The key barrier for companies looking to do business in Iran following the much heralded sanctions relief of Implementation Day is the lack of access to finance, largely caused by the remaining US sanctions. Broader concerns surround the application of US sanctions to non-US persons and the need for enhanced due diligence on Iranian counterparties, creating further obstacles to trade.
The US Iran Nuclear Agreement Review Act (INARA), enacted in May 2015, calls for the president to issue a certification to Congress every 90 days regarding Iran's compliance with the Joint Comprehensive Plan of Action (JCPOA). If the president fails to issue the certification, INARA provides an expedited process for re-imposing US-Iran sanctions that were lifted under the JCPOA.
President Trump declined to provide the INARA certification that was due on October 15, 2017. So, what happens now?
Must Congress take action under INARA?
No. Congress is not required under INARA to do anything. Indeed, given the current US political divides, it is entirely possible that Congress will not act. INARA simply provides a means for expedited consideration by Congress of "qualifying legislation" should it be introduced in the 60 calendar days following non-certification.
What is "qualifying legislation" under INARA?
There is only one form of qualifying legislation under INARA – a congressional bill that provides for reinstatement of some or all statutory US-Iran sanctions that were waived under the JCPOA. If legislation is introduced that would add new statutory sanctions, it would not be qualifying legislation and would not benefit from expedited consideration under INARA.
What are the "statutory sanctions" that could be reinstated by qualifying legislation?
Not all of the US-Iran sanctions lifted under the JCPOA were statutory sanctions. Many were imposed by the president – through executive orders – that were revoked when the JCPOA was implemented on January 16, 2016. These sanctions would not be reinstated by qualifying legislation.
Statutory sanctions are those imposed through congressional acts. Under the JCPOA, statutory sanctions were waived – and could be reinstated by qualifying legislation if enacted – under the Iran Sanctions Act of 1996 (as amended), the Iran Threat Reduction and Syria Human Rights Act of 2012, the Iran Freedom and Counter-proliferation Act of 2012, and the National Defense Authorization Act of Fiscal Year 2012 (as amended). Such sanctions include financial and banking-related sanctions, sanctions on the provision of underwriting services, insurance, and reinsurance, sanctions on transactions with Iran's shipping and shipbuilding, energy, and petrochemical sectors, and sanctions on Iran's trade in gold, precious metals, and other metals.
There was no relief from statutory sanctions under the JCPOA for US companies and citizens, so reinstatement of such sanctions would have no direct impact on them. General License H, issued under the JCPOA to authorize US-owned or -controlled foreign entities to engage in certain Iran-related business, would also be unaffected by reinstatement of statutory sanctions, as it was issued by the Treasury Department's Office of Foreign Assets Controls (OFAC)
What does "expedited consideration" mean?
The expedited consideration procedures in INARA include truncated House and Senate committee reviews, limited debate times, and votes on passage immediately after conclusion of debates. In short, INARA provides for fast-track consideration of qualifying legislation so that applicable statutory sanctions can be reinstated quickly.
If Congress does not take action under INARA, does that mean things will stay the same?
INARA does not impose any constraints on what Congress – or the President – can do regarding sanctions on Iran. It is certainly possible that, despite President Trump's failure to certify Iran's compliance with the JCPOA, the status quo will be maintained, but current posturing suggests that change in one form or another is coming.
At any given time, President Trump could decide that US interests are no longer served by abiding by the JCPOA, withdraw all statutory waivers, issue new executive orders mirroring those that were revoked, and remove related OFAC licenses, such as General License H. For its part, Congress could enact legislation outside the INARA process that reinstates statutory sanctions waived under the JCPOA, or that imposes brand new Iran-related sanctions that conflict US commitments under the JCPOA.
Weighing against such actions, of course, is the continuing widespread support for the JCPOA among US allies.
