U.S. and Iran flags with nuclear symbol between them

Practical Steps Non-U.S. Companies Can Take Now

The international business community is watching intently to see whether the United States will withdraw from the Iran nuclear deal.  Although the consequences of a U.S. withdrawal, and the European Union’s response, could be far-reaching, it is difficult to anticipate how non-U.S. companies will be affected.  Rather than just waiting to see what will happen, you could be taking steps now to help your company manage its risk.  

President Donald Trump has claimed repeatedly that the Iran nuclear deal — known formally as the Joint Comprehensive Plan of Action (JCPOA) — is the “worst deal ever.”  Despite sentiment among policy experts that the JCPOA would endure even in the face of a hostile White House, the anti-JCPOA rhetoric of President Trump and other senior officials has grown deafening.  Some now believe it is a question of when, not if, the United States will renounce the JCPOA and withdraw.

Although the Trump administration is reviewing its Iran policy, including the JCPOA, it has many opportunities to pull the United States out of the deal.  These opportunities arise from a JCPOA commitment by the United States to waive certain nuclear-related sanctions against Iran.  Additionally, the President must certify to Congress every 90 days that Iran is in compliance with its JCPOA obligations.

The next certification deadline is October 15, and there are reasons to believe the administration may be ready to abandon the deal.  Even if President Trump grudgingly certifies Iran’s compliance in October, he could easily reverse course in the future.

Because non-U.S. persons and companies are likely to bear the brunt of a U.S. withdrawal from the JCPOA — through the re-imposition of secondary sanctions — I examine several potential consequences of that scenario, including possible responses by the European Union (EU).  I also outline some steps that non-U.S. companies can take to prepare for the possibility of a U.S. withdrawal, insulate their businesses from financial loss or disruption and guard against future enforcement actions by the U.S. government.

What Are Possible Consequences of a U.S. Withdrawal from the JCPOA?

If President Trump withholds the next required certification to Congress, the withdrawal process could begin as early as October 15.  The Iran Nuclear Agreement Review Act (INARA) of 2015 requires the President to make four specific certifications, including that Iran is not in material breach of the JCPOA.

Should the President refuse to certify, then INARA lays out a “fast-track” process for the re-imposition of sanctions if “qualifying legislation” is introduced within 60 days.  Although there is no guarantee that all previously waived sanctions would be re-imposed, it seems prudent to assume that outcome.  Congress could also choose to pursue new legislation to expand sanctions against Iran at the behest of President Trump and Republican leaders who vocally opposed the JCPOA from the outset.

Ultimately, Europe’s response to a U.S. withdrawal is likely to determine how far-reaching, or limited, the consequences will be.  All signs indicate that the three European JCPOA signatories — France, Germany and the United Kingdom — will not follow suit if the United States elects to withdraw.

Furthermore, the EU’s Ambassador to the United States recently indicated that the EU is prepared to use its “Blocking Regulation” (EU Council Regulation 2271/96) to protect European companies from U.S. secondary sanctions should they be re-imposed.  The Blocking Regulation, adopted in 1996 to counter the extraterritorial effects of U.S. secondary sanctions targeting Cuba, could prohibit EU companies from complying with re-imposed U.S. secondary sanctions against Iran.  If that occurs, then EU companies could be shielded from the reach of U.S. enforcement agencies.  At the very least, such a maneuver could start a dialogue with the United States to negotiate a solution, as it did in the late 1990s.

Practical Steps Non-U.S. Companies Can Take to Manage Risk and Mitigate Adverse Consequences of a U.S. Withdrawal

With so much uncertainty, it is difficult to assess this issue from a risk management perspective.  Here are several practical steps that can help your company manage risk intelligently in the midst of this volatile situation.

Proactively manage any existing commercial commitments in Iran and intelligently weigh the risks of entering into any new commitments.

A U.S. withdrawal from the JCPOA could be especially challenging for companies that have re-engaged with the Iranian market.  Recent news reports indicate that non-U.S. companies have reached deals to invest $60 billion in Iran since the JCPOA.  Given the magnitude of those investments, affected companies should think carefully about possible consequences and plan accordingly.

Current guidance from the Treasury’s Office of Foreign Assets Control (OFAC) about possible re-imposition of secondary sanctions indicates that the United States “would provide non-U.S., non-Iranian persons a 180-day period to wind down operations in or business involving Iran.”  Assuming the 180-day wind-down period remains in place, it is not much time to unwind complex transactions and business arrangements.  To stay ahead of the curve, you should consider talking to your Iranian partners and counterparties about potential complications that could arise.  Understandably, that could be a difficult conversation, which may not yield favorable results.  Regardless, you should thoroughly review any contracts (specifically, payment and material breach provisions), financing documents, export credit insurance policies or the like to understand the options available to you.  Likewise, if you are finalizing any new deals, you should draft those documents with secondary sanctions in mind (e.g., can your company extricate itself from the deal with minimal or no penalty should re-imposed sanctions require it?).

For non-U.S. financial institutions, confer with your U.S. correspondent banks and any other U.S.-based financial institutions integral to your business.  

