After UN Showdown, INSTEX Can Help Sustain Iran Nuclear Deal

In return for limits to Iran’s nuclear activities under the 2015 agreement, or the Joint Comprehensive Plan of Action (JCPOA), the other side—the United States, the EU/E3 (France, Germany and the UK), China and Russia—were supposed to lift sanctions on the country. The US opted out of this compromise in May 2018 by withdrawing from the JCPOA. By deterring most private sector actors from Iran-related activities, US secondary sanctions have also prevented other JCPOA parties from living up to their end of the deal. In addition to a deep socio-economic crisis within Iran, US sanctions have undermined Iranian people’s access to basic humanitarian goods--and pushed the country to reduce its nuclear commitments. The EU and E3 efforts to protect the JCPOA under these circumstances have offered a grim lesson about the limits of European autonomy in a dollar-dominated world economy. 

When the Trump administration withdrew from the JCPOA, the EU stressed its commitment to ensuring continued sanctions lifting and to upholding the agreement. This determination was also expressed in practical measures. In summer 2018 the EU included the upcoming US sanctions on Iran in the so-called Blocking Regulation, thus banning EU companies from complying with them. In September 2018 the EU and the E3 announced that they would develop a special trade instrument to facilitate European-Iranian trade, including in oil, which was to be targeted by US secondary sanctions.

However, the Trump administration’s obliviousness to the Blocking Regulation soon exposed the absence of an effective enforcement mechanism to enforce it, and in practice US law took priority over EU law in the private sector’s risk assessments. Apparently recognizing their lack of political and economic leverage over US policy, by January 2019 the E3 had reduced the mission of the trade instrument—then named Instrument in Support of Trade Exchanges (INSTEX)— to trade in humanitarian goods.

While its limited focus fell short of previous expectations that the EU could counter or even significantly minimize the negative effects of US sanctions, INSTEX addresses a critical problem created by them. Humanitarian trade, which is in principle exempt from sanctions, has also been hit by the banking sector’s fear of US penalties, leading to a medicine shortage in Iran. In addition to being urgent, addressing this particular area of sanction over-compliance is also practical, as humanitarian trade runs a lower risk of being targeted by US sanctions than other trade areas.

INSTEX seeks to enable the exchange of humanitarian goods or services between Europe and Iran without the transfer of currency, thus minimizing the risk of US penalties. European exporters are to be compensated with funds located in Europe, based on the value commensurate with the value of imports from Iran. INSTEX’ Iranian counterpart, the Special Trade and Finance Instrument (STFI), is similarly tasked to coordinate payments within Iran.

INSTEX can reassure banks and companies through its joint ownership by the E3 and four other European states—Belgium, Denmark, the Netherlands and Norway, as well as Finland and Sweden, which are expected to join soon. In addition to providing a high level of trust in the instrument’s due diligence procedures, governmental ownership raises the threshold for the USA to impose sanctions on INSTEX.

Having processed only one pilot transaction thus far, INSTEX still needs to overcome major obstacles to function as intended. One key challenge is that the value of European exports to Iran exceeds the value of Iranian exports to Europe. Potential solutions to the problem include paying European exporters using Iran’s revenues currently frozen in foreign banks, or offering Iran a loan to buy humanitarian goods. However, the US is seeking to block these options.

The chances of striking a functioning trade balance could also be increased through the expansion of INSTEX to non-European companies, and extension of the INSTEX mandate to non-humanitarian trade that are not targeted by the USA but are impeded by fear of secondary sanctions. While INSTEX is unlikely to deliberately go against US sanctions, the E3 might decide to take further steps to protect is economic sovereignty if the instrument is targeted by the USA.

Currently it might seem that INSTEX is being taken over by political events, in particular the 2020 US presidential elections. Democratic Party victory in the elections could open the door for the US re-entry into the JCPOA, which would appear to make INSTEX less relevant. However, restoring the JCPOA or reaching any new agreements with Iran is dependent on sanctions lifting. This is likely to be difficult given the private sector’s disillusionment with the Obama administration’s previous assurances about the safety of engaging with Iran. INSTEX could help address this problem by providing additional guarantees to risk-averse banks and companies fearing the next U-turn in US policy towards Iran. 

Alternatively, the possibility of Trump’s re-election as US president—or a snapback of UN Security Council sanctions on Iran—could lead to the collapse of the JCPOA. While this can be expected to reduce European commitment to INSTEX, its humanitarian mission should be pursued as a matter of ethical necessity, even without the JCPOA.

Clearly, INSTEX alone cannot save the JCPOA, the future of which essentially depends on US-Iranian relations. INSTEX can nevertheless help maintain the nuclear agreement until, or even after, diplomatic solutions are found. In addition to demonstrating solidarity on the JCPOA and commitment to basic humanitarian principles, INSTEX can also been seen as a test case of a more independent European foreign policy.

Photo: IRNA

As Iran Faces Virus, Trump Admin Fails to Use Swiss Channel to Ease Medical Exports

The report is published in partnership with the European Leadership Network.

Just a few days after Iran announced its first deaths from COVID-19 in February, the Trump administration’s Special Envoy for Iran Brian Hook was asked during a briefing for an update on the Swiss Humanitarian Trade Arrangement (SHTA), a payment channel intended to ease the sale of medicine and medical devices by Swiss companies to Iran. Responding to the question, Hook acknowledged that no further exports had been processed since a pilot sale of $2.55 million of medication a month earlier, but insisted that there were “more transactions coming.”

Two months later, over 6,000 Iranians have lost their lives to COVID-19, and the Swiss channel has yet to process any further transactions. 

Since the Trump administration reimposed secondary sanctions on Iran in November 2018, the Swiss government has worked to establish a dedicated banking channel to ease the export of medical supplies to Iran. Switzerland is the second largest supplier of medicine to Iran after the European Union. While technically exempt from sanctions, the sale of medical supplies has been made more difficult as banks refuse to process Iran-related transactions. In a recent client note, former Director of the US Office of Foreign Asset Control (OFAC) John Smith detailed how “the Trump administration’s maximum pressure campaign has likely dissuaded many companies from exporting medicine and medical devices to Iran that they otherwise could.” 

New data from the Swiss Federal Customs Administration makes clear that the export of medicine to Iran has weakened over the last year. As a result of these disruptions, ordinary Iranians face rising prices and shortages of sorely-needed medication, a situation all the more unacceptable during a global pandemic.

As COVID-19 spread in Iran, the Trump administration faced increased pressure to ease humanitarian trade. A statement organized by the European Leadership Network and The Iran Project and signed by 24 former senior officials from the United States and Europe warned that “failure to provide relief could have significant and long-lasting consequences for the reputation of the United States and Europe among the Iranian people.” But the administration has yet to respond to these calls with any sense of urgency, deflecting questions on humanitarian trade by pointing to the channel “set up through the Swiss to help the Iranian people.”

While Swiss officials originally hoped the payment channel would be ready in February 2019, it took nearly a year to complete negotiations with the Trump administration and launch the framework. Hawkish officials, including John Bolton, saw the channel as an unnecessary concession to Iran. The administration also proceeded with new sanctions designations that complicated implementation of the channel, including a move in September 2019 to impose new sanctions on the Central Bank of Iran that eliminated long-standing exemptions allowing the bank to play a role in humanitarian trade. The Swiss channel was only “finalized” by the US Treasury Department on 27 February, the same day a new general license was issued restoring key humanitarian exemptions for Iran’s central bank. 

The failure to process further transactions through the channel over the last three months is surprising given the reported interest among “dozens” of Swiss companies. But the Trump administration has failed to address two key impediments. 

First, companies wishing to use the channel are faced with extraordinary reporting requirements. European officials have likened these requirements to a “fishing expedition” for information about Iran’s financial sector. Rather than simply revive the arrangement that enabled Swiss entities to sustain sales of medicine to Iran after the Obama administration imposed devastating financial sanctions on Iran, the Trump administration increased the documentation and reporting requirements, demanding unprecedented disclosures by Swiss companies on the financial holdings of the Iranian banks from which they expect to receive payment. Even if Swiss exporters are prepared to overcome these hurdles, the channel is obviously ill-suited as a means to ease trade during a global pandemic when purchases of medical supplies need to be made quickly and reliably. Peter Harrell, who worked on Iran sanctions in the Obama administration, has argued that the Treasury Department ought to “temporarily relax some of the most oversight stringent requirements for this” in light of COVID-19.

Second, the Trump administration apparently failed to ensure that there was sufficient liquidity available to allow Iranian importers to pay their Swiss suppliers, leaving Swiss officials in a lurch. The Central Bank of Iran is believed to maintain CHF 50 million in reserves at Banque de Commerce et de Placements (BCP), the bank which has long played a central role in Swiss-Iran bilateral trade and around which SHTA has been designed. In addition, several Iranian private sector banks also hold funds at BCP. A rough estimate of the combined holdings is CHF 150 million. By comparison, Switzerland’s total exports of pharmaceutical products to Iran in 2019 was just over CHF 150 million.

Iranian authorities are reluctant to draw down these reserves, which would be nearly impossible to replenish while the country remains under “maximum pressure” sanctions. In a revealing interview from last December, Brian Hook suggested that Iran maintains access to just 10 percent of its foreign currency reserves. Notably, Iran’s central bank governor, Abdolnasser Hemmati, has suggested that Iran’s request for an emergency loan from the International Monetary Fund (IMF) could help address liquidity issues facing SHTA, stating that the IMF loan could be paid out via the Swiss channel in order to assuage concerns voiced by the Trump administration over the potential misuse of funds. 

The successful operationalization of SHTA requires Iranian buy-in. Authorities in Tehran will be concerned about funneling critical trade of medical supplies through a channel made unreliable due to precarious access to financial resources. Meanwhile, recent enforcement actions taken against Halkbank in Turkey and the Industrial Bank of Korea—two banks that have historically supported humanitarian trade but which failed to maintain rigorous compliance standards—will test the resolve of executives at BCP. In another warning shot, OFAC last week announced a $7.8 million settlement agreement with Swiss technology firm SITA, which inadvertently used US-based servers to provide baggage handling services to an Iranian airline making it the “the first company to pay a large settlement merely for routing otherwise lawful transactions through U.S. computer servers.”

The troubled launch of the Swiss channel offers a cautionary tale for other countries seeking to ease humanitarian trade with Iran through good faith engagement with the Trump administration. Since November of last year, the South Korean government has been in discussions with the Trump administration over measures that could revive falling humanitarian exports to Iran. In December 2019, Korean pharmaceutical exports to Iran were down 47 percent year-on-year. Recently, Korean authorities announced that they had made some headway and that they are working to establish the Korean Humanitarian Trade Arrangement, an analogue of the Swiss channel that would be built around Woori Bank. 

The Swiss government is advising the Korean government on how to meet the stringent requirements set-forth by officials in Washington. While South Korea is not a major exporter of pharmaceutical products to Iran, it is a former buyer of Iranian oil and Iran maintains significant reserves in the country. One possible solution to the liquidity problems facing SHTA may be to allow Iran’s central bank to draw on reserves held in South Korea in order to make payments to Swiss exporters. In March, Iranian Foreign Ministry Spokesperson Abbas Mousavi complained that the United States was “creating an obstacle for the transfer of Iran’s financial resources into the channel,” and cited an effort to draw “other financial resources in various countries” for use in SHTA. 

Against this backdrop, references made by Trump administration officials to SHTA as evidence of efforts to protect humanitarian trade with Iran have been deceptive, if not deceitful. The Treasury Department’s recent reply to congresswoman Alexandria Occasio-Cortez’s letter warning of sanctions impacts on Iran's COVID-19 response, tellingly omits any reference to the Swiss channel, suggesting that the administration is aware that their failure to operationalize the channel during the COVID-19 crisis undermines voiced commitments to humanitarian trade. 

Swiss officials should be applauded for continuing to pursue operationalization of the channel despite the hurdles put in front of them. They remain confident that further transactions will be made soon and note progress on a solution that would give Iran freer use of its foreign currency reserves. But the Trump administration abjectly failed to ensure its much-touted channel eased Iran’s access to medical supplies at the moment of greatest need for the Iranian people.

Photo: State Department

Treasury Department Makes Unprecedented Iran Sanctions Move

On Thursday, Swiss authorities announced that they had processed a pilot transaction through the Swiss Humanitarian Trade Arrangement (SHTA), a new payment channel that intends to ease the sale of food and medicine to Iran by Swiss companies. Work on this channel began in late 2018 following the Trump administration’s reimposition of secondary sanctions on Iran.

Expectations around the mechanism should be tempered with caution. The Trump administration dragged its feet for over a year before supporting the mechanism, despite clear evidence that sanctions were causing humanitarian harm. Additionally, Iranians might be reluctant to use the mechanism. There are concerns that some of the conditions imposed on the SHTA by the Treasury Department could be used as a part of a “fishing expedition” for information that could be used to interfere with routine trade.

But hidden in the mechanics of SHTA’s initial 2.3 million-euro transaction is an unprecedented provision that could help address growing concerns that the Trump administration’s “maximum pressure” sanctions campaign will be impossible to lift even in the aftermath of new negotiations with Iran.

The relevant provision is hidden in the jargon of a statement issued last October describing Treasury’s framework for SHTA: “Provided that foreign financial institutions commit to implement stringent, enhanced due-diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.”

A press release on the SHTA released by Swiss authorities confirms that the initial transaction was processed on the basis that the Treasury Department “has given the necessary assurances to the Swiss bank involved for this specific transaction.”

Such assurances, when provided in written form, are called “letters of comfort.” This is likely the first ever transaction in which the department addressed the concerns of a foreign financial institution by providing a letter of comfort, despite the fact that the transaction was technically sanctions exempt.

This is highly significant, given that the architects of the Trump administration's Iran policy have spoken publicly about their efforts to build a “sanctions wall.” Building the wall involves creating a web of complex designations related to Iran’s role as a “state sponsor of terrorism, including its terror-financing central bank; its missile program, which is progressing toward an intercontinental ballistic missile; and its human-rights abuses and corruption.” The intention is to heighten the risk perception of banks and businesses in order to keep them from doing business with Iran even if a new deal is stuck.

