Iran Sanctions: U.S. Withdrawal from the JCPoA

Position | External Economic Policy & International Markets

Iran Sanctions: U.S. Withdrawal from the JCPoA BDI Position on the Reintroduction of U.S. Economic and Financial Sanctions against Iran

August, 7 2018

Summary On 8 May 2018, U.S. President Donald Trump announced that the United States would withdraw from the nuclear agreement with Iran, the Joint Comprehensive Plan of Action (JCPoA), and once more enforce sanctions against the country.

The agreement was concluded on 14 July 2015 with the objective of ending all potentially arms-related nuclear activities by Iran and placing remaining activities under reliable international supervision. The promises made by Iran in this regard have been met in full, there have been no complaints arising from the ongoing regular inspections since. In return, a relaxation of Western sanctions was promised and implemented in line with the agreement from the start of 2016.

On the basis of regular inspections, the International Atomic Energy Agency (IAEA) has found that Iran has not contravened the agreement.

German industry sharply criticizes the United States’ withdrawal from the nuclear agreement. In a global and interconnected world, partners must be able to rely on each other and comply with previously concluded agreements.

German industry expressly condemns the extraterritorial application of sanctions.

Companies must not be exposed to accusations by the United States which damage their reputation and business if they continue to engage in non-sanctioned transactions.

Deployment of the “blocking statute” currently under discussion in the European Commission makes sense as a political signal. But it would be a good idea to look at the effects more closely in order not to harm European companies.

The Federal Government and the European Union (EU) should examine how payment transfers with Iran can be maintained.

Benjamin Godel | +49 30 2028-1521 | b.godel@bdi.eu | Breite Str. 29 | 10178 Berlin | www.bdi.eu Dr. Nikolas Keßels | +49 30 2028-1518 | n.kessels@bdi.eu | Breite Str. 29 | 10178 Berlin | www.bdi.eu

U.S. Withdrawal from the JCPoA

List of contents Background: What Is at Stake? ......................................................................................................... 2 Requests to the Federal Government and the EU ........................................................................... 3 Imprint .................................................................................................................................................. 5

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U.S. Withdrawal from the JCPoA

Background: What Is at Stake?

Implementation of the Iran agreement in January 2016 was originally the source of great hopes, not least in German industry. The withdrawal of the United States from the agreement harms business and in addition places a question mark over the credibility of the West’s wish to create a regulatory framework for the globalized world.

German industry has benefited from the opening of Iran, albeit not as strongly as initially forecast.

German exports recorded steady growth, sometimes in excess of 20 percent. Whereas German companies delivered goods worth 2.05 billion euro to Iran in 2015, the equivalent figure was 2.9 billion euro in 2017. Demand was strongest for machinery, motorized vehicles, electrotechnology, and pharmaceutical products. The total value of reciprocal trade was around 3.4 billion euro. The Federal Government provided important support in this connection by reintroducing Euler Hermes export credit guarantees for German-Iranian commercial activity.

Nevertheless, German banks continued to be hesitant about financing projects in Iran. Moreover, the U.S. Administration’s critical rhetoric about Iran intensified with the entry into office of U.S. President Donald Trump. With the now effective withdrawal from the Joint Comprehensive Plan of Action (JCPoA), the United States has announced that it wants not only to reintroduce sanctions against Iran but also to intensify them further. The sanctions which have hitherto been suspended will come back into force on 7 August and 5 November 2018. Against this background, German companies now also fear that they will fall under the so-called secondary sanctions. Sanctions regimes normally apply only to citizens, firms established in the country as well as firms operated by citizens or business people with permanent residence permits. Yet U.S. secondary sanctions apply with extraterritorial effect.

These extraterritorial sanctions apply U.S. law outside U.S. territory and without reference to U.S. citizens. In so doing, the United States leverages its position as the world’s largest and deepest financial market. Even before the JCPoA, such secondary punitive economic measures were already directed against business relations with Iran and almost exclusively via monitoring of international financial flows. For instance, if a bank were to handle business between a German company and a company in Iran or if “significant transactions” were to be facilitated, this financial institution, or its subsidiary, could be excluded from doing business in the United States or banned from having business relations with U.S. citizens.

