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Second Level Sanctions: State Divestiture and Contracting Statutes Targeting Iran Post-Nuclear Deal

I recently discussed the (limited) effect sanctions relief will have for U.S. companies in the wake of Iran successfully completing its obligations under the Joint Comprehensive Plan of Action (JCPOA), otherwise known as the Iran nuclear deal.

Second Level Sanctions: State Divestiture and Contracting Statutes Targeting Iran Post-Nuclear Deal

With some speculating that the International Atomic Energy Agency (IAEA) could soon deliver its report affirming Iran’s compliance with the deal – and thus marking Implementation Day when sanctions will be lifted – it’s worth considering what other obstacles businesses might run into.

State Divestiture and Contracting Statutes

Aside from the federal government, many states also have enacted their own economic sanctions targeting countries engaging in various forms of contemptible behavior. Generally, those sanctions affect companies engaged in commerce with the target countries either by requiring public money to be divested from those companies (which is intended primarily to ensure that public pensions are not supporting irresponsible governments through foreign direct investment), or to prevent the state and local governments from contracting with those companies so engaged.

Thirty states and the District of Columbia have versions of either divestiture or contracting statutes, or both. Indiana has both: a divestiture statute targeting state sponsors of terrorism as defined by the Department of State (currently only Iran, Syria and the Sudan), and a contracting statute specifically targeting Iran. Indiana enacted the latter in 2012 in response to passage at the federal level of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), which specifically granted to state and local governments the jurisdiction to pass economic sanctions of their own against Iran.

Under the JCPOA, however, the U.S. must remove the sanctions carefully imposed during various administrations, such as those authorized by CISADA. Built into most of the Iran-related sanctions statutes are “waivers” by which the president or the secretary of Treasury can unilaterally limit such sanctions if determined to be “necessary to the national interest.” Presumably the president will exercise such waivers if Iran complies. The JCPOA did not, however, eliminate the provision granting states the authority to enact their own sanctions statutes.

Indiana House Bill 1092

For its part, Indiana is moving to restrict even further federal discretion to affect its divestiture statute. Under current law, mandatory divestment remains in effect until either the secretary of State removes that country from its official list of state sponsors of terrorism, or Congress or the president declares that such divestment interferes with the conduct of foreign policy. If the president makes such determination, therefore, it would nullify Indiana’s divestiture statute.

Indiana House Bill 1092 seeks to eliminate such discretion. If passed, Indiana’s divestiture statute will remain in effect until the country is removed from the list of state sponsors of terrorism. It is unclear whether this amendment is sought in response to the JCPOA. But it is worth noting that, after the JCPOA was reached last summer, Indiana Gov. Mike Pence declared that he would work with the general assembly to bolster Indiana’s state-level sanctions. This could mean that even more severe sanctions (if possible) might be somewhere in the works.

Paragraph 25 and State Level Sanctions

One provision of the JCPOA will undoubtedly ruffle feathers in state assemblies as implementation proceeds, and could also lead to interesting constitutional questions about sovereignty between the state and federal levels. Paragraph 25 states:

“If a law at the state or local level in the United States is preventing the implementation of the sanctions lifting as specified in this JCPOA, the United States will take appropriate steps, taking into account all available authorities, with a view to achieving such implementation. The United States will actively encourage officials at the state or local level to take into account the changes in the U.S. policy reflected in the lifting of sanctions under this JCPOA and to refrain from actions inconsistent with this change in policy.”

While sanctions relief in the agreement does not specifically obligate the U.S. to eliminate state-level sanctions (indeed leaving in place the federal provisions authorizing such sanctions), how will Iran respond if states maintain or expand them? And how much effort must the executive branch exert to “actively encourage” state and local officials? Even though the court generally sides with the executive on the scope of its foreign policy power, the JCPOA is not a treaty, which, as federal law, would obviously trump state law. If someone challenged the constitutionality of these state-level sanctions vis-a-vis the JCPOA, the court might have to decide between its commitment to federalism and the broad power over foreign affairs the executive branch enjoys.

Bottom Line for Businesses

As stated in my previous post, not much will change after Implementation Day. Most U.S. businesses and their foreign concerns will still be constrained by U.S. Iran sanctions. There will, however, be some opportunities in the civilian aerospace industry – or for aspiring entrepreneurs in the carpet and pistachio markets. The notable takeaway for businesses is that there might continue to be barriers to transacting with Iran if and when comprehensive sanctions relief materializes in subsequent years. That is especially true if your company often receives contracts from state and local governments or actively seeks investment from public pensions.

Read “Could Kentucky’s Economy Soar with the Iran Nuclear Deal? How One Important Kentucky Industry Could Benefit From the Lifting of Sanctions” on the BGD blog here.

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