For those who do want to do business in Iran, this problem first surfaced during the Obama administration. In the months immediately following the implementation of the nuclear deal with Iran, U.S. officials toured Europe and encouraged companies to go ahead with their plans for Iran, and financial institutions to process Iran-related payments on behalf of their clients. But companies found themselves hitting a wall as banks remained reticent to offer the required services.

Bankers were anxious about what was and wasn’t allowed, and made their concerns known at a meeting with Secretary of State John Kerry. But the Obama administration resisted calls from European bankers and officials to provide letters of comfort, relying instead on the technical permissions afforded under sanctions relief and their verbal encouragement.

This approach might have sufficed had more time been available for economic operators to develop a new understanding of the compliance risks emanating from Iran, but the election of President Donald Trump and his campaign promises to discard the Iran nuclear deal cut short any such period of recalibration. Had the Obama administration employed comfort letters, more trade and investment could have been completed in the period between the nuclear deal’s implementation and Trump’s inauguration.

Here, the launch of SHTA establishes an important and hopeful precedent, and may improve the prospects of negotiations toward an end to the U.S.-Iranian standoff. Fears of a “sanctions wall” have contributed to Tehran’s unwillingness to enter any talks. But if Trump or any future president credibly combines quick and decisive sanctions relief with letters of comfort, it would be a game-changer for multinational companies engaged in Iran and the banks on which they rely.

Photo: Wikicommons

An Opportunity in Iran’s Latest Tragedy

Iran has sought international assistance in the investigation of the crash of Ukraine International Airlines Flight 752, which killed all 176 people onboard on Wednesday. But the ongoing tensions between Washington and Tehran threaten to prevent the involvement of American experts in the investigation of what brought down the Boeing 737-800 aircraft.

The U.S. National Transportation Safety Board faces two quandaries. It must determine whether the Trump administration’s sanctions on Iran prohibit engagement with Iranian authorities in the investigation, and whether it is safe to send investigators to the crash site at a time when the two countries are in a heightened state of confrontation.

NTSB experts are widely recognized as among the best crash investigators in the world and they regularly participate in investigations at the behest of foreign governments, under a process outlined in Annex 13 of the Convention on International Civil Aviation.

Boeing Co. has said it is ready “to assist in any way needed,” but the airplane maker, too, must reckon with sanctions restrictions.

American sanctions on Iran require NTSB investigators to procure a license from the Treasury Department in order to work with Iranian counterparts—such clearances can take as long as a year to be issued.

The tragedy presents the Trump administration an opportunity to demonstrate its often-stated goodwill toward the Iranian people by immediately issuing the licenses. In return, the U.S. should seek public assurances about the safety of American experts who would travel to Iran, and for these experts to be provided access to the plane’s black boxes—which Iranian officials are reportedly reluctant to provide. 

Part of this reluctance stems from the fact that Iranian civil aviation officials believe their own efforts to improve the safety of Iran’s airlines have been significantly hampered by the Trump administration’s “maximum pressure” sanctions policy. Boeing’s contracts to sell 100 aircraft to Iranian airlines were cancelled when the U.S. withdrew from the Iran nuclear deal in May 2018—Iranian airlines fly some the oldest aircraft still in service anywhere in the world. The reimposition of secondary sanctions also blocked Iran’s ability to purchase spare parts from U.S. suppliers for its existing fleet, and even prohibited the sale of training manuals and technical documentation.

The International Civil Aviation Organization, a United Nations body, has long gathered evidencedemonstrating that U.S. sanctions hamper the safety of the Iranian aviation industry. A 2010 ICAO Universal Safety Audit found that “Iranian carriers are unable at present to fulfill most requisite ICAO aviation safety and maintenance standards and recommended practices (SARPs)… because they were denied access to updated aircraft and aircraft spare parts and post-sale services around the world.” The rate of passenger fatalities in Iran is 5.5 times higher than in the rest of the world.

As a foreign carrier, the safety of the Ukraine International Airlines flight is unlikely to have been impacted by these sanctions issues. But the death of over 100 Iranian nationals in the crash has compounded the grief for a country where planes all-too-regularly experience catastrophic accidents.

When issuing licenses to enable U.S. participation in the investigation, the Trump administration should also respond to the wider concerns around aviation safety in Iran by issuing licenses for planemakers such as Airbus SE, Boeing and ATR to resume sales of safety-related materials, including flight manuals used in pilot training and schematics used in aircraft maintenance. These limited licenses would in no way undermine the Trump administration’s “maximum pressure” policy, but could generate some trust between American and Iranian authorities seeking to de-escalate tensions.

This would not be the first time that the U.S. has sought space for understanding and cooperation with Iran under tragic circumstances. In the aftermath of the devastating 2003 Bam Earthquake, American search and rescue teams traveled to Iran to provide disaster aid and medical assistance to survivors—without in any way compromising the U.S. position on Iran’s nuclear program.

This is another moment for that kind of cooperation.

Photo: IRNA

New Trump Admin Channel for Iran Humanitarian Trade Comes With a Killer Catch

The Treasury Department has announced that it will operationalize a financial channel to ease humanitarian trade with Iran, after acknowledging to European officials that recent sanctions imposed on the Central Bank of Iran (CBI) risked encumbering trade in food and medicine. 

The channel, which was originally expected to become operational in February 2019, was first was first proposed by the Swiss government in the aftermath of the Trump administration’s reimposition of secondary sanctions on Iran in November of last year.

Switzerland is a leading exporter of pharmaceutical products to Iran. The Swiss government had sought to safeguard its bilateral trade by seeking legal clarity from the Treasury Department on behalf of Swiss banks. But the National Security Council, then led by John Bolton, blocked its operationalization despite support for the channel within the State Department. 

The new announcement expands the scope of the channel to include any American or foreign financial institution engaged in humanitarian trade with Iran. This expanded scope and the timing of the move likely reflect concerns over the impact to humanitarian trade resulting from the Trump administration’s move to designate Iran’s central bank under a terrorism authority. That sanctions designation eliminated a long-standing exemption permitting a role for CBI in trade in food and medicine. 

Over the last few weeks, European multinationals involved in the sale of humanitarian goods to Iran have been scrambling to understand the impact of the new designation on CBI. The Treasury Department failed to issue guidance in the aftermath of the designation to inform changes to compliance policies.

In particular, European companies engaged in the sale of food and pharmaceuticals were unclear as to whether the reliance of their customers on foreign currency allocations made by the Central Bank of Iran constitutes exposure to the new designation. Bourse & Bazaar contacted treasury managers and compliance officers at six European multinational companies in the days following the designation of the central bank. All refused to provide comment, but confirmed that the new sanctions had triggered internal reviews. 

The move to finally launch the humanitarian channel appears to be an attempt to manage the unintended consequences of CBI’s terrorism designation. Over the last few weeks, European officials raised concerns with American counterparts about the impact of humanitarian trade. Speaking on background, a European official confirmed to Bourse & Bazaar that U.S. officials had described the launch of the humanitarian channel as a way to assuage those concerns. 

Under the new framework, financial institutions which accept payments related to the sale of food and medicine to Iran will be permitted to “seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.” For years, European banks have sought “comfort letters” from the Office of Foreign Assets Control (OFAC) for humanitarian trade. It has been OFAC policy not to provide such letters and humanitarian transactions are not eligible for the licensing process due to the exempt nature of the trade. In this regard, the new framework represents a significant shift in policy. 

But the new framework may introduce more problems than it solves. In order to receive such comfort letters, the financial institutions must undertake an enhanced due diligence process, reporting to Treasury “a great deal of information on a monthly basis.” The due diligence requirements go far beyond what has been considered the industry standard process for companies engaged in trade with Iran. Considering the significant costs and administrative burdens of such reporting, the requirement will likely limit the uptake of the new framework to those financial institutions engaged in the greatest volume of humanitarian trade with Iran.

The reporting requirements will also raise concerns among Iranian banks. Among the information requested by the Treasury Department are the “monthly statement balances with the value, currency, and balance date of any account of an Iranian financial institution” held at the foreign bank and used for humanitarian trade. 

Concurrently with its announcement of the new channel, the Treasury Department identified Iran as “a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act.” As Tyler Cullis warned in Bourse & Bazaar in July, this move could independently have a devastating impact on humanitarian trade:

Under the proposed rule, US banks would be required to undertake “special due diligence” with respect to correspondent accounts maintained on behalf of foreign financial institutions. Such “special due diligence” does not require that US banks close the accounts of foreign banks that themselves maintain accounts for Iranian banks so long as such banks do not permit Iran indirect access to the US correspondent account. But US banks are unlikely to narrowly tailor their conduct to the precise nuances of law and will show reluctance to continue banking foreign correspondents that themselves bank Iran. As a result, European banks that maintain accounts on behalf of Iranian financial institutions are likely to take steps to shutter such accounts so as to sustain their own accounts at US banks.

It is unclear whether companies can opt not to seek comfort letters through the new framework. Some financial institutions may prefer to maintain trade without the additional legal clarity as they have done since the reimposition of secondary sanctions last year, relying on the existing general licenses issued by the Treasury Department to permit humanitarian trade.

But the Treasury Department’s pursuit of “unprecedented transparency into humanitarian trade” and its allegations of Iran’s use of “so-called humanitarian trade to evade sanctions and fund its malign activity,” may see Trump administration officials pressure companies to use the new framework, requiring disclosures of sensitive financial information that will be unacceptable to Iranian banks and companies wary of U.S. intentions. The Trump administration’s latest gesture to ease humanitarian trade may end up doing just the opposite.

The Treasury Department’s announcement may be intended to pre-empt next week’s launch of a major report from Human Rights Watch that is expected to show significant failures on the part of the United States to safeguard humanitarian trade in accordance with its own sanctions policies. The administration continues to claim that its “unprecedented economic pressure” is “not directed at the people of Iran.”

Photo: IRNA

Trump Administration May Use Patriot Act to Target Iran Humanitarian Trade

The Trump administration has imposed successive rounds of economic sanctions targeting nearly all productive sectors of Iran’s economy. These sanctions have been imposed with conflicting objectives in mind, up to and including regime change. But a new wave of restrictive measures now under consideration would have the practical effect of totally severing Iran’s economy from Europe, critically undermining humanitarian trade with Iran. Considering Europe’s renewed motivation to inaugurate INSTEX—the special purpose vehicle through which Europe and Iran will facilitate non-sanctioned trade—the Trump administration’s action could undermine months of high-level diplomatic efforts to save the nuclear accord by entirely eviscerating the limited leverage that Europe possesses with respect to Iran moving forward. This is the likely intention.

Section 311 and Iran

Section 311 of the USA Patriot Act—which was enacted in response to the September 11, 2001 terrorist attacks on the United States—provides authority for the Secretary of the Treasury to designate a foreign jurisdiction, institution, class of transactions, or type of account to be of “primary money laundering concern” and thereby requiring US financial institutions to take “special measures” with respect to them. This authority has been used in relation to foreign countries such as Burma, North Korea, and Ukraine, as well as foreign financial institutions such as ABLV Bank, Banco Delta Asia, Bank of Dandong, and the Lebanese Canadian Bank. The “special measures” imposed with respect to each “money laundering concern” can range from certain minimal record-keeping and reporting requirements to a total ban on the maintenance of correspondent or payable-through accounts.       

In November 2011, as part of its own campaign to ramp up the sanctions pressure on Iran, the Obama administration found Iran to be a jurisdiction of primary money laundering concern and proposed the imposition of the fifth special measure pursuant to Section 311. This “special measure” prohibits the opening or maintaining of a correspondent or payable-through account by a US bank for a foreign financial institution if the correspondent account involves Iran in any manner. In addition, the fifth “special measure” requires US banks to apply “special due diligence” with respect to all of their correspondent accounts to ensure that such accounts are not used indirectly to provide services to an Iranian financial institution. 

The proposed rule never took effect during the Obama administration’s tenure, as the growing sanctions pressure on Iran made finalization of the rule superfluous and little more than a bureaucratic headache.  The Obama administration had accomplished the intended purpose of the rule regardless, as Iran’s banking sector was left isolated and ostracized on the global stage—its reputation muddied by the Section 311 finding and the proposed rule. Once negotiations commenced between the US and Iran with respect to Iran’s nuclear program, the Section 311 rule-making was thrust aside—the Obama administration more immediately focused more on how to lift sanctions than how to impose additional ones.

Treasury’s New Move

But Section 311 rule-making appears to be back with a vengeance. The Trump administration is mulling the issuance of a “Final Rule” that would give the Section 311 designation the force of law. In doing so, the administration would impose the fifth special measure with respect to Iran. The administration’s outside enablers are quickly laying the public groundwork for Treasury’s imminent action. The effects could prove dramatic.

The most significant result of such rule-making could well be the total cessation of humanitarian trade with Iran, as those few foreign banks that maintain accounts for non-designated Iranian banks to facilitate legitimate trade with Iran—including humanitarian trade—shutter such accounts in order to avoid the onerous scrutiny of their US correspondents. 

Under the proposed rule, US banks would be required to undertake “special due diligence” with respect to correspondent accounts maintained on behalf of foreign financial institutions. Such “special due diligence” does not require that US banks close the accounts of foreign banks that themselves maintain accounts for Iranian banks so long as such banks do not permit Iran indirect access to the US correspondent account. But US banks are unlikely to narrowly tailor their conduct to the precise nuances of law and will show reluctance to continue banking foreign correspondents that themselves bank Iran. As a result, European banks that maintain accounts on behalf of Iranian financial institutions are likely to take steps to shutter such accounts so as to sustain their own accounts at US banks.

The US Treasury Department is fully aware as to how European banks will react if the proposed rule is finalized, having long used scare tactics to undermine Iran’s banking links to the outside world, so the likely consequences of the proposed rule should be considered the intended ones. This fact provides further evidence that key figures in the Trump administration are seeking to constrict humanitarian trade with Iran, as they seek to foment conflict with Iran or within its borders.

