Trump’s Refusal to “Recertify” the JCPOA and Potential Implications

In 2016 while campaigning for the Presidential election, President Trump strongly criticized the JCPOA. Since the beginning of the Trump Administration in January of this year an intense debate has been underway within the US government regarding the JCPOA’s skeptics, led by President Trump, and its supporters, including senior officials such as Secretary of State Tillerson.

In 2015 US Congress enacted the Iran Nuclear Agreement Review Act (INARA), as part of a political process intended to ensure Congressional review of the JCPOA which was then in its final negotiations. As a matter of purely domestic US law, INARA has ongoing significance as it requires the President to report to Congress every 90 days regarding whether Iran is in compliance with the JCPOA and related matters. President Trump has now refused to issue the latest of these certifications to Congress.

President Trump was persuaded by strong pressure from Tillerson and other senior officials not to terminate US participation in the JCPOA outright. However, he insisted that the US government should expand its unilateral sanctions on Iran, and that US Congress and Iran, the EU and other parties involved in the JCPOA should agree upon additional measures to address US concerns over the sunset dates in the JCPOA, Iran’s missile programs, and Iran’s support for Hizballah and other armed groups.

Under Trump’s new Iran policy, it is possible that some time in 2018 the Trump Administration could terminate US participation in the JCPOA and reimpose the suspended US sanctions. The US sanctions that could be reimposed mainly consist of “secondary sanctions”, targeting EU and other non-US companies for penalties if they engage in certain activities involving Iran, its government or sanctioned Iranian persons.

In addition, “General License H” could be terminated. The US government issued General License H in January 2016, as provided under the JCPOA, to cut back the sanctions preventing transactions involving Iran by non-US companies owned or controlled by US persons. Though General License H is narrowly drafted, it provides some protection to EU and other non-US companies that have a US parent company or US owners and that are engaged in business with Iran.

Recent US Secondary Sanctions on Russia and Potential Implications

In August 2017, President Trump reluctantly signed into law a lengthy statute referred to as “CAATSA” that imposed significant new US unilateral sanctions on Russia and North Korea, and less significant new sanctions on Iran. CAATSA includes new “secondary sanctions” authorities, under which the President has the option of penalizing non-US companies that the Trump Administration determines have engaged in certain activities relating to Russia, even if the penalized company has no ties or contact with the United States. Congress and President Obama imposed somewhat similar secondary sanctions on Iran, prior to the implementation of the JCPOA.

At present, it seems unlikely there will be extensive enforcement of these measures. However, in guidance issued on 31 October 2017, the Trump Administration has indicated that it intends to implement at least some of these sanctions, and Secretary of State Tillerson has made informal public statements that CAATSA will be fully implemented. On the positive side, this recent guidance also suggests that the Trump Administration will exercise its discretion regarding the sanctions, and will refrain from penalizing companies based in EU Member States or other countries in a manner that would damage “unity and coordination with [US] allies and partners”.

Following this guidance, it therefore remains the case that EU-based companies and financial institutions involved in covered transactions may need to decide whether to avoid those transactions, on the basis that they could theoretically trigger US secondary sanctions penalties. The covered activities include (among others) certain investments or the provision of goods or services that support the construction or repair of Russian energy export pipelines, significant transactions with entities in the Russian defense or intelligence sector, and certain transactions relating to privatization of Russian state assets.

Risks and Difficulties for European Companies and (Potential) EU Reactions

The growing trend towards unilateral US sanctions and the decrease of foreign-policy coordination between Washington and Brussels as well as other EU capitals puts European companies in an increasingly difficult position as business transactions with certain countries that are perfectly lawful under EU law, are prohibited and severely penalised under US law. This is particularly true with regard to Iran, with which many EU companies have resumed their business relations after the implementation of sanctions relief under the JCPOA, but partly also with regard to Russia.

In reaction to Trump’s decertification of the JCPOA, the Council of the European Union has stressed the importance of the agreement with Iran as “a key pillar of the international non-proliferation architecture” and has called upon the US to “maintain its commitment to the JCPOA and to consider the implications for the security of the US, its partners and the region before taking further steps”. At the same time, the EU has underlined its commitment to a “continued full and effective implementation of all parts of the JCPOA”. The Head of the EU Delegation to the US, David O’Sullivan, has stressed at an Atlantic Council conference that the EU “will act to protect the legitimate interests of its companies with all the means at its disposal”, thus hinting at a potential extension of the EU Blocking Statute (Regulation (EC) No 2271/96).

In order to be effective, such an extension of the EU Blocking Statute, prohibiting EU persons from complying with new US secondary sanctions, would need to be accompanied by efficient enforcement measures and strong political support. However, whether such an extension would afford EU companies a higher degree of legal certainty is questionable: EU companies would in most cases still risk severe penalties under US law. This is particularly true when considering the high degree of connectivity of EU banks to the US banking system and the enforcement options of US authorities which range from the seizure of US assets to the blocking of EU companies from US market access. Nevertheless, with regard to the envisaged extension of US extra-territorial sanctions on Russia, targeting notably the building of Russian-European gas pipelines such as Nord Stream II and Turk-Stream, the prospect of an extension of the EU Blocking Statute may be a significant factor in the apparent reluctance of the Trump Administration to implement these sanctions. It might therefore also work with regard to possible new Iran sanctions. With a view to the effectiveness of a potential extension of the EU Blocking Statute also see the interview given by BLOMSTEIN partner Roland Stein to Energy Compass.

Moreover, the EU also retains the option of challenging any US extraterritorial sanctions at the WTO level by initiating a formal legal action. In the mid-1990s, when the EU exercised this option with view to the extraterritorial US sanctions against Cuba and Iran, this served to bring about a political solution if not settlement. Under the political understanding reached between the US and EU in 1997, the US committed not to penalize EU-based companies under the extraterritorial Iran Sanctions Act. In the years leading up to the JCPOA, when these and other US extraterritorial sanctions on Iran were being actively enforced, there were only a handful of penalties for companies based in EU Member States.

In addition, the creation of offshore dollar-clearing facilities would be conceivable which could at least weaken the threat of EU banks – and EU companies – from being cut off the US financial system.

For the time being, EU companies should make sure to include force majeure clauses in their contracts regarding sensitive countries and regions. Moreover, they should enter into a close dialogue with policy makers on the national as well as the EU level to en-sure their understanding of the economic impacts of new potential US extraterritorial sanctions and their speedy intervention should this be necessary.

Jacobson Burton Kelley and BLOMSTEIN will closely monitor and inform about any developments. If you have questions regarding the potential impacts on your company or sector, please contact Roland M. Stein or Glen Kelley.