In a recent survey carried out by Clyde & Co, 25% of senior executives of business looking to enter the Iranian market listed the remaining US sanctions as their top concern for doing business in Iran, more than any other category. It is understood that this concern relates predominantly to the impact of those sanctions on financial institutions and dollar transactions and consequently the impact on access to finance and the transfer of funds.
Although there has been significant sanctions relief following Implementation Day, the US sanctions that remain in place are proving a strong disincentive to businesses looking to do business with Iran, and even more so to their financiers. On "Implementation Day" the vast majority of Iran-related EU sanctions and US secondary sanctions were lifted. This means that, broadly, it is permissible for EU persons to trade with Iran subject to certain restrictions including the inability to trade with designated entities. There is also scope for US nationals to legally establish non-US subsidiaries, which would allow US companies to indirectly trade with Iran.
However, US primary sanctions – those US sanctions targeting US persons (both US individuals and entities) – remain in place. This means that virtually all trade, directly or indirectly, with Iran is still prohibited for US persons. The remaining US sanctions are a concern, not because the US sanctions apply directly but due to the uncertainty amongst exporters and their financiers about the consequences of breaching the remaining sanctions.
Access to credit
To date, European tier one banks have so far shown zero appetite for conducting Iran-related business. This means businesses are unable to access credit to fund their business with Iran and in some cases are unable even to use their bank accounts to effect the transfer of funds generated from Iranian business. The extent of the problem is evidenced by 30% of respondents revealing that they were not comfortable talking to their current banks about their appetite to do business with Iran.
The high level of regulation involved is proving too arduous for most banks, coupled with concerns over handling Iran related business. In these conditions, while Iran and the UK are keen to develop trade ties, the banks are preventing such ties from being developed at pace and unless they can be encouraged to process payments relating to Iran the opportunity for such ties will fade and the UK will find itself at the back of the queue.
It is not simply the availability of credit that is affecting potential trade with Iran; getting money out of Iran is also a major problem. The US dollar is the most liquid currency in the world and is therefore used in lots of global businesses contracts, particularly in the energy and commodities areas.
Nearly all US dollar transactions have to clear via the US banking system. If such transactions are linked to Iran-related business, they will be blocked by the US bank and/or potentially place the clearing bank in breach of sanctions.
Therefore US dollars cannot be used for such business, which is a major problem as a large proportion of international companies conduct their business in dollars. The alternative of trading in a different currency is more expensive, as it can often require hedging.
Lack of insurance cover
Insurers are in a similar position to other businesses and the remaining sanctions are negatively impacting their risk-appetite for doing business with Iran. The survey revealed that just 36% of business said they had been able to get insurance cover for their proposed business activities in Iran.
There are however specialist financial providers set up to specifically help UK exporters by providing them with insurance and guarantees to banks to share the risks of providing export finance.
Due diligence concerns
Another concern is that exporters may unwittingly trade with a designated person or entity. The survey revealed that 58% of businesses looking to enter Iran do not feel confident that they know what level of due diligence is required in order to protect their investments and avoid enforcement action from the regulators.
The remaining US sanctions are not the only problem. There are still a significant number of individuals and entities that are listed by the EU/UK and US (including the Islamic Revolutionary Guard Corp which is heavily involved in the Iranian economy). This creates significant compliance challenges as information on counterparties is not as readily available as in other countries. The risks of getting this wrong are substantial so extra caution is required before entering any contracts and businesses are right to be concerned about their due diligence requirements.
Clyde & Co survey
*100 Senior Executives of a range of UK headquartered international firms, with plans to enter Iran, were surveyed.
Clyde & Co conducted the survey at a seminar in London held in conjunction with the London Chamber of Commerce and Industry on the Iran-related sanctions relief. Talks were given by the following:
Rt Hon Jack Straw
Peter Bishop, Deputy Chief Executive, London Chamber of Commerce and Industry (LCCI)
Nicholas Hopton, Head of Mission, British Embassy Tehran