Moreover, no one seriously believes that the proposed Section 311 action will lead Iran to remediation. In fact, the opposite is likely true. When compared to other financial sectors in the developing world, the deficiencies in Iran’s legal regime have often been grossly exaggerated, at times more the consequence of the U.S.’s punishing sanctions than their cause.  As Iran continues to take steps consistent with the Action Plan agreed to with the Financial Action Task Force (FATF), Treasury’s action will have the effect of convincing Iran to end its remediation project before the global watchdog, as any such remediation will have negligible benefit in the face of Iran’s designation by the United States.  

Will Europe Muster a Response?

Considering European efforts to promote non-sanctioned trade with Iran through the newly-minted INSTEX, the Trump administration’s pending action could not be more concerning. Just as Europe’s leaders work to convince Iran to forget the promised dividends of the nuclear accord and to stick to their own nuclear-related commitments thereunder for a minimum of trade ties, the Trump administration is threatening to hobble INSTEX and thereby undo months of intensive high-level diplomacy. Such an outcome would show Iran just how bound Europe is to American sanctions and how little power and influence Europe exercises within its own borders, much less without.  Defying domestic laws such as the blocking regulation in order to comply with US sanctions targeting Iran, Europe’s commercial actors have made clear where power lies in the global economy.

If Europe has any self-regard for its economic sovereignty, it will be sure to publicly and privately warn Washington of the consequences of imposing the fifth special measure—not just to the nuclear accord or the humanitarian situation inside Iran, but also to the transatlantic relationship.

Those in power in the United States envision a world in which Europe has no place but in thrall to Washington.  While Iran might not prove sufficiently consequential to Europe to inspire a fight back, the lesson that the Trump administration (and others in Washington) will draw from this episode will be applied more broadly—and more consequentially—to Russia, where European interests are much more significant.  If Europe cedes all the ground now, it will have little to defend later.  

Photo: Wikicommons

Political Risks Outweigh Legal Impact of IRGC Terrorism Designation

This article was originally published by The Black List.

The Trump administration announced the designation of the Islamic Revolutionary Guards Corps (IRGC)—a branch of Iran’s armed forces—as a Foreign Terrorist Organization (FTO) pursuant to section 219 of the Immigration and Nationality Act (INA).  In the White House press statement, President Trump called the designation “unprecedented,” underscoring that it represents “the first time that the United States has ever named a part of another government as a FTO.”   

Trump underlined that the designation “will significantly expand the scope and scale of our maximum pressure on the Iranian regime.” Secretary of State Mike Pompeo echoed those remarks in his own press conference announcing the designation, noting that the designation “will help starve the regime of the means to execute [the IRGC’s] destructive policy.” Helping amp up the designation action, US officials (dubiously) argued that the designation will target more than 11 million people comprising the IRGC’s network.

Hyperbole aside, the practical effect of the FTO designation is negligible at best. Considering the multiple sanctions programs under which the IRGC is currently designated, the FTO designation appears entirely superfluous, exerting no additional substantial pressure against the IRGC.  

On the other hand, the risks to the US from the designation could be severe. As long reported, the Department of Defense and the CIA have been steadfastly opposed to designating the IRGC an FTO—viewing the designation as fraught with consequences for US troops and without material benefit for the United States. Their opposition appears to have been overcome, however, by those in the White House and State Department who have rallied to increase the pressure-in substance or rhetoric-against Iran regardless of the potential consequences.

Legal Authority for FTO Designation and the Sanctions Consequences

12 U.S.C. § 1189 authorizes the Secretary of State to designate an organization an FTO if the Secretary finds that the organization is a foreign organization that engages in terrorist activity that threatens US nationals or US national security. The Secretary’s intent to designate a foreign organization an FTO is first communicated to members of the Congress, along with the findings and factual basis for the Secretary’s decision to designate the organization, which explains the apparent delay between President Trump’s announcement and the formal designation of the IRGC as an FTO.  

The immediate consequences of an FTO designation are limited in scope.  Pursuant to 12 U.S.C. § 1189(2)(C), the Secretary of Treasury is given discretionary authority to require US financial institutions to block all financial transactions involving assets of an FTO. In addition, all members of an FTO are prohibited from entering the United States under 12 U.S.C. § 1182(a)(3). This latter provision could be used to block Iranian persons who performed mandatory military service in Iran from entering the United States. This could explain the “11 million people” claim by members of the Trump administration.

Preexisting US Sanctions Targeting IRGC

The IRGC is already designated under multiple U.S. sanctions authorities—most of which cover the ground of an FTO designation. For instance, the IRGC is designated under:

• E.O. 13224 as a Specially Designated Global Terrorist;

• E.O. 13382 as a WMD Proliferator;

• E.O. 13553 as a human rights abuser; and

• E.O. 13606 as a human rights abuser as well.

These designations have significant U.S. secondary sanctions consequences. For instance, 31 C.F.R. § 561.201 exposes foreign financial institutions that conduct a significant financial transaction with, or provide significant financial services for or on behalf of the IRGC or a person designated pursuant to E.O. 13224 or E.O. 13382, to correspondent or payable-through account sanctions. In addition, the Iran Freedom Counter-Proliferation Act subjects foreign banks to correspondent or payable-through account sanctions, and foreign persons to menu-based sanctions, for engaging in significant transactions with Iranian persons, which would include the IRGC.

Due to the serious secondary sanctions consequences inherent in dealing with the IRGC, OFAC has long given the IRGC its own program tag “[IRGC]” to aid foreign persons seeking to comply with U.S. sanctions targeting the group.  

In addition, multiple US statutory authorities require the President to identify officials, agents, or affiliates of the IRGC and to impose sanctions with respect to them. These reporting requirements ensure that the U.S. remains hyper-focused on the IRGC and its activities and prepared to impose additional designations as warranted.

Practical Consequences of FTO Designation

Amidst this veritable labyrinth of US sanctions targeting the IRGC, the designation of the IRGC as an FTO has limited, if any, immediate practical consequence.  For instance, the blocking of the IRGC’s assets is already mandated by the executive authorities under which the IRGC is designated—some of which also impose visa requirements.  Iranian persons who formerly served in the IRGC have long been subject to intensified scrutiny from US immigration authorities and have often been denied entry on these grounds.

The sole possible additional consequence arising from an FTO designation is the extraterritorial criminal jurisdiction afforded over foreign persons acting outside the United States that knowingly provide material support to an FTO.  18 U.S.C. § 2339B states that persons who knowingly provide material support or resources to an FTO or attempt or conspire to do so are subject to fine or imprisonment of not more than twenty (20) years (unless death results from the prohibited act). Material support is defined broadly to include any property or service.

18 U.S.C. § 2339B(d)(1) expressly provides for extraterritorial criminal jurisdiction, stating that there is jurisdiction over an offense “if . . . after the conduct required for the offense occurs an offender is brought into or found within the United States, even if the conduct required for the offense occurs outside the United States.” This means that foreign persons providing material support to an FTO are subject to criminal prosecution in the United States, even if the foreign person has no legal status in the United States; acted outside of the United States; and the conduct did not touch or otherwise have effects within the United States.

This provision could lead foreign parties conducting business with Iran to exercise even more heightened due diligence with regard to their dealings. Yet, the consequences of dealing with the IRGC are already especially dire, and foreign parties doing legitimate trade with Iran are likely to have taken steps to ensure the absence of IRGC-related parties.       

So What’s the Purpose...?

Considering the negligible benefits of an FTO designation, the Trump administration appears to have two things in mind through its designation of the IRGC: (1) to invite an Iranian response that could collapse the nuclear deal and risk a broader conflict with the United States; and (2) to use the threat of criminal prosecution to deter even legitimate business with Iran, as members of the Trump administration have long claimed that the IRGC controls broad sectors of the Iranian economy. This latter element could also be used to constrain a future President from re-entering the Iran nuclear accord and complying with its terms, considering the potential political pitfalls inherent in rescinding the FTO designation.

Indeed, chief proponent of the FTO designation and close adviser to the Trump administration Mark Dubowitz of the Foundation for Defense of Democracies stated that the designation “just layers on top of all of the current sanctions an additional and more expansive, punitive measure that will deter more business and . . . diminish current business that’s still ongoing between the Europeans and the Iranians, and the Asians and the Iranians.” The purpose of this, he earlier wrote, is to “make the case for dismantling these sanctions [hard],” thereby “block[ing] [the next administration] from delivering sanctions relief to Iran” consistent with the Iran nuclear accord.

Such motivations—if accurately depicting internal deliberations by the administration—would prove a grave abuse of the FTO designation process and the broader use of US sanctions authorities to target activities anathema to US security interests.   

Photo Credit: IRNA

Here’s How the United States Can Help Iran's Flood Recovery

Over the last two weeks, Iran has been ravaged by unprecedented floods, resulting in over 60 deaths and the devastation of whole communities. The natural disaster has only added to the the country’s woes, already reeling from an economic crisis brought about in part by the reimposition of the Trump administration’s decision to reimpose secondary sanctions in November 2018. The coincidence of tightening sanctions and a major natural disaster has led for calls for the Trump administration to take steps to ensure that sanctions policies do not unduly interfere with relief efforts. In the aftermath of the 2003 Bam Earthquake, the Bush administration established new licenses to ensure that the program of then-expanding US sanctions would not stymie relief efforts in Iran, which even came to include the dispatch of American search-and-rescue teams. In 2012, the Obama administration took similar steps to ensure financial aid could reach Iran in the aftermath of yet more devastating earthquakes.

So far, the Trump administration has given no indication that it intends issue new licenses to provide legal clarity to those individuals and organizations wishing to provide aid or to support relief efforts in Iran. A brief statement from Secretary of State Pompeo declared that the US “stands ready to assist and contribute to the International Federation of Red Cross and Red Crescent Societies, which would then direct the money through the Iranian Red Crescent for relief.” However, in an indication of the depth of the Trump administration’s sympathies, Pompeo also claimed that “it is the [Iranian regime’s] mismanagement that has led to this disaster.”

Given the administration’s commitment to imposing “maximum pressure” on Iran through an ever-expanding sanctions program, it is highly unlikely that the administration will prove willing to make it easier for American or foreign entities to provide substantial material or financial relief for the recent floods. However, despite the Trump administration’s regrettable political stance, there are still measures that administration should take—with encouragement from Congress—to ensure that Iran is able to more effectively recover from the floods, in particular by enabling preparedness efforts in advance of the next major natural disaster.

Iran, like all countries worldwide, is facing new and growing challenges related to both climate change and natural disasters. In addressing these challenges, proactive measures of preparation, prediction, and prevention will always have a greater bearing on the protection of human life and mitigation of destruction than the provision of financial aid for relief efforts in the aftermath of a disaster. But in order to succeed in boosting national preparedness for frequent earthquakes, floods, sandstorms, and heat-waves, Iran urgently needs to upgrade its surveying and monitoring technologies to better model and predict meteorological, hydrological, and geological events.

Acquisition of these technologies has been made significantly more difficult by the recent reimposition of US secondary sanctions, meaning that even if Iran takes on board the difficult lessons of the recent floods, it will be hampered in its ability to adapt. The Trump administration should create a new general license to permit the sale of such surveying and monitoring technologies, which produce nothing more than useful information that can be used to save lives. Over the last decade, Iran has undertaken several systematic reviews of its climate change and disaster readiness. In each instance, the acquisition of better technology has been identified as key a priority for authorities.

In December 2017, Iran submitted its “Third National Communication” to the United Nations Framework Convention on Climate Change, a major report which detailed the country’s assessment of the challenges posed by climate change and the status of its preparedness and remediation efforts. The report, compiled by Iran’s Department of Environment in collaboration with the United Nations Development Programme, offers a sober assessment of the Iran’s failures to adequately deal with the effects of climate change—failures which stem largely from weak regulations and mismanagement. But the report also highlights how “years of economic instability and unfair sanctions have delayed mitigation and adaptation measures.” In particular, the report notes that “this situation even has prevented civil technologies transfer to Iran, which has constrained mitigation measures and actions.”

As part of the its national communication report, Iran also submitted a separate “Technological Needs Assessment.” Focused largely on technologies that would help increase energy efficiency and reduce emissions, the report also details ways in which Iran has struggled to acquire the survey and monitoring technology necessary to understand and adapt to new climate change phenomena. New technology is needed to identify “the emerging environmental phenomena and challenges such as desertification, drought, sand and dust storms… and mainstreaming environmental considerations in future national development plans.” Notably, the report also details that “climate change causes inconsistencies in historical and data series obtained from the meteorological and hydrometric monitoring stations,” a reference to the fact that Iran is seeing more unprecedented weather events. Today, Iran’s dams are nearly at capacity after historic rainfall, offering a real world example “of greater inaccuracies in estimating water return period for designing and construction of hydrostructures.”

Beyond climate change, a similar emphasis on the need to improve monitoring technologies can be seen in Iran’s official assessments of disaster readiness. Iran’s 2013 assessment report for disaster readiness, complained in accordance with the United Nation’s Hyogo Framework for Action, identified “neither comprehensive nor substantial” achievement in regards to the availability of “national and local risk assessments based on hazard data and vulnerability information.” The report’s authors point to a wide range of issues preventing effective monitoring for natural disaster risks and providing adequate warnings to the population. These challenges include a lack of satellite imagery and the software to interpret that imagery, a lack of a robust climatological models to develop seasonal forecasts, and a lack of tools to predict the severity of complex weather phenomena while they are developing. Pointing to the dual threats of earthquakes and weather-related disasters, the report notes that sanctions are “a serious hindrance in the increase of seismic monitoring instruments and upgrading early warning systems.”

