This has been a historic month for the United States and several other leading nations as they reached an apparent settlement with Iran over the development of its nuclear program. On July 14, the five permanent members of the U.N. Security Council – China, France, Russia, the United Kingdom, and the United States, or simply the “P5” – plus Germany (the “P5+1”) announced their Joint Comprehensive Plan of Action (“JCPA”). In essence, the JCPA with Iran calls for the gradual phased lifting of economic sanctions against Iran in exchange for certain Iranian commitments to scale back its nuclear development plans and to make its key nuclear facilities open to on-going inspections and verifications by the International Atomic Energy Agency (“IAEA”).

In the United States, President Obama has already begun the process for submission of this complex set of agreements and annexes to the Congress. The Congress has until September 10 to concur with or reject the proposals on a simple up-or-down basis. However, any potential Congressional disapproval would then be subject to the President’s veto power. President Obama has already given indications that he would veto any such Congressional disapproval, which then would require a two-thirds vote in each house of the Congress to overturn such a veto.

Many critics of the JCPA have already attacked it as inadequate and even dangerous for Middle East peace and stability and especially for the safety of the State of Israel. Further, a number of key members of Congress have already announced they will oppose its approval. Others who support JCPA have said it is useful and will achieve its aims to limit Iran’s efforts to develop nuclear weapons and, more broadly, to begin to heal the decades-long rift between Iran and the West and to recognize Iran’s place in Middle Eastern and global affairs. On July 20, 2015, the U.N. Security Council unanimously adopted a resolution to approve the JCPA and lift certain U.N.-mandated sanctions on Iran, although that vote does not affect directly any sanctions currently in place that have been established by individual member nations or by the European Union. Accordingly, barring any set-backs such as a rejection by Congress with a veto-proof margin in both houses, the JCPA should go into effect on October 18, 2015.

For the U.S. business community that has generally been forbidden to do business with Iran for many years, the two key questions are:

  • When will the U.S. Iranian sanctions be lifted? and
  • What sorts of business will then be possible for U.S. companies or financial institutions?

Unfortunately, the answers provided by the JCPA to these apparently simple questions are somewhat complicated and will probably be ultimately unsatisfying for most U.S. businesses, although European Union and Asian businesses will feel rather differently.

The “when” question turns on what the JCPA calls the “Implementation Day.” That is the date on which the IAEA is able to certify that Iran has taken all the specific steps with respect to its nuclear program as required under JCPA Section 15 so that the European Union and the United States will then lift certain sanctions on Iran. However, the IAEA cannot yet begin any work towards that process and so Implementation Day will be some months away because multiple nations, most especially the United States and Iran, must first follow their own respective legislative approval procedures to confirm that each involved government can and will implement the JCPA. There must also be a uniform response among the P5+1 acting through the U.N. Security Council and by others to go forward. Given the clear rancor and division at least in the U.S. Congress, the next two or three months will still be suspenseful as the world awaits the outcome of all these legislative reviews of the Iranian settlement proposals.

In the “best case” scenario, if all the involved governments approve the JCPA, Iran cooperates, and the IAEA is eventually then able to establish the Implementation Day so that the European Union and the United States will then alter their respective sanctions regimes, what should the U.S. business community expect? Does this mean anything close to “business as usual” for U.S. exports and trade with, and investments in, Iran? The short answer to this “what” question is “Absolutely not!” Careful and thoughtful strategic planners in U.S. companies need to be aware of the extremely limited effect that “lifting sanctions” will have for those U.S. companies after that Implementation Day.

First, the key U.S. sanctions that would be removed on Implementation Day will be those currently directed towards non-U.S. persons. Annex II to the JCPA contains a section called “Effects of the Lifting of U.S. Economic and Financial Sanctions,” which specifically provides that, when and if the U.S. sanctions are lifted, then those U.S. sanctions would just not “apply to non-U.S. persons” who do business with Iran that would not be allowed by U.S. persons under the Iranian Transactions and Sanctions Regulations (“ITSR”). However, the ITSR would largely remain in full force and effect with regard to U.S. persons even after Implementation Day.

In other words, generally speaking, even after Implementation Day, unless licensed by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), most U.S. companies still will not be able to deal or transact with “Iranian property;” trade with any Iranian nationals, especially those considered Specially Designated Nationals (“SDNs”); or handle any business with the Government of Iran (the “GOI”). Moreover, after Implementation Day, U.S. financial institutions will remain barred from handling the movement of funds to or from Iranian financial institutions, which itself continues a massive trade barrier between the two countries. Despite certain express and promising exceptions for U.S. companies who may supply travel and travel-related services; publications, books, films or other media; civilian aircraft and aircraft parts; food and agricultural commodities; and medical devices or pharmaceuticals, most private sector trade by U.S. companies with their counterparts in Iran will still be far off in the geopolitical future (as discussed below).

