Iran sanctions and EU businesses

Companies should also be aware of the impact of the EU's blocking regulation which prohibits EU and UK businesses and nationals from complying with certain US Iranian sanctions.

Application of EU sanctions in the UK during the transition period

The UK left the EU on 31 January 2020, and is now in a transition period, scheduled to run until the end of 2020.

During this transition period, EU sanctions will continue to be implemented in the UK through EU law.

To provide a legal framework to ensure the continued ability to impose, update and lift sanctions autonomously after the end of the Brexit transition period, 31 December 2020, a number of regulations imposing sanctions have been enacted under the UK's Sanctions and Anti-Money Laundering Act 2018 (SAML), although they will not come into force until after the transition period. This includes the Iran (Sanctions) (Human Rights) (EU Exit) Regulations 2019/134 and the Iran (Sanctions) (Nuclear) (EU Exit) Regulations 2019/461. 

Whilst the regulations enacted under SAML broadly mirror those imposed by the EU, delivering substantially the same policy effects as the existing regimes, organisations cannot assume that they are identical. In some cases, there are key differences which may have a significant impact on future relations and the ability to conduct business lawfully.

What is caught by the EU sanctions?

In early 2016, under the Joint Comprehensive Plan of Action (JCPoA) the majority of the EU's economic and trade sanctions against Iran were lifted including the wide ranging EU sanctions relevant to the oil and gas sector.

Some sanctions remain though. They apply to all EU businesses and nationals both inside and outside of the EU and to any overseas businesses and individuals when in or doing business in the EU.

This means that an EU national working outside of the EU may commit a sanctions related offence, for example, by brokering a deal to supply nuclear or missile related items to an Iranian individual, entity or body or for use in Iran in breach of the sanctions that remain in place.

The EU Iranian sanctions that remain in place restrict sales, supplies, transfers or exports directly or indirectly, to any individual, entity or body in Iran or for use in Iran of items featured in two EU Council Regulations: Council Regulation (EU) No 267/2012 and Council Regulation (EU) No 359/2011. The restrictions apply regardless of whether or not items originated in the EU, which means that sales and transfers from non-EU countries by EU persons are also prohibited.

The restrictions apply to:

• nuclear related items that feature on the Nuclear Suppliers Group list;
• certain items that could contribute to reprocessing- or enrichment-related or heavy water-related activities or other activities inconsistent with the JCPoA;
• items that feature on the Missile Technology Control Regime list;
• certain software designed specifically for use in nuclear and military industries;
• certain graphite and raw, fabricated semi-finished metals;
• certain items that may be used for internal repression;
• certain items that may be used for the monitoring or interception of internet or telephone communications;
• any items that an EU Member State has determined could contribute to the development of nuclear weapon delivery systems.

The provision of certain services connected to such items and items that feature on the EU's Common Military List are also subject to restrictions, including the provision of technical assistance, financing, financial assistance or brokering services.

Wider restrictions also apply in respect of:

• the purchase, import or transport from Iran of certain of the above listed items;
• the provision of i) bunkering or ship supply services to, or any other servicing of, vessels or ii) engineering and maintenance services to cargo aircraft, owned or controlled directly or indirectly, by an Iranian person, entity or body where there are reasonable grounds to determine that the vessels or aircraft carry items included in the EU’s Common Military List or certain of above listed items;
• entering into arrangements with an Iranian person, entity or body (or persons acting on their behalf of at their direction) that would enable them to participate or increase participation in commercial activities involving uranium mining, the production or use of certain nuclear materials or involving certain of the above listed items or the manufacture of items listed on the EU Common Military list; and
• the provision of any telecommunication or internet monitoring or interception services of any kind to, or for the direct or indirect benefit of, Iran's government, public bodies, corporations and agencies or any person or entity acting on their behalf or at their direction.

Also prohibited is the direct or indirect acceptance of funds or economic resources from targets of Iranian financial sanctions, or making funds or economic resources available to or for the benefit of those targets. Economic resources are assets of any kind, whether tangible or intangible, that may be used to obtain funds, goods or services.  Any funds or economic resources belonging to, owned or controlled by targets of Iranian financial sanctions must be frozen and may require to be reported to a government body. The Iran-specific financial sanctions targets are listed in the UK's Consolidated List of Financial Sanctions Targets.

Supplies and dealings with entities more than 50% owned or controlled by financial sanctions targets are also prohibited.

Additional matters

Knowingly participating in activities that are designed to circumvent the above restrictions is also prohibited.

Licences or authorisations may be available in respect of certain activities that would otherwise breach the remaining EU Iranian sanctions.

EU member states are to introduce penalty regimes for breaching the EU Iranian sanctions that are "effective, proportional and dissuasive".  In the UK it is a criminal offence to breach the EU Iranian sanctions punishable by periods of imprisonment, unlimited fines or both. A criminal offence is not committed in the UK if there was no knowledge, and in certain instances reasonable to cause to suspect, that the relevant acts would infringe the remaining EU Iranian sanctions.

Notwithstanding the lifting of the EU Iranian sanctions, EU persons may face practical issues in receiving payment in respect of any activities in Iran. Many banks refuse to be involved in any Iran-related activities following the decision by the US to reinstate US Iranian secondary sanctions. 

Wider non-sanctions export controls may apply within EU member states on the export of a wider range of goods and technology to Iran, including for example items that feature on the EU's Common Military List and the EU Dual-Use list.

US Iranian secondary sanctions

On 8 May 2018 US president Donald Trump withdrew the JCPoA sanctions relief against Iran and began a process to reinstate secondary trade and economic sanctions.  

