Deal with Iran Is Major Diplomatic Feat: But the implementation battle is just beginning

On July 14, 2015, negotiators from Iran, the EU, and the P5+1 countries – China, France, Russia, the United Kingdom, the United States and Germany – announced that they had reached a consensus on the final text of the Joint Comprehensive Plan of Action (“JCPOA”) with Iran.[1] In exchange for Iran’s commitment to scaling back its existing nuclear operations and developing a commercial nuclear program for exclusively peaceful purposes, the remaining parties committed to gradually lifting UN Security Council (“UNSC”) sanctions, multilateral sanctions and national sanctions related to Iran’s nuclear program.

While finalizing the text represents a major diplomatic achievement almost two years in the making for the negotiating governments, not everyone is thrilled with the JCPOA. Under the terms of the Iran Nuclear Agreement Review Act of 2015 (“Iran Review Act”),[2] Congress has 60 days to review the final text of any agreement with Iran; the President may not waive congressional sanctions during the review period. The congressional review period began on July 20, 2015, and will end on September 18, 2015. Many Republicans and some key Democrats in Congress are unhappy with the deal. If Congress passes a resolution disapproving of the JCPOA, President Obama has made clear that he will veto the action. A U.S. presidential veto may be overcome by a two-thirds majority of Congress. Consequently, the biggest question in the process is whether Congress has the votes necessary to override a veto. The Majlis of Iran (Iranian Parliament) also has formed a committee to review and approve the text of the JCPOA; many hardline conservative elements in Iran have openly opposed the deal.[3] While the diplomats who endured 18 straight days of around the clock negotiations in Vienna may have thought the worst was over with respect to the JCPOA, it seems that the battle may be just beginning.

The Structure of the JCPOA

The JCPOA lays out specific milestones for implementation of Iran’s nuclear commitments and sanctions relief. The first milestone, Adoption Day, will occur 90 days after the endorsement of the JCPOA by the UNSC. On July 20, 2015, the UNSC unanimously adopted Resolution 2231 endorsing the JCPOA and suspending the application of certain sanctions measures under existing UNSC resolutions. Adoption Day therefore will be October 18, 2015, unless all JCPOA parties consent to moving it to an earlier date. After Adoption Day, all parties are required to begin making necessary legal and administrative preparations to implement their JCPOA commitments. The United States and the European Union are obligated at that time to take all necessary measures to ensure that required waivers are issued and appropriate measures are taken to cease the application of certain sanctions as of Implementation Day, as described below.

Implementation Day will be the date that the International Atomic Energy Agency (“IAEA”) delivers a report verifying that Iran has implemented its nuclear-related commitments under the JCPOA. There is no set date for Implementation Day; experts suggest it will occur in the spring or summer of 2016, depending upon the progress being made by the IAEA.[4] The parties have agreed to maintain in force the limited sanctions relief set forth in the interim Joint Plan of Action from November 2013 until Implementation Day.[5]

Although existing legislation will remain in place, the United States and the European Union will cease to apply certain nuclear-related sanctions on Implementation Day. In the United States, a number of other sanctions not directly related to Iran’s nuclear program will remain in place, such as those allowing the U.S. Government to block property and interests in property of Iranian persons involved in the commission of serious human rights abuses[6] and the Iranian Government and Iranian financial institutions.[7]

Importantly, the sanctions that the United States will cease to apply on Implementation Day are all provisions applicable to the activities of non-U.S. persons. The JCPOA provides that U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to the JCPOA without a license from the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). Once the JCPOA is implemented, however, foreign entities owned or controlled by U.S. persons will be able to obtain licenses from the U.S. government to engage in activities with Iran permitted under the JCPOA.

Transition Day will be eight years after Adoption Day (i.e., October 18, 2023), or the date on which the Director General of the IAEA submits a report stating that all nuclear material in Iran remains in peaceful activities (known as “the Broader Conclusion” in the JCPOA), whichever occurs earlier. After Transition Day, the United States must seek appropriate legislative action to terminate the sanctions against non-U.S. persons that it ceased to apply as of Implementation Day, and all remaining EU nuclear-related economic and financial sanctions against Iran shall be terminated.

