U.S. Issues Guidance for Implementation of Iran/P5+1 Geneva Joint Plan of Action

Posted on January 21, 2014 by Farhad Alavi — Leave a comment

The U.S. Departments of the Treasury and State yesterday issued a joint official statement titled in response to Iran’s agreement with the five permanent members of the United Nations Security Council and Germany (the “P5+1”) in November 2013 in Geneva with respect to Iran’s nuclear program. This publication, titled Guidance Relating to the Provision of Certain Temporary Sanctions Relief in Order to Implement the Joint Plan of Action Reached on November 24, 2013, between the P5+1 and the Islamic Republic of Iran, spells out changes to the sanctions regime maintained by the United States against Iran for the period starting January 20 and ending on July 20, 2014. This is based on the recently issued Joint Plan of Action (JPOA) following the Geneva accord.

Tehran

Of particular significance is the fact that many limitations on dealings with certain entities that have been labeled as Specially Designated Nationals (SDNs) by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) will be exempted for very defined, narrow purposes. Further it is critical to note that while the JPOA may be extended, the validity of this sanctions relief, as of now, is certain only until July 20.

The JPOA rests on six core areas that will see some sanctions relief, specifically: (1) petrochemical exports; (2) Iran’s automobile industry; (3) precious metals; (4) civil aviation; (5) petroleum exports; and (5) humanitarian matters. As the document itself spells out clearly, only the aviation and humanitarian issues will directly impact U.S. persons and foreign persons owned or controlled by U.S. persons. Details are provided below.

Petrochemical Exports. Third country entities importing Iranian petrochemical products will no longer be subject to potential U.S. penalties for doing so. Furthermore, banks, shippers, and insurers in third countries who deal with such entities will not be subject to sanctions on the financial institutions or blocking sanctions on other entities, provided that dealings do not involve SDNs, other certain Iranian financial institutions, namely those designated solely under Executive Order 13599, are exempted.

Automotive Industry. The United States will suspend secondary sanctions imposed this past summer on Iran’s automobile industry. This is critical as Iran’s automotive industry is by some measures its largest after energy. Under the JPOA, sanctions will be waived on entities that “knowingly engage in transactions for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran that are initiated or completed entirely within the JPOA period.” As such, this will include supply chain partners in addition to actual exporters.

Precious Metals. The United States will suspend certain secondary sanctions on parties (including banks) dealing in precious metals such as gold with Iran, provided certain conditions are met. There are strict limitations on what funds in particular can be used for these metals.

Civil Aviation. OFAC announced that it will soon issue a licensing guidance policy enabling U.S. persons (and non-U.S. persons owned or controlled by U.S. persons) to obtain specific licenses to engage in engage in certain transactions related to the overhaul of civilian aircraft. Note there are two caveats – first, Iran Air is a permitted beneficiary, despite being on the SDN list; and second, all work must be completed before the JPOA expires.

Petroleum Exports. The United States has agreed to temporarily halt efforts to persuade purchasers of Iranian petroleum (namely China, India, Japan, South Korea, Taiwan and Turkey) to reduce their purchases of Iranian oil. Furthermore, there will also be a waiver of sanctions on related transactions, including certain oil payments and shipping/insurance matters. Interestingly, related transactions with the National Iranian Oil Company (NIOC), the National Iranian Tanker Company (NITC) and certain Iranian financial institutions (those only designated under E.O. 13599) will not be subject to U.S. sanctions. Note this does not allow U.S. companies to deal with Iranian origin crude oil or related services.

Humanitarian Transactions. The P5+1 will be taking steps to ease Iran’s purchase and importation of humanitarian goods, such as food, medicine, and medical devices, which despite being authorized have become logistically difficult in part due to the ripple effect of other sanctions. This may include creating certain banking channels with third country banks. Notably, the presently authorized payment systems will continue to be compliant under the new system. Also, there will be channels for the payment of tuition for Iranians studying outside the country.

A journalist asked me today what particularly stood out when I saw these guidelines. Two things in particular stood out:

The now permissible (or at least non-sanctionable) transactions must be consummated within the six month JPOA period. Unless the JPOA period is extended, it is difficult to foresee how in, for example, a plan to sell aircraft parts to Iran, the plan can be authorized, the parties negotiate successfully, the goods sold and the parts installed.

Will third country banks, shippers, insurers and counterparties deal with Iran given the narrow time window and uncertainty? As I told the journalist, many of these banks have spent heftily on their compliance programs. Will they suddenly start accepting payments from SDN Iranian banks given the lack of clarity on the JPOA and its longevity?

What is clear is that the guidelines and upcoming policy will surely bring about questions, both for U.S. and third country entities. It will be interesting to see how much business does take place under the JPOA and whether or not it will serve as a prelude to Iran’s reintegration into the world economy.

I’ve written on this blog before as to what sanctions relief for Iran could look like. If all goes well and the parties are able to move forward, it will not be unforeseeable that Iran will want to be readmitted into the international SWIFT messaging system (used for global wire transfers between banks) and procure new civilian aircraft. Additionally, it will likely want relief from certain secondary banking sanctions, like the Iranian Sanctions Act (an American law that allows the United States to impose sanctions on companies investing more than a certain, limited amount in Iran’s energy sector) as well as the Comprehensive Iranian Sanctions And Accountability Divestment Act (CISADA), which places secondary limitations on many dealings with Iran, including the sale of refined petroleum to that country.