Six compliance lessons from the Iran nuclear sanctions deal

 On July 14, 2015, the so-called E3/EU+3 group* and the Islamic Republic of Iran announced their agreement on a Joint Comprehensive Plan of Action (JCPOA) for the nuclear program of Iran. The E3/EU+3 group, also known as the G%+1 consists of the five permanent states members of the United Nations Security Council (China, France, Russian Federation, United Kingdom, and the United States), plus Germany and the EU High Representative for Foreign Affairs and Security Policy.

The agreement was the outcome of two years of negotiations with the aim to roll back sanctions in a defined timeframe. The action plan includes details of Iranian government commitments to reduce the stockpile of uranium and dismantle nuclear facilities as well as procedures for inspections, monitoring, and verification of compliance and measures to repeal United Nations (UN) sanctions.

On Jan. 16, 2016 (Implementation Day), the International Atomic Energy Agency (IAEA) confirmed in a report presented by its Director-General Yukiya Amano, that the Iranian government had fulfilled its first commitments on the dismantling of its nuclear program (at least its military component) specified by the Annex V of the JCPOA. This was the start to all nuclear-related UN Security Council sanctions as well a part of the EU and U.S. sanctions being lifted.

Over the next eight years, further steps will be taken towards a complete removal of sanctions. On Transition Day, in October 2023 or earlier, the remaining nuclear-related sanctions or ballistic missile restrictions will be lifted provided that the IAEA has confirmed that all nuclear material in Iran is used for peaceful purposes only. On Termination Day, in October 2025, the UNSC will conclude its consideration of the Iranian nuclear issue.

For those compliance officers watching Iran closely, and especially within companies considering doing business with Iran, what does all of this mean?

Interesting market potential
The JCPOA and the first lifting of sanctions has triggered a wave of enthusiasm and optimism in the world economic community. Iran is the biggest market to join the world trade system since Russia after the breakdown of the Union of Soviet Socialist Republics more than 20 years ago. Iran is a country with a large and well-educated population of over 80 million people, rich in diverse resources and in desperate need of significant investment. For many companies, this is a once-in-a-lifetime opportunity.

Trade promotion authorities of various countries have started setting up trade missions in Iran. Contacts between foreign and Iranian companies have been established or reestablish in the case of companies that had been forced to leave the country after the tightening of the international sanctions in 2012. We read reports about mega-deals already signed.

Difficult environment
However, uncertainty—which is probably the worst enemy of business—still remains. Even though a broad range of sanctions has been lifted, an important part is still in force. Since mid-January, the EU and the United States have formally lifted important elements of their previously enforced strict nuclear-related sanctions. But the non-nuclear related sanctions, intended to punish Iran for violating human rights or being involved in terrorism acts, are still in place. Both the EU and the US have also removed numerous Iranian entities (individuals, companies, banks) involved in oil, gas, shipping, or financial activities from their Specially Designated Parties/Nationals Lists (sanction lists).

The EU has lifted almost all of their sanctions and restrictions but maintain the prohibition to sell, supply, transfer, export or procure, directly or indirectly, goods and technology contained in the Missile Technology Control Regime list under Annex III of Council Regulation 267/2012 and related technical and financial services, and license requirements for specific items (such as items contained in the Nuclear Supplier Group list Annex I or goods inconsistent with the JCPOA and listed in Annex II) or raw materials and software described in Annex VIIA and B of Council Regulation 267/2012.

The United States has lifted its secondary (or extraterritorial) sanctions, and therefore no longer prevent non-US companies from trading with Iranian entities. Non-US subsidiaries of US enterprises, or companies controlled or owned by a “U.S. person” can now engage in trade with Iranian entities, thanks to the new general license H issued by the Office of Foreign Assets Control (OFAC).

On the other hand, primary sanctions continue to be in force, which—amongst other challenges—prohibits the processing of any payments that are linked to Iranian transactions. This forbids any US-dollar payments for transactions with a connection to the Iran. This also applies if the transactions themselves are not in breach of sanctions. It also prohibits any involvement of “US persons” in any trade with the Iran. Only a limited range of businesses (import of Iranian foodstuffs and carpets into US territory, export of commercial passenger aircrafts and related services) are exempted.

