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Red Light For Indian Companies Doing Business With Iran

In the wake of the April 2, 2015 announcement that the P5+1 countries (the United States, the United Kingdom, France, Russia, China, and Germany), together with the European Union had reached agreement with Iran on the parameters of a deal in which Iran would curtail its nuclear program in exchange for sanctions relief from the United States and the EU, the Indian government reportedly has moved swiftly to expand trade ties with and boost investment in Iran.  On May 6, for example, India entered into a new memorandum of understanding with Iran to develop the Chabahar Port in southeast Iran.  India also sent a trade delegation to Iran in April to discuss oil imports and investments in the energy sector, including the development of Iran’s Farzad-B gas field.  India has significant energy needs that increased reliance on Iranian oil and gas could help satisfy, and India’s development of the Chabahar Port could help facilitate transit to Afghanistan and Central Asia that bypasses Pakistan.

However, most U.S. and EU sanctions against Iran remain in place pending a final deal with Iran over its nuclear program and confirmation that Iran is meeting its nuclear commitments under the deal, including most of the U.S. government’s “secondary” or “retaliatory” sanctions that target non-U.S. persons that engage in certain types of business with Iran.  And the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has emphasized in guidance published on its website that U.S. sanctions against Iran “will continue to be vigorously enforced.”  Given the continued risk of exposure under U.S. sanctions, Indian companies should exercise caution before pursuing business opportunities in or with Iran. 

Iran Nuclear Negotiations and Limited Sanctions Relief

The U.S. government has imposed sweeping economic sanctions targeting Iran.  In addition to the “primary” U.S. sanctions that prohibit U.S. persons (including U.S. companies and their subsidiaries) from engaging in virtually any dealings with Iran unless licensed by OFAC, the U.S. government also imposes “secondary” or “retaliatory” sanctions against non-U.S. persons that engage in certain business activities involving, among other things, Iran’s energy, shipping, shipbuilding, and financial sectors.

A non-U.S. person that engages in conduct targeted for secondary sanctions is not exposed to civil or criminal liability, but rather to a menu of possible sanctions.  The most severe such sanction is the “blocking” (i.e., “freezing”) of the sanctioned person’s property that is or comes within the United States or the possession or control of a U.S. person anywhere in the world, effectively cutting off access to U.S. markets. 

On November 24, 2013, the P5+1 group reached an initial agreement with Iran to freeze the progress of Iran’s nuclear program while subsequent negotiations were held over a long-term arrangement.  That agreement—called the Joint Plan of Action (“JPOA”)—provided limited and reversible relief from certain U.S. and EU sanctions targeting Iran.  In particular, the U.S. government temporarily suspended certain, limited aspects of its secondary sanctions regime, including with respect to certain exports of petrochemical products and crude oil from Iran. 

However, all other aspects of the U.S. secondary sanctions regime continue to be enforced, and  the U.S. primary sanctions were largely unchanged.

The more recent parameters that the P5+1 group agreed to with Iran on April 2, 2015 serve as the basis for a Joint Comprehensive Plan of Action (“JCPOA”) that the parties will seek to conclude by June 30.  While the JCPOA—if concluded—will provide for the further easing of sanctions after the International Atomic Energy Agency  has verified that Iran has taken key, nuclear-related steps, the parameters do not provide any sanctions relief in and of themselves. 

The U.S. State Department has indicated that only the “nuclear-related” sanctions against Iran will be suspended under the JCPOA; sanctions imposed as a result of Iran’s support for terrorism or human rights violations would remain in place.  It is not entirely clear what the State Department considers “nuclear-related” sanctions to include.  However, it seems likely that many of the U.S. government’s secondary sanctions will be suspended, but few (if any) of its primary sanctions.  Suspended sanctions would “snap back into place” if Iran fails at any time to fulfill its commitments under the JCPOA. 

Implications for Indian Business

Indian companies currently may engage in certain, limited business activities in or with Iran—such as exporting crude oil (up to the levels India was importing at the time of the JPOA) or qualified petrochemical products from Iran—without risk of being sanctioned by the U.S. government (provided that no U.S. persons are involved in the transactions and the companies are not owned or controlled by U.S. persons), but many other activities remain subject to secondary sanctions.  For example, it remains sanctionable to provide significant support to members of Iran’s energy, shipping, and shipbuilding sectors (including Iranian port operators), or to engage in significant transactions with most Iranian financial institutions.

Further, U.S. citizens and permanents residents (i.e., “green card” holders) are subject to the primary sanctions regime, and are prohibited from being involved in or otherwise facilitating any transactions involving Iran even if they are employees of Indian or other non-U.S. companies.

The U.S. Executive Branch may, in certain circumstances, grant licenses or waivers permitting certain trade activities with Iran that would otherwise be prohibited or sanctionable.  For example, shortly before the limited sanctions relief under the JPOA went into effect, the U.S. Secretary of State granted a waiver permitting financial institutions in India, China, South Korea, Turkey, and Taiwan to conduct or facilitate transactions for the purchase and import of Iranian oil. 

However, absent a final comprehensive agreement with Iran, the U.S. government probably will not be willing to grant a license or exercise waiver authority to permit the types of investment and development activities that India is currently pursuing with Iran, including the development of the Chabahar Port and the Farzad-B gas field, due to concern that it could erode the effectiveness of Western sanctions against Iran and, as a result, reduce the P5+1 group’s leverage in their continued negotiations with Iran over its nuclear program.  There is even a risk that the U.S. government could make targeting Indian companies for secondary sanctions an enforcement priority as a stick to induce India to curb its efforts to expand trade ties with Iran.

In fact, in recent weeks U.S. officials have been exerting pressure on India to put the brakes on its rush to expand these trade ties.  For example, Under Secretary of State Wendy Sherman, the lead U.S. negotiator with Iran, publicly urged India in April 29 remarks at the University of Chicago to “hold its horses” and not pursue new trade opportunities with Iran until the JCPOA is concluded and U.S. and EU sanctions against Iran are rolled back. 

Indian companies should carefully consider their continued risk of exposure under U.S. sanctions before following the Indian government’s lead and pursuing new business opportunities in or with Iran at this time.  Prematurely entering the Iranian market could have high costs, including the loss of access to U.S. markets if the U.S. government were to impose property blocking sanctions.  

© 2020 Covington & Burling LLPNational Law Review, Volume V, Number 154

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About this Author

Stephen C. Bartenstein, Covington Burling, Litigation attorney
Associate

Steve Bartenstein advises companies on the application of international trade controls, including export controls, sanctions, and antiboycott laws and regulations. Mr. Bartenstein also is a litigator with experience representing clients in complex and high-stakes civil litigation, including antitrust matters.

In his international trade controls practice, Mr. Bartenstein counsels clients on U.S. trade controls regulations administered by the State Department, Commerce Department, Census Bureau, and U.S. Customs and Border Protection; economic sanctions programs...

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