UNSCR Termination Day will take place 10 years after Adoption Day (i.e., October 18, 2025). At this time, the provisions of UNSC Resolution 2231 will terminate, assuming that all obligations under the JCPOA have been met by all parties and that sanctions have not been reinstated.

The JCPOA establishes a Joint Commission to settle any disputes that may arise between the JCPOA parties. If any of the parties believe that Iran or the P5+1 have failed to meet their obligations under the JCPOA, the Joint Commission will have 15 days to attempt to reach a resolution on the issue. The JCPOA parties also may refer issues to the Ministers of Foreign Affairs, who may consider the issue in parallel to the Joint Commission review. After the Joint Commission and/or the Ministers of Foreign Affairs consider the issue, disputes may be escalated to an Advisory Board for mediation, which will issue a non-binding opinion after 15 days. In the event that the parties consider the issue unresolved after this 30-day process, the unresolved issue may be used as grounds to cease performance under the JCPOA or to notify the UNSC that the issue constitutes significant non-performance. In the event that the UNSC is notified of significant non-performance by Iran, it would have the ability to reinstate sanctions against Iran under the previous UNSC resolutions, although the sanctions would not apply with retroactive effect to contracts signed prior to the date of reinstatement.

Conditional Sanctions Relief Commitments by the United States

The United States has committed to cease the application of sanctions to non-U.S. persons on Implementation Day with respect to the following activities:

• Financial transactions between non-U.S. persons and certain entities, including the Central Bank of Iran and other specified financial institutions, the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), and the National Iranian Tanker Company (“NITC”).
• Other financial and banking actions taken by non-U.S. persons, such as the following: conducting significant transactions related to the purchase or sale of Iranian rials; providing U.S. banknotes to the Government of Iran; transferring Iranian revenues held abroad; purchasing, subscribing to, or facilitating the issuance of Iranian sovereign debt; providing financial messaging services to the Central Bank of Iran and other designated financial institutions; and performing services associated with these activities.
• Provision of underwriting services, insurance, or reinsurance in connection with activities permitted under the JCPOA.
• Certain activities in the energy and petrochemical sectors, including the following: investing in Iran’s oil, gas and petrochemical sectors; purchasing, acquiring, selling, transporting or marketing petroleum, petrochemical products and natural gas from Iran; exporting, selling or providing refined petroleum products and petrochemical products to Iran; transactions with certain entities in the energy sector such as NIOC, NICO and NITC; and services associated with these activities.
• Transactions with Iran’s shipping and shipbuilding sectors and port operators, including transactions with the Islamic Republic of Iran Shipping Lines (“IRISL”), NITC, South Shipping Line and the port operators of Bandar Abbas. Sanctions also will not be applied with respect to services associated with such transactions. The relaxation in shipping sanctions does not extend to the prohibitions under Section 211(a) of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“TRA”), which allows the United States to impose sanctions on persons that knowingly sell, lease or provide a vessel or provide insurance or reinsurance or any other shipping service for the transportation to or from Iran of goods that could materially contribute to the activities of the Government of Iran with respect to the proliferation of weapons of mass destruction or support for acts of international terrorism.
• Iran’s trade in gold and other precious metals, as well as sanctions on associated services for such transactions. The United States also will suspend the application of sanctions with respect to trade with Iran in graphite and raw or semi-finished metals, provided that the trade is in connection with activities permitted under the JCPOA.
• Sale, supply or transfer of goods and services used in connection with Iran’s automotive sector.

The United States will remove certain individuals and entities from OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”), the Foreign Sanctions Evaders List, and the Non-SDN Iran Sanctions Act List. Certain entities being removed from these lists are Iranian financial institutions, as well as individuals and entities that previously have been identified by OFAC as being part of the Government of Iran. U.S. persons and foreign entities owned and controlled by a U.S. person continue to be prohibited from engaging in transactions with Iranian financial institutions and the Government of Iran (designated with an asterisk in Attachment 3 to Annex II of the JCPOA) pursuant to Section 560.211 of the Iranian Transactions and Sanctions Regulations[8] and Executive Order 13599, even though these individuals and entities no longer will appear on the SDN List.

