Iran Nuclear Deal’s Final Hurdle Is Lifting Terrorism Sanctions on Revolutionary Guards

The effort to revive the 2015 nuclear deal agreement now hinges on perhaps the most politically sensitive issue in the negotiations: whether to remove the U.S. terrorism designation for Iran’s elite Revolutionary Guards, the country’s powerful security force, diplomats said.

The issue is galvanizing opposition to the nuclear deal in Washington and among Middle East allies such as Israel, where the government issued stinging public criticism of any attempt to remove the terrorism designation of the Islamic Revolutionary Guard Corps.

Senior U.S. officials say a failure to find a compromise with Iran on the issue quickly could cause a breakdown in negotiations that—over almost a year—have resolved nearly every other disagreement.

The U.S. has accused the Guard of killing hundreds of Americans, while its elite Quds Force has arranged weapons and support for proxy forces throughout the region and for pro-Iranian groups that fought in Syria. The Guard has long faced U.S. sanctions for its ballistic-missiles programs and alleged human-rights violations and was placed on the counterterror sanctions list in 2017.

Those backing compromise argued that other sanctions on the Guard would still keep foreign companies away from dealing with Guard-linked Iranian firms, damping the economic benefits of any nuclear deal for Iran. Opponents argue the foreign terror organization listing is a necessary, punitive deterrent.

In arguing for lifting the terror sanctions, U.S. officials have said the threat posed by the Guard and other terrorist-listed entities would be much worse if Iran gets nuclear weapons. Iran, which says its nuclear program is peaceful, is currently weeks away from having enough highly enriched uranium for a bomb, according to the U.N. atomic agency.

The divide over the Guard’s terrorism designation comes at a critical moment in discussions about the steps Washington and Tehran will take to comply again with a deal that the U.S. withdrew from under former President Donald Trump and that Iran has since breached with a massive expansion of its nuclear work. The deal lifted most international sanctions on Iran in exchange for tight but temporary restrictions on its nuclear program.

President Biden believes the U.S. should now work to resolve the issue, U.S. officials said, given that Tehran’s breakout time to amass enough nuclear fuel for a bomb was significantly reduced after the U.S. withdrew from the agreement under the Trump administration.

The view among Mr. Biden and many of his top advisers is that reaching a deal with Iran now and then improving upon the agreement later is a better option than waiting, these officials said. The White House also views an agreement restraining Iran’s nuclear program as key to Middle East stability, allowing the U.S. to focus on China and Russia. And these U.S. officials argue that withdrawing from the 2015 deal didn’t yield positive results.

“Not only has Iran’s nuclear program advanced, but their behavior in the region and beyond has gotten more aggressive, including by the Islamic Revolutionary Guard,” White House press secretary Jen Psaki said last week. “So the notion that the actions of the past administration pulling out of the Iran nuclear deal has cut down on the actions or the escalatory behavior of the [Guard] is inaccurate.”

According to people involved in the talks, the American offer would remove the Guard from the U.S. list of Foreign Terrorist Organizations if Iran commits to rein in its regional aggression and refrains from targeting Americans. If Iran doesn’t abide by the agreement, the listing could be reimposed.

Iran, which refuses to negotiate directly with Washington, hasn’t yet responded, creating a stalemate that senior U.S. officials say could imperil a deal.

The Guard has complicated the talks by claiming responsibility for a missile attack this month from Iran on northern Iraq, which the force said targeted an Israeli compound but landed near a new U.S. consulate under construction.

In a televised new-year’s speech on Monday, Iranian Supreme Leader Ayatollah Ali Khamenei, who has the final say on most important strategic issues, said Iran should continue pursuing the nuclear talks.

“Of course, I am not saying stop pursuing removal of the sanctions…The principle is to run the country in a way that the sanctions cannot hit the economy substantially.”

The issue of the Guard’s terrorism designation has haunted the negotiations since they started last spring.

According to people close to the talks, the U.S. team dangled the possibility of lifting the Guard’s terrorism designation last spring with the approval of some in Washington. At the time, there were also strings attached. However, the U.S. team pulled back the offer over senior administration concerns.

Now, Washington is behind the offer to lift the terror designation if Iran meets its conditions, recognizing that without that step, Tehran may walk away from a deal, U.S. officials say. But they also say there is little room for negotiation on the conditions Iran must accept around the offer.

The Guard designation highlights the crosscurrents facing the Biden administration’s efforts to revive the nuclear deal.

Iran has wanted the Biden administration to lift terrorism, human-rights and other sanctions on it that aren’t related to its nuclear program. U.S. allies in the region, who are already nervous about a nuclear deal that doesn’t permanently constrain Iran’s nuclear work, fear that if Washington lifts the terror sanctions on the Guard, it will embolden Iran-backed proxies, such as Hezbollah in Lebanon and the Houthis in Yemen.

“We are very concerned about the United States’ intention to give in to Iran’s outrageous demand and remove the IRGC from the list of terrorist organizations,” Israeli Prime Minister Naftali Bennett said Sunday, adding that Washington seemed willing to agree to a deal with Iran “at almost any cost.”

The Guard listing was part of a series of moves by the Trump administration to list Iranian people and entities under terror sanctions. Advocates said the moves would make it difficult for the next administration to restore the nuclear pact. It was the first time Washington had designated an element of a foreign state a terrorist entity.

Critical to the argument over the Guard is the economic impact it would have. The counterterror sanctions heighten the potential criminal liability for companies and people that do business with the group, said Mark Dubowitz, chief executive officer of the Foundation for Defense of Democracies, which opposed the 2015 nuclear deal.

Mr. Dubowitz says delisting the Guard would also make it far harder for American victims of Iran-sponsored terrorism to recover $50 billion in outstanding judgments against Iran.

Supporters of the nuclear deal argue that the terrorism sanctions alone have little economic effect and have done nothing to curtail the Guards’ regional threat.

“U.S. insistence on holding on to a superfluous sanctions that has failed to make any difference in the IRGC’s behavior is as absurd as Iran’s insistence on lifting a designation that would do nothing to make the IRGC less radioactive for multinational firms,” said Ali Vaez, Iran project director for the International Crisis Group, a conflict-resolution organization that receives funding from governments and foundations.