US withdrawal from the Iran Nuclear Deal – what now for shipping and maritime trade with Iran?
On 8 May 2018, President Trump announced that he was withdrawing the US from the Iran Nuclear Deal, otherwise known as the Joint Comprehensive Plan of Action ("JCPOA"). The US sanctions regime is now likely to return to the state it was in before the JCPOA, with clear ramifications for shipping and maritime trade with Iran.
US withdrawal from the JCPOA will lead to the re-imposition of secondary sanctions related to Iran. Secondary sanctions have extraterritorial effect and are directed at non-US persons and entities conducting business with Iran wholly outside of US jurisdiction. For example, secondary sanctions would apply to a Norwegian entity conducting business with an Iranian party, even though no US person or entity is involved in the transaction. The secondary sanctions that the US government will re-impose target specific individuals and entities as well as certain activities and transactions related to Iran. For actors in the shipping and maritime sectors, the most important of these are sanctions targeting Iran’s port operators and its shipping and shipbuilding sectors.
Following President Trump’s decision, the US Treasury Department announced that there will be wind-down periods before secondary sanctions will take effect again. These 90- and 180-day periods are designed to give entities doing business in Iran an opportunity to wind down operations that would otherwise violate the re-instated sanctions. During these periods, the entities may conduct transactions and receive payments under agreements entered into before May 8, but should not enter into any new transactions. Entities that fail to comply may face penalties from the US government.
Which sanctions are coming back?
The first group of secondary sanctions to be re-imposed (after the 90-day wind-down period expiring on 6 August 2018) will include sanctions prohibiting the sale, supply or transfer, directly or indirectly, to or from Iran of the following materials: graphite, raw or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes, if those materials are:
- sold, supplied, or transferred to or from an Iranian entity or person on the US Treasury Department’s List of Specially Designated Nationals and Blocked Persons (except for certain Iranian Financial Institutions); or
- to be used in connection with the nuclear, military, or ballistic missile programs of Iran, with the energy, shipping, or shipbuilding sectors of Iran, or with any sector of Iran’s economy determined to be controlled directly or indirectly by the Islamic Revolutionary Guard Corps (IRGC).
Other activities that will be prohibited after the 90-day wind-down period are Iran’s trade in gold or precious metals, Iran’s automotive sector, significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in Iranian rials, and purchase, subscription to, or facilitation of the issuance of Iran’s sovereign debt.
The second group of secondary sanctions to be re-imposed (after the 180-day period expiring on 4 November 2018) targets several entities and activities that are particularly important for shipping and maritime trade, for example:
- individuals or entities determined to be operating a port in Iran or part of the shipping or shipbuilding sectors of Iran, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, NITC, or Tidewater Middle East Co., or their affiliates.
- any non-US person providing significant support to, or goods or services in support of, or any activity or transaction on behalf or for the benefit of any of the abovementioned parties.
- any person that owns, operates, or controls a vessel (including controlling beneficial owners) that is used to transport crude oil from Iran or used in a manner that conceals the Iranian origin of crude oil or refined petroleum products transported on the vessel.
- petroleum-related transactions with, among others, National Iranian Oil Company, National Iranian Oil Tanker Company or Naftiran Intertrade Company.
- the provision of underwriting services, insurance, or reinsurance.
Furthermore, OFAC intends to revoke General License H (“GL H”), which authorized US-owned or -controlled foreign entities from engaging in certain activities involving Iran. Revised licenses that allow for the wind-down of activities previously authorized under GL H will be available during the wind-down periods, after which these activities will be prohibited.
Before 4 November 2018, the US will also redesignate parties that it had removed from the List of Specially Designated Nationals and Blocked Persons (“SDN List”) pursuant to the JCPOA (for example, parties falling within the definition of “Government of Iran” or “Iranian financial institution)”. Non-US persons will be exposed to secondary sanctions for engaging in certain transactions with parties on the SDN List. Companies engaged in the shipping and offshore industry should therefore conduct updated due diligence of their Iranian business partners to ensure that they are not engaging in transactions with an SDN.
Reactions and practical implications
To mitigate the risk of secondary sanctions exposure, proper due diligence should be carried out to ensure that neither the cargoes carried nor the parties involved in the transactions have ever been subject to US secondary sanctions.
A marked difference between the pre-JCPOA era and the present is that America’s key allies are actively opposed to the re-imposition of sanctions against Iran. On 18 May 2018, the EU Commission announced four measures that it will launch to protect European companies from the extraterritorial effects of US sanctions, including activating the ‘blocking statute’ from 1996. This statute forbids EU companies from complying with the extra-territorial effects of US sanctions and nullifies the effect in the EU of any foreign court judgement or administrative decision based on them.
As such, it is still possible for European companies and financial institutions to conduct business with Iran, even under the threat of US sanctions. However, there is a strong possibility that non-US financial institutions will be reluctant to be involved in such transactions, for fear of being frozen out of the US financial system.
Wikborg Rein will continue to monitor US sanctions developments and their effects on the shipping industry and maritime trade.