The lack of sophisticated meteorological tools can also contribute to the loss of life even when there is no full-blown natural disaster. In February 2018, an Aseman Airlines ATR 72-212 aircraft crashed in Iran’s Zagros Mountains, killing all 66 people on board. The interim investigation report released last month by Iran’s Civil Aviation Organization concludes that the accident was mainly the result of “human factors,” including the actions of the cockpit crew. However, the accident transpired as the aircraft entered adverse weather conditions and the investigators have concluded that contributing factors included a lack of “significant meteorological information” about the wind conditions in the mountain area. This oversight was identified in part because data provided by Météo-France, the French national meteorological association, was more accurate in modeling the wind and ice formation conditions at the time of the accident than the data available to Iran’s own meteorological agency. The report recommends that the Islamic Republic of Iran Meteorological Organization undertake efforts to research how it can provide more sophisticated information on mountain weather hazards, something which will require new monitoring technologies.

Multiple agencies in Iran, looking at issues of climate change, disaster management, and aviation safety, have formally detailed the need for more advanced survey and monitoring technologies. They have also identified sanctions as a major impediment to the acquisition of these technologies. It is a common claim that Iranian authorities point to sanctions to deflect away from their own mismanagement. However, in regards to climate change and disaster management efforts, sanctions-related challenges have consistently been described by authorities as just one of many challenges, most of which stem for domestic failures of best-practice adoption. Additionally, the effect of sanctions on Iran’s ability to acquire these much needed surveying and monitoring technologies is readily observed in the relevant trade data.

A general license issued by US Treasury Office of Foreign Assets Control would drastically increase the ease with which suppliers of meteorological, geological, and hydrological monitoring equipment could determine the compliance of sales to Iranian customers. Such a license would benefit US companies as there is precedent for sales of such equipment to Iran. In 2007 and 2008, before US secondary sanctions on Iran were expanded, with just under USD 8,000 dollars worth of “surveying instruments and appliances,” specifically  exported in 2007 and just under USD 80,000 exported in 2008, according to trade data from the US Census Bureau.

But more importantly, a general license would significantly impact the ability of European companies, including the European subsidiaries of American companies, to export meteorological, geological, and hydrological survey and monitoring instruments to Iran. Europe is by far the largest exporter of such technology to Iran, but it’s exports have been significantly impacted by US secondary sanctions.

A review of European exports to Iran since 2000 makes it clear that the vast majority of “hydrographic, oceanographic, hydrological, meteorological or geophysical instruments” (HS code 9015) were purchased by Iran prior to 2009, meaning that much of the technology Iran has deployed is at least a decade old. The imposition of international sanctions on Iran saw exports in these categories fall precipitously, with totals falling from a high of over EUR 16 million in 2006 to just over EUR 375,000 in 2014. A small recovery can be observed in 2016, when Iran received sanctions relief following the implementation of the Joint Comprehensive Plan of Action, but the limited recovery tallied suggests that the lingering impact of US sanctions on banking channels and the anticipation of the Trump administration’s possible withdrawal from the JCPOA dampened sales. In a concerning indication of the likely impact of the reimposition of US secondary sanctions on Iran in November 2018, European exports of goods in these categories fell to just over EUR 5,000 in December of last year, rising slightly to just over EUR 40,000 in the first month of this year. A general license would help address the decline in exports by giving legal clarity to European companies and banks regarding the status of the trade.

Given the seriously degraded commercial environment, any new general license would need to make several provisions. The license should draw on the model of General License D-1, which covers sales to Iran of “certain services, software, and hardware incident to personal communications.” The operational relationship between climate monitoring hardware, captured datasets, and modeling software would be critical to reflect in the license. However, General License D-1 only allows the provision of communications-related services to the government of Iran on the basis they are “no cost.” In the case of the survey and monitoring technology necessary for climate change or disaster readiness, any license must include the more expansive provisions outlined in the longstanding exemptions for humanitarian trade of food and medicine with Iran. Specifically, the general license should authorize sales “to the Government of Iran, to any individual or entity in Iran, to persons in third countries purchasing specifically for resale to any of the foregoing.” In addition, the general license must authorize the activities necessary for the related transactions, such as “the making of shipping and cargo inspection arrangements, the obtaining of insurance, the arrangement of financing and payment, shipping of the goods, receipt of payment, and the entry into contracts.” It should also include permissions for training and technical assistance necessary for the proper implementation of newly acquired technologies in the field. Finally, given that these sales will be denominated in foreign currency, the license must enable Iran to use funds originating from the Central Bank of Iran, such as funds currently held in escrow accounts related to the Trump administration’s waivers for the import of Iranian crude.

The establishment of such a general license, if matched by genuine and proactive communication from the US Department of State and US Department of Treasury, would significantly improve Iran’s ability to acquire much needed surveying and monitoring instruments. Because of its own political decisions, the Trump administration can do little to help Iran respond to the recent devastating floods. However, if American policymakers, including leaders in Congress, truly wish to see the resolution of the current political disagreements with Iran and to reduce the costs borne by the Iranian people, they ought to think long-term. Decisions taken today to provide targeted sanctions relief can help Iranian authorities save lives tomorrow. The provision of scientific tools can empower Iranian stakeholders with more sophisticated information about the evolving risks of floods, earthquakes, forest fires, sandstorms, heat-waves, droughts, and other threats. Preventing Iran’s access to this critical information, even if the unintended consequence of a broad sanctions policy, in no way serves US national security interests and only serves to complicate the earnest work of individuals and organizations committed to protecting lives by improving Iran’s response to mounting environmental threats.

Photo Credit: IRNA

Parsian Bank CEO: US Treasury Made ‘Mistake’ in Iran Sanctions Designation

The CEO of Iran’s Parsian Bank, which was sanctioned last week by the US Treasury, has described the designation of the bank as a Specially Designated Global Terrorist (SDGT) a “mistake.” The unprecedented move against one of Iran’s leading private sector banks by US authorities has many in Iran’s banking sector worried, especially with regards to the ongoing viability of humanitarian trade.

On October 16, the US Treasury Office of Foreign Assets Control (OFAC) designated twenty Iranian entities as SDGTs for allegedly providing support to Bonyad Taavon Basij, a holding company associated with Iran’s Basij paramilitary force. Several banks and financial institutions were among the targeted entities—the most prominent among them was Parsian Bank, a private sector financial institution.

Parsian was designated "for assisting, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, Andisheh Mehvaran Investment Company", itself one of several intermediaries ultimately linked back to Bonyad Taavon Basij.

The designation of Parsian seemed to confirm growing concerns that the Trump administration intends to target Iranian banks previously exempt from secondary sanctions as part of its “maximum pressure” policy on Iran.

According to Parsian Bank’s CEO, Kourosh Parvizian, US authorities have exaggerated a financial link in order to designate the bank. "Parsian was sanctioned because one company, Andisheh Mevaran, bought and sold less than 0.3 percent of the total shares of the bank in the stock market," Parvizian told Bourse & Bazaar, adding that such a small shareholder would have no influence over the management or operations of the bank, meaning that any financial link fell well below OFAC’s typical concern with the “control” of Iranian companies by sanctioned entities.

The number of shares purchased by Andisheh Mehvaran even falls below the normal threshold for regulatory oversight by the Central Bank of Iran. The markets regulator only requires approval for share purchases when real or legal persons are seeking to purchase more than 5 or 10 percent of the firm's total outstanding shares respectively. Parsian Bank has 23.7 billion shares currently outstanding on the Tehran Stock Exchange and counts over 70,000 shareholders.

By either deliberately or negligently misconstruing the bank as beholden to Andisheh Mehvaran, US treasury officials made a “mistake at the expense of over 70,000 shareholders and 6.5 million customers of a bank that handles the transactions behind the majority of imports of foodstuffs, medicine and other humanitarian trade items for the Iranian people," Parvizian said.

The belief that Parsian Bank’s designation is a result of a "mistake" runs counter to the views of many sanctions attorneys, who believe that the Trump administration is trying to send signal of zero-tolerance to Iranians banks and their international partners.

Adam Smith, of law firm Gibson Dunn & Crutcher, told the Wall Street Journal’s Samuel Rubenfeld that the designation of Parsian Bank “will make it more difficult to get financing for humanitarian projects.” Smith, a former Treasury Department official, is “very nervous” about how a more hardline sanctions policy from the Trump administration could impact humanitarian trade.  

Iran's Foreign Minister Javad Zarif seemingly agrees that the designation of Parsian Bank was intended to send a signal, slamming the Trump administration’s “addiction to sanctions” in a tweet. Zarif specifically pointed to the eight degrees of separation between Parsian Bank and Bonyad Taavon Basij, the primary target of the sanctions action.

Iran’s foreign minister also decried the disregard for the ruling earlier this month from the International Court of Justice (ICJ) which called on the US to lift restrictions on humanitarian trade. Likewise, Parvizian stated, “The designation [of Parsian] runs counter to remarks made by senior US officials that foodstuffs and medicines will not be targeted by sanctions.”

In the aftermath of the designation, Parsian Bank has sought to reassure its customers and shareholders. Shortly after Parsian was added to the SDGTs list, the bank released statements both for the general public and for its shareholders declaring that operations will not be significantly impacted since the bank had already halted all dollar-denominated transactions years ago due to sanctions. Parvizian added, "I cannot say the sanctions won't have any effects, but those effects won't be what the US wants.”

But in some respects, the damage has already been done. Parvizian is understandably upset that his customers and shareholders will bear the brunt of the designation. They had put their trust in the bank being spared from the full extent of sanctions since Parsian was among the Iranian banks that enjoyed a favorable position relative to the wider Iranian financial system prior to the JCPOA nuclear deal. "On top of everything, the designation has considerably increased our reputational risk," he said.

Over the years, the bank’s reputation has benefited from its investments in raising managerial standards, including improving anti-money laundering (AML) and combating financing of terrorism (CFT) compliance procedures as well as know your customer (KYC) due diligence. Parvizian believes that US authorities are fully aware of Parsian’s efforts in these areas.

"For instance, during our non-dollar dealings with Iraq, even the Central Bank of Iraq made an inquiry with US authorities about Parsian and they had answered positively," he said.  

That Parsian serves as an example for other banks in compliance standards is especially important given the intense debate that has surrounded Iran’s progress on instituting the reforms required by the Financial Action Task Force (FATF) action plan.

Last Friday, the global standard-setting body extended Iran's deadline to complete its action plan until February, a victory over US and several of its allies have long sought to blacklist the Islamic Republic. The push for financial reforms will be harder to justify if banks like Parsian, which are among the closest to meeting FATF standards in their international operations, will nonetheless be targeted with new US sanctions.   

As relayed by Parvizian, the history of private sector banking in Iran is a story of overcoming adversity. This episode is no different. The bank, which had not been contacted or otherwise informed by the OFAC prior to its designation, is now working through "defined channels" to explore whether it can appeal to have the designation reversed.

Photo Credit: Ibena.ir

Under Trump, US Sale of Medical Goods to Iran Down Nearly 40%

With just two weeks until Trump reimposes secondary sanctions on Iran, administration officials are under increasing pressure to prove that the returning sanctions will not adversely impact humanitarian trade.

Secretary of State Mike Pompeo has declared that “sanctions and economic pressure are directed at the regime and its malign proxies, not at the Iranian people.” But a review of US trade data shows that humanitarian exports from the US to Iran have withered under the Trump administration, lending credence to claims that while sanctions exemptions for humanitarian trade persist in principle, companies are struggling to avail themselves of these exemptions in practice.

In August, US exports to Iran surprisingly surged to nearly USD 150 million dollars, levels not seen since late 2008, when the Bush administration oversaw the sale of a significant volume of wheat to Iran, pushing monthly exports above USD 100 million for several months. The sudden increase in US exports to Iran was even reported upon by Iranian media outlets.

Looking into the content of those exports, just over USD 140 million dollars of the August trade is attributable to the sale of American soybeans to Iran, the number one destination for the crop that month. Due to Trump’s trade war, the export of soybeans to China has collapsed 95 percent, making commodities traders eager to offload supply to Iran.

But August’s sharp increase in exports to Iran remains exceptional for the Trump administration. Looking to data for the twenty months of the Trump presidency, a clear pattern emerges—along with overall trade, the export of humanitarian goods like food and medicine remains significantly lower than average monthly values registered during the Obama years.

Isolating humanitarian trade within United States Census Bureau export data can be done by analyzing twenty-one of ninety-nine standard “Schedule B” commodity codes, used to categorize trade in live animals, cereals, food oils, pharmaceuticals, and medical devices, among other goods that may fall under sanctions exempt or readily licensed trade.

Looking to the average monthly export value for goods in these categories, the Trump administration’s average of USD 15.4 million is actually about 6 percent higher than the monthly average of 14.5 million dollars registered during the Obama years. However, the Trump average is significantly distorted by the bumper trade in soybeans during July and August. When excluding these two months from the calculation of the Trump average, the monthly export value falls to just USD 7.1 million dollars, about half the level seen during the Obama years.

The significant decline in humanitarian trade is also evidenced by looking to the median monthly export value, which may better account for the natural volatility in US exports to Iran. In the 96 months of the Obama presidency, the median value of humanitarian exports to Iran was USD 9.4 million dollars per month. In the 20 months of the Trump presidency so far, the same figure has fallen to USD 5.8 million dollars per month, a 40 percent reduction.

The most regular kind of humanitarian trade between the US and Iran is the export of pharmaceutical goods. There was just a single month during the whole Obama presidency in which no exports of pharmaceutical products to Iran were registered. Likewise, pharmaceutical exports to Iran have so far been registered in every month of the Trump presidency. However, even in this routine trade, the Trump administration is falling short.

Under Obama, the United States exported an average of USD 2.1 million in pharmaceutical products to Iran each month. Under Trump, that monthly average export value has collapsed to just USD 720,000, a paltry one-third of the former level.

Importantly, in the last few years, the trade in medical devices to Iran has outpaced trade in pharmaceuticals, which may point to Iran succeeding in finding other suppliers of key medications while also boosting domestic production. The shift begins around March 2014, shortly after the January 2014 implementation of the Joint Plan of Action (JPOA)—the precursor of the nuclear deal—in accordance with which the Obama administration began to expand secondary sanctions relief for humanitarian trade, including pharmaceutical exports to Iran. It is likely that European exports continue to offset the fall in American exports, including the reexport of American-made products from European divisions of American companies.

