The Joint Comprehensive Plan of Action (“JCPOA”), which came into effect on 18 October 2015, sets out a plan for phased relief of sanctions which apply to trade with Iran. Implementation Day under the JCPOA, which took place on 18 January 2016, substantially liberalised the EU sanctions regime, but it does not give free reign to businesses seeking to transact with Iranian entities and individuals. Many sanctions remain effective, particularly those which apply to the interactions between the US and Iran.
The US is retaining its primary sanctions, which prevent US nationals (including individuals with the right to work in the US) and entities from engaging directly with Iran, in place. Transactions with an Iranian element cannot involve the US financial system, nor can they involve entities and individuals based in the US. That means, for example, that US banks, and their branches outside the US, remain wholly prohibited from processing payments to and from Iranian entities and individuals.
The EU sanctions regime has been more significantly relaxed and European entities are largely permitted to interact directly with Iran. The US’s secondary sanctions remain effective, however, and European entities must avoid involving US elements in those interactions. In particular, US dollar clearing restrictions are still in place, and so banks outside the US may not receive payments from Iranian entities and individuals in US dollars. The ongoing restrictions also mean that non-US entities must avoid involving US subsidiaries, shareholders or business associates in their transactions with Iran.
Despite the extensive lifting of EU sanctions against Iran, banks in the UK have proceeded with considerable caution in this developing environment. Some major English clearing banks have taken the view that the risks outweigh the current benefits of dealing with Iranian business entities. This has resulted in political criticism, with accusations that banks are failing to finance or support legitimate trade between British business and Iran. English financial institutions are wary of handling transactions which could involve US dollars, US subsidiaries or US stakeholders. Non-US institutions are also conscious of the limits of US disapplication of its secondary sanctions, which does not apply to certain persons and entities which are on the “Specially Designated Nationals” (“SDN”) list. Among those entities is Bank Saderat, which is a major Iranian trade bank and which processes a significant volume of Iranian transactions. Non-US banks which transact with persons on the SDN list are at risk of sanctions from the relevant regulators, regardless of the currency in which the transaction is denominated.
The possibility of incurring penalties from US regulators (which are known both for their extra-territorial exercises of jurisdiction and for their sometimes very significant fines) has had a substantial chilling effect and, in the UK at least, many banks are taking a very risk-averse approach in relation to trade with Iran. US regulators have, in the recent past, imposed fines measured in the billions of dollars on European banks for activities taking place outside the US. The patterns of regulatory enforcement in the US and in the UK, where the Office of Foreign Assets Control has also imposed significant recent penalties, point towards continued aggression in enforcement and ongoing close monitoring.
The costs for banks of implementing the necessary due diligence, controls, and compliance and recusal policies are also prohibitively high in circumstances where the regulators’ approach is not certain and the sanctions legislation is complex. A number of UK banks and institutions do not clear payments to and from Iranian entities. The result of this is that while EU sanctions against Iran have been lifted to a much greater extent than US sanctions, in practice the impact is much more limited than one would expect from the changes in law alone.
This reticence on the part of banks and financial institutions has its detractors. The government has criticised certain banks’ refusals to process payments linked with Iran, and UK businesses have publicly complained of the inhibitory effects of these policies. Also, those banks’ approach risks the ire of the body of Iranian high net worth individuals for whom London real estate, amongst other things, represents an attractive investment. Commentators have suggested that investment by Iranians in London properties over the next ten years will be in the region of £6 billion, but the current difficulties in transferring funds to effect purchases represent an obvious problem, although it has certainly not, to date, prevented such investment entirely.
In the absence of express reassurances or clarifications from the US regulators, and ongoing political uncertainty in the US due to the presidential elections, it is likely that banks will continue to behave in this cautious manner at least in the short term. Guidance is welcome but has not yet been forthcoming. Sanctions “snap back” cannot be ruled out, since the JCPOA expressly provides for sanctions to be reapplied in the event of non-performance with certain obligations on Iran. On the other hand, the UK Export Finance department has plans to give assistance to UK exporters intending to deal with Iran, and Sajid Javid, the Secretary of State for Business, Innovation and Skills, has scheduled a trade mission to Tehran in spring of this year. It remains to be seen whether these overtures will be sufficient to persuade banks and financial institutions that the multitude of business opportunities in Iran justifies the risks of reprisal from the regulators in the UK and in the US.