On 14 July 2015, Iran and a group of countries comprising the USA, the UK, France, Russia, China and Germany agreed on a Joint Comprehensive Plan of Action (JCPoA) on Iran’s nuclear programme. Completion of the JCPoA should lead to the lifting of various sanctions currently in place against Iran and relating to Iranian business.
Businesses have become excited about the potential to steal a march on their competitors by getting into Iran quickly. Many believe sanctions have already been lifted. But this is not the case: in reality, no business subject to the UK sanctions regime can have any further dealings in or with Iran now than they could have done before the JCPoA. Several conditions attach to the lifting of the sanctions, which mean that it is unlikely we will see any relaxation much before mid-2016. Even then, some restrictions will remain.
That said, financial institutions need to prepare for an increase in client requests for loans, insurance and other financial products that relate to Iran, and assess how they will react.
Under the JCPoA, Iran will take certain steps in respect of its nuclear programme and the International Atomic Energy Agency (IAEA) will verify that it has done so. Once it has done so (and a final recommendation is expected in mid-December), all signatories will need to put in place legislation to lift the sanctions referred to in the JCPoA. Once these laws come into force, the sanctions will be temporarily lifted, with permanent lifting in late 2023. This provides the possibility for reimposition of sanctions should various promises not be kept or actions not taken.
Reminder of current Iran sanctions under UK law
Five key strands
There are currently five key strands to sanctions relating to Iran that apply to UK businesses:
- the ban on dealing with persons designated under EU Regulation or UK legislation (Designated Persons), or acting in a way that circumvents this – and the associated obligations on banks to freeze funds;
- the ban on dealing in any goods or related products or services that are subject to export or trade controls;
- prohibitions on dealings with and transactions involving the Iranian petroleum, oil, or petrochemical industries;
- restrictions on remitting moneys to Iranian persons; and
- restrictions on dealing with the Iranian banking sector.
What lenders need to be particularly wary of
- Designated Person risk. Any UK entity currently considering doing business in Iran will have to satisfy itself that it would not, in doing so, provide any funds or economic resources directly or indirectly to any Designated Person. It is often difficult to assess ultimate ownership and control so as to be confident that no Designated Person will benefit. Of course, this is not a problem unique to dealing with Iran – the Designated Person risk always exists, but the risks are clearly greater in jurisdictions with large numbers of Designated Persons.
- Iranian banking sector and Iranian persons restrictions. The current restrictions on dealing with the Iranian banking sector and receiving funds from Iranian persons are equally problematic. In principle, payments can be made and received from Iranian persons who are not Designated Persons. But the combination of the notification/authorisation requirement for payments and the restrictions at international, EU and domestic level on dealing with Iranian banks make business difficult and often not worth the risk.
What is allowed?
At the moment, the JCPoA has made no difference to restrictions, so those that have been in place for the past several years (as amended over time) continue to apply.
So, in theory, nothing prevents UK businesses entering into agreements with Iranian counterparties where there is no link to any Designated Person and the agreement does not relate to anything that is the subject of trade sanctions or embargoes.
In practice, however, the difficulties in making and receiving payments because of the ongoing difficulties for European and US banks in dealing with the Iranian banking sector, and the knowledge that deliberately acting in a way that circumvents sanctions is also a criminal offence, will make all but the most determined businesses continue to avoid Iran. Most deals involving Iran currently typically involve a Middle Eastern financial institution, but this does not of itself solve all EU and US sanctions problems.
Any business whose model makes dealings in Iran sufficiently important to take the risk should expect its bank to require evidence of detailed and thorough independent due diligence on counterparties and practical and robust systems for notifying and authorising payments.
Warranties will be wide, to ensure risks have been considered. This will include not only immediate sanctions risks, but also money laundering and corruption risk. Businesses will often also have to consider their need for insurance, and the impact on existing cover.
Will all the sanctions be lifted soon?
No. All existing sanctions will remain in force until the IAEA has verified that Iran has taken the actions that it has agreed to under the JCPoA. This could take several months.
Even when the phased lifting of economic sanctions begins, some UN, EU and US sanctions will continue. In particular the arms embargo, and sanctions targeted at Iran’s nuclear and ballistic missile programmes, and those measures applied because of its human rights record and as a sponsor of terrorism, will remain in place. So there will still be Designated Persons in Iran, and several elements of the trade sanctions will still apply.
The UK Government's view is that, even as sanctions are lifted, Iran will remain a challenging place to do business. Many lenders need to comply also with US-imposed sanctions, and will remain concerned about the views of the US authorities. Also, the JCPoA has "snap back" provisions, allowing for reimposition of sanctions if Iran does not keep to its side of the agreement. This creates not only uncertainty as to whether any sanctions lifted will remain lifted, but also concern over how to treat ongoing transactions if the snap back provisions are invoked. The upshot is that banks and other financial institutions are likely to remain uneasy about Iran-related deals for some time.