However, when adding medical devices and equipment into an overall calculation of exports of medical goods, the picture remains dire. During the Obama years, the US exported an average of USD 6.3 million in medical goods each month. In the first 20 months of the Trump administration, that figure has fallen to USD 4.6 million, a significant 37 percent drop.  

The decline of medical exports to Iran is unlikely to reflect falling Iranian demand. There were no exports of medical devices or equipment to Iran during the first nine months of the Trump presidency. But in October 2017, the same month when Trump “decertified” the JCPOA nuclear deal, exports of medical devices and equipment began again, and have recently reached the highest monthly level since 2015, despite the fact that the sharp devaluation of the real has made such imports much more expensive. Add to this the clear evidence from Iran that sanctions are beginning to result in shortages in key medicines and foodstuffs, and it is obvious that there remains significant scope for the Trump administration to expand its humanitarian trade with Iran.

It would seem that the Trump administration has reached a kind of crossroads when it comes to its strategy for humanitarian trade with Iran. It has publicly insisted that it will allow trade to flow and export volumes in the last few months are more consistent with the decade-long pattern of exports in food and medicine sustained by the US concurrently with the imposition of secondary sanctions.

At the same time, moves such as the recent sanctions targeting Parsian Bank, suggest that the administration is unwilling to send reliable signals to those companies and financial institutions engaged in vital humanitarian trade with Iran. Whether the administration will make good on its own reassurances and meet its moral obligation to facilitate humanitarian trade with Iran remains to be seen.

Photo Credit: IRNA

Bankless Task: Can Europe Stay Connected to Iran?

This article is re-published with permission from the European Council on Foreign Relations. 

As part of the effort to salvage the Iran nuclear deal, European governments have vowed to sustain their economic ties—not least their banking connections—with Iran. From 4 November, American sanctions targeting Iran’s banks will make it extremely difficult for European companies to engage in transactions with firms in the country. Many of the pathways to reducing the secondary impact of US secondary sanctions on the European financial sector present significant technical and political challenges—which stem from the US financial system’s global dominance and the integration of the US and European banking sectors. Moreover, the Iranian financial sector must take several proactive steps to ensure it meets the international compliance standards European banks require.

The Banking Blockage

With the incoming US sanctions, European companies face an even greater struggle to engage in transactions with Iran. For instance, Swedish automaker Volvo is leaving Iran because, as one of its spokesman put it, “with all these sanctions and everything that the United States put [in place] ... the [banking] system doesn’t work in Iran … We can’t get paid.”

This problem has driven most of the multinationals once active in the Iranian market to suspend their operations there, ahead of the new round of US sanctions. There is a widespread expectation that several Iranian private banks and the Central Bank of Iran will be designated entities under the measures.

Some European companies, such as Airbus and Total, require a licence or waiver from the US authorities to continue their operations in Iran, as they work in sectors subject to targeted sanctions. Many areas of Iranian trade, such as that in basic goods, are either unsanctionable or will be exempt from the measures. Yet US sanctions have adversely affected even these areas, as outlined in a recent ruling of the International Court of Justice.

Such restrictions on trade arise from the contamination risk that US secondary sanctions pose to European financial institutions, which generates unique pressure on the Iranian banking sector. This risk combines with Iran’s current shortfalls in meeting its commitments under a Financial Action Task Force (FATF) action plan – although the recent passage of the Combating Financing of Terrorism Bill suggests that Tehran is raising its compliance standards. Until the FATF changes Iran’s designation as a high-risk jurisdiction, global financial institutions will limit their dealings with Iranian banks.

Since President Donald Trump withdrew the US from the Iran nuclear deal in May this year and announced the re-imposition of secondary sanctions on Iran, banks in Europe have come under growing direct and indirect pressure from American regulators. Following the repeal of international sanctions on Iran in 2016, many large European banks began quietly facilitating transactions involving Iran for their largest industrial clients, especially those with long-standing operations in the country. Among these institutions, Danske Bank was the most visibly open to business with Iran, even opening a €500 million line of credit to support Danish firms’ expansion in the country. But as it falls into disrepute over suspected money laundering at its Estonian subsidiary, Danske Bank has opted to cease transactions involving Iran as an immediate show of responsiveness to US regulators. More broadly, banks tend to jettison their business with Iran if regulators exert pressure on them, even in the absence of a direct compliance issue.

Meanwhile, small European banks are coming under pressure from their larger competitors. When these institutions, which have relatively limited exposure to the US financial system, engage in Iran-related transactions, their routine SEPA transfers – payments to other banks within the Single European Payments Area – are often refused outright. This isolates the banks and complicates other aspects of their business. And the refusals extend beyond Europe. Asian banks have shown increasing concern about dealing with small European financial institutions that engage in business with Iran, understanding that they too could fall foul of the US authorities.

Europeans banks have been reluctant to engage with Iran due to fears about the response from their shareholders and creditors. This is most clear in the case of the European Investment Bank (EIB), which has refused to invest in Iran. European governments (which number among the bank’s shareholders) encouraged the EIB to consider lending to Iran, but the bank’s leadership felt that investing in the country would jeopardise its ability to raise capital from American institutional investors in the bond market.

Europe’s Possible Solutions

Despite their efforts to sustain economic channels with Iran, European governments have been unable to ease this pressure on banks. With US sanctions on Iran’s banking sector due to come into effect soon, European countries are now considering measures that would facilitate trade transactions with Iran through a new legal and institutional structure.

On the sidelines of the recent United Nations General Assembly, EU High Representative Federica Mogherini announced that “EU Member States will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue trade with Iran, in accordance with European Union law, and could be opened to other partners in the world”.

European governments have been reviewing this legal entity, known as a Special Purpose Vehicle (SPV), for months. The timing of this public announcement suggests that they have a degree of confidence that the SPV can become operational, and that Europe can use the model to showcase its ability to deliver on its commitments.

US Secretary of State Mike Pompeo immediately responded that he was “disturbed and indeed deeply disappointed” at the news. US National Security Advisor John Bolton commented: “we will be watching the development of this structure that doesn’t exist yet and has no target date to be created. We do not intend to allow our sanctions to be evaded by Europe or anybody else.”

There remains scant detail on the SPV. In her statement, Mogherini added that more information will become available “as the technical work continues in the coming days”. It may be advisable for European actors involved in the creation of the SPV to keep the details private for now. Operationalising the SPV will require a period of trial and error. Making the details of the project public in its early stages would provide the structure’s opponents with further opportunities to undermine it.

Can the SPV Model Work?

Reportedly, an internal European Commission paper describes the European Union’s efforts to “bundle and reduce cross-border payments to and from Iran”. In this way, the SPV would “avoid or severely restrict the role of commercial banks in the payment system and protect payment transactions with Iran from US sanctions”. European policymakers’ apparent consideration of this approach indicates that they want to avoid placing critical European financial institutions, such as the EIB, in the crosshairs of the Trump administration.

To operationalise the SPV, policymakers will need to quickly make progress in several technical areas. Firstly, European governments need to determine how aggressively they will push back against US sanctions; this is a consideration of the first order for the structure and operation of the SPV. Theoretically, the SPV could facilitate payments for what the US authorities consider to be sanctionable activity. Indeed, European officials have openly discussed their intention to use the SPV to support purchases of Iranian oil.

As guidelines from the US Treasury’s Office of Foreign Assets Control make clear, even barter arrangements involving petroleum or petroleum products from Iran are sanctionable – on the basis that they provide “material support” to Iran’s oil industry “regardless of whether a financial institution is involved”. However, because the envisaged SPV would bypass the US financial system and foreign branches of US banks, the American authorities would have no direct jurisdiction over it. Thus, transactions the SPV facilitated would not give rise to the same kind of civil liability that led to hefty fines on Europe’s largest banks in the previous era of sanctions.

The US authorities could, in theory, prevent entities engaged in the SPV from accessing the US market. American officials have stressed that US sanctions will target European central banks and SWIFT – an international payments messaging system headquartered in Belgium – if these institutions facilitate transactions with Iran. Furthermore, this targeting would extend beyond entities engaged in oil purchases, covering all companies that use the SPV to engage in transactions with Iran – even those in sectors that are exempt from sanctions, such food and pharmaceuticals.

European governments working on the SPV will have to find a way to counter such measures. On a technical level, they may be able to use creative structuring solutions. The SPV could be set up primarily as a payment mechanism for only small and medium-sized companies that are content to be excluded from the US market. And the mandate of the SPV could initially facilitate just payments for trade that is exempt from US sanctions.

The SPV is most likely to succeed if takes this approach, starting off small and gradually expanding. The basic structure of the vehicle is replicable. One SPV could focus on sanctionable trade related to support for Iran’s oil, automotive, or aviation sectors. Another could be limited to sanctions-exempt trade in consumer goods, food, and pharmaceuticals – allowing multinationals to use it as a convenient payment channel. With multiple SPVs available, companies could engage with Iranian entities in accordance with their appetite for risk and their business models.

Each SPV could take a different form. It could be a stand-alone, state-owned bank; a conduit for payments that European central banks ultimately facilitate; or simply a clearing house for companies that transfer money to Iran, repatriate funds from the country, or engage in barter trade with it.

The process of establishing the SPV will prove instructive in testing the limits of America’s sanctions power and US willingness to use sanctions as a weapon against its putative allies. Reports indicate that the US Department of the Treasury is already starting to push back against the White House over proposals to sanction European financial institutions, particularly SWIFT, for maintaining ties with Iran.

Of course, creating the SPV will require significant technical work. For its part, Iran will need to demonstrate that its financial system is also continuing to reform in accordance with international standards on money-laundering and terrorism financing. European governments will closely watch the country’s progress in implementing the FATF action plan ahead of an important review on 14-19 October.

From a political perspective, Iran has drawn encouragement from European countries’ sustained and unanimous commitment to the nuclear agreement. Iranian President Hassan Rouhani praised Europe for taking a “big step” to maintain trade. Iran’s foreign minister, Javad Zarif, stated that while implementing the SPV will be difficult, Iran is willing to show “a little bit more patience” with Europe. The SPV is an important immediate contribution to improving conditions for trade between Europe and Iran, but both sides must view it as the start of a road map for long-term economic engagement.

Photo Credit: Depositphoto

Fears Grow That Trump Sanctions Will Throttle Iran's Humanitarian Trade

The second and final sanctions deadline of November 4 is drawing near. After this date, unilateral US sanctions on Iran’s financial sector will once again come into force. According to Iranian bankers and government officials, this could mean that Iran struggles to import humanitarian goods, including basic foodstuffs.

The sale of essential foodstuffs and medicine to Iran is exempt from sanctions, giving latitude to US officials to reiterate their claims that sanctions are targeted and not intended to hurt the Iranian people. However, while no direct legal barriers might exist for trade in humanitarian goods, potential restrictions slapped on banks that facilitate the necessary transactions might yet cause problems.

Prior to the nuclear deal, Iran’s private sector banks were exempt from secondary sanctions and thereby to be able to handle humanitarian trade payments. As sanctions are set to be reimposed, ambiguities about the scope of the returning restrictions forthcoming from the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury have left bank leaders and government officials in Iran with more questions than answers.

To understand the growing fears around the maintenance of humanitarian trade, Bourse & Bazaar spoke to several senior bankers and government officials in Iran and executives from global trading companies who are key stakeholders in this trade. All requested to remain unnamed given the sensitive subject matter.  

A veteran banker and a board member of a major Iranian private bank described two possible scenarios. "U.S. officials have said they aim to reinstate sanctions that were lifted as a result of the nuclear deal. If we use this as the basis, the interpretation is that private banks that were previously exempt from secondary sanctions and any foreign banks working with them on humanitarian trade will once again be exempt," he said.

But he warned that this time may very well be different given that the US has hardened its rhetoric and promised “maximum pressure” from the sanctions. "Your guess is as good as mine,” he quipped.

He said his bank is currently conducting business as usual but has seen some foreign counterparts take preemptive measures to reduce their transaction volume ahead of the November deadline.

“Some banks are implementing a number of limitations over concerns about what happens next. They are already doing some of the things that will be expected of them once sanctions return on November 5,” he said.

An official at the international department of another major Iranian bank expressed the same feeling of uncertainty, and highlighted concerns  that private sector banks like his will not be spared from secondary sanctions this time around.

“We are already facing issues with imports of some essential goods even before [the November] sanctions snap back,” he said. In his assessment, if the bank becomes subject to secondary sanctions, there is little to nothing Iran’s central bank can do to support them.

While Iranian bankers may feel powerless to prevent the return of secondary sanctions, they are also concerned about risks stemming from an area in which Iranian stakeholders do have control—compliance with the Financial Action Task Force (FATF) action plan, which outlines steps for Iran to improve anti-money laundering and combating financing of terrorism standards.

Iran has until mid-October to demonstrate sufficient progress to the FATF or its already embattled banking system will become more isolated than ever. Time is running out for Iran to pass the required legislation in the face of domestic pushback from local interest groups and persistent lobbying by FATF member states including the US and Israel.

“If we don’t pass the bills related to the FATF, we are effectively sanctioning ourselves,” stated the deputy chairman of one of Iran’s largest private sector banks.

These external and internal threats to routine banking between Europe and Iran could have significant knock-on effects for humanitarian trade.

Speaking on background, an executive at a major multinational commodity company described how even if food sales to Iran remain permitted under US sanctions, the imposition of secondary sanctions on Iran’s private sector banks could make the trade effectively impossible.

The Government Trading Corporation of Iran (GTC), the trading arm of country’s agriculture ministry, confirmed these concerns but insisted that contingency planning is underway.

A senior official involved in foreign trade for GTC said, “We are at the moment implementing measures to ensure that we won’t have problems concerning humanitarian trade.”

The official could not share further details, beyond explaining that any such measures will fall outside the boundaries of the banking system—a likely allusion to the use of barter trade, a method which helped sustain imports in the previous sanctions period.

“We will continue to conduct our business even after November sanctions are in place because we have had the experience of working under sanctions before and the sanctions didn’t stop us,” the official said. “You can be sure that sanctions will only serve to increase costs, not close the way entirely.”

