Sanctions, Politics, Risks and a Road Forward Doing Business in Iran Sanctions, Politics, Risks and a Road Forward Satish Kini Carl Micarelli Alex Parker Konstantin Bureiko 31 January 2017

JCPOA Recap

JCPOA Overview The P5+1 (Security Council members plus the European Union) negotiated a roll back of sanctions in exchange for a commitment by Iran to cease certain nuclear-related activities The JCPOA provides for phased sanctions relief based on the achievement of certain milestones by Iran First phase of sanctions relief triggered 16 January 2016 (“Implementation Day”) JCPOA provides for sanctions “Snap Back” if parties fail to meet obligations

JCPOA: EU Sanctions Relief Three “targets” of EU sanctions on Iran: 1. Human rights violations-related restrictions Asset freezes on individuals involved with human rights violations Restrictions on providing equipment for internal repression and associated services 2. Nuclear industry / military restrictions Arms embargo Restrictions on importing ballistic missile / nuclear industry components Restrictions on investing in Iran’s nuclear industry Asset freeze against persons and companies assisting with nuclear proliferation 3. Commercial restrictions Fund transfer restrictions Banking restrictions Insurance restrictions Oil and gas industry restrictions Shipping industry restrictions Gold and currency Broad asset freeze against commercial / governmental entities Since “Implementation Day” all Category 3 sanctions suspended

JCPOA: US Sanctions Relief 1. Primary sanctions (“Trade embargo”) -US companies and individuals must not deal, directly or indirectly, with: Government of Iran and its controlled entities Goods and services of Iranian origin Goods and services for export to Iran SDNs of Iran (human rights, missile tech.) Reexports of US-origin items to Iran are prohibited 2. Primary sanctions affecting non-US subsidiaries Primary sanctions apply to persons “owned or controlled” by a US person 3. Secondary sanctions Restrict non-US companies from undertaking certain trading activities with Iran Imposition of secondary sanctions may lead to restrictions on access to US financial system, disqualification from US government contracts and blocking of company property Many entities removed Introduction of “General License H” Mostly suspended

Political Developments IAEA continues to monitor and verify Iran compliance with JCPOA No breaches identified US Pres. Trump has been openly critical of Iran deal; many in Congress are aligned with Trump on this point OFAC, under Obama Administration, issued snap-back guidance (including expected 180-day wind-down period) EU view: “clear that the JCPOA is working for all” Brexit unlikely to effect JCPOA UK is a direct signatory

Legal Developments New OFAC export licences granted Aircraft and spare parts deliveries Additional OFAC guidance relating to: US persons acting as senior managers/directors of non-US entities Application of General Licence H Scope of General Licence H Provision of compliance/legal services Successful EU court challenges to asset freeze listings by 11 Iranian persons and entities Removal of further 4 persons from asset freeze list

Business Activity

Oil and Gas developments Iran oil & gas industry now open to non-US persons World’s fourth largest oil reserves Major part of Iran economy (23% of GDP in 2014) Iranian oil exports have doubled since January 2016 Major contracts announced Total signed $4.8bn deal to develop part of South Pars gasfield Shell signed a preliminary agreement to explore future projects Siemens awarded compressor trains contract for two onshore natural gas processing plants BP opted out of entering into agreements ahead of Trump’s presidency

Banking and Insurance Non-US persons can provide banking services in Iran and to Iranian companies Over 30 Iranian banks have connected to SWIFT Some banks entered into correspondent relations with Iranian financial institutions BUT major international banks remain reluctant to process Iran-related transactions “U-turn” payments NOT allowed under US law (so USD transactions restricted) Non-US persons can insure risks relating to Iranian persons and Iranian transactions Iranian insurance market valued at around ~$9 billion Lloyd’s market active on Iranian risks

Other Business Opportunities Substantial opportunities in Iran’s infrastructure and manufacturing sectors for non-US persons ~$1 trillion new infrastructure investment over next 10 years in transport, airports, power generation and ports Care required as dual use/military export restrictions remain EU has started providing export support for Iranian transactions E.g. UK’s Export Finance providing case-by-case support for “material” contracts and direct lending Major sales announced: 50 Siemens diesel-electric locomotives MAPNA licensed to produce Siemens power generation gas turbines Sale of 100 Airbus aircraft Sale of 80 Boeing aircraft

Common Questions Relating to Iran

How Will This Man’s Election Change Things?