The reintroduction of U.S. sanctions violates international law. As a response Commission President Jean-Claude Juncker proposed to reactivate a regulation from 1996 [(EG) 2271/96]. In that case, the newly imposed U.S. sanctions would be incorporated in the annex to the regulation. This requires a majority in the Council. The regulation seeks to ensure protection against extraterritorial application of legislative acts adopted in a third country. It provides that European companies must inform the Commission within 30 days where economic or financial interests are negatively affected. A European sanction mechanism is not specified. It is up to the Member States to penalize compliance with extraterritorial sanctions. Derogations would apply if non-compliance with sanctions would seriously damage the interests of a company or the interests of the EU. The directives necessary for this are to be drawn up by a committee of the Member States chaired by a representative of the Commission.

In addition, European firms would be entitled to one-off compensation for damage suffered. However, since it is hardly possible to calculate damage caused by long-term listing by the U.S. authorities, for instance in the form of an enduring ban on activity in the United States, and the associated economic consequences, this damage would not justify compensation payments to the affected party.

Compensation for damage, known as clawback, would be carried out in the framework of national law.

In this regard, the regulation provides that assets can be recovered from the parties which have caused the damage or have played an intermediary role. Their sale would finance claims for damages.

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Requests to the Federal Government and the EU 1.

Seek out an international solution

The JCPoA is an international agreement which the United Nations Security Council integrated into international law through resolution 2231 (2015). BDI expressly welcomes that the Federal Government is in close exchange with the other contracting parties and EU Member States following the United States’ withdrawal from the agreement. The goal of this involvement must be to ensure fair competition for companies doing business in Iran and hence to create incentives for all parties to pursue the Iran agreement.

2.

Remain in dialog with Iran

Moderate forces in Iran have been strengthened through the JCPoA and the associated revival of the economy. According to the International Atom Energy Agency (IAEA), Iran has complied with all stipulations set out in the JCPoA. Putting this positive development at risk poses the danger of an escalation in the region which impedes economic cooperation and weakens moderate forces in Iran.

BDI therefore also welcomes that the Federal Government and its partners remain in dialog with Iran.

From the standpoint of German industry, further discussions should serve the purpose of implementing the obligations on the “Western” contracting partners to normalize business with Iran. In addition, further effective measures to stabilize the Near and Middle East should be agreed – to complement the JCPoA.

3.

Deploy EU “blocking statute” to protect and not to harm European business

German industry welcomes the wish of the EU and the Federal Government to fight back against the United States’ extraterritorial sanctions policy. It makes sense to deploy the “blocking statute” currently under discussion in the European Commission as a political signal. However, potential externalities should be investigated first so that it is not European companies which are ultimately harmed. It must therefore be implemented in such a way that possible damage to domestic business is minimized.

Business should be consulted when drafting the derogation criteria provided for in the blocking statute.

4.

Safeguard payment transfers

BDI calls on the Federal Government and the European Union to safeguard the smooth flow of international payment transfers. The planned U.S. sanctioning of specialized financial messaging services from 5 November 2018 runs the risk of undermining the standardized communication used for international payment transfers. This would also include SWIFT, which provides transparent and efficient communication on national and international payments and is therefore an essential hub through which banks are interconnected – also for business with Iran. The European partners must endeavor to ensure that the disruption of this standard does not create greater legal uncertainty. It is in the general interest that the arteries which keep global trade flowing are not jeopardized.

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5.

Maintain export credit guarantees

German industry recognizes the Federal Government’s efforts to promote German companies’ business with Iran through Euler Hermes export credit guarantees. This support should be maintained, and the Federal Government should ensure that German companies which continue to do business with Iran while observing EU sanctions can use all relevant instruments for the promotion of exports.

6.

Pursue discussions with U.S. Administration on Iran

Against the background of the United States’ withdrawal from the JCPoA, it is necessary that the Federal Government remains in close contact with the U.S. Administration. The aim must be to stabilize the situation in the Middle East, to create dependable legal, economic and political framework conditions for companies, and to safeguard the continuation of non-sanctioned transactions. Vis-à-vis the United States, the Federal Government should continue to work intensively to uphold the agreement or to limit the extraterritorial effect of U.S. sanctions, respectively.

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Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T. +49 30 2028-0

Contact Friedolin Strack Head, International Markets T. +49 30 2028 -1423 f.strack@bdi.eu Dr. Stormy-Annika Mildner Head, External Economic Policy T. +49 30 2028 -1562 s.mildner@bdi.eu Benjamin Godel Senior Manager, International Markets T. +49 30 2028 -1521 b.godel@bdi.eu Dr. Nikolas KeĂ&#x;els Senior Manager, External Economic Policy T. +49 30 2028 -1518 n.kessels@bdi.eu

Date and Number August 2018 BDI publication number: D 0951

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