Clyde & Co legal update: US Sanctions and foreign insurers – The JCPOA effect

Associations, Legal, Military, Organisations, Piracy and Terrorism, Safety and Security, Sanctions — By on April 16, 2015 at 7:43 PM

sanctions_800_450_90_s_c1_c_c_800_450_90_s_c1_c_cThe Joint Comprehensive Plan of Action, announced on April 2, 2015, is expected to substantially ease U.S. sanctions that apply to both U.S. and non-U.S. insurers.

The JCPOA will be the final product of the lengthy negotiations between Iran and the “P5+1” (the U.S., U.K., Germany, France, Russia and China) under the interim Joint Plan of Action (the “JPOA”), which was first agreed in November 2013 and has been extended through June 30, 2015. The goal of these negotiations has been to obtain meaningful limits on Iran’s nuclear program in exchange for relief from the crippling sanctions imposed upon Iran by the international community.

Insurers incorporated in the U.S., and those owned by entities incorporated in the U.S., are subject to the full measure of U.S.-Iran sanctions. With very limited exceptions, such insurers are prohibited from insuring any trade or other transaction that involves Iran. If the insurer violates these prohibitions, it is subject to potentially catastrophic fines and penalties.

Most foreign insurers — that is, those not incorporated in the U.S. and not owned by entities incorporated in the U.S. — are painfully aware that they too are exposed to U.S.-Iran sanctions, but in a different way. Foreign insurers are generally not subject to U.S. sanctions prohibitions, but they are nevertheless exposed to sanctions penalties if they engage in targeted Iran-related transactions.

Secondary Sanctions

U.S.-Iran sanctions that target transactions by foreign individuals and entities, including insurers, are often referred to as “secondary” sanctions. If a foreign insurer engages in a transaction targeted by secondary sanctions, a variety of penalties may be imposed against it. The most severe penalties includes freezing of the foreign insurer’s U.S. assets (including its funds held in U.S. banks) and cutting off its access to U.S. banking, thus prohibiting it from engaging in U.S. dollar transactions.

U.S.-Iran secondary sanctions appear in various congressional acts and numerous presidential executive orders. Among other things, secondary sanctions target foreign insurers that insure or reinsure:

  • vessels used to transport crude oil from Iran to another country;
  • transportation to or from Iran of goods that could materially contribute to Iran’s proliferation of weapons of mass destruction or support for terrorism;
  • any activity that violates any U.S. sanctions on Iran;
  • an entity with respect to the Iranian energy, shipping or shipbuilding activities for which sanctions have been imposed;
  • an entity with respect to the sale, supply or transfer of precious metals and certain nonprecious metals and software to or from Iran;
  • an entity designated for sanctions in connection with Iran’s proliferation of weapons of mass destruction or support for international terrorism; or
  • an Iranian individual or entity (other than certain Iranian financial institutions) named on the U.S. blacklist of Specially Designated Nationals.

Limited relief from certain of these secondary sanctions has been provided under the JPOA since January 2014.

What Relief Can be Expected under the JCPOA?

First, according to a White House statement released on April 2, 2015, there will be no sanctions relief under the JCPOA until its final text is agreed, which is expected on or before June 30, 2015.

Second, the White House statement explains that:

  • US and EU nuclear-related sanctions will be suspended after the IAEA [the International Atomic Energy Agency] has verified that Iran has taken all of its key nuclear-related steps. If at any time Iran fails to fulfill its commitments, these sanctions will snap back into place.
  • The architecture of US nuclear-related sanctions on Iran will be retained for much of the duration of the deal and allow for snap-back of sanctions in the event of significant non-performance.
  • A dispute resolution process will be specified, which enables any JCPOA participant, to seek to resolve disagreements about the performance of JCPOA commitments.
  • US sanctions on Iran for terrorism, human rights abuses, and ballistic missiles will remain in place under the deal.

Given that the parties must now return to the negotiating table, it is unlikely that further information or guidance will be provided until the JCPOA is finalized. What is abundantly clear now, however, is that there are a great number of hurdles to surmount before U.S. sanctions will be eased.

Indeed, successful completion of the JCPOA is far from certain. The parties might find themselves unable to agree on the “key nuclear-related steps” that Iran must take before sanctions will be eased. Past inspection efforts by the IAEA, which must verify that Iran has taken its “key nuclear-related steps”, have been spectacularly unsuccessful. Efforts to agree on procedures for resolving JCPOA disputes might reveal that one party does not wish to have such disputes resolved impartially or efficiently.

The biggest challenge to implementing the JCPOA might prove to be the U.S. Congress, about which the White House release is conspicuously silent. All U.S.-Iran sanctions have their genesis in congressional acts. While most such acts provide the president with limited waiver authority, wholesale waivers without congressional support are likely to engender a backlash in the form of amended or new sanctions legislation. In short, it is difficult to imagine the JCPOA process reaching a successful conclusion without the president and Congress working together, and while the president’s views are reasonably clear, Congress’ views are not.

Finally, even if full sanctions relief under the JCPOA is achieved, a number of U.S. sanctions will remain in place. As noted in the White House statement, these include sanctions based upon Iran’s support for terrorism, human rights abuses and ballistic missiles programs. Such sanctions are not only significant in themselves, but in general they are inseparable from those intended to curb Iran’s nuclear activities, posing yet another challenge for those tasked with reaching final agreement under the JCPOA.

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“Jo”

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