Structuring Management Teams US individuals remain prohibited from participating in Iranian transactions Includes “facilitation” of Iranian transactions, which can mean simply approving a transaction Compliance and legal advice is okay Key issues to consider: How to recuse / “wall off” US persons from Iran business Disclosure requirements for issuers with securities trading on U.S. exchanges How to structure payments to avoid US banks 13

Scope of General Licence H Authorized transactions for non-US subsidiaries include: Transactions with the Government of Iran and Iranian persons Transactions in which Iranian persons have an interest, such as Providing support services or products (e.g., insurance) for Iran- related transactions Providing technical advice in support of Iran-related activities Certain activities remain prohibited or restricted, unless authorized: No transaction involving Iran may use the US financial system No US-origin goods, services or technology may be supplied to Iran No dealings involving Iranian military, police or intelligence services No dealings involving Iran-related SDNs or FSEs Dealings with Iran’s nuclear industry must comply with UN rules Records of all Iran-related transactions must be kept for five years 14

Access to Banking Post JCPOA, Obama Administration tried to assure banks BUT many major international banks continue to prohibit Iranian transactions Fear of US enforcement action AML risk Contact bank in advance of any Iran transaction Some banks may offer limited flexibility Transactions with persons subject to US blocking requirements unlikely to be accepted by non-US banks (even if technically permitted)

AML/ABC Risk Iran considered one of the highest AML/ABC risk jurisdictions Low Corruption Perceptions Index ranking (131/176) Low Ease of Doing Business ranking (120/190) Government dominates certain industrial sectors (e.g. oil & gas) Businesses may be linked to Islamic Revolutionary Guard Corps, Iranian military or Iranian police May be difficult to vet counterparties/potential partners Lack of transparency Immature compliance environment Likely involvement of commercial intermediaries

Practical Considerations

Contractual Warranties Consider termination rights in case of “snap back” Include sanctions clauses to: Protect against unexpected involvement of sanctioned persons (e.g. a third party under the contract is subject to an EU asset freeze) Provide cover for future sanctions changes Include comprehensive ABC/AML compliance warranties If appropriate, consider including end-use warranties to prevent military/weapons of mass destruction product use

Business Planning Contract duration key Consider short term contracts/projects “Snap back” likely to include some grandfathering provisions, but these will likely only provide a finite “wind down” period Avoids risk of long term commitment to Iran if relations deteriorate in the future Reduces risk of litigation for potential breach of contract if sanctions prevent performance of contract

Cross Default Risk Financial documents/contractual arrangements may include sanctions representations, warranties or undertakings, e.g.: Loan documents may require a borrower to represent that it does not operate in jurisdictions subject to country-wide sanctions Private equity fund investment mandates or investor side letters may prohibit investment in certain countries Participating in Iran transactions may lead to technical breaches Consider whether contractual amendments may be required When negotiating new agreements/renewals, consider allowing Iranian business

Structuring Investments Iran’s Foreign Investment Promotion and Protection Act provides some investor protections Iran has over 50 Bilateral Investment Treaties (BITs) in force Notable treaty partners include: China, France, Germany, South Korea and Switzerland Japan, Russia and Singapore have all recently agreed BITs with Iran, although these are not yet in force Notable omissions: US, UK, the Netherlands BITs with key jurisdictions provide for Investor-State dispute resolution Iran is not a party to the ICSID Convention, which impacts enforcement of awards

Satish Kini (smkini@debevoise Satish Kini (smkini@debevoise.com) Carl Micarelli (cmicarelli@debevoise.com) Alex Parker (aparker@debevoise.com) Konstantin Bureiko (kbureiko@debevoise.com)