Financial institutions
While these primary sanctions do not prevent banks outside the United States from processing transactions in other currencies, the reality is that most banks are deeply concerned that they may unwittingly breach U.S. sanctions and face huge fines. Every bank has still in mind the case of BNP Paribas, sentenced to a $9 billion fine for having financed transactions with Iranian entities in U.S. dollars.

As most major banks have activities in the United States and employ U.S. citizens, they have to be very careful in their transactions with Iranian parties. Many currently feel the benefits are not worth the risks. Thus, they tend to reject trade finance deals with Iranian connections out of fear of breaching U.S. sanctions, even if these deals are in non-U.S. currency. Companies and banks are also worried that the view of the U.S. Treasury Department could be different from the view of American prosecutors and financial regulators (as the case of BNP Paribas has shown).

Difficulties remain on the Iranian side as well. Iranian enterprises struggle to make payments to companies abroad due to the reluctance of many banks to deal with Iranian banks. The Iranian banking system is outdated, much less regulated and much less transparent than its Western counterparts. Iranian banks are weighed down by an accumulation of bad debts, mainly as a result of investments in real estate that went sour after the tightening of sanctions in 2011-2012 and the end to the oil boom. Useful banking tools, such as stress tests, stimulus packages, and quantitative easing cannot be used by the Iranian banking system to restore solvency.

Sanctions lists
Several Iranian entities remain on the sanction lists of the UNSC, the EU, or the United States. It is strictly forbidden, or there are serious restrictions, to deal with these listed persons and companies. A famous example is the Islamic Revolutionary Guard Corps (IRGC), a branch of Iran’s armed forces with extensive commercial and banking activities. It is often rather difficult to ascertain who the owner of a given Iranian company is. However, it is mandatory for any Western company that wants to do business with Iran to screen all trading partners and intermediaries in order to be compliant. In fact, banks also ask their clients to conduct a thorough due diligence investigation on their Iranian partners and service providers.

Moreover, the Financial Action Task Force (FATF) still considers Iran a country that supports terrorism. Therefore, financial institutions have to pay special attention to business relationships and transactions with Iranian companies to avoid being accused of money laundering or breaching anti-terrorism laws.

“Snap back”
The willingness of the Iranian government to abide by its commitments under the JCPOA is also uncertain. Conservative forces that oppose the agreement remain strong. The possibility that the Iran may not fulfill its treaty obligations has been foreseen by the JCPOA. In this case the UN will reintroduce the sanctions within 65 days. This is called the “snap back.”

Investors and trading companies will not be condemned for trade agreements they have signed in the meantime retroactively, but they will probably have to leave the country again. Nevertheless, the interpretation of this mechanism by the United States and EU authorities is still unclear. Indeed, in the light of U.S. FAQ M.4., it appears that there is still a chance that sanctions will apply to contracts signed prior to “snap back”. (“The JCPOA does not grandfather contracts signed prior to snapback”). It is not known how early authorities would be aware of an imminent “snap back”, how quickly they would pass on this information, and how much time companies would be allowed to disengage from Iran. As a consequence, financial institutions are still very cautious in financing trade with and investments in Iran.

So, when is the right time to get back into business with Iran? Now? Or should companies wait a little longer? The messages sent to the business community by various governments are mixed at best, but it is still necessary to remain cautious.

While it is true that many of the sanctions imposed by the EU and United States have been lifted, significant U.S. sanctions still remain in place. And US sanctions are characterized by a lack of clarity. This constrains a safe conduct of business. It should also be remembered that other countries, such as Australia, Canada, and Japan still have sanctions against Iran in place. This means that a large-scale return to full trade with Iran is still a long way off. It will take some time before trade with Iran can be conducted safely and smoothly.

In the meantime, you should make inquiries with your bank to ensure payments are accepted from your trading partners. U.S. banks cannot be involved with Iranian parties. Huge international non-U.S. banks, mostly Western banks, will probably be reluctant to do business with Iranian entities for a certain time yet. Smaller banks, which may not have any activities in the United States and do not hire U.S. staff, are probably more willing to finance your business activities. But they have to be cautious about other countries’ sanctions, too, and screen their Iranian counterparts very carefully. This means that non-EU, non-U.S., non-Western banks are in a much more advantageous position, and can probably be more easy to deal with.

Furthermore, you should buy into global trade management software that enables you to access critical information such as sanction lists, automate transactions, gain control, and compliance.