As a consequence of scaling back its nuclear program, the sanctions imposed on Iran by the US, EU and UN Security Council were relaxed on January 16, 2016 under the Joint Comprehensive Plan of Action (JCPOA).
The move has already attracted increased investment into the country. Japan and Singapore have entered into bilateral trade agreements with Iran, while Airbus recently announced a US$ 25 billion deal with the nation involving the purchase of 118 new aircraft1. Iran also broadcast plans to boost crude oil output by 500,000 barrels a day soon after the embargo was lifted2.
Investors the world over are poised to take advantage of Iran’s return from economic isolation, including those based in the Middle East and North Africa (MENA) region. Nevertheless, it is important to remember that JCPOA does not signal the end of the US or EU sanctions regimes.
Given the hefty fines recently enforced on US and non-US financial institutions for breaching Iran sanctions, any organization conducting business with an Iranian entity needs to understand that sanctions on Iran still exist; and they need to be aware of the scope of these sanctions.
“US institutions are still prohibited from processing dollar transactions with Iran and there are limitations on foreign banks clearing such transactions through the US financial system. MENA-based organizations with US investors or lenders are well-advised to conduct extensive due diligence to guard against a sanctions breach.”
Implications for non-US Persons
In January, the US chiefly relaxed its ‘secondary sanctions’ package, which pertained to non-US Persons. In this context, the term ‘US Person’ applies to any US citizen (including dual citizens), permanent resident alien, entity organized under US law or any US jurisdiction (including foreign branches), or any person in the US.
Non-US Persons are now able to access the following Iranian sectors, provided there are no other sanctions conditions that are being violated in the process:
• Petroleum and petrochemical
• Shipping, shipbuilding and ports
• Civil aviation
• Automotive industry
• Insurance sector
Which sanctions remain in place?
Under the current US regime, sanctions still apply to non-US Persons in relation to certain Iranian financial institutions, energy companies and other entities due to their association with terrorism, the Iranian Republican Guard Corps (IRGC) or the Quds Force.
On the other end of the scale, most trade and commercial activity with Iran is still off limits for US Persons. Bans that have been relaxed include the import of certain foods (including caviar and pistachio nuts) and carpets from Iran to the US. Certain US exports of civilian aircraft and parts to Iran are also receiving the green light – but strictly on a case-by-case basis.
US institutions are still prohibited from processing dollar transactions with Iran and there are limitations on foreign banks clearing such transactions through the US financial system. MENA-based organizations with US investors or lenders are well-advised to conduct extensive due diligence to guard against a sanctions breach.
US sanctions, including secondary sanctions, pertaining to dealings with any person on OFAC's list of Specially Designated Nationals (SDNs) also remain intact – although the list of Iranian SDNs has been reduced.
The EU has lifted the majority of its nuclear-related sanctions against Iran. These include but are not limited to financial, banking, and insurance measures; as well as the trade in Iranian crude oil, gas, petroleum and petrochemical products. However, certain Iranian banks remain off limits and EU sanctions relating to human rights violations, support for terrorism and other non-nuclear related issues will stay put for the time being.
“A sanctions breach can involve sizeable fines and even criminal penalties (depending on the case). Moreover, institutions that fall foul of sanctions will have their names dragged through the mud and it could take years to rebuild a good reputation.”
Foreign entities owned or controlled by US Persons
Some sanctions relief has been afforded to Iran-related dealings of foreign entities owned or otherwise controlled by US Persons. This is subject to the limitations contained in the new US Office of Foreign Assets Control (OFAC) General License H.
Under this general license, an entity is owned or controlled by a United States person “if the United States person: (1) holds a 50 percent or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity”3.
Advice for MENA-based organizations
Should Iran ever backtrack on its nuclear commitments, the JCPOA permits the relevant sanctions to “snap back” into place. In view of that, companies entering into relationships with Iranian entities could build safety measures in their contracts that protect them in the event that the agreement suddenly poses a sanctions breach4.
As Iran finds its footing in the international business community, organizations in the region and beyond need to stay cognizant of the risks involved when re-establishing ties with Iranian business partners and exploring the many promising opportunities available.
Failure to comply with sanctions requirements can have severe repercussions for an organization on a legal, financial and reputational level. A sanctions breach can involve sizeable fines and even criminal penalties (depending on the case). Moreover, institutions that fall foul of sanctions will have their names dragged through the mud and it could take years to rebuild a good reputation and repair strained relationships with other clients.
Due to its political volatility, Iran remains an unpredictable environment for business. This calls for an in-depth understanding of the country and its complexities – which includes how the proceeds of financial crime and corruption are channeled. It also necessitates up-to-the-minute knowledge of the latest developments on the sanctions stage.
For any investor considering doing business with Iran, a careful, case-by-case approach to compliance is required both at the on-boarding stage and beyond. This involves a comprehensive Know Your Customer (KYC) framework, sophisticated technology, extensive due diligence and continuous investigation into the direct, third party and offshore entities that are potentially involved in – or stand to benefit from – your transaction.
Author: Ernst Pienaar
Bio: Ernst Pienaar is Head of Proposition for C3R Risk Intelligence and Regulation at Thomson Reuters. Thomson Reuters’ risk intelligence and regulation products are designed to help compliance teams face extraordinary market conditions, constantly shifting regulation with multi-jurisdictional requirements, and increased pressure to deliver uncompromising compliance with reduced budgets and significant resource constraints.