The recent announcement that the European Union would be establishing a special purpose vehicle to facilitate humanitarian trade will offer some encouragement that a significant disruption to food imports can be avoided. But with the sanctions deadline just weeks away, the risks of dangerous supply shocks are rising by the day.

Photo Credit: IRISL

Iran: The Case for Protecting Humanitarian Trade

This article has been republished with permission from the European Council on Foreign Relations. 

A crisis is looming in Iran’s healthcare sector: patients are reporting shortages in life-saving medicine. The situation is expected to worsen once US sanctions on Iran are reimposed in November. European and US companies that can provide the advanced medicine and equipment needed to treat chronic diseases inside Iran are grappling with how to sustain their operations. The goods that are making it into Iran are being sold at soaring prices due to a sharp currency downturn following Donald Trump’s sanctions decision.

Millions of ordinary Iranians are bracing themselves for the impact of these sanctions. The UN special rapporteur for human rights warned that the sanctions will undermine human rights in the country, drive people into poverty, and make imported goods unaffordable. The impact of incoming sanctions on the humanitarian sector contradicts the US administration’s repeated statements in support of the Iranian people.

Iranians experienced similar hardship between 2012-2013 when the United States and Europe introduced the severest of sanctions to pressure Iran to restrict its nuclear program. At the time, the US Treasury provided broad authorization and exceptions for the sale of medicine and medical devices. Yet only a limited number of Western companies managed to operate under these conditions. Many were forced to halt or downsize trade due to disruptions in banking and high operational costs.

A repeat of this situation must be prevented. Unilateral US sanctions must not be allowed to needlessly cause suffering to millions of Iranian citizens. This is especially the case given that Iran continues to implement restrictions on its nuclear program under the 2015 deal. Europe, China, and Russia have also vowed to uphold the agreement.

The overarching hurdle facing many companies that export medical goods and services to Iran is related to securing banking services and finance to enable such transactions to happen. This includes a recent foreign currency shortage with which to reimburse European companies. The lack of clarity over how the US will enforce its sanctions has exacerbated these problems. For example, while the latest US OFAC guidelines reaffirm that there is broad authorization for humanitarian transactions, there is ambiguity over how extensively the US will use secondary sanctions to target private Iranian banks.

Since the nuclear deal, such banks were clearly exempt from secondary sanctions. That meant that non-US companies could establish ties with such banks to facilitate payments for the sale of humanitarian goods to Iran. Their position is now unclear. The US has outlined plans to sanction the Central Bank of Iran (CBI); but it is inevitable that any local private Iranian bank will have to transact with the CBI. Under the current US sanctions framework it is unclear if this would trigger a designation for that local bank, meaning that European banks would most likely refuse to transact with that entity.

Such uncertainty can effectively block payment channels into Iran and prevent life-saving assistance from reaching doctors and Iranian patients. Indeed, several leading pharmaceutical companies currently engaged in Iran have shared with us their concerns that banks, insurance companies, and distribution channels that have facilitated humanitarian trade with Iran are getting cold feet, fearing they could fall foul of US sanctions. Competing interpretations of the OFAC guidelines also are causing over-compliance by European companies whose board members are reluctant to accept reputational damage in the US even for humanitarian exchanges with Iran.

For Iranians, access to basic healthcare is a constitutionally protected fundamental human right. In recent years, health conditions in Iran have been gradually improving for underprivileged patients. In part this has been due to the easing of international sanctions that have made healthcare products more affordable and easily accessible. President Hassan Rouhani’s government also introduced new reforms that offer healthcare to almost 11 million previously unprotected people.

Treatment for chronic diseases is a major challenge for Iran where successful treatment requires advanced devices, training, and pharmaceuticals that are often provided through Western companies. Protecting access of such companies to Iran is therefore imperative.

As global powers look to salvage the nuclear deal despite the US withdrawal, they should seek to preserve humanitarian trade with Iran. Despite opposing views between Europe and the US on the nuclear agreement, saving the lives of Iranians should not be a topic of debate. Brian Hook, the newly appointed US special representative for Iran, recently stated that the US and Europe should be working together to “find lasting solutions that truly support Iran’s people”. Europe should press the US to fulfill this offer by working to immediately facilitate and remove obstacles to humanitarian trade with Iran.

European governments should urge the US Treasury to quickly clarify the ambiguities created by its latest guidelines and ensure that a reasonable number of Iranian private financial institutions remain exempt from US secondary sanctions. The European Union should double down on efforts to ensure payment channels with Iran are preserved, including Iran’s access to the SWIFT financial messaging service. As a matter of priority it should aim for banks in Europe to remain open for humanitarian trade with Iran. To help foreign companies sustain the profit margins of operations inside Iran, the Iranian government could also offer cost-saving incentives for companies that import medicine and medical goods into the country.

The European Commission recently announced it will provide an €18m economic package for the social benefit of ordinary Iranians. If required, it should introduce similar new provisions after November to bridge any gaps in funding and payment facilities for medicine exported by European companies. This lending mechanism (in euros as opposed to US dollars), should be large enough to at least cover the import of life-saving medicine into Iran and should be flexible enough to respond to new needs. The EU and Iran could also consider establishing a medical fund for donating pharmaceuticals and equipment to Iran. In such instances, no banking transactions will be required and therefore the risks to European companies will be reduced.

The EU could also encourage expanded scientific cooperation with Iran in medical research and training. Relative to many countries in the Middle East, Iran has advanced public and private medical research institutions that are likely to welcome such bilateral cooperation. In fact, Iranian and US scientists have long engaged in successful health diplomacy projects. European governments can support and facilitate such humanitarian-focused projects. Such measures from Europe can demonstrate that their commitment to the humanitarian needs of Iranian people goes beyond rhetoric.

Many Western governments view sanctions as an effective economic tool to alter the actions of adversary states. Yet sanctions have repeatedly hit ordinary people the hardest and resulted in a negative impact on health in the targeted country. The human cost of sanctions in countries such as Iraq, Iran, Syria, and Venezuela has been severe. Going forward, the international community must implement safeguards to fully protect humanitarian sectors of trade. As Europe pledges to demonstrate its commitment to the Iran nuclear deal, it could take a lead in this dialogue and provide concrete solutions.

Photo Credit: IRNA

US Officials Warn of ‘Deceptive Web’ of Iran Business, But Hamper Transparency Efforts

In a recent speech, Under Secretary of the Treasury Sigal Mandelker warned that foreign companies that maintain a presence in Iran must conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” Mandelker has been touring countries in Europe, Asia, and the Middle East, engaging governments and businesses in order to “make clear the very significant risks of doing business with companies and persons” in Iran. 

Many Iranian companies, particularly in the private sector, have long taken seriously the need to conduct enhanced due diligence, including on their own customers and partners. Improved transparency is a prerequisite of working with foreign companies, which remain wary of the wrath of US regulators for any inadvertent sanctions violations.

Since the implementation of the JCPOA nuclear deal, and in anticipation of new foreign trade and investment, many Iranian enterprises have hired specialist consultants to help establish internal compliance departments and institute robust anti-money laundering (AML) and counter-terrorist financing (CTF) processes. Technology solutions are central to any such transparency efforts. 

While Iran is witnessing a wider push for transparency, particularly around Iran’s compliance with the Financial Action Task Force (FATF) action plan, there remains internal resistance to compliance reforms. As explained by one consultant who advises Iranian companies on compliance policies, "Elements of the Iranian government contribute to the problem by issuing instructions that foreign companies and technologies should not be engaged to assist the banks in their compliance efforts." These sensitiveness are especially acute for the Central Bank and Ministry of Economy, where Iranian officials fear that foreign technology could be used for espionage. Given that there are no homegrown compliance tools, system-wide implementation remains a distant prospect. 

In the meantime, ambitious banks such as Middle East Bank and Saman Bank have been at the forefront of the effort to empower their compliance departments and to demonstrate competencies in know-your-customer (KYC) and know-your-transaction (KYT) due diligence. 

However, conversations with several international compliance specialists, who agreed to describe their experiences on background, make clear that—counterintuitively—US sanctions pose the most significant challenges in the effort to improve sanction compliance within Iranian banks and companies. These sanctions prevent industry-standard technology, including software that enables the automated searches of companies and entities for hits against global sanctions lists, from being accessed by users with Iranian IP addresses.  

For example, World-Check, a market-leading compliance tool from Thomson Reuters which allows users to “automatically and cost-effectively screen all of their customers, partners, employees, and business transactions for potential Iran sanction risk,” is inaccessible from Iran, despite the fact that the company advertises a specific “Iran Economic Interest Solution” comprised of World-Check and a second product called IntegraScreen. So while foreign companies can use the product to mitigate their sanctions risks, Iranian companies cannot do so for the benefit of their foreign clients or customers.  

American companies such as Thomson Reuters are reluctant to enable use of their service from Iran due to primary sanctions prohibitions on exporting a service to Iranian companies, even if that service is intended to help Iranian firms improve their compliance with US and EU sanctions laws. Compliance professionals report that smaller European software companies, which could have filled the gap, are reluctant to do so due to the possible negative impact on their US business and difficulties in processing related licensing fees.

These circumstances leave some Iranian companies to pursue less-robust software solutions from markets such as India, which can contribute to screening failures. Alternatively, Iranian companies seek back office support “offshore,” in effect subcontracting their compliance work on an ad hoc basis. Neither of these solutions reflect the compliance best-practice that US officials insist upon for those companies that wish to pursue trade and investment in Iran. In the event of a compliance failure, such measures are unlikely to hold up to regulatory scrutiny.

US officials could remedy these issues through smarter sanctions policy. Given similar fears among consumer technology companies, the US government enshrined the accessibility of internet and communications tools in 2014 with the creation of General License D, which protects the provision of services and software “incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.” The license, which has been only partially successful at preserving access to technology products for Iranians, reflected an assessment on the part of US officials that protecting the free exchange of information was consistent with the aims of Iran policy.  

Despite the consistent message from US Treasury Department and State Department officials that a lack of transparency in Iran’s economy represents a national security threat to the United States, particularly in regards to terrorist financing risks, there has been no similar effort to ensure the availability of compliance tools for Iranian end users. One compliance executive, who specializes in enhanced due diligence, wondered, “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?”

Photo Credit: Wikicommons

New US Sanctions Target Operator of Iran's Presidential Aircraft

The US Treasury on Thursday announced a new round of targeted sanctions designations, including sanctions on Dena Airways, the company which operates the Iran’s presidential aircraft used by Hassan Rouhani for official travel.

The new sanctions follow the designation of Iran’s central bank governor, Valliollah Seif, and reflect a further direct targeting of the Rouhani administration.

Dena Airways is the company which operates EP-DAA, an Airbus A340. Until November 2017, the aircraft was registered to Meraj Airways, an entity which was previously sanctioned as part of the Specially Designated Nationals list, known as the SDN list.

The new sanctions on Dena could prevent the use of the use of the company’s sole registered aircraft for official travel, as ground handling companies worldwide may refuse to refuel or service the aircraft. In February, a Meraj-registered aircraft used by Foreign Minister Javad Zarif to attend the Munich Security Conference needed to be refueled by the German military, after companies refused to provide services to the aircraft, citing US sanctions. That aircraft, EP-AGB, was notably left off the list of designations, despite another government liveried aircraft, EP-AJC being added to the SDN list. 

The new designations also extend to thirty-one separate aircraft operated by airlines included Mahan, Caspian, and Pouya. These three entities were previously listed on the Office of Foreign Assets Control’s SDN list, and had been targeted due to reported ownership links to the IRGC and to the reported use of aircraft for military airlifts to Syria.

Mahan is Iran’s largest airline by fleet size and number of destinations. The specific targeting of Mahan’s aircraft will inhibit their continued use on commercial flights. For example, EP-MMB, an Airbus A340, flies regular routes to Istanbul, Ankara, Moscow, and Dubai.

Photo Credit: Planespotters

Ambiguity in Trump Sanctions Could Put Humanitarian Trade with Iran at Risk

In the years prior to the nuclear deal, when Iran was under broad international sanctions, the country saw shortages in key foodstuffs and life-saving medicines. Despite attestations to the contrary by proponents of the economic blockade, who spoke of its "targeted" nature, international sanctions hurt the Iranian people in cruel ways.

According to Iran's Food and Drug Administration, the list of medicines subject to shortages in Iran extended to 350 drugs in the sanctions period. Shortages were precipitated by a number of factors. Several multinational corporations downsized their operations or withdrew from the Iranian market. Interruptions in banking channels saw payments turn from the use of industry-standard letters of credit and deferred payment terms to cash-in-advance payments using exchange houses. Transaction and operational costs skyrocketed, with costs being passed on to the consumer, whose buying power was eroded by currency devaluation. 

After the lifting of international sanctions as part of the Iran nuclear deal, the situation improved dramatically. Today, the number medicines subject to shortage has dropped to 65 drugs. Yet, it is important to realize that the shortages precipitated by sanctions would have been even worse had it not been for specific carve-outs for humanitarian trade established by the United States’ sanctions enforcement agency, the Office of Foreign Assets Control (OFAC),  part of the Department of Treasury.

As per OFAC’s own guidance on the matter, “the U.S. maintains broad authorizations and exceptions that allow for the sale of food, medicine, and medical devices” to Iran by both U.S. and non-U.S. persons. During the sanctions period, the more committed multinational companies, often those with longstanding ties to the Iranian market, took advantage of these exemptions to maintain their sales to Iran. While a commercial incentive reigned supreme, the Iranian people benefited to the extent that the country was not under a total blockade. 

Now, with U.S. sanctions poised to return, more suffering seems to be on the horizon. The Trump administration has announced that it will be reinstating all primary and secondary sanctions removed as part of the Joint Comprehensive Plan of Action (JCPOA). This total reapplication of sanctions, which is to take place despite Iran’s proven compliance with its commitments under the nuclear deal, has taken many by surprise given its extreme and unjustified breadth. But take a closer look at the mechanics of the so-called “snapback” and what the Trump administration is seeking to do could prove much more dangerous than anything Iran has been subjected to before.

