additionally, it is important to note that the EU has only lifted certain nuclear-related sanctions, and that other prohibitions and sanctions still remain with regard to military goods, human rights and anti-terrorism sanctions.
UAE SANCTIONS RELIEF
The UAE previously applied UN sanctions on Iran in relation to the Iranian banking sector and engaging in banking transactions with Iranian entities, however this has now become mostly inapplicable. Therefore, as a general rule, businesses and individuals are no longer restricted from entering into dealings with Iran.
Following the lifting of such sanctions, the UAE which has well-established trade ties with Iran, has started to work towards re-establishing such relationship. Iran trade roadshows have been hosted in Dubai and Abu Dhabi in order to assess and discuss the changes to sanctions in relation to the JCPOA and its impact on international trade and finance. Additionally, it is expected that a number of non-oil sectors of the UAE to benefit, such as transportation and logistics, banking, tourism and trade. It is also expected that there will be a rise in Iran’s imports, including machinery, vehicles, construction related goods, commodities, food and consumer goods.
However, it should be kept in mind that this is subject to any remaining sanctions that are in place, for example, as a result of US primary sanctions, whereby a US citizen living in the UAE would still be restricted under the US primary sanctions.
BUSINESS IN IRAN MOVING FORWARD
Set up and Establishment of Presence in Iran
Based on the aforementioned information, businesses are now assessing the steps and processes required in order to move forward with establishing a presence in Iran. Likewise, Iran is also taking steps to open itself up once again to the global market.
Generally, foreign businesses establish a presence in Iran through the use of branches and representative offices. Alternatively, foreigners may enter into agreements and relationships with local partners in order to conduct business through a limited liability company or private joint stock company.
Furthermore, Iran has recently establishes free zones, regulated by relevant authorities. These free zones allow foreign companies to form wholly owned subsidiaries.
Finally, the Foreign Investment Promotion and Protection Act provides protections to foreign investors for non-commercial related risks, and thereby provides incentives in order to draw in foreign investment into Iran, such as allowing for the repatriation of sales related profits for foreigners, providing for fair compensation in the event of nationalization, and allowing for international arbitration in the event of disputes involving an investor based in a country with which Iran has a Bilateral Investment Treaty.
Issues being Presented
Although US Secondary Sanctions, EU Sanctions and UN sanctions have generally been lifted and/or eased in relation to Iran, it should be noted that many entities, especially financial institutions and banks, remain hesitant with regard to engaging in business with the Government of Iran, Iranian banks and Iranian nationals. This is mainly due to the remaining US sanctions; since US banks are still prohibited from doing business in Iran (either directly or indirectly), and because doubt remains regarding how sanctions and US dollar clearing will work in practice, many foreign institutions fear that they could be targeted by the US or face US legal problems if they were to resume business in Iran. Thus, the risk of exposure to huge penalties and fines in the US in addition to other legal and/or regulatory problems in the US is holding financial institutions back in spite of the lifting of sanctions thus far.
Other risks being taken into consideration include the risk of bribery and/or corruption, the lack of a well-established infrastructure, risk of bureaucratic delays, and the uncertainty of sanctions that still remain in place. https://www.gov.uk/government/publications/doing-business-with-iran/frequently-asked-questions-on-doing-business-with-iran
Thus, it remains to be seen how the lifting of sanctions will continue to impact business and dealing with Iran in the foreseeable future.
lecocqassociate arabia dmcc provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.
This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact us for any questions.
 US Department of Treasury Resource Center (2016); https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20160324_33.aspx
 Christos Charalambous & Ben Constance, Taylor Wessing LLP, “Iran Sanctions Update” (28 October 2015), http://united-arab-emirates.taylorwessing.com/en/iran-sanctions-update
 Baker & McKenzie debates impact of Iran trade developments in the UAE (21 February 2016), http://www.bakermckenzie.com/news/Baker–McKenzie-debates-impact-of-Iran-trade-developments-in-the-UAE-02-21-2016/
 Babu Das Augustine, Gulf News, “Sanctions-free Iran a positive development for UAE economy” (17 January 2016), http://gulfnews.com/business/economy/sanctions-free-iran-a-positive-development-for-uae-economy-1.1655062
 Matthew Spivack, Harvard Business Review (5 May 2016), https://hbr.org/2016/05/what-to-know-about-doing-business-in-iran
 Shahram Safai, Afridi & Angell, “Doing Business in Iran: Life After (Secondary) Sanctions” (2 February 2016)
 John Whittaker and Anousheh Bromfield, Clyde & Co LLP, “Investing in Iran” (17 June 2016), http://www.lexology.com/library/detail.aspx?g=e18278f7-74b4-4f74-b303-d6423764db4a
 Tom Arnold, Reuters (6 March 2016), http://www.reuters.com/article/us-iran-trade-banks-idUSKCN0W80MU
 Foreign & Commonwealth Office of the UK, Guidance, https://www.gov.uk/government/publications/doing-business-with-iran/frequently-asked-questions-on-doing-business-with-iran