Notwithstanding the significant lifting of sanctions, business between the U.S. and Iran remains limited, risky and difficult – and recent legal and political events may have just made it more so.
On January 16, 2016, the United States and other Western allies, along with Iran (the “P5 + 1”) declared “Implementation Day,” meaning that Iran had met all the conditions to commence easing of certain UN and U.S. sanctions against it pursuant to the Joint Cooperative Plan of Action (“JCPOA”) signed last July in Geneva. These sanctions specifically related to Iran’s pursuit of its nuclear weapons program; in the U.S., they were bolstered by specific legislation enacted in 2010 and expanded in 2012, and successive Executive Orders. Hopes rose for renewed commerce with Iran, and its reintegration into the world community on the basis of trade and other exchanges, financed in part by the release of embargoed oil revenues.
Then, last month, the United States Supreme Court ruled 6-2 in Bank Merkazi v. Peterson, 136 S. Ct. 1310 (2016), that private claimants, survivors of Americans lost in specific acts of state-sponsored terror, could access $2 billion in Iranian dollar assets (currently held in a U.S. bank in New York) in recovering damages from Iran under their claim. Reaction in Teheran was swift and severe; Iran’s president called it “theft, pure and simple,” and the director of its central bank termed the Court’s ruling “highway robbery.”
This week, in apparent response to the Supreme Court’s decision, the Iranian parliament voted overwhelmingly (174-7) to require its own government to demand payment from the United States in compensation for specific acts against Iran (including the U.S. role in the 1953 coup installing the Shah; its support for Iraq in the Iran-Iraq War in the 1980s; and for funds confiscated during sanctions).
It seems that despite the easing of the proliferation sanctions, U.S.-Iran business dealings for now may be as fraught with legal risk and business uncertainty as ever. It may be worth briefly examining the issues that persist, and the extent to which these recent developments may have intensified them.
Implementation of the JCPOA in January lifted, for U.S. persons and companies, only those sanctions related to efforts to stop Iran’s development of nuclear weapons (so-called “Secondary Sanctions”). These were imposed by numerous Executive Orders and by the 2010 Comprehensive Iran Sanctions, Accountability and Divestment Act (“CISADA”), followed by the 2012 Iran Threat Reduction And Syria Human Rights Act (“ITRSHRA”).
It did not, however, relieve any of the previously existing sanctions imposed by the U.S. on Iran in connection with its support of terrorism and assorted human rights violations (so-called “Primary Sanctions”) which – including the longstanding prohibition on “any U.S. person” having any business dealings whatsoever with “any person or entity owned by, connected with, or under the jurisdiction of, the government of Iran” – remain fully in effect. 31 CFR §§ 560.101-.901. This includes the prohibition against the financing, or handling of the proceeds of, any unlicensed (by the U.S. Treasury) Iran transactions by any U.S. bank or financial institution.
The few types of business activity with Iran now newly permitted to U.S. persons or entities include: (a) on a case-by-case basis, the export and provision of certain commercial aviation equipment, parts and services; (b) transactions through a wholly or majority-owned (by the U.S. entity) foreign affiliate or subsidiary (effectively repealing ITRA § 215), provided that no U.S. person is involved in the transaction; and (c) the importation from Iran of certain foodstuffs and carpets. For all else, a Special License must be obtained from the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”). Applicants should not be overly sanguine.
With such limited relief, U.S. companies are already at an obvious disadvantage in developing Iranian business ties, compared to the European competition (for whom sanctions relief was much broader). Recent legal developments may have the effect of raising the bar even further.
Bank Merkazi Case and Iranian Reaction
In 2002, Congress passed the Terrorism Risk Insurance Act, allowing U.S. victims of terrorism to sue and recover from the blocked or seized assets of terrorists or terrorist entities. The Bank Markazi case represents the consolidation of dozens of such suits against Iran (based on the 1983 Beirut Marine Barracks bombing, the bombing of Khobar Towers in Saudi Arabia and other incidents linked to Iran), and found its way to the Supreme Court after passage of ITRA – one provision of which (22.U.S.C. § 8772) expressly provides that the blocked (by 2010 Executive Order) Iranian foreign exchange assets can be reached by the plaintiffs in this case. The matter reached the Court on appeal (by Bank Merkazi) from the Second Circuit.
Over the dissent of Chief Justice Roberts (who accused Congress of “commandeering the Court to make a political decision appear to be a legal one”), the majority led by Justice Ginsburg found that the ITRA provision did not violate separation-of-powers principles, and upheld the Second Circuit’s award to the plaintiffs.
Popular and political outrage in Iran culminated in this week’s Act of Parliament, charging the Islamic
Republic’s leaders to reciprocate by demanding American compensation for what parliament termed its “long list of crimes and deliberate acts of damage against” the people of Iran.
Business Impediments and Risks
While the high hopes accompanying the easing of sanctions back in January may always have been somewhat overstated, there’s little question the political climate between the U.S. and Iran has resumed a level of tension that the JCPOA was intended, at least, to mitigate; and that the recent Supreme Court decision, while far from the only factor, has played a definite role. In particular, the decision and Iran’s response to it have further magnified the uncertainties surrounding the risk attaching to banks and other financial institutions involved in this commerce.
For the U.S. business person or entity attempting to engage in commerce with Iranian interests (whether under a License, or through its non-U.S. agents or employees in a foreign subsidiary), several practical legal issues persist:
- Scope. Given that the majority of U.S. sanctions remain in force, strict attention should be paid to ensuring that all activities are within the specific scope of the License issued by OFAC.
- Counterparty risk. Despite the removal under the JCPOA of some 400 Iranian persons from OFAC’s list of “specially designated nationals” with whom dealings are prohibited, an even larger number remain on the list, most significantly including members of businesses associated with Iran’s Revolutionary Guard Corps. Careful diligence regarding counterparties must be exercised in all transactions to ensure that no prohibited persons are included in the course of dealing in any transaction. OFAC’s publicly-available SDN list is the place to start.
- Financial regulatory risk. Despite easing of some sanctions, many of Iran’s banks are still regarded as “of primary money laundering concern” by the Financial Crimes Enforcement Network (“FinCEN”), and thus subject to “special measures” under section 311 of the Bank Secrecy Act. Assets or payments deposited to or through such banks are potentially subject to being blocked with little notice.
Compounding these uncertainties, recent developments underscore potential new, or at least exacerbated, concerns:
- Payment issues. In view of the Court’s recent decision, Iranian interests may well be unwilling to send even $1 to a western bank where it may be vulnerable to being blocked and seized by plaintiffs in a lawsuit such as the Bank Merkazi case. And banks – whether U.S., European or other – already skittish about running afoul of residual U.S. sanctions and potential FinCEN activity, may be reluctant to handle such payments. Obtaining trade financing, lines of credit and processing payments can only become more challenging, at least in the short term.
- Investment asset risk. It’s too soon to tell what risk assets invested or created in Iran may run of being seized under whatever process the Iranian government devises to enforce this week’s Act of Parliament. But it’s clear that the Iran regime is under increasing pressure to take action in response to perceived U.S. legal high-handedness. For a U.S.-related person or business, that risk cannot now be ignored.
In sum, while some sanctions have been eased to open up new business opportunities in trading with Iran, legacy sanctions, the Bank Merkazi case and domestic politics on both sides have deepened uncertainties and intensified the challenges of meeting those opportunities. Experienced counsel should always be consulted in considering engagement in such – for now – risky business.