There is exists an important caveat to OFAC’s exemptions for humanitarian transactions with Iran. These sales “do not trigger sanctions under U.S. law… so long as the transaction does not involve certain U.S.-designated persons (such as Iran’s Islamic Revolutionary Guard Corps or a designated Iranian bank) or proscribed conduct.” The emphasis on banks is what matters here. 

Iran’s private sector banks play a vital role in facilitating humanitarian trade. The major multinational corporations selling and manufacturing agricultural commodities (eg. Cargill, Bunge), food (eg. Nestle, Danone), and medicines and medical devices (eg. Sanofi, Novartis, GE Healthcare) depend on these types of banks to access the financial services necessary for day-to-day operations in Iran. 

Importantly, while Iran’s private sector banks were targeted as part of efforts to isolate Iran from the international financial system and were included on the SDN list, this was done under designations for which secondary sanctions did not apply.

Foreign companies and financial institutions were prohibited from transacting with Iranian financial institutions under the Iran Freedom and Counter-Proliferation Act (IFCA) in 2012 and Executive Order 13645 in 2013. However, there was a notable carve-out created for those "Iranian depository institution[s] whose property and interests in property are blocked solely pursuant to E.O. 13599." The Iranian financial institutions included in the E.O. 13599 list include the country's private sector banks. The unique status of the banks on this list partly reflects that these entities maintain higher compliance standards and clearer governance structures, lack exposure to government or IRGC shareholders, and have no known history of financial crime or terrorist financing.

The Trump administration has made clear that it intends to re-list all of the entities that had been removed from the SDN list as part of the JCPOA (these entities are listed in the attachments to Annex II of the nuclear deal). What remains unclear is whether Trump’s intended re-listing of these entities means returning them to their precise status prior to the nuclear deal. Legal experts and former government officials are coming to different interpretations of the relevant sanctions guidance.  OFAC’s FAQs document issued following Trump’s announcement of the U.S. withdrawal from the JCPOA addresses precisely this question for entities on the E.O. 13599 list. The entry reads:

Will the persons that were placed on the List of Persons Identified as Blocked Solely Pursuant to Executive Order 13599 (E.O. 13599 List) on JCPOA Implementation Day (January 16, 2016) be put back on the SDN List?

The provided answer is concerning (emphasis added):

No later than November 5, 2018, OFAC expects to move persons identified as meeting the definition of the terms “Government of Iran” or “Iranian financial institution” from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”) to the SDN List. OFAC will not add these persons to the SDN List on May 8, 2018, to allow for the orderly wind down by non-U.S., non-Iranian persons of activities that had been undertaken prior to May 8, 2018, consistent with the U.S. sanctions relief provided for under the JCPOA involving persons on the E.O. 13599 List. The Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked pursuant to E.O. 13599 and section 560.211 of the ITSR, and U.S. persons continue to be broadly prohibited from engaging in transactions or dealing with the Government of Iran and Iranian financial institutions. Beginning on November 5, 2018, activities with most persons moved from the E.O. 13599 List to the SDN List will be subject to secondary sanctions. Such persons will have a notation of “Additional Sanctions Information – Subject to Secondary Sanctions” in their SDN List entry.

The guidance indicates that the entities moved from the E.O. 13599 list to the SDN list “will be subject to secondary sanctions." In practical terms, the guidance can be interpreted to mean that all of Iran’s private sector banks will be listed with a designation more restrictive than was the case prior to the nuclear deal. In this scenario, after November 5, 2018, any company that transacts with Iran’s private sector banks will be exposed to U.S. secondary sanctions.

Several sanctions experts, speaking on background given the sensitivity of the subject, pointed to this concerning lack of clarity. In the assessment of an attorney specializing in U.S. sanctions, "It is not clear whether the mere placement of persons identified on the E.O. 13599 List back on the SDN List will subject private Iranian banks—not otherwise designated pursuant to an authority other than E.O. 13599—to secondary sanctions. If it returns to the pre-JCPOA sanctions, then it will revert to the rules established by IFCA and E.O. 13645." But if the new guidelines do reflect an intention to make secondary sanctions for Iranian banks that were previously exempt, "OFAC has the discretion to do so," the attorney noted. 

This reading was echoed by a former U.S. government official: "One could read [the FAQs] to suggest the pre-JCPOA identifications, which is what E.O. 13599 was created to address, are all becoming SDNs. This would be a significant escalation. Most of the private banks on E.O. 13599 were never subject to secondary sanctions because we never had evidence of bad behavior."

If this interpretation holds, the typical exemptions for humanitarian trade will no longer apply for the multinational companies bringing vital foodstuffs and medicines to Iran. This is because the private sector banks that they have customarily used to facilitate this trade will be considered “a designated Iranian bank" exposing their counter-parties or clients to secondary sanctions. Re-listing Iran’s private sector banks in this manner would prove devastating to humanitarian trade. 

Several major international law firms are advising clients that the re-listing will not exceed the restrictions of the pre-deal designations. In this assessment, the transactions that were not sanctionable pre-JCPOA should not be sanctionable on November 5. The problem is that such a fundamental question, with a direct bearing on humanitarian trade, should not be a matter for interpretation. OFAC has historically offered clear and reliable guidance is these fundamental areas.

It remains possible that OFAC has simply made a mistake in leaving things ambiguous regarding E.O. 13599 entities. In the assessment of many sanctions attorneys, the FAQs released on May 8 are sloppy and incomplete—perhaps an indication of the last-minute nature of their preparation as President Trump announced his decision on the nuclear deal earlier than expected. If this is just an error in the guidance, OFAC must immediately update its FAQs and provide clarity on the matter.

However, if the re-designation is intended as an escalation, and the United States does aim to designate Iran’s private sector banks as SDNs and target their multinational clients with secondary sanctions, the international community must use all available means to compel the Trump administration to restore full and unfettered humanitarian exemptions for Iran trade. Thousands of lives are at stake. 

Photo Credit: IRNA

U.S. Sanctions on Iran Set to Return: A Simple Explainer

This client note was prepared by the German trade compliance team at Dentons Europe. It is republished here with permission. 

On 8 May 2018, U.S. President Trump announced that the United States “will withdraw from the Iran nuclear deal” and that the United States “will be instituting the highest level of economic sanctions”. At the same time, U.S. authorities announced that U.S. sanctions would be re-instated, at the latest by 4 November 2018. What does this mean for companies who have ties to Iran or who do business in Iran?

In January 2016, the U.S. and the EU lifted some of the sanctions that they had imposed on Iran. This was based on an international agreement, the so-called Joint Comprehensive Plan of Action (“JCPOA”). Since 2016, many European companies engaged in business activities in Iran or extended their activities. Transactions with Iran will now meet with severe difficulties, and many companies will be forced to cease and wind down their operations.

In the following, we summarize the most important developments and applicable rules.

U.S. Companies and Their Subsidiaries

Applicable U.S. laws generally prohibit U.S. companies from engaging in any business activities with a relation to Iran. This prohibition also applies to non-U.S. subsidiaries of U.S. companies. Based on the JCPOA, the U.S. had issued General License H. This General License broadly allowed non-U.S. subsidiaries of U.S. companies to engage in business activities with Iran.

General License H will be revoked “as soon as feasible”. It will then be replaced with a “new” General License H; this new General License will, however, only authorize the wind down of existing transactions and operations that had been made possible by the “old” General License H. Wind-down operations must be completed by 4 November 2018.

Adding Parties to the U.S. List of Blocked Parties

The U.S. Government has imposed prohibitions a number of individuals, entities and groups (“Specially Designated Nationals” – “SDN”). Any dealings with SDN are prohibited. In addition, all dealings with a company in which an SDN owns at least 50% of the interest are also prohibited.

Not only U.S. nationals and U.S. companies (amongst others) must comply with this prohibition. Any party must comply with these prohibitions when that party is involved in a transaction that is made in US Dollars or when a U.S. bank or U.S. company is also involved in that transaction.

In 2016, a large number of companies and individuals were removed from the SDN List of the U.S. These parties will be added to the SDN List again. It is currently unclear when that will happen, but at the latest on 5 November 2018. Amongst these parties are Iranian banks as well as the National Iranian Oil Company, and also companies and banks established outside of Iran, e.g. in the EU.

U.S. Measures Targeting Specific Industry Sectors

Before 2016, the U.S. had adopted numerous regulations to deter also non-U.S. companies from doing business with Iran. These regulations, so-called Secondary Sanctions, threaten that the U.S. Government can impose severe measures on non-U.S. companies who enter into transactions with certain industry sectors and with certain entities and individuals in Iran.

These measures can amount to a complete exclusion of the non-U.S. company from the U.S. market and from transactions with all U.S. companies worldwide. This can also mean that companies are designated as SDN. Companies which are faced with the risk of Secondary Sanctions should carefully analyze the risks for continuing their activities. U.S. authorities have stated that they want to enforce Secondary Sanctions in the future.

These measures had been waived or lifted under the JCPOA. They will now be re-instated by 6 August 2018 and by 4 November 2018. Until then, companies engaged in the industry sectors concerned must wind down their operations if they want to avoid Secondary Sanctions.

The most important Secondary Sanctions concern the following activities:

• Wind-down by 6 August 2018
  • Transactions with the automotive sector;
  • Sale or purchase of graphite, raw or semi-finished metals such as aluminum and steel, and coal;
  • Provision of software for integrating industrial processes.
• Wind-down by 4 November 2018
  • Transactions involving ports, shipping and shipbuilding, including Iranian shipping lines;
  • Petroleum-related transactions;
  • Transactions with the petrochemical sector;
  • Investments in the development of oil resources;
  • Transactions by non-U.S. banks with certain Iranian banks, including the Iranian Central Bank;
  • Forwarding of “SWIFT” messages to Iranian banks.

Commercial Aircraft and Related Services

As a result of the close global cooperation in the aircraft industry, any commercial aircraft will include material parts with U.S. origin. As a consequence, commercial aircraft and most spare parts for commercial aircraft can only be supplied to Iran with a license from U.S. authorities. Similarly, even non-U.S. companies require licenses from U.S. authorities for maintenance and other services for commercial aircraft.

Under the JCPOA, U.S. authorities granted such licenses to both U.S. and non-U.S. companies. All these licenses will be revoked. U.S. and non-U.S. companies must wind down their activities under these licenses by 6 August 2018.

The Meaning of Wind-Down

Where a wind-down of operations or business relations is required, deliveries and supplies can be made, and services can be provided, until the wind-down date, but only if the contract has been concluded before 8 May 2018.

Business activities and operations must end by the applicable wind-down date. In order to end business operations, companies are allowed to “engage in all transactions ordinarily incident and necessary to wind down” the activities. This may be necessary, for example, where contracts specify delivery dates that are later than the wind-down date.

Non-Iranian companies can receive payments even after the wind-down date, if the following two conditions are fulfilled: The contract has been concluded before 8 May 2018, and all deliveries have been made by the wind-down date. This also applies to loans or credits granted by non-Iranian banks. By contrast, Iranian banks and companies may not receive any payments after the wind-down date.

Activities that Remain Permitted

Even before 2016, U.S. authorities had issued General Licenses which permit certain business activities in Iran. The most important General Licenses are a General License that permits the export to Iran of food, foodstuffs, agricultural items, pharmaceutical products (drugs) and medical devices (often referred to as the “AgriMed” General License). In addition, U.S. authorities had issued a General License that permits the export to Iran of many standard IT items and software, if these products could be acquired without restrictions on the general market (General License D-1).

Based on information that is currently available, these General Licenses will not be revoked, and exports under these General Licenses remain permitted. These General Licenses cannot only be used by U.S. companies, but by companies from other countries as well.

EU Companies: Existing EU Sanctions Still Apply

The EU has not changed or amended the respective EU sanctions. For EU companies who have business operations in or with Iran, the EU sanctions and embargo apply in addition to the U.S. measures. The most important restrictions under EU sanctions and embargos are the following.

Sanctioned Parties and “Financial” Sanctions

The EU has imposed prohibitions to enter into business transactions with a number of individuals, entities and groups in Iran (so-called “Designated Parties”). EU companies may not make any payments and any deliveries to Designated Parties. There are also restrictions for dealing with companies which are owned or controlled by Designated Parties. These range from increased due diligence requirements to prohibitions on dealing with such subsidiary.

Export Prohibitions

The EU has adopted several lists of items which may not be supplied to Iran. It is also prohibited to conclude sales contracts for these items, to provide technical support services or the provision of export financing for these products. These prohibitions apply, e.g., for military items (arms embargo) and for certain items that could be used in a nuclear program.

Export Licensing Requirements

In addition, licenses are required to supply certain items to Iran. The items concerned are also included in several lists adopted by the EU. As with the export prohibitions, licensing requirements do not only apply for the actual export of these items, but in addition for the conclusion of the respective sales contract, the provision of technical support services for these items or for the provision of export financing of these products. Licensing requirements apply, for example, for the supply of items for the interception of telecommunication, of less important items that could be used in a nuclear program or for graphite, raw or semi-finished metals such as aluminum and steel. Depending on the product in question, licensing procedures may be quite complex, because some licenses must be reviewed by a special committee established under the JCPOA before they are granted.

Restrictions for Investments in Iran

In accordance with the EU sanctions and embargo, establishing companies in Iran or investing in companies in Iran may be prohibited or may require a license. These restrictions apply to companies which engage in certain business activities in Iran (e.g. in activities linked to the nuclear sector). The same restrictions apply for providing financing to companies in Iran.

Trading With Iran in the Future

These new unilateral U.S. measures will severely impact doing business with Iran and doing business in Iran. In addition to the prohibitions and other restrictions that apply to certain business activities directly, the U.S. measures will have a severe “chilling” effect. Companies will refrain from business activities involving Iran, and banks will refuse to provide financing for business activities in Iran.

