The Iran nuclear deal and economic sanctions: 5 key points for Canadian businesses

17 minute read
28 January 2016

On January 16, 2016, the United States, the European Union and the United Nations announced a process for the lifting of key economic sanctions imposed against Iran in connection with Iran’s nuclear program. The news followed the release of the International Atomic Energy Agency (“IAEA”) report confirming implementation by Iran of certain measures required by the Joint Comprehensive Plan of Action (“JCPOA” or the “Iran Nuclear Deal”), reached last summer in Vienna between Iran and the United States, the United Kingdom, China, France, Germany and Russia (the “E3/EU+3”). Under the Iran Nuclear Deal, confirmation by the IAEA that Iran has fulfilled certain requirements is referred to as “Implementation Day”, and triggers the lifting of a series of nuclear-related sanctions imposed by the European Union, the United States and the U.N. Security Council. Although Canada is not a party to the Iran Nuclear Deal and has its own set of sanctions against Iran, the Canadian government has announced its intention of easing its sanctions against Iran. An easing of sanctions by Canada is likely to occur in the near future, although the exact details or the extent of sanctions relief is yet to be announced. Implementation of the JCPOA and the possible easing of Canadian sanctions will have consequences for Canadian businesses that intend to engage in business with Iran.

The Path Towards Sanctions Relief

On July 14, 2015, the E3/EU+3 countries finalized the Iran Nuclear Deal, the objective of which is to ensure that Iran’s nuclear program is exclusively peaceful.

The day of conclusion of the negotiations of the Iran Nuclear Deal, also known as “Finalisation Day”, represented the first out of five steps in the sequence of actions required before the U.N. Security Council, U.S. and EU would relieve certain economic sanctions. The second step, known as “Adoption Day”, occurred on October 18, 2015, when the U.N. Security Council adopted the Iran Nuclear Deal by resolution. Iran then began taking the steps necessary to implement its JCPOA commitments, which included removing thousands of centrifuges, reducing its enriched uranium stockpile to 300 kilograms and redesigning the heavy water research reactor in Arak. A vital step towards the completion of Iran’s key commitments occurred on December 28, 2015, when Iran sent a shipment containing almost all of its low-enriched uranium materials to Russia, in accordance with the JCPOA.

The third and most recent milestone occurred on January 16, 2016, which marked Implementation Day, and coincided with the process for relief of nuclear-related sanctions. The lifting of the first set of sanctions pursuant to the JCPOA on Implementation Day represents the reconnection of Iran to the global economy, including access to the Swift banking system which facilitates financial transactions, access by Iran to more than $100 billion in assets frozen overseas, and the ability to sell oil and gas on the international market as Iran used to do prior to the nuclear-related sanctions.

The JCPOA will continue to last for 10 years from Adoption Day, during which IAEA inspections will be regularly conducted to ensure Iran’s compliance with its nuclear-related commitments. The fourth step, “Transition Day”, will occur 8 years from Adoption Day or upon delivery of a report from the Director General of the IAEA stating that the IAEA has reached the broader conclusion that all nuclear material in Iran remains in peaceful activities, whichever is earlier. Finally, 10 years after the Adoption Day, in accordance with the terms of the U.N. Security Council resolution endorsing the Iran Nuclear Deal, the U.N. Security Council will no longer be seized of the Iran nuclear issue, provided that the provisions of the council’s previous resolutions have not been reinstated. It shall be noted that, at anytime before this fifth step, known as “Termination Day”, the JCPOA provides for sanctions to be reintroduced should Iran not comply with its commitments, a concept known as snapback.

Sanctions Relief: 5 Key Points for Canadian Businesses

Canada is not a part of the E3/EU+3 and is therefore not bound by the Iran Nuclear Deal. Canada has enacted its own set of sanctions against Iran in addition to implementing the U.N. nuclear-related sanctions through domestic regulations. As a result, Canada currently has two sets of regulations that impose Iran-related sanctions: those that reflect the U.N. regime and its own set of Canada-specific sanctions.