Although the JCPOA afforded non-U.S. financial institutions more flexibility to process U.S. dollar transactions and maintain U.S. dollar-denominated accounts that involve Iran, U.S. financial institutions remain broadly prohibited from engaging in transactions involving Iran, including clearing U.S. dollar transactions through the United States.  This dynamic has made many U.S. financial institutions uneasy because they bear much of the legal risk if there are, for example, Iranian transactions inadvertently cleared through their correspondent accounts in the United States.

The low risk tolerance of U.S. financial institutions on this issue is unlikely to change, and the re-imposition of secondary sanctions could lower that risk tolerance even further.  Non-U.S. financial institutions need to understand how their U.S. financial institution partners, especially their correspondent banks, will respond should they continue processing Iranian transactions.  For instance, if the EU Blocking Regulation were used to permit European banks to continue conducting business with Iranian customers, including U.S. dollar transactions, then U.S. financial institutions could sever correspondent banking ties with such European institutions to protect themselves from incurring the wrath of U.S. enforcement agencies and thus avoid reputational harm.  If your institution were blindsided by such an action, the consequences could be devastating.  Avoid that possibility by discussing these issues now with your U.S. banking partners.

Pay close attention to the pace of U.S. enforcement of secondary sanctions.

A review of enforcement actions announced publicly by OFAC or the Department of Justice during the years the secondary sanctions were in effect reveals no apparent cases involving violations of secondary sanctions by non-U.S. persons or companies.

Non-U.S. companies should not, however, count on the same enforcement posture from the United States going forward.  The prior era of U.S. secondary sanctions was part of a comprehensive multilateral effort designed to exert pressure on the Iranian government.  As a result, the United States could focus on enforcing its primary sanctions against Iran with many foreign partners sharing the burden.  Now, the United States likely would be going it alone, which could change the way secondary sanctions are enforced.  This issue will require careful monitoring to assess the risks to your company.

Stay abreast of sector-specific sanctions.

Given the potential for a more aggressive U.S. enforcement strategy, the specifics will matter tremendously.  Any revived U.S. secondary sanctions seem likely to target the same industries subject to pre-JCPOA restrictions (e.g., financial and banking, insurance, energy and petrochemical, shipping and shipbuilding).  If you work in those sectors, then you are familiar with the prior sanctions and can revive your pre-JCPOA compliance policies should the need arise.

If the secondary sanctions were to include entire new industries, however, there could be a chaotic period of adjustment for affected companies as they assess Iranian business relationships and their own compliance policies.  Although this seems to be a low-likelihood scenario, the disruptive potential is significant and, thus, demands close attention.

Revisit your compliance program sooner rather than later.

The devil will be in the details when it comes to calibrating an appropriate compliance and risk management response to a U.S. withdrawal from the JCPOA.  Nevertheless, there are steps that non-U.S. companies can take today to lay the groundwork for a successful compliance response.

Because it has been less than two years since Implementation Day, your company may be well positioned to adapt to the possible re-imposition of U.S. secondary sanctions.  Revisiting your pre-JCPOA compliance policies is a good place to start.  However, even if you conclude that a reversion to prior policies would be a sufficient solution, you may be in a position to make improvements.  This is especially true in light of circumstances that could lead to a more active U.S. enforcement climate.

Brian Fleming

Brian Fleming is a member at Miller & Chevalier in Washington, D.C. His practice encompasses a wide range of matters at the intersection of international trade and national security with an emphasis on export controls and economic sanctions, foreign direct investment, and cybersecurity. In particular, Mr. Fleming focuses on compliance and disclosure issues concerning the regulatory regimes administered by the Treasury Department’s Office of Foreign Assets Control (OFAC), the State Department’s Directorate of Defense Trade Controls (DDTC), and the Commerce Department’s Bureau of Industry and Security (BIS). Mr. Fleming also conducts internal investigations and defends companies and individuals against enforcement actions brought by those agencies and the Department of Justice (DOJ). Mr. Fleming’s practice also focuses on guiding domestic and international companies through the Committee on Foreign Investment in the United States (CFIUS) process from pre-filing consultations through the formal review and investigation and the management of mitigation agreements.

Before joining Miller & Chevalier, Mr. Fleming served as Counsel to the Assistant Attorney General for National Security at DOJ where he advised senior DOJ leadership on sensitive legal and policy issues pertaining to economic sanctions, cybersecurity, intellectual property theft, and the Foreign Agents Registration Act (FARA), among others. Both within DOJ and across the U.S. government, Mr. Fleming worked extensively on policy issues relating to the Joint Comprehensive Plan of Action (JCPOA). Mr. Fleming also managed DOJ’s review of all CFIUS matters and advised on mitigation proposals across numerous transactions and industries. Initially, Mr. Fleming joined DOJ as a Trial Attorney in the National Security Division’s Counterintelligence and Export Control Section where he investigated and prosecuted U.S. and international companies and individuals in connection with export control and economic sanctions violations, cyber intrusions, economic espionage, and unauthorized disclosures of classified information.

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