US-Iran sanctions tightened up again

The political and economic conflict between the United States of America and the Islamic Republic of Iran has reached a further stage of escalation following the targeted killing of Iranian General Qassem Suleimani by the US and Iran’s reactions to it. On 10 January, the US once more tightened the sanctions already in place against Iran.

Extension of US secondary sanctions to other sectors of the Iranian economy

The core element of the most recent US economic sanctions against Iran targets serveral sectors of the Iranian economy that were excluded from the previous sanctions. Significant transactions in the construction, mining, manufacturing and textile industries are now prohibited. The newly levied sanctions are secondary sanctions, i.e. sanctions that apply extraterritorially to transactions outside US territory without any link to the US. They are very broad and are aimed in particular at natural persons and legal entities that are economically active in the above sectors or that supply goods and services to the above sectors to a significant extent or purchase goods from these sectors to a significant extent. Transactions in the above sectors that were entered into before 10 January 2020 must be completed within a 90 days wind-down period until 9 April 2020. The extension of the new sanctions to other sectors is also expressly reserved.

Furthermore, the US has added the largest Iranian producers of steel, copper, aluminium and iron to the list of Specially Designated Nationals and Blocked Persons ("SDN List"). It is noteworthy that significant transactions in the steel, aluminium, copper and iron sectors have already been subject to sanctions since May 2019. For this reason, trade with the vast majority of the now-listed metal producers was already at considerable risk of sanctions (see our News article of 10 May 2019). The explicit listing of major Iranian producers of steel, iron, copper and aluminium appears to indicate that the US wants to tighten its sanctions net on these sectors even further.

The stated aim of these reinforced sanctions is to deprive the Iranian economy of access to significant financial funds, thereby denying the Iranian government direct or indirect resources that may be used for Iran’s nuclear or missile programme or its military operations in the region.

Legal consequences

Both in significant transactions in the now-sanctioned sectors of the Iranian economy and in transactions with the newly listed Iranian commodity producers, German and European companies run the risk of being targeted by the US sanctions authorities and being placed on the SDN list. Violations of the new sanctions in the Iranian construction, mining, textile and manufacturing industries may also result in a ban on entry to the USA.

The consequences of an SDN listing are devastating and are equivalent to a far-reaching economic inability to act. US companies are prohibited under threat of punishment from doing business with natural persons and legal entities listed as SDN, and most Western business partners also refrain from doing business with SDN for fear of being listed as SDN themselves.

We strongly recommend that German companies with Iranian business relations update and carry out their sanctions list screening with great care. Business partners and, where possible, their shareholders should be checked for SDN listing. When dealing with US secondary sanctions against Iran, the requirements of the EU Blocking Regulation must also be observed (see our News article of 7 August 2018).

Initiation of the JCPOA dispute settlement mechanism

Europe has so far had few means to counter the US sanctions programme and its effects. In response to the unilateral withdrawal of the US from the nuclear deal (Joint Comprehensive Plan of Action or JCPOA) and to the US sanctions and the lack of actions to reme-dy the crippling sanctions consequences by the remaining JCPOA parties, in the summer of 2019 Iran began to suspend the fulfilment of individual obligations under the JCPOA, such as restrictions on the number of centrifuges allowed and the amount of enriched uranium. In light of recent developments, there is growing concern that Iran will continue to withdraw from its JCPOA commitments. The European parties to the JCPOA – the UK, France and Germany – decided on January 14th to activate the dispute settlement mechanism that the JCPOA provides for in this case.

Any remedy from Europe? INSTEX so far offers few alternatives

The barter clearing house INSTEX (Instrument in Support of Trade Exchanges), which was set up by the UK, France and Germany, is not yet able to alleviate the current gridlock either. INSTEX is intended to maintain as much trade with Iran as possible, in spite of existing US sanctions and the largely eliminated possibilities of payments, in order to avoid a failure of the JCPOA (see our news of 1 February 2019). INSTEX is ready for operation, and European economic operators can register claims arising from non-sanctioned transactions with Iran there. However, it appears that there are still difficulties with the settlement of counterclaims on the Iranian side. However, at the end of November 2019 six new states (Belgium, Denmark, the Netherlands, Norway, Finland and Sweden) joined INSTEX, while others are expected to follow. It remains to be seen whether INSTEX will be able to develop into an effective channel for doing substantial trade with Iran.