1. U.N. sanctions have been lifted by the U.N. Security Council but additional Canadian Government action is required to effect the lifting of those sanctions under Canadian law

Since 2006, the U.N. Security Council had imposed four rounds of nuclear-related sanctions against Iran that included, among other restrictions, a prohibition on the export to Iran of certain items, materials, equipment, goods and technology which could contribute to Iran's uranium enrichment-related, reprocessing or heavy water-related activities, or to the development of nuclear weapon delivery systems. In response, Canada enacted the Regulations Implementing the United Nations Resolutions on Iran (the “Regulations on U.N. Resolutions”) pursuant to the United Nations Act1 to enable the measures set out in the U.N. Security Council resolutions to be applied within Canada. Pursuant to the Iran Nuclear Deal, the U.N. sanctions have been lifted by the U.N. Security Council, although certain specific restrictions, such as those relating to the transfer of proliferation sensitive goods, will continue to apply. Additional action by the Canadian Government is needed before these sanctions are formally lifted by Canada. As a result, at the time of preparation of this brief, the sanctions imposed by the Regulations on U.N. Resolutions remain in force in Canada pending the expected termination of these sanctions by the Canadian Government.  

2. For now, the Canada-specific economic sanctions against Iran remain in force

In 2010, the Canadian Government enacted its own regime of sanctions pursuant to the Special Economic Measures Act2 (“SEMA”). The Special Economic Measures (Iran) Regulations3 (the “Regulations”) sanction a broad range of Iran-related activities and are applicable to any person in Canada or any Canadian outside Canada. The sanctioned activities include the following:

  • dealing in the property of specific designated persons listed in the Regulations, entering or facilitating any such transactions, making any goods available to such designated persons or providing any financial or financial-related services to the benefit of such persons;
  • exporting, selling, supplying or shipping goods to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran, subject to certain exemptions;
  • transferring, providing or communicating to Iran or any person in Iran any technical data related to specific goods identified under the Regulations, and any technical data required for the manufacture, use or maintenance of arms and related material, the refining of oil or the liquefaction of natural gas, the production of petrochemicals, the building, maintenance or refitting of ships, the transportation or storage of crude oil, or petroleum or petrochemical products, drilling and mineral surveying and exploration, or the processing, storing or handling of liquid natural gas;
  • importing, purchasing, acquiring, shipping or transhipping any goods that are exported, supplied or shipped from Iran after May 29, 2013, whether the goods originated in Iran or elsewhere, subject to certain exemptions;
  • providing or acquiring marketing services, or any financial or other services in respect of the import, purchase, acquisition or shipment of natural gas, crude oil, or any petroleum or petrochemical products from Iran;
  • providing or acquiring financial services to allow an Iranian financial institution (or a branch, subsidiary or office) to be established in Canada, or vice versa;
  • conducting any financial transaction with Iran, subject to certain exemptions;
  • making an investment in an entity in Iran;
  • providing or acquiring insurance and reinsurance to, from or for the benefit of, or on the direction or order of, Iran or any entity in Iran;
  • establishing correspondent banking relationships with Iranian financial institutions, or purchasing any debt from the government of Iran;
  • providing a vessel owned or controlled by, or operating on behalf of the Islamic Republic of Iran Shipping Lines (IRISL) with services for the vessel's operation or maintenance and providing any flagging or classification services to Iranian oil tankers or cargo vessels.

Exemptions to these sanctions apply in certain, but limited, circumstances, including for the provision of food, medicine and medical supplies falling under one of the categories specified in the Regulations.

In addition to certain exemptions, the SEMA also provides for a separate Special Economic Measures (Iran) Permit Authorization Order4 that authorizes the Minister of Foreign Affairs to issue to any person in Canada or any Canadian outside Canada a permit to carry out a specified activity or transaction that is restricted or prohibited under the Regulations. The issuance of a permit is at the discretion of the Minister, who may also impose such terms and conditions as are in the opinion of the Minister consistent with the SEMA and the Regulations. While in some circumstances permits have been issued to allow for certain financial and other transactions that otherwise would be prohibited by the sanctions, there are no formalized procedures or timelines for permit applications and issuance. In many cases, months or even years have passed between the submission of a permit application and the grant of a permit.

3. The Canadian Government has expressed its intention to ease sanctions on Iran and has shown signs of openness to renewing diplomatic relations with Iran

Given that diplomatic relations between the two countries have been suspended since 2012, it remains to be seen to what extent the Canadian government will re-engage with Iran. Following Implementation Day, Canada’s Foreign Affairs Minister Stéphane Dion noted that Canadian companies would be at a disadvantage if the Canadian government maintains the sanctions against Iran. More recently, Mr. Dion announced that the government plans to lift the Canadian economic sanctions against Iran without specifying the extent of sanctions relief and whether or not it will affect both sanctions imposed pursuant to the U.N. regime and Canada-specific sanctions. This new approach taken by the Canadian government is in line with the pledge that Canada’s newly-elected Prime Minister Justin Trudeau made during his elections campaign to reopen Canada’s embassy in Iran and to re-establish diplomatic relations with the country. While at the time of preparation of this brief, no formal date or specific details have been announced by the Canadian Government for the lifting of the sanctions, it appears that the government intends to move ahead rapidly towards easing sanctions against Iran.  

