0. 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

1. JCPOA Recap

2. 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 (“Implementation Day”)
JCPOA provides for sanctions “Snap Back” if parties fail to meet obligations

3. 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

4. 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

5. 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

6. 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

7. Business Activity

8. 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

9. 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

10. 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

11. Common Questions Relating to Iran

12. How Will This Man’s Election Change Things?

13. 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

14. 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

15. 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)

16. 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

17. Practical Considerations

18. 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

19. 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

20. 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

21. 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

22. Satish Kini (smkini@debevoise
Satish Kini Carl Micarelli Alex Parker Konstantin Bureiko