Monday, June 6, 2016

Financial Services to Iran? – Why it is so difficult to lift sanctions

Iran is back in the international business community. We all know this since last summer (July 14, 2015 – to be precise), when Iran has signed a Joint Comprehensive Plan of Action (JCPOA) with the UN, U.S., and EU.

But is Iran really back? Have sanctions really been abolished? One way to find answers is to go through the agreements and implementing U.S. and EU legislations.

Selling yes / Paying no

Let’s say, you want to export to Iran. You must obviously be allowed to ship your stuff to Iran. Let’s assume this is the case. Then, you will only do this if you can get paid. And this is where the trouble starts and financial sanctions kick in.

Now, let’s further assume that you are a European bank. In theory, it is easy to establish whether you can provide financial services to Iran: As you are subject to the European regulator, you simply look at the most recent version of Regulation 267-2012 concerning restrictive measures against Iran, currently the version dated April 16, 2016.

Here, you face a first problem: You basically want to be sure that the type of financial service you want to provide is not prohibited by the EU. Why is that so complicated to establish? It is simply because the EU Regulation tells you what is forbidden but not what is allowed. Confirming something that doesn’t exist is always as hassle in the legal business. The reason is that your response would require the interpretation that your financial service to Iran is allowed because it is not forbidden under current EU legislation. Because the topic is complex and many banks have made bad experiences with sanctions in the recent past, I wish you good luck for getting this confirmation from your lawyer!

A second problem is my assumption that a European bank applies only European sanctions. Regrettably, this is only partly true. In fact, the U.S. regulator could see things differently and impose U.S. sanctions on any (U.S. or foreign bank) operating in the U.S. As every international bank works with USD and/or in the U.S., nobody wants to risk trouble with U.S. authorities. This is why many European banks, in practice, not only respect European, but also self-imposed U.S. sanctions. First, this doubles your work as need to go through U.S. sanctions legislation as well. Second, the definitions of what is (no more) sanctioned are not the same in Europe and the U.S.

EU Sanctions to be lifted

Here is what the EU has promised to lift:

  • Financial, banking, and insurance measures (transfer of funds between the EU and Iran, opening of representative offices, subsidiaries, or joint ventures in Iran/the EU by EU/Iranian banks or financial institutions, correspondent banking relationships, insurance and re-insurance for Iranian entities, financial messaging services to Iranian entities, EU member states’ commitment to provide financial support for trade with Iran (export credits, guarantees, insurance, etc.), and sale or purchase of public guaranteed bonds to and from Iran)
  • Oil, gas, and petrochemical sectors (import of Iranian crude oil and petroleum products, sale of equipment and technology, and financing to the oil and gas sector)
  • Shipping, shipbuilding, and transport sectors (sale of naval equipment and technology, access to European airports for Iranian carriers, cessation of inspection and seizure of cargoes from Iran, provision of bunkering or ship supply services)
  • Gold, other precious metals, banknotes, and coinage
  • Nuclear proliferation-related measures
  • Metals
  • Software
  • Arms
  • Asset freeze and visa ban on listed persons, entities, and bodies

To see which sanctions still remain in place today, the consolidated version of EU Regulation 267-2012 of April 16, 2016 is a good starting point.

U.S. Sanctions to be lifted

U.S. authorities have made similar commitments:

  • Financial and banking measures (lifting of sanctions on Iranian individuals and entities, lifting of sanctions on the Iranian Rial, provision of U.S. banknotes to the Government of Iran, transfer of Iranian revenue held abroad, possibility to purchase Iranian sovereign debt, and the capacity to provide financial messaging services to Iranian financial institutions)
  • Insurance measures (insurance to Iranian entities)
  • Energy and petrochemical sectors (lifting sanctions on Iranian crude oil sales, petrochemical products, and natural gas, possibility to provide investment, technological, and technical expertise)
  • Shipping, shipbuilding, and port sectors
  • Gold and other precious metals
  • Software and metals
  • Automotive sector
  • Removal of Iranian persons and entities from U.S. sanctions listings
  • Nuclear proliferation-related measures (lifting of sanctions linked to the mining, production, or transportation of uranium)

To U.S. Department of the Treasury has summed up the current status of sanctions lifting in a guidance paper dated January 16, 2016, available here.

The Joint Comprehensive Plan of Action (JCPOA)

As a background, the above commitments from the EU and the U.S. have been fixed in the Joint Comprehensive Plan of Action, which the UN Security Council has endorsed, on July 20, 2015. The goal of the JCPOA is to promote and facilitate the development of normal economic and trade contacts and cooperation with Iran.

On Iran’s side, the Government

  • reaffirms that under no circumstances will Iran ever seek, develop or acquire any nuclear weapons;
  • agrees to limit its uranium enrichment and uranium enrichment related activities including R&D activities to a maximum uranium enrichment of 3.67 % for 15 years;
  • engages to implement the roadmap agreed upon with the IAEA, especially with regards to the new heavy water research reactor in Arak;
  • shall allow the IAEA to monitor its nuclear commitments.

In return, the international community commits to lift sanctions as outlined above.

A look at the implementation plan of the JCPOA shows that the topic will stay with us for some time: The IAEA is granted 8 years until it shall reach the broader conclusion that all nuclear material in Iran remains in peaceful activities and the UN Security Council is granted additional two years to fully terminate the sanctions lifting process.