Second, U.S. companies know that, under the 2012 Iran Threat Reduction and Syria Human Rights Act (“ITRSHRA”), their foreign subsidiaries are barred from doing business with Iran if the U.S. parents would be equally barred. The Obama Administration has no executive authority to relieve U.S. companies of this statutory extra-territorial barrier under ITRSHRA. Further, the JCPA does not purport to provide any relief to U.S. companies or their foreign subsidiaries. Likewise, ITRSHRA will continue to require that any public reporting companies whose shares are listed on any U.S. stock exchange will still have to make an affirmative disclosure of their business activities with Iran in their annual or quarterly disclosure documents filed with the U.S. Securities and Exchange Commission.

Third, in recent years, in efforts to increase the weight of western sanctions on Iran, Congress also has passed laws that impose an increasing number of adverse consequences on non-U.S. companies who choose to do business with Iran but who, as non-U.S. companies, would not be directly subject to the jurisdiction of the ITSR. Under these laws, such non-U.S. companies who trade with Iran above certain limits might lose the ability to sell their products to the U.S. Government, lose access to the U.S. financial markets for trading of their securities or lose access to U.S. financial institutions from which to borrow money. Under the JCPA, after Implementation Day, under the executive authority granted by these laws to the President, the United States will remove these adverse consequences for non-U.S. companies that are not subsidiaries of U.S. companies.

JCPA Annex II sets out the entire list of activities that non-U.S. companies will now be able to undertake with Iran without fear of these adverse U.S. market access consequences. Some of those activities are:

  • Finance or banking transactions with the GOI, the Central Bank of Iran, other named Iranian financial institutions, the National Iranian Oil Company (“NIOC”), the Naftiran Intertrade Company (“NIC”), the National Iranian Tanker Company (“NITC”), and certain other previously sanctioned Iranian persons;
  • Loans, transfers, accounts and other financial instruments for Iranian persons, including correspondent accounts at non-U.S. financial institutions; 
  • Sale and purchase of U.S. bank notes by the GOI;
  • Sale and purchase of sovereign debt instruments issued by the GOI;
  • Sale, purchase and transport of Iranian petroleum products;
  • Investment in the Iranian petroleum and petrochemical industry;
  • Sale of goods or technology to the Iranian petroleum and petrochemical industry, including NIC, NIOC, NITC;
  • Ownership, control or operation of vessels to transport Iranian crude oil, petroleum or natural gas;
  • Sale of goods and technology or provision of financial services to the Iranian shipping or shipbuilding industry;
  • Sale of goods and technology or provision of financial services to the Iranian to the Iranian automobile industry;
  • Sale, purchase and transport to or from Iran of gold or other precious metals; and
  • Underwriting, insurance, or re-insurance in relation to other business activities to be allowed under the JCPA, such as those listed above.

Moreover, on the Implementation Day, the JCPA would lift a host of sanctions imposed by the European Union since 2010, mainly those issued under Council Decision 2010/413 CFSP and Council Regulation (EU) No 267/2012. For the most part, these changes will benefit EU financial institutions and companies who want to do business with Iranian financial institutions or with Iranian companies in the oil, gas and shipping industries. However, since the ITSR will remain in effect after the Implementation Day for all U.S. persons, including all U.S. citizens or permanent resident aliens who may be directors, officers or employees of such EU financial institutions or companies, those EU financial institutions and companies will still need to avoid any active involvement of such U.S. national personnel in their renewed business activities with Iran. They will also need to be cautious about any material amounts of “U.S.-origin content” that might inadvertently flow into any EU-produced goods or services that will be supplied to end-users in Iran because, as noted above, for the foreseeable future, U.S. companies and their foreign subsidiaries will still not be allowed to trade directly or indirectly with Iran in spite of the JCPA.

The JCPA does provide for another key date that is likely to be of greater interest to the U.S. business community – July 20, 2023, eight years after the U.N. Security Council’s adoption. That date is called the “Transition Day” under the JCPA. If, by the Transition Day, Iran remains in compliance with its JCPA obligations and is not viewed by the United States as conducting any covert nuclear weapons program, then the then-incumbent Administration is committed to seek new legislation from Congress that would allow the actual lifting of the OFAC sanctions that will continue to bar most U.S. companies and their foreign subsidiaries from doing business with Iran for the foreseeable future.

Thus, for now, the announced nuclear settlement with Iran is one that is likely only the first and rather tentative step forward in the fractured relationship between Iran and the United States. There can be no assurance today that the settlement will be finally approved by both Iran and the United States or, if approved, it can remain intact for eight years until the Transition Day is reached. Accordingly, for most U.S. companies and their foreign subsidiaries, the settlement will leave largely intact all of the OFAC economic sanctions that bar trade with Iran, which means that their present sanctions compliance safeguards vis-à-vis Iran should not be changed or reduced. Only a handful of U.S. firms in specific sectors (as noted above) will be able to do business with Iran under the ITSR during this period.