Eric Sohn, CAMS, Director of Business Product, Dow Jones Risk & Compliance, New York, US, looks at the potential impacts on firms involved in international trade with Iran as a result of the proposed reimposition of secondary sanctions on dealings in various goods and sectors of the Iranian economy by the US, following its exit from the Joint Comprehensive Plan of Action.

‘It was the best of times, it was the worst of times’, the opening lines of Charles Dickens’ Tale of Two Cities could very well describe the state of the Joint Comprehensive Plan of Action (JCPOA) as of June 2018. According to all neutral observers, the deal to freeze Iran’s nuclear weapons ambitions, negotiated by Iran and China, France, Russia, the UK, the US and Germany, is still living up to its stated goals. However, the withdrawal of the US from the pact, and the scheduled ‘snapback’ of the sanctions relief provided under the JCPOA later this year, has the potential to scuttle the delicate balance of concessions both sides agreed to in 2015.

The US exit from the JCPOA has significant impacts on firms involved in or interested in international trade with Iran. What will ultimately determine the future of Iran’s status in the international community, however, is likely more a battle of national will and economic might than one of diplomatic overtures.

Long shadow of extra-territorial reach

The JCPOA didn’t change all that much for ‘US persons’ (US citizens, persons resident in the US, companies registered in the US and US operations of non-US companies). While a significant number of sanctions targets were removed from the Specially Designated Nationals List (SDN List), the biggest impact was felt by non-US firms.

In addition to the removal of persons from the SDN List, an additional set of sanctions targets were moved to a new, separate list (the ‘Executive Order 13599 List’) that did not include secondary sanctions. Those sanctions can result in a range of economic restrictions in the US market (up to, and including, losing the ability to maintain a correspondent account at banks in the US) against foreign financial firms that have dealings with Iranian banks, or against firms that participate in transactions with a number of sectors of the Iranian economy, including its shipping, automotive or energy industries, or against firms involved in trade transactions in a number of mineral commodities and semi-finished goods.

Over the next few months, that will all be reinstated. Outside the US, therefore, President Trump’s actions have turned a relatively open field into an array of potential landmines.

All the sanctioned parties will be returned to the SDN List, which will make them off limits worldwide due to the extraterritorial application of secondary sanctions. And, of course, secondary sanctions would also be applicable to any entity implicated by the Office of Foreign Assets Control (OFAC) 50 Percent Rule.

The secondary sanctions attached to dealings with the Central Bank of Iran and Iranian financial institutions are also being reinstated. Additionally, the US hopes to have Iranian banks removed once more from the Society for Worldwide Financial Telecommunications (SWIFT) network, the global utility which financial services firms use to, among other things, facilitate international trade. Such an action would significantly hinder Iran’s ability to participate in international trade.

Additionally, all the secondary sanctions on dealings in various goods and sectors of the Iranian economy will also be reinstated. The change with the biggest potential to cause the JCPOA to fall apart, of course, is the anticipated reimposition of secondary sanctions on foreign firms involved in business dealings with Iran’s petroleum and petrochemical industries. Were that to occur, it would have an outsized effect on the health of the Iranian economy, which would remove the Tehran government’s remaining incentive to live up to its side of the JCPOA agreement. The Frequently Asked Questions issued in conjunction with the president’s decision specifically mentions pursuing the goal of reducing Iranian revenue from petroleum and petrochemical sales.

The cruxes of the matter

The big unanswered question is how other governments will react to the US flexing its financial leverage to force other signatories out of the JCPOA. While capitulation to the demands of the world’s largest economy may make economic sense, issues of global security, and the spectre of a nuclear-armed Iranian regime, may be considered more important in the overall decision-making process.

To a certain extent, all eyes are on the EU, which hosts the world’s second largest economy. Jean-Claude Juncker, the President of the EU Commission, stated that the EU plans to revive a 1996 ‘blocking statute’ that would make complying with US sanctions illegal for EU firms before the first tranche of sanctions is reimposed on 8 August. Additionally, EU leaders decided that the European Investment Bank could facilitate investments by European companies in Iran. If these intentions are realised, it will largely recreate the sanctions landscape that existed prior to 2012. Prior to that time, the US largely stood alone in imposing significant sanctions on Iran. Because of the lack of sufficient economic leverage, those sanctions were not effective in encouraging a demonstrable change in Iranian attitudes or behaviour.

In a similar vein, how SWIFT decides to respond to US sanctions on ‘specialized messaging services’ will significantly impact the ease of conducting trade with Iran. For now, SWIFT has stated that it takes its orders from EU leaders in Brussels.

In the long run, however, black gold – oil – may hold the key to what ultimately becomes of the JCPOA. There is only so much crude on the world market, and automotive fuel prices have already risen dramatically in response to the US action. Additionally, other petroleum producers are experiencing production issues. Venezuelan oil production is down, and US and EU restrictions on investment in the Russian energy industry constrains their ability to fill the gap in global supply that reductions in Iranian shipments would produce. Trying to limit the development of petroleum resources in all three countries at the same time, while perhaps politically desirable, may be a challenge to get agreement on in the face of its effect on global supply and demand.

Not joint, not comprehensive… but a plan

Faced with such uncertainty, how should companies that conduct business with Iran, or wish to, proceed? Unfortunately, there is no one hard and fast answer, although there is a clear roadmap on how to arrive at the proper response.

The lynchpin of the decision-making process is the stance taken by one’s primary regulator and government. Ultimately, they are the only ones who will decide whose position they will support: that of the US, or that of countries wishing to keep the JCPOA (or a negotiated replacement) in place.

It is not the responsibility of individual corporations to shoulder the burden of international relations by themselves. However, it is also not part of their role to take sole responsibility for the consequences of OFAC’s extraterritorial reach. It might be wise, therefore, to treat any commerce targeted by US regulations as off limits if the government from a firm’s home country does not provide relief from any enforcement actions taken by OFAC, or if it does not impose consequences for following US policies instead of its own (such as the anticipated blocking statues in the EU).

Depending on the nature of one’s business, blindly disengaging from commerce with Iran out of a fear of OFAC enforcement actions may leave lucrative business behind. For example, on the day where the EU announced its intention to block US sanctions, the Danish shipping company Maersk announced its intention to withdraw from its Iranian business. On the other hand, the 2017 OFAC enforcement action against CSE TransTel, in which US jurisdiction applied to a US dollar-denominated bank account at a Singapore-based bank, should give one pause before proceeding too aggressively.

To properly respond to the changing environment, one should become conversant in US sanctions regulations and guidance, as well as available licences and licensing policy. Luckily, all such materials are publicly available on the OFAC website, which is extremely well organised.

Navigating the waters of commerce with Iran in 2018 (and beyond) may ultimately prove the old maxim about patience being a virtue. Rather than panicking, properly understanding the regulatory exposures and exemptions that will apply to specific business transactions and relationships will provide a clearer path between expensive regulatory liabilities and profitable business opportunities.

Eric A Sohn
CAMS, Director of Business Product, Dow Jones Risk & Compliance, New York, NY, US
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