Iran: Easing of sanctions by the United States (“US”) and European Union (“EU”)

On 24 November 2013, a joint commission of the United Kingdom ("UK"), the United States, Germany, France, Russia and China (collectively known as the "P5+1", "E3/EU+3" or "E3+3") reached agreement on a "Joint Plan of Action" with Iran, whereby Iran will comply with restrictions to its nuclear programme in return for limited relief from international trade sanctions. While seen as a significant step, the Agreement has not yet been put into effect; existing sanctions will remain in force until implementing steps are undertaken by the parties.

The "Joint Plan of Action" envisages a two-step process. The first step, with a time limit of six months renewable by mutual consent, will see both Iran and the E3+3 countries undertake various voluntary measures. The second step, still to be negotiated, is aimed at a longer-term solution which envisages the lifting of United Nations ("UN"), multilateral and national nuclear-related sanctions in exchange for a comprehensive solution to the international community's concerns with Iran’s nuclear program.

Key terms of the Agreement

Iran has agreed to limit its nuclear activities in various ways and accept enhanced monitoring by the International Atomic Energy Agency ("IAEA"). This will include the provision of information on Iran’s plans for nuclear facilities, daily access for IAEA inspectors to specified facilities, and managed access to other facilities, workshops, mines and mills.

The E3+3 countries have in return agreed to ease sanctions currently in place against Iran.

The United States has committed to:

• Allow US$2.4 billion in restricted oil sale assets to be transferred to Iran in instalments
• Suspend certain sanctions on Iran’s automobile industry
• Allow safety-related repairs and inspections for certain Iranian airlines inside Iran

Additionally, it has been proposed that the E3+3 will undertake additional voluntary measures (as set out in detail in the Joint Plan of Action) including:

• Suspending sanctions on the prohibition on the import, purchase and transport of Iranian petrochemical products
• Suspending sanctions on Iranian imports of gold and precious metals
• Suspending sanctions on oil-related insurance and transportation services (allowing the provision of services to third-party states for the import of Iranian oil)
• Increasing EU authorisation thresholds for non-sanctioned trade

In addition, it was agreed that efforts to reduce the volume of Iran’s crude oil exports will be suspended for six months. Current purchasers of Iranian oil (China, India, the Republic of Korea, Turkey, Taiwan and Japan) will be allowed to continue imports at current levels, holding Iran’s oil exports at less than half of early 2012 levels. On 29 November, the U.S. Department of State issued formal waivers covering five of those countries to allow crude purchases to continue without U.S. sanctions consequences.

The E3+3 further pledged to facilitate humanitarian transactions. While the purchase of food, agricultural commodities, medicine and medical devices is not currently sanctioned, such trade has been severely curtailed by the risks, costs and burdens faced by banks and supply chain partners. U.S. authorities are expected to take a more active role to establish viable payment channels for humanitarian products.

A first step but international sanctions remain in place

Notwithstanding the Joint Plan of Action, the sanctions position currently remains unchanged.1 The initial six-month period has not yet started to run and the 24 November agreement easing sanctions has not yet taken effect, with the "modalities" of implementation yet to be agreed.

No prohibitions will be lifted or suspended until the official publication of relevant legislation, and the precise details and logistics of these proposed measures will not be known until that legislation is published. There have been suggestions that EU sanctions against Iran could be lifted during December, with EU ministers expected to meet within the next few weeks to discuss the partial lifting of sanctions, but the exact timing will depend on when the six-month period begins to run. Similarly, U.S. agencies are expected to issue formal orders and additional guidance in the weeks ahead to implement the accord; the Obama administration has taken the view that the sanctions relief proposed in the Joint Plan of Action can be implemented without formal action by Congress. Implementation is said to be contingent on certain steps by Iran to cooperate with the IAEA as specified in the Joint Plan; media reports have indicated that IAEA visits are expected to commence during December.

It should also be noted that any suspension or lifting of sanctions will not be permanent. The situation will remain under review, and all measures put in place will be reversible, depending on Iran’s performance of its side of the agreement. All sanctions not specifically designated for suspension will remain in full effect. Crucially, it is not clear at this stage how activities or agreements that may be permitted during the six-month period will be treated should sanctions be re-imposed part way through performance.

There is no doubt that the Joint Plan of Action represents a historic first step in the reduction of sanctions against Iran. The agreement may lead to a comprehensive solution, with a more permanent and long-standing easing of sanctions against Iran, provided that Iran adheres to its commitments. The road ahead will be challenging, however. In addition to the differences over Iran’s nuclear program, any major sanctions relief for Iran will have to be adopted by the U.S. Congress, which has been broadly sceptical of the interim deal. Indeed, even today, a large bipartisan group in Congress continues to support and work on pending legislation to add new sanctions on Iran.