As a result of the Secondary Sanctions threatened for sending SWIFT messages to Iranian banks, there is a risk that it will become impossible (again) to make electronic transfers of funds to and from Iranian banks. In addition, banks will now be even more reluctant with processing payments to and from Iran. EU companies will face the problem again that they may have perfectly legal business activities in Iran but will not be able to find a bank where they can receive payments.

It remains to be seen if European leaders manage to find a unified response to the new measures adopted unilaterally by the U.S.

Photo Credit: REX/Shutterstock

Iran Air Expands Routes Amid Uncertainty

Despite recent uncertainty surrounding the 2015 nuclear deal, Iran Air has been moving forward with its expansion efforts. The airline's CEO, Farzaneh Sharafbafi, attended last Friday's meeting of the JCPOA Joint Commission. Her presence indicated the significant political efforts being made to facilitate the acquisition of new aircraft which the airline needs to successfully maintain its growth.

Celebrating its 57th anniversary this year, Iran Air began flights from Tehran to Belgrade and Tbilisi on March 10 and is planning to start flights to Budapest, Malmö, and Saint Petersburg later this year. 

With visa restrictions being lifted in Serbia, further optimism points to India. In a joint statement by President Rouhani and Prime Minister Modi in February, Iran and India committed to the opening of e-visa facilities for their citizens. In 2016, neighboring Armenia and Georgia lifted visa requirements for Iranians, leading to the overall flight increases between the two countries and the addition of Tehran-Tbilisi flights to Iran Air’s schedule.

Although Iran Air does not publish passenger statistics and load factors on its routes, its performance can be estimated based on frequency increases on many of its European routes in the last year. Flights to Frankfurt, Gothenburg, Stockholm, and Vienna have all seen the addition of more weekly flights and higher capacities. The Tehran-Belgrade flights, have already sold out through the summer of this year. The airline has also begun codeshare flights on Lufthansa’s Tehran flights, and expanded its codeshare services with Turkish Airlines.

Iran Air's network has grown significantly since 2015, but remains much smaller than that of a decade ago. In 2002, the airline was serving 18 European destinations, compared to 13 destinations today. Iran Air’s Asian flights to Beijing, Bangkok, Kuala Lumpur, Seoul, and Tokyo, have not been in operation for a several years.

By re-establishing these routes, Iran Air could capitalize on a hub and spoke system used by most global airlines. Better geographically positioned in the Middle East than any other Persian Gulf carrier, Tehran could serve as a connecting point for passengers traveling to East Asia and Australia from Europe and North America.

With neighboring Qatar Airways, Emirates, and Etihad Airways experiencing financial difficulties due to political tensions, increased competition, and investments in struggling European airlines, now would be an ideal time for Iran Air to revitalize its own hub and spoke strategy in order to grab market share. 

However, despite the opening of new routes planned for this year, Iran Air faces an uphill battle in sustaining its growth. Because the airline's network remains limited, the success of newly launched routes is initially dependent on Iranian tourists. Economic pressures could see Iranian tourist figures fall. The Iranian departure tax may rise later this year and current proposals show increases from USD 15 to USD 45, which must be paid by all passengers departing Iran.

Furthermore, due to the existing sanctions on financial transactions, Iran Air tickets are not sold on various travel websites. Tickets are sold only through Iran Air offices or travel agents, making it difficult for those booking online from outside of Iran. This hinders growth for connecting passengers and makes competing airlines more attractive, which have already increased their Iran services. In the last two years alone, Iran Air has faced new competition from Air France, Austrian Airlines, British Airways, and KLM, all of which have resumed services or increased the number of seats on Iranian flights. 

Nonetheless, Iran Air has revitalized its domestic flights with the creation of a new regional service using newly acquired ATR aircraft. Iran Air is projecting a significant rise in revenue. At the height of economic pressure in 2013, the company’s revenue was approximately USD 330 million. The airline hopes to earn around USD 1 billion annually once its new fleet has been put into service over the next decade. Plans to begin flights to many intercontinental destinations depend on the arrival of new long-haul aircraft. 

The airline currently has fifteen Boeing 777-300ERs on order, most of which will be used for intercontinental flights. During a press conference in Paris, the airline’s CEO, Farzaneh Sharafbafi, confirmed that upon receipt of the Boeing aircraft, Iran Air would start or resume flights to Adelaide, Bangkok, Kuala Lumpur, and Sydney, further expanding its reach into Asia and Australia. On these planned routes, Iran Air faces little to no competition from Asian carriers. 

Sharafbafi reassured all that Boeing would remain committed to its landmark contract. She also said that there are no problems in financing the orders and that Boeing and Airbus jets would be delivered in late 2018 and 2019 respectively.

But while the licenses issued by the U.S. government allowing for the sale of Airbus, Boeing, or ATR aircraft remain valid, the Trump administration continues to threaten to pull out of the Iran nuclear deal. Ultimately, the growth of Iran Air significantly depends on American adherence to the deal and the delivery of the new aircraft. It remains to be seen whether Sharafbafi will have the opportunity to pursue Iran Air's ambitious reintegration in the global airline industry.

Photo Credit: Alireza Izadi

American Medical Company Second Sight Enters Iranian Market

Second Sight, a publicly-listed American company which develops and manufacturers visual prosthetics, has announced its market entry into Iran with two landmark procedures. Two patients in Shiraz suffering from Retinis Pigmentosa, a category of genetic disorder which leads to the degeneration of cells in the retina, have had their sight partially restored with the implantation of the company’s Argus II device.

The milestone procedures were carried out last month at Shiraz Pars Hospital and the Khalili Hospital of the Shiraz Medical Science University. The devices were successfully implanted by Professor Mohsen Farvardin and his team. The Argus II system uses a small video camera mounted to a patient’s glasses to send images to a small patient-worn video processing unit. This small computer then processes the images and sends corresponding visual instructions to an antenna in the retinal implant. The implant emits small pulses of electricity to the stimulate the remaining photoreceptors in the retina, allowing the patient to perceive visual patterns.

 The procedures were facilitated by Second Sight’s exclusive local distribution partner, Arshia Gostar Darman Company, an established supplier of sound processors and cochlear implants that help remediate hearing loss. Second Sight and Arshia Gostar Darman entered into a partnership in July 2016, at which time Second Sight had received a specific license from the U.S. Office of Foreign Asset Control (OFAC) to permit the sale of the company's medical devices in Iran.  

Second Sight’s market-entry announcement came just one day after the U.S. Department of Treasury levied a USD 1.2 million fine on another American medical company, Dentsply Sirona. US regulators found that between 2009-2012, Dentsply made 37 shipments of dental equipment and supplies to Iran via its international subsidiaries. Company personnel concealed the fact that the goods were destined for Iran. In its public notice, OFAC indicated that products sold by Dentsply “were likely eligible for a specific license.”

The divergent experiences of Second Sight and Dentsply point to persistent challenges for specialist American medical companies that wish to supply the Iranian market. These companies, though smaller than the global behemoths such as Merck or Johnson & Johnson, play a vital role in the healthcare sector as they bring advanced therapies and innovative devices to market. While U.S. licensing policy is generally accommodating of the sales of medicines and medical equipment to Iran on humanitarian grounds, the regulatory burden and legal costs for these companies can be inhibitive. Securing an OFAC license is nearly always necessary in order to operate in a compliant manner. 

At a time when the prospects for renewed American trade with Iran have dimmed, Second Sight's recent success offers a welcome reminder of the opportunities that persist in the pharmaceutial and healthcare sector. 

Photo Credit: Second Sight

Iran Sanctions Policy Increasingly Throttles Free Trade in Ideas

This article was originally published in LobeLog.

In 1988, as legislators were creating the legal basis for the modern use of economic sanctions as a tool of American foreign policy, an important amendment was added to two laws, the Trading With the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA). The so-called Berman Amendment was devised to withdraw the president’s authority to use sanctions to prohibit the import or export of informational materials, whether directly or indirectly.

Former Representative Howard L. Berman (D-CA), who put forward the amendment, felt that support for access to information was a cornerstone of American foreign policy and should not be undermined by any program of economic sanctions. He stated: “The fact that we disapprove of the government of a particular country ought not to inhibit our dialog with the people who suffer under those governments…. We are strongest and most influential when we embody the freedoms to which others aspire.” In 1994, the provisions in the Berman Amendment were expanded in the Free Trade in Ideas Act in response to the fast changing media landscape. The definition of “informational materials” came to apply “regardless of format or medium of transmission” to “any information or informational materials.”

Since then, American sanctions policy has generally sought to ensure that the targeting of commercial and financial channels does not inhibit the transmission of information. This is perhaps best exemplified in the case of the sanctions regime levied on Iran, the most extensive ever devised. Even in the case of Iran, exemptions exist in the sanctions regulations for activities such as, publishing, journalism, Internet communications, and even organizing events. In addition, more specific permissions are granted in the form of so-called General Licenses issued by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). These include General License D-1, which permits the use of certain software or hardware for personal communications, and General Licence G, which licenses the export or import of educational services to and from Iran. Companies can also apply for specific licenses, which have been awarded to enable publishing, research, and communications activities that may be more commercial in nature, but are still consistent with the notion of “free trade in ideas.”

However, recent developments suggest that American regulators have lost sight of the absolute importance of protecting informational exchange. On October 13, the U.S. Treasury designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a “Specially Designated Global Terrorist” (SDGT) As several sanctions designations had already blocked the IRGC, the new action made little difference to the prohibitions around commercial and financial dealings with the Guards. But the push for a terrorism designation did have one new and substantive outcome.

In the FAQ note issued to clarify the new designation, OFAC explains that the new designation draws upon a counterterrorism authority, Executive Order 13224, which was not previously applied to the IRGC. As a result of this new authority, the IRGC “may not avail themselves of the so called ‘Berman exemptions’ under the International Emergency Economic Powers Act (IEEPA) relating to personal communication, humanitarian donations, information or informational materials, and travel.”

This represents one of the first instances in an Iran sanctions designation in which OFAC has specifically clarified that the provisions of the Berman Amendment do not apply. Sanctions experts are quick to point out that, despite the new designation, OFAC will necessarily prioritize enforcing possible illicit financial support for the IRGC above the possible transmission of information, which could be as innocuous as usage of social media platforms or distribution of news media. But if the loss of the exemptions is the only substantive legal consequence of the new designation, then the stakes are actually quite high. As sanctions attorney Clif Burns sharply observed in a blog post, “It is now a federal crime for a U.S. person to give a copy of The Bible to anyone in the IRGC.”

American policymakers may not harbor any sympathies for members of the IRGC, but the manner in which the designation affects informational exchange is emblematic of a general failure in US sanctions policy to adequately consider or protect the free trade in ideas with people and entities, even those on the opposing sides of an adversarial relationship. Beyond the nefarious IRGC, members of Iranian civil society also see their access to information increasingly restricted. In August, Iranian apps were removed from both Apple’s App Store and Google Play, causing an uproar among Iranian users. In September, the online-course platform Coursera began to limit a wider range of content for users based in Iranian, citing sanctions regulations.

For now, the likes of Apple, Google, and Coursera are making voluntary decisions to limit their service provision to Iranian users. But the moves were likely spurred by the marked shift in Iran policy between the Obama and Trump administrations. These companies may have changed their policies in accordance with a stricter interpretation of General License D-1, which had previously been used to justify providing Iranian users access to these online platforms. During the Obama years, the “spirit” of OFAC’s enforcement mandate was clear and informational exchange was in fact encouraged within the scope of exemptions and general licenses.

It may seem tenuous to link the IRGC’s new designation with the recent experiences of Iranian Internet users. But in both cases, the overall disposition of American sanctions policy has clearly moved away from the political and ethical intentions behind the Berman Amendment. Even if the impact on information flows is so far inadvertent and primarily reflective of voluntary actions by the companies operating informational platforms, OFAC could absolutely be doing more to provide comfort around the general permissibility of informational exchange.

The consequences of any reduced “trade in ideas” with Iran will be profound. The United States is limiting its means to influence decisionmaking within the IRGC at precisely the same moment that it is undermining the ability of Iranian civil society to freely access informational services. It is unclear how removing the Berman exemptions for the IRGC weakens the organization. If anything, it may make it harder for Iranian and foreign stakeholders to help influence key reforms that would help mitigate the IRGC’s political and economic might.

For example, with the new designation, a non-governmental organization with a so-called U.S. nexus (such as funding that originates in the United States, or U.S. nationals on the staff) can no longer seek to treat IRGC affiliates as subjects in any research or technical-assistance programs. This is particularly concerning as Iran’s government seeks to push forward with a program of economic liberalization and attempts to induce the IRGC to sell assets and reduce their economic footprint. The Rouhani government needs foreign assistance to cleave the IRGC from its role in the economy, but that assistance may now be prohibited if the informational materials in question are ultimately earmarked for IRGC affiliates.

In March of this year, American University in Beirut agreed to pay a penalty of $700,000 to settle claims in a civil suit brought by the United States. The penalty was tied in part to the provision of “material support” to Jihad al-Binaa, an organization linked to the SDGT-designated Hezbollah, on a university database “for the stated purpose of connecting Non-Governmental Organizations (“NGOs”) with students and others interested in assisting them.” The IRGC has a much wider range of affiliated entities than most organizations designated under counterterrorism authorities, including commercial entities, welfare organizations, and educational institutions. If even listing these entities in a database can be seen as tantamount to material support, warranting an enforcement action, then the SDGT designation could significantly reduce the scope for responsible dialogue with the IRGC, whether direct or indirect.

Considering the fundamental role that both government-backed and independent research and technical assistance programs played in fomenting political and economic liberalization in formerly embargoed countries such as the former Soviet Republics, China, and Vietnam, any policy that blocks informational exchange will deprive the United States of some of its best foreign-policy tools.

There are times when blocking economic relations is necessary. But there is no situation in which the total denial of the free trade of ideas is sensible. The Berman Amendment is much more than a quirk of sanctions policy. It is among the most lucid formulations of liberalism in American foreign policy. In devising its approach to Iran, the Trump administration would do well not to lose sight of how the exchange of ideas has long made American foreign policy great.

Photo Credit: Rouzbeh Fouladi