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Commercial Question

Behind the sanctions: how to prevent Iran from going nuclear

updated on 12 October 2010

Question

What is the commercial impact of the European Union's new sanctions against Iran?

Answer

Iran's drive towards nuclear weapon capability has caused alarm in the Middle East and Asia, as well as in the United States and the European Union. Iran, together with 189 other states, is a signatory to the Nuclear Non-Proliferation Treaty of 5 March 1970, which seeks to limit the spread or proliferation of nuclear weapons. All signatories have pledged to observe certain safeguards, including inspection where necessary by the UN International Atomic Energy Agency (IAEA).

On 4 February 2006 the IAEA reached a rare non-consensus decision (with 12 abstentions) that Iran had breached its treaty obligations, including failing to declare its uranium enrichment programme. It reported the matter to the UN Security Council in 2006, which then passed a resolution calling on Iran to stop its programme. Iran ignored this resolution and this led to increasingly tough sanctions to be imposed by the United Nations, United States and European Union.

Listed in UN Security Council Resolution 1737 of 23 December 2006 were a number of persons and entities involved in Iran's alleged nuclear proliferation whose funds and economic resources were to be frozen; the resolution has since been updated by several other resolutions made between 2007 and 2009. On 9 June 2010 the United Nations adopted UN Security Council Resolution 1929, which contains a range of new, tougher sanctions which UN member states are expected to consider and enact in their national laws. So far, economic sanctions against Iran have been adopted by the United States, the European Union, Japan and Australia (and partially by Korea).

On 26 July 2010 the Council of the European Union endorsed the UN sanctions against Iran and imposed its toughest sanctions yet: hitting the energy, transport, finance and insurance sectors, as well as expanding the list of 'designated' individuals and entities with which commercial and financial dealings are prohibited. The new sanctions are contained in Council Decision 2010/413/CFSP and in a draft implementing regulation published on 31 August 2010, which is currently being discussed with member states and the European Commission. The regulation is a consolidated regulation repealing previous EU sanctions against Iran and containing an updated list of targeted Iranian individuals and entities; this regulation is expected to be adopted at any moment, especially if no significant concessions are made by Iran. Concessions are unlikely given the Iranian president's recent public declarations against the United States, made at the United Nations, which lead to collective condemnation by the United States and EU member states.

The regulation will apply:

  • within the territory of the European Union (including its airspace);
  • on board any aircraft or vessel under the jurisdiction of a member state;
  • to any person inside or outside the territory of the European Union who is a national of a member state; and
  • to any legal person, entity or body which is incorporated or constituted under the law of a member state.

The EU sanctions will be followed by national measures imposing criminal penalties for breach of the sanctions, as is the case for the sanctions currently in force.

The objective of the UN sanctions is to have a strong negative impact on Iran's economy and force it to return to the negotiation table. Meanwhile, when the new sanctions package comes into force it will have an immediate impact on EU financial, insurance, energy, transport and technology companies operating in, or with interests in, Iran. An example of the difficulties the sanctions will create is money transfers to and from the country: any transfer above €40,000 will need to be pre-authorized by the relevant EU authorities and any transfer above €10,000 will need to be notified.

Indeed, the sanctions will make it almost impossible to maintain or start new business dealings with Iran at a global level. Clients with any direct or indirect business links with the country should review their business practices with the help of lawyers in the jurisdictions which have imposed sanctions to ensure compliance. Violation of the sanctions could result in substantial fines or even imprisonment, when national criminal sanctions have been enacted by the member states.

Solange Leandro is a senior associate in the EU & competition group at Clyde & Co.