The United States also will suspend its efforts to reduce Iran’s crude oil sales on Implementation Day, including by placing limits on the quantities of Iranian crude oil sold and the nations that can purchase Iranian crude oil. It is not yet clear exactly how the United States will effect this provision and whether it will involve removing the requirement under the existing Joint Plan of Action that certain countries buying Iranian crude oil maintain their current average import levels from Iran.[9] OFAC has stated that it will provide detailed guidance on the U.S. implementation of the JCPOA prior to Implementation Day, which likely will include additional information on this point.

In addition to removing sanctions, the United States committed to allowing certain commercial transactions with Iran on Implementation Day. One U.S. commitment under the JCPOA involves the licensing of the sale of commercial passenger aircraft and related parts, components, and services to Iran exclusively for civil aviation use. Associated services include warranty services, maintenance and repair services, and safety inspections. Appropriate conditions will be included in any license to ensure that no aircraft, goods, or services are re-sold or re-transferred to any person on the SDN List. The United States also will issue licenses allowing for the importation of Iranian-origin carpets and foodstuffs, including pistachios and caviar, into the United States. Finally, as mentioned above, the United States will begin issuing licenses for foreign entities owned or controlled by a U.S. person to engage in activities with Iran that are permitted under the JCPOA. The licensing policy should make it easier for these foreign entities to engage in the activities outlined in the JCPOA that could be undertaken by their counterparts that are not owned or controlled by a U.S. person.

As mentioned above, the United States will be required to seek legislative action on Transition Day to terminate the previously suspended sanctions. The United States also will be required at that time to remove an additional group of individuals and entities from the SDN List and the other sanctions lists. Finally, the United States must lift additional sanctions on Transition Day. These include sanctions under the Iran, North Korea, and Syria Nonproliferation Act related to the acquisition of nuclear-related commodities and services for the nuclear activities contemplated under the JCPOA, which will make the treatment of Iran consistent with the way the U.S. treats other non-nuclear weapons states under the Non-Proliferation Treaty. Sanctions on joint ventures related to mining, production, and transportation of uranium also must be lifted at this time, and Iranian citizens will no longer be excluded from careers in the United States in nuclear science, nuclear energy, and the energy sector.

Conditional Sanctions Relief Commitments by the EU

The EU also has committed to terminate certain of its nuclear-related economic and financial sanctions[10] on Implementation Day, including related designations. The EU sanctions relief as proposed under the JCPOA is broader than the U.S. sanctions relief. Unlike the United States, the EU never imposed sanctions against foreign persons operating in Iran, and thus the sanctions relief to be afforded by the EU is relevant to EU persons inside or outside the EU and foreign persons doing business in the EU only. As a result of the lifting of sanctions, the following restrictions and associated services will be lifted:

• Prohibition and authorization regimes on financial transfers to and from Iran
• Sanctions on banking activities
• Sanctions on insurance
• Sanctions on financial support for trade with Iran
• Sanctions on grants, financial assistance, and concessional loans
• Sanctions on Government of Iran public-guaranteed bonds
• Sanctions on the import of oil, gas and petrochemical products from Iran
• Sanctions on the export of key equipment for the oil, gas and petrochemical sectors
• Sanctions on investment in the oil, gas and petrochemical sectors
• Sanctions related to shipping and shipbuilding
• Sanctions related to the transportation sector
• Sanctions on gold, precious metals and diamonds, banknotes and coinage

Moreover, the EU also will allow, in connection with activities consistent with the JCPOA, the supply, transfer or export of software, graphite and raw or semi-finished metals, such as aluminum and steel, to any Iranian person or for use in Iran.

Under the terms of the JCPOA, all nuclear-related economic and financial EU sanctions against Iran shall be terminated by Transition Day (i.e., October 18, 2023). Notably, the EU previously imposed economic sanctions on Iran in response to human rights violations. These sanctions will be unaffected by the JCPOA and remain in force. Thus, persons subject to EU sanctions will remain restricted from supplying certain goods and equipment that can be used for internal repression, and designated Iranian persons will remain subject to the EU asset freeze. Moreover, until October 18, 2023, the EU’s arms embargo and restrictions on transfer of ballistic missiles also remain in place.