4. U.S. nuclear-related sanctions continue to apply to U.S. persons but Canadian subsidiaries of U.S. entities can benefit from certain lifted restrictions

Under the Iran Nuclear Deal, the U.S. commits to remove what is referred to as “secondary” nuclear-related sanctions, meaning its nuclear-related sanctions against Iran directed towards “non-U.S. persons”. As a result, U.S. nuclear-related sanctions continue to apply to “U.S. persons”, which term, for the purposes of the JCPOA, refers to: (i) any U.S. citizen, permanent resident alien, entity organised under U.S. laws or any jurisdiction within the U.S., or any person in the U.S. (including foreign branches), and (ii) any entity owned or controlled by a U.S. person. Therefore, a non-U.S. entity is considered to be a U.S. person if it is “owned or controlled” by a U.S. person, which would be the case if the U.S. person: (a) holds a 50 percent or greater equity interest by vote or value in the entity; (b) holds a majority of seats on the board of directors of the entity; or (c) otherwise controls the actions, policies, or personnel decisions of the entity. That being said, the JCPOA includes an additional commitment by the U.S., which has paved the way for specific exceptions from nuclear-related sanctions for foreign subsidiaries of U.S. persons.

Under the JCPOA, the U.S. has further committed to license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with the JCPOA. To abide by this commitment, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued a general license which allows foreign subsidiaries of U.S. persons to engage in certain authorized transactions with Iran.5 Once the Canadian sanctions are lifted, these changes will present additional opportunities for Canadian subsidiaries of U.S. entities when compared with their peers organized under U.S. laws. However, given the complexity of the sanctions regimes of both countries, businesses must proceed with caution and are advised to seek specific Canadian and U.S. legal advice to ensure that their Iran-related activities are compliant with both sets of laws. Moreover, U.S. parents of such entities, their employees and related entities must take necessary precautions to ensure that they do not unwittingly breach U.S. and Canadian sanctions laws through their subsidiary’s involvement in Iran-related transactions.  

5. Canadian businesses interested in doing business with Iran should closely monitor financial and insurance services providers’ changing policies

While Canada’s Iran-related sanctions allow for certain limited exemptions and exceptional permits to engage in transactions with Iran, many financial and insurance service providers have favored a cautious approach to compliance and refuse to process payments or offer support services for such transactions. The broad application of the U.S. and E.U. financial sanctions was a primary motivator underlying this approach. Following the lifting of most such sanctions since Implementation Day, the potential for increased trade and financial transactions depends largely on the willingness of banks and insurance providers to re-engage with Iran, to re-establish trade finance links and to facilitate processing of payments. It is expected that certain institutions will continue to act cautiously with respect to Iran-related transactions and perhaps continue to apply their existing internal policies to avoid even those transactions that are permitted by Canadian laws. Moreover, the possibility of a snapback of the E.U., U.S., and U.N. Security Council resolutions pursuant to the Iran Nuclear Deal may further motivate this cautious approach. At present, it is uncertain whether and how financial and insurance services providers will adjust to the new realities associated with Implementation Day and the potential easing of Canadian sanctions against Iran.

What’s next for business activities?

In the long term, the Iran Nuclear Deal is a major milestone for the Iranian and global economy, with the potential for far-reaching economic and political ramifications. The reopening to the West of the Iranian market, with some 80 million people and an annual output of $400 billion, could provide major business opportunities. After a decade of economic and financial sanctions, the lifting of the sanctions will allow banks to re-engage in financial activities with Iran and foreign companies to respond to the Iranian demand for goods and services and the modernization of infrastructure. Iran also provides interesting opportunities for Canadian businesses, as many of the goods and services offered by Canadian businesses, including those active in the natural resources, aerospace, pharmaceutical, automotive, technology and innovation sectors, are likely to be of interest to Iranian partners. However, for the time being, given that Canadian sanctions and certain other sanctions imposed by Canada’s peers remain in place, Canadian businesses wishing to enter the Iranian market or deal with Iranian business partners should proceed with caution and carefully evaluate the legal and business risks of their specific activities.

Could Iran become the next market for your business activities?


1 R.S.C., 1985, c. U-2.

2 S.C. 1992, c. 17

3 SOR/2010-165

4 SOR/2010-166

5 General License H: Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person, Iranian Transactions and Sanctions Regulations 31 C.F.R. Part 560 (the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC)).

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