Impact of Sanctions Relief

Despite the fanfare over the recently reached Iran deal, Tehran remains a bad actor. Iran recently tested a missile capable of carrying a nuclear warhead in violation of a key UN Security Council resolution, increased its crackdown on its citizens, and expanded its support for Syria’s Assad regime and terrorist organizations like Hezbollah.

Navigating economic sanctions on Iran—both those that will be lifted and those that will remain—is a legal and reputational minefield for international companies.

On one hand, the Iran deal, known as the Joint Comprehensive Plan of Action (JCPOA), will provide extensive sanctions relief to Iran. The Obama administration has already issued waivers suspending “nuclear-related” sanctions following this summer’s agreement. These suspensions, along with similar steps taken by the EU, will come into effect on Implementation Day when the International Atomic Energy Agency (IAEA) verifies that Iran has fulfilled its specific nuclear commitments.

On the other hand, companies will face enormous compliance challenges.

First, major discrepancies exist between U.S. and EU “de-designation” lists. Differences between EU and U.S. sanctions have existed for years – for example, the EU has designated more than 50 high ranking Iranian human rights violators who have escaped U.S. sanction, while the U.S. has designated two-dozen Iranian financial institutions that have never been sanctioned by Europe. These inconsistencies will continue, and on Implementation Day, there will be more than one hundred entities “de-listed” by the U.S. but not by the EU, or vice versa.

These discrepancies likely will create a nightmare for professionals charged with keeping international businesses in compliance with U.S. laws and global reputational standards. The problem is especially acute when it comes to foreign financial institutions. Any institution engaged in “significant financial transactions” with banks that are sanctioned by the U.S. “will risk losing its access to the U.S. financial system,” warned Treasury Secretary Jack Lew.

American companies also need to navigate the legal and political complexities concerning what business they are permitted to conduct through their foreign subsidiaries. Under the JCPOA, the U.S. will license foreign subsidiaries to conduct business from which their parent companies are prohibited—a loophole that Congress previously closed and one that legislators, and a future administration, may not want reopened.

Furthermore, America’s primary trade embargo against Iran will continue, meaning that U.S. persons are banned from conducting business with most Iranian entities. Foreign companies, meanwhile, need to ensure that their transactions don’t transit through New York because Iran is banned from conducting the “momentary transaction to… dollarize a foreign payment,” known as a U-turn transaction, Acting Under Secretary of the Treasury Adam Szubin noted. As Treasury Secretary Lew explained succinctly, Iran “will continue to be denied access to the world’s largest financial and commercial market.”

Of most concern for U.S. and foreign companies is the involvement of Iran’s Islamic Revolutionary Guard Corps (IRGC) in Iran’s business sector. The IRGC not only directs Iran’s external regional aggression, its nuclear and ballistic missile programs, and its vast system of domestic repression, it also controls large swaths of Iran’s economy. “The IRGC is Iran’s most powerful economic actor,” the U.S. Treasury Department explained, “dominating many sectors of the economy, including energy, construction, and banking”—precisely those sectors set to receive sanctions relief under the JCPOA. It is difficult to image a significant business transaction in these key sectors where the IRGC won’t be in on the deal.

Given the complexities of the sanctions relief, the IRGC’s control of key sectors, and continued Iranian illicit behavior, firms concerned about legal and reputational risks may prudently decide to keep the Iranian regime—and its most dangerous elements—at arm’s length.

Mark Dubowitz is the executive director of the Foundation for Defense of Democracies and heads the foundation’s Center on Sanctions and Illicit Finance. Annie Fixler is a policy analyst at the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance (CSIF).

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