With the US out of the Iran deal, the EU considers ‘Blocking Regulation’

Written by Jason Morris on Friday June 1, 2018

In 2015, an agreement, known as the Joint Comprehensive Plan of Action (JCPOA), was drawn up in which Iran agreed to curtail its nuclear activities in return for the lifting of UN, US and EU sanctions.

The JCPOA was made between Iran, the US, the UK, France, Germany, Russia and China, and included the following conditions:

• Iran will reduce its enrichment capacity by two-thirds
• Iran’s stockpile of low enriched uranium will be reduced to 300kg, a 96% reduction
• the core of the heavy water reactor in Arak will be removed, and it will be redesigned in such a way that it will not produce significant amounts of plutonium
• Iran will allow UN inspectors to enter sites, including military sites, when the inspectors have grounds to believe undeclared nuclear activity is being carried out there. It can object but a multinational commission can override any objections by majority vote. After that Iran will have three days to comply. Inspectors will only come from countries with diplomatic relations with Iran, so no Americans
• once the International Atomic Energy Agency (IAEA) has verified that Iran has taken steps to shrink its programme, UN, US and EU sanctions will be lifted
• restrictions on trade in conventional weapons will last another five years, and eight years in the case of ballistic missile technology
• if there are allegations that Iran has not met its obligations, a joint commission will seek to resolve the dispute for 30 days. If that effort fails it would be referred to the UN security council, which would have to vote to continue sanctions relief. A veto by a permanent member would mean that sanctions are reimposed. The whole process would take 65 days.

Having met these conditions sanctions against Iran were lifted on 16 January 2016.

However in May 2018 President Trump announced that the US will be leaving the agreement, meaning the US Office of Foreign Asset Control (OFAC) sanctions would be reinstated.

There are specific time periods in place for this to happen, namely a 90-day and a 180-day wind-down period for institutions to effectively end business transactions with Iran.

The first deadline is on 6 August 2018. This will affect the trade of certain products including raw and semi-finished metals, and the purchase of US dollars. The second deadline is on 4 November 2018 and will affect the trade of petroleum products.

There are requirements for the interim period too that must be understood by institutions involved with Iran. Any ‘new’ business that has been placed after 8 May 2018, and prior to the above deadline dates, involving trades that will become the subject of sanctions when they are reintroduced, are likely to be construed as sanctionable.

As such, any firms or institutions involved with Iran should think carefully about business now being placed, and assess whether it would be sanctionable or whether it is instead part of existing business that pre-dates 8 May 2018. To aid this, OFAC issued waivers which will remain in place for the duration of the relevant wind-down periods. When appropriate, OFAC will also revoke or amend general and specific licences issued in connection with the JCPOA.

At that time, OFAC will issue new authorisations to allow the wind-down of transactions and activities that were authorised pursuant to the revoked or amended general and specific licenses. At the end of the 90-day and 180-day wind-down periods, the applicable sanctions will come back into full effect.

The impact of these sanctions being reinstated could be far-reaching. For example, in the oil and gas sector, the US itself is not a particularly big customer, however, other countries who are will have to reduce or end their trade with Iran or risk facing US sanctions.

European oil companies Total and BP could be significantly affected because of the deals they have in place with Iran. BP has a 50/50 ownership arrangement with the Iranian Oil Company (IOC) of the Rhum gas field, situated 240 miles off the Scottish coast. As a result of the reintroduction of US sanctions on Iran, BP has had to halt work on this gas field and is looking to sell its stake to another oil and gas company.

The lifting of sanctions is not restricted to energy companies; in the aviation industry Airbus and Boeing both have lucrative deals in place to sell aircraft to Iran. Under the sanctions changes they stand to lose out on billions of dollars because of US parts being used in the construction.

It’s not all doom and gloom, though. The remaining active partners of the JCPOA have said they will continue to support the agreement. The EU has even started the process of blocking the US sanctions on Iran by adding them to the so-called ‘Blocking Regulation’, which was created by the EU in 1996 in response to the US penalising firms for trading with Cuba. Essentially, it is a piece of legislation that the EU can use to warn Washington to back down over its reneging on the Iran deal.

There are four main elements to the blocking regulation:

• it requires any EU person to notify the European Commission of any effects on the economic and/or financial interests of that person caused by a measure blocked in the Annex.
• no judgment of a court or tribunal, and no decision of an administrative authority located outside the EU that gives effect, directly or indirectly, to the measure in the Annex, or to actions based thereon or resulting there from, shall be recognised or be enforceable in the EU in any manner. This is the main blocking measure.
• no EU person shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the measures specified in the Annex or from actions based thereon or resulting therefrom. EU persons may be authorised, in accordance with the procedures provided in Articles 7 and 8, to comply fully or partially to the extent that non-compliance would seriously damage their interests or those of the European Community.
• an EU person shall be entitled to recover any damages, including legal costs, caused to that person by the application of the measures specified in the Annex or by actions based thereon or resulting therefrom. This is sometimes referred as the ‘clawback’ measure.

Whether or not this will allow business to continue with Iran for the remaining parties is yet to be seen. The US have huge influence, globally, on what business is done where, and accordingly many institutions will be reluctant to risk proceeding.

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