Recent developments and relaxation of EU sanctions against Iran have opened up significant business opportunities for manufacturers and exporters. Whilst in principle it should now be easier to trade with Iran, this is proving challenging in practice given the understandably cautious approach taken by financial institutions. Whilst there are challenges arising from the disconnect between US and EU sanctions, there are potentially significant benefits to greater involvement in this area of business.
One of the current ‘Hot Topics’ in the legal regulatory sanctions space relates to the relaxation of financial sanctions restrictions against Iran. Since the coming into force of the Joint Comprehensive Plan of Action in July 2015, leading EU countries, with the involvement of China, Russian and the US, have been working towards introducing a phased lifting of the long standing sanctions against Iran in return for commitments regarding their nuclear programme. Since the successful commencement of the process on 16 January 2016 (Implementation Day) there has been a considerable degree of interest within the business community regarding the possibilities of engaging or re-engaging with trade in Iran. It has however become apparent that whilst the primary limiting factor in doing business with Iran is no longer sanctions restrictions, banks do now face significant compliance difficulties in relation to processing the necessary transactions to allow businesses to be paid.
To summarise the legal changes in simple terms, whilst many but not all EU sanctions have been relaxed, most of the US sanctions in relation to Iran remain in force. Since Implementation Day, the EU has significantly reduced asset freezing provisions, in particular removing many of the previously sanctioned Iranian Banks from the list of asset freeze targets as well as a number of individuals. This means that previous restrictions on being able to do any business with those institutions and people have been removed. Restrictions on products have also been reduced and the onerous and complex fund transfer restrictions which previously caused considerable practical difficulties in allowing for payments to be received from Iranian businesses have been lifted in their entirety. It should therefore be significantly easier for EU businesses to trade with Iranian ones; that is however not necessarily proving to be the case.
One of the key structural problems for businesses and financial institutions seeking to navigate the new landscape in relation to Iranian sanctions is the disconnect between the relaxed EU position and the much stricter US position. In essence the US has retained all of its primary measures (those applicable to US persons) and has focussed sanctions relief on the suspension of its secondary sanctions (applicable to non-US persons). It remains the case that US financial institutions and their foreign branches are entirely prohibited from Iran-related transactions. This presents obvious practical difficulties for financial institutions which have both a US and EU footprint and a significant compliance headache in trying to navigate the now increasingly conflicting requirements of the respective trans-Atlantic sanctions regimes.
Anecdotally what the recent changes in sanctions appear to have produced is a position where EU based financial institutions are having to take a stance on doing business with Iran which is potentially significantly stricter than that actually required by EU and UK law. Whilst this is entirely understandable given the significant risk of fines and other penalties in the EU and more importantly in the US, such an approach brings into focus related issues arising from the process of de-risking, which has previously been more obviously focussed on the risks associated with Money Laundering and Financial Crime.
In February 2016 the Financial Conduct Authority (FCA) published a detailed report it had commissioned from consultants John Howell & Co entitled “Drivers and Impacts of De-risking”. Whilst the report contains little direct mention of financial sanctions it makes it apparent that such risks are often, correctly, treated as an analogous risk to the core concerns of money laundering and financial crime, not least given that breaches of financial sanctions can be prosecuted as a criminal offence.
It is also apparent from the tone of the report and previous commentary from the FCA that it is concerned to ensure that banks take a nuanced and case specific approach to managing their de-risking processes such as closing down bank accounts. The report quotes from the FCA’s own 2015 report, “De-risking: Banks’ management of money-laundering risk – FCA expectations” which states:
“(but) the risk-based approach does not require banks to deal generically with whole categories of customers or potential customers: instead, we expect banks to recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately.”
It is clear that financial institutions continue to face difficult challenges in understanding and managing risk in relation to financial sanctions provisions particularly in areas of recent change such as the measures against Iran. However, as identified by the Howell & Co. report, there appears to be no ‘silver bullet’ for the de-risking issue. Potential solutions may lie in the balancing of costs and risks between banks and high risk sectors and a better developed understanding of how to measure risk on a ‘case by case’ basis
The key conclusions here are that:
- EU and Iranian businesses are keen to work together;
- changes in the legal landscape now allow them to do so much more easily than before;
- an unintended limiting factor now appears to be the understandable reluctance of the financial community to facilitate such business given concerns surrounding compliance risk management; and
- an important factor to take into account within the necessary balancing act of a risk based assessment is the potential impact of de-risking.