Secondary sanctions are wide enough to capture non-US businesses and individuals for dealings that occur entirely outside of the US. US persons and companies never benefited from the sanctions relief under the JCPoA as the relief did not apply to dealings involving US persons, US origin goods and technology, the US financial system or individuals, businesses and certain connected parties featured on the US's Specially Designated Nationals list.

The US Iranian secondary sanctions were reinstated in two stages.

The first tranche of sanctions were reinstated on 7 August 2018 and related to:

• trade in gold and precious metals
• sale and transfer to and from Iran of graphite, raw, or semi-finished metals
• sales or transfer from Iran of software for integrating industrial processes
• transactions and accounts related to Iranian's rials or Iranian sovereign debt
• automotive and aircraft sector sanctions
• importation into the US of Iranian-origin carpets and foodstuffs

The second tranche were reinstated on 5 November 2018 covering: 

• sanctions on the energy sector, including supplies to the Iranian energy sector
• sanctions on petroleum related transactions with, amongst others, National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO) and National Iranian Tanker Company (NITC)
• sanctions on port operators, shipping and shipbuilding sectors, including dealings with particular shipping
• sanctions on transactions by financial institutions with designated Iranian financial institutions
• sanctions on financial messaging
• sanctions on underwriting and insurance
• re-designation of thousands of individuals and businesses as Specially Designated Nationals, meaning they are designated persons or sanctions targets.  
• Iran has brought a case to the International Court of Justice challenging the US's withdrawal from JCPoA and its reinstatement of secondary sanctions. A ruling is expected before the end of September 2018.  

Since the reinstatement of these sanctions the US has continued to impose restrictions on business involving Iran or any Iranian persons to impose maximum pressure on Iran.

Most recently, in January 2020 the US imposed a further raft of sanctions against Iran including those targeting the construction, mining, manufacturing and textiles sectors of the Iranian economy.  These sanctions include the ability of the US authorities to revoke the correspondent and payable-through account privileges of any non-US financial institution that facilitates a “significant” transaction of certain targets of US sanctions or that relates to these sectors of the Iranian economy.

EU Blocking Regulation

In response to the US withdrawal from the JCPoA the EU moved to protect EU entities and individuals against certain US extraterritorial sanctions by updating its 1996 Blocking Regulation (Council Regulation (EC) No 2271/96) to include certain US's secondary sanctions on Iran. 

The Blocking Regulation applies to nationals of EU member states, legal entities incorporated in the EU, residents of the EU – unless in the country of which they are a national – and any others individuals while acting in a professional capacity in the EU.

The Blocking Regulation has four components:

• The prohibition: this prohibits those to which the Regulation applies from complying, directly or through a subsidiary or other third party, with the relevant US Iranian secondary sanctions or actions based, or resulting from those sanctions, without authorisation in advance from the European Commission. This covers active compliance or compliance by deliverable omission. Guidance accompanying the Blocking Regulation says that it does not require EU persons to do business with or in Iran but rather that EU persons "are free to choose whether to start working, continue, or cease business operations in Iran…The purpose of the Blocking Statute is exactly to ensure that such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation, which the [European] Union law does not recognise as applicable to them".

  Authorisation will only be granted if non-compliance would seriously damage the interests of the application or those of the EU. The criteria to be assessed by the European Commission when determining whether or not to grant an authorisation are contained in EU Implementation Regulation (EU) No 2018/1101. The criterion includes a broad range of factors, including a 'catch all' of "any other relevant factor".

• The reporting obligation: if the economic or financial interests of any person to which the Regulation applies are directly or indirectly affected by the relevant US Iranian secondary sanctions they must notify the European Commission of this within 30 days. For corporate entities, the notification should be made by the directors, managers or others with management responsibilities.
• The nullification of foreign decisions: any judgement or decision of a non-EU court, tribunal or administrative authority giving effect to relevant US Iranian secondary sanctions is not enforceable in the EU. 
• The right to damages: if a person to which the Regulation applies suffers loss as a result of the application of the relevant US Iranian secondary sanctions they are entitled to recover damages from the business or individual causing that loss. To recover damages, the person must be engaging in "in international trade and/or the movement of capital and related commercial activities between the Community and third countries". The guidance to the EU Blocking Regulation raises the question of whether an EU person can raise an action against the US authorities for damages, but it is non-committal in its response stating that "who exactly will be the defendant in each case will depend on the specifics of the case, on the kind of damage caused, the person or entity actually causing it, the possible shared responsibility in causing such damage, etc.".

In the UK it is a criminal offence to breach the 'prohibition' or fail to comply with the 'reporting obligation', punishable by an unlimited fine. 

To date the EU Blocking Regulation has not been tested in the UK courts and its effectiveness more generally as a tool to protect EU persons that engage in dealings with Iranians or in Iran is unclear. How effective it will be in the future depends on whether or not it will be enforced consistently and with vigour throughout the EU.

The future of the JCPoA

In January 2020, France, Germany and the UK, known as the E3, triggered the dispute resolution procedures in the JCPoA following the announcement by Iran that it would no longer comply with the JCPoA restrictions on the number of nuclear centrifuges in use for uranium enrichment and other "enrichment-related matters".

The E3 has however reiterated their commitment to preserving the JCPoA, issuing a joint statement that the decision is not intended to implement 'maximum pressure' against Iran but to bring the country back into full compliance with the terms of the JCPoA.

The triggering of the dispute mechanism by the E3 coincided with the introduction by the US of sanctions referred to above against the construction, mining, manufacturing and textiles sectors of the Iranian economy.

The dispute mechanism can involve many stages and if there is no resolution the matter could be referred to the UN Security Council.

The end result of this process could be the reintroduction of the UN and EU sanctions lifted in 2016, although it is too early to say if that is a realistic outcome.