Iran - US Conflict Gets Out Of Hand - A Law Guide to Sanctions

Following the further re-installment of sanctions that has been announced by the US administration, Iran decided on 8 May to leave parts of the Joint Comprehensive Plan of Action (JCPOA), commonly referred to as `Iran Nuclear Deal` of 2015, in case the EU would not shield Iran against renewed US sanctions within 60 days. The withdrawal is the last step in a downwards-spiral of renewed confrontation that started 2 years ago, but the roots of which are much older. We shed light on the legal history of the conflict.

Sanctions on Iran are not a new phenomenon. Since 1979, when the so called `Islamic revolution´took place in Iran, successive US governments imposed sanctions on Iran. These sanctions always took a `carrot and stick`- approach. The respective laws always had 5-6 years of duration to see afterwards if there would be progress in Iran.

In 1996 the US imposed the D`Amato-Kennedy Act, which targeted Iran and Syria. Due to their vast oil reserves both countries were considered to be crucial for global energy trade. The Act imposed a cap on investments. It was not possible to invest more than 40 Million US Dollars per year in Iran. In addition, those investments had to contribute directly to the country`s ability to develop oil & gas reservoirs. In 2015 the USA as well as European countries signed the so called `Iran Nuclear Deal´ (Joint Comprehensive Plan of Action (JCPOA).

However, after a long debate in the USA, president Trump decided on 5 November 2018 that he would restore US sanctions that had been lifted for the Iran Nuclear Deal and walked away from the deal. The administration decided now that further waivers of the sanctions would no longer apply.

Besides the restoration of nuclear-related sanctions, the US also upheld and/restored other non-nuclear sanctions on Iran under the Iran Threat Reduction and Syria Human Rights Act (ITRSHA), which are relevant for energy. The effect of this `web´of sanctions: more than 700 individuals, entities, vessels and aircraft are on the sanctions list, including major banks, oil exporters and shipping companies. 

From a legal point of view these sanctions are problematic, as these are so called sanctions with extraterritorial effect. They are prohibiting, for instance, participation in a joint venture established for development of petroleum resources outside of Iran, if Iran is a substantial partner/investor in the joint venture . Moreover, they are prohibiting to own, operate, control or insure a vessel that on (or after) 90 days from the ITRSHA’s enactment was used to transport crude oil from Iran to another country or that is used in a manner that conceals the Iranian origin of crude oil or refined petroleum products on vessel.

Sanctions with extraterritorial effect are controversial under international law. Their idea is as follows: the subsidiaries of home state companies (in this case US companies) that are legally incorporated as lone-standing companies in other countries, so called `host states´ (for instance companies in the EU that are subsidiaries of US `mother companies´). The government of the home country (US) is now trying to direct the actions and the behaviour (do not deal with Iran) of those subsidiaries in other countries, although they are not incorporated in the US and are, thus, not subject to US jurisdiction. This is done via a legal trick: the US assumes jurisdiction under certain particular principles of international law, mostly the nationality principle (people working at these companies might be US citizens), the universality principle (used usually for international crimes that can be punished by any state) and the passive personality principle (jurisdiction over foreigners who commit severe crimes against nationals of the home state outside of home state territory). The aim is to create a level playing field by denying non-US companies opportunities that are made available by US sanctions. 

The problem is that US-controlled entities that are managed and incorporated in Europe have to act in contradiction to laws of host state (European countries) by not honouring their contractual obligations with Iranian companies. In an effort to counter the US sanctions the EU deploys a systemn of so called `blocking statutes´. They can take various forms. On 31 January 2019 Germany, France and the UK (on behalf of all others) set up a special purpose vehicle called `Instrument In Support Of Trade Exchanges (INSTEX)´. The aim is to facilitate EU-Iran trade under nuclear deal after US departure. INSTEX works like a barter arrangement operating outside of the US-dominated global financial system, not using the US-Dollar. Initially the systemn should only apply to non-sanctioned goods, not oil, but this was supposed to change in the future.

Given that the US- administration decided to re-install sanctions  and Iran`s reaction of an `ultimatum´ to the EU to shield Iran against these renewed sanctions, it is likely that Iran is also leaving the `Nuclear Deal´. This would be the end of the INSTEX system and more, would ultimately prove that unilateral sanctions with extraterritorial effect are stronger than the political will of the EU to stand up to them.