In addition, the United States has warned that if Iran fails to fulfil its commitments, it will be met with a strong response from the international community with further isolation and pressure through economic sanctions. We are closely monitoring the situation, and will publish further alerts following any major developments.

Return of Islamic Republic of Iran Shipping Lines to asset freeze list

Finally, it is important to note another recent development in respect of Iranian sanctions. Regulation No 1203/2013 of 26 November reinstates 16 entities, including Islamic Republic of Iran Shipping Lines and Khazar Shipping Lines, to the asset freeze list on the basis of "new statements of reasons" concerning each of those entities.

Syria: possible derogations from previous prohibitions?

Iran is not the only key jurisdiction to be affected by sanctions changes this year.

The EU Council agreed to renew sanctions against Syria for a further 12 months by Council Decision 2013/255, published 31 May 2013. However, as a result of the amendments introduced by Council Regulation 697/2013, of 22 July 2013, Regulation 36/2012 now enables derogation from the following previously prohibited activities, subject to the prior authorisation of the competent authority of the Member State:

• The purchase, import or transport of crude oil and petroleum products from Syria and related financing or financial assistance (including derivatives, insurance and reinsurance)
• The sale, supply or transfer of key equipment and technology for key sectors of the oil and natural gas industry in Syria or to Syrian or Syrian-owned entities engaged in those sectors outside Syria, and related financing or financial assistance
• The grant of a financial loan or credit to, or the acquisition or participation in, enterprises in Syria engaged in the Syrian oil industry sectors of exploration, production or refining, or Syrian or Syrian-owned enterprises engaged in those sectors outside Syria, including the creation of joint ventures with enterprises in Syria that are engaged in the Syrian oil industry sectors of exploration, production or refining, and with any subsidiary or affiliate under their control
• The opening of a new bank account or a new representative office, or the establishment of a new branch or subsidiary by a financial institution within the relevant Member State

Crucially, all of these waivers are subject to a list of conditions being satisfied. The competent authority must reasonably determine, in consultation with the Syrian National Coalition for Opposition and Revolutionary Forces ("SNCORF") and on the basis of available information (including any information provided by the person, entity or body requesting the authorisation), that:

• The activities are for the purposes of providing assistance to the Syrian civilian population, in particular in view of meeting humanitarian concerns, assisting in the provision of basic services, reconstruction or restoring economic activity, or for other civilian purposes
• The activities do not directly or indirectly benefit any person, entity or body included on the asset freeze list at Annex II and IIa of Regulation 36/2012
• The activities do not breach any other provisions in the existing Syrian sanctions

Taken together, the restrictions that continue to remain in place (without the required authorisation to circumvent the prohibitions), and the above conditions for granting such authorisation amount to a significant package of qualifications that are likely to limit the impact of the embargos repeal in the immediate term.

Additionally, the market would be well advised to take note of widely circulated media reports that a number of important oil fields and rudimentary refinery operations in the eastern provinces of Deir al-Zour and Hassakeh are predominantly under the control of the Al-Qaida-affiliated organisation Jabhat Al-Nusra (Jabhat Al-Nusra is listed on both the UN Security Council’s and the U.S.’s sanctions blacklists). In the event that Syrian crude exports do come online, in the short-term, buyers should ensure that, even where the requisite authorisations have been provided by the Member State concerned, a sufficiently rigorous process of due diligence is nevertheless carried out so as to avoid falling foul of the separate prohibitions provided for in dealing with terrorist and/or Al-Qaida-affiliated organisations.

Navigate through the Sanctions Regimes

In an effort to help clients navigate through the complex plethora of sanctions, Reed Smith has created and maintains an interactive reference guide to the specific sanctions regimes, identifying the designated individuals and entities with which they are prohibited to conduct business.

This interactive reference guide has now been updated. A link to the reference guide is set out below. Our previous publications and useful links are now available on our sanctions page at http://www.reedsmith.com/Sanctions/.

Click here to view the Sanctions Reference Guide. 

If you have any queries about the contents of this alert, or about the sanctions regimes in general, please contact one of the authors of this alert, sanctionsteam@reedsmith.com or your usual contact at Reed Smith.

^{1. For a summary of the sanctions still in place, please see our earlier client alerts here.}

Client Alert 2013-329