Preparing for a Possible Showdown with the U.S. Congress

On July 19, 2015, the U.S. Department of State transmitted the full text of the JCPOA, its annexes, and related materials to Congress and stated that the 60-day review period would begin the following day. Controversy immediately ensued, with many members of Congress feeling that it was inappropriate to submit to the UNSC the draft resolution approving the JCPOA before Congress had its 60 days to review the text. Senate Foreign Relations Committee Chairman Bob Corker (R-Tenn.), who sent a letter cosigned by Ranking Member Ben Cardin (D-Md.) to President Obama on July 16 urging that the UNSC vote be postponed until after Congress had an opportunity to consider the JCPOA,[11] stated that the administration’s decision to move forward at the UN was “contrary to the spirit of the Iran Nuclear Agreement Review Act.”[12] Senator Ted Cruz (R-Texas), a 2016 Republican presidential hopeful, threatened to block nominees and funding for the State Department as a result of the UN vote.[13] Senator Cruz and others also have expressed concerns over the so-called side agreement between Iran and the IAEA and other federal guidance materials that were not provided to Congress, with Senator Cruz going so far as to introduce a resolution asserting that the 60-day review period did not begin with the July 19 transmittal from the State Department because the Iran Review Act requires all related materials to be submitted along with the agreement.[14]

Despite the vocal opposition, the Obama administration is working hard to shore up support in Congress for the JCPOA. Since submitting the deal to Congress, Secretary of State John Kerry, Secretary of Energy Ernest Moniz, and Secretary of the Treasury Jacob Lew have testified before the Senate Foreign Relations Committee and the House Foreign Affairs Committee.[15] These hearings turned contentious at times, with particularly tense exchanges between Secretary Kerry and Republican members of the House Foreign Affairs Committee. President Obama is personally reaching out to his fellow Democrats with the goal of ensuring that Republicans do not have enough votes to override a potential veto. On July 29, President Obama met with Democrats from the House of Representatives during an evening session – a highly unusual move for him – to answer individual questions about the JCPOA.[16] President Obama even brought three key Democratic congressmen on a recent weekend golf outing.[17] The President’s efforts suffered a setback on August 6, when Senator Charles Schumer (D-NY), who is expected to succeed Senator Harry Reid (D-Nev.) as the leader of the Senate Democrats, publicly announced that he would oppose the agreement and vote in favor of a motion of disapproval.[18]

Insiders seem to agree that there is a strong chance Congress will reject the JCPOA, particularly because a number of Democrats initially will vote against it. Democrats with constituents concerned about the security of Israel are expected to feel particular pressure to vote against the deal. In addition, Democrats who have taken a hard line on national security issues related to Iran in the past may be reluctant to endorse the JCPOA. However, we anticipate that many of these Democrats will decline to override a presidential veto, thus denying congressional Republicans the two-thirds majority required. Democrats are expected to use the fact that the United States would be walking away on its own from a multilateral agreement endorsed by major allies in Europe and at the UN as political cover with their constituents. Some sources have suggested that if the Republicans feel that they do not have enough votes to override the veto prior to the end of the 60-day period, congressional leadership may choose not to pass any resolution at all on the JCPOA, preferring instead to use the limited time before the end of the federal government’s fiscal year to deal with the budget.[19] Ultimately, insiders still feel that it is difficult to tell where the vote stands because so many Democrats have stayed quiet during the debates.

Congress will be in recess during the month of August, and it is likely that many undecided Democrats will be influenced one way or another on the Iran issue when meeting with their constituents in their home districts during this break. Lobbying groups in favor of the agreement and opposing the agreement are expected to be extremely active this month, with many planning direct appeals to members of Congress as well as encouraging constituents to make their opinions on the JCPOA known to their elected representatives.[20] The American Israel Public Affairs Committee, which opposes the deal, has been particularly active, launching an ad campaign and encouraging their members to meet with every member of Congress prior to the September deadline.[21]

In conclusion, with key members of the Democratic leadership in Congress such as Senator Cardin and Rep. Steny Hoyer (D-Md.) still reported to be undecided,[22] the path forward for the JCPOA is anything but clear. Even if Congress does not pass a resolution rejecting the JCPOA (or if such a resolution is passed, but Congress cannot override the presidential veto), there is still no definitive timeline as to when sanctions relief will go into effect. The next six months will be crucial to determining whether the diplomatic efforts behind the JCPOA will come to fruition as envisioned by negotiators, with the next four weeks being particularly critical.