February 20, 2018 | Foreign Policy

Europe’s Sanctions-Blocking Threats Are Empty

European Union official’s threat this month that Europe would block any attempt by the United States to reimpose sanctions on Iran showed a new level of desperation to deter President Donald Trump from leaving the Iran nuclear deal in May. But with their access to the U.S. financial system hanging in the balance, European banks know that, in the end, the EU must satisfy Trump’s demands to fix the deal or be prepared to fully comply when U.S. sanctions return.

The latest salvo from Denis Chaibi, the head of the Iranian task force at the European External Action Service, echoed previous threats from David O’Sullivan, the EU ambassador to the United States, that if America tried to reimpose its secondary sanctions on Iran, the EU would revive 1990s-era blocking regulations ordering European businesses not to comply.

Unsurprisingly, supporters of the Iran deal in the United States use these threats as evidence that the accord, along with Euro-Iranian commerce, could survive regardless of a U.S. decision to exit it. They point to a recent survey of international business managers as proof that blocking legislation could work.

When first asked what European and Asian companies would do if Trump brought back U.S. sanctions on Iran, only 4 percent of respondents thought businesses would ignore U.S. sanctions. But when asked whether European regulations to “prevent U.S. authorities from penalizing your company over Iran business” would positively affect their decision to invest in Iran, 54 percent said yes.

If such an antidote to America’s secondary financial sanctions existed, European threats to ignore U.S. sanctions might be credible. But these threats are based on outdated understandings of America’s Iran sanctions policy.

In 1996, Congress passed the Iran and Libya Sanctions Act, which in part threatened a menu of U.S. sanctions against any foreign entity that invested in Iran’s energy sector. Europe responded by issuing blocking regulations and threatening action against the United States at the World Trade Organization.

Back then, the United States took Europe’s threats seriously because of how the U.S. law was drafted. It required then-President Bill Clinton to impose meager sanctions that a foreign company could painlessly ignore. At the time, the upside of trade with Iran far outweighed the downside of U.S. sanctions. Facing certain embarrassment, Clinton backed down.

But this changed in 2010 when Congress passed a new law leveraging America’s greatest strength against the fulcrum of global commerce with Iran: financial transactions.

After years of blacklisting most financial institutions in Iran for their involvement in various illicit activities, Congress recognized that it also needed to punish third parties for doing business with these criminal enterprises. Thus, it declared that any foreign bank that maintained a correspondent banking relationship with a designated Iranian bank would forfeit its banking relationships in the United States.

In 2011, the United States extended this prohibition to transactions conducted with the Central Bank of Iran and, in 2012, to transactions conducted in connection with a wide range of Iranian economic sectors and activities.

If Trump decided to enforce these sanctions again, banks around the world would immediately be at risk of losing their correspondent accounts in the United States.

Blocking regulations might shield a company from American-levied fines, but they cannot shield a British bank from losing its access to the U.S. financial system. This time around, the downside of U.S. sanctions would far outweigh the upside of Iranian trade.

This raises serious questions about what would happen if Trump’s deadline arrived and Europe remained unwilling to fix the nuclear deal by eliminating its sunset provisions, requiring inspections of Iranian military sites, and prohibiting Iran from further developing or testing any ballistic missiles. If Trump leaves the deal, America’s toughest sanctions could snap back immediately. And while diplomats in Brussels may want to stare Trump down and see if he flinches, banks will not want to take that risk.

The British, French, and German governments could help avoid this potential crisis by taking a more thoughtful approach on the Iran deal. Agreeing to repudiate its sunsets would avoid a transatlantic train wreck today without violating the agreement for years to come. Demanding verification of the agreement with visits to Iranian military sites would be a step toward enforcing the deal, not breaking it.

Furthermore, nothing in the Iran deal prohibits Europe or the United States from reimposing sanctions related to any Iranian entity — even the central bank — if it is connected to non-nuclear activities such as ballistic missile development and terrorism. That’s a view shared by both Democrats and Republicans in the United States — and given Europe’s direct security interest in curbing Iran’s missile program and regional expansion, it’s a view that European diplomats should adopt as well. If they do, they just might avoid the consequences of a U.S. reimposition of secondary financial sanctions.

Richard Goldberg is a senior adviser at the Foundation for Defense of Democracies. Follow him on Twitter @rich_goldberg.

Follow the Foundation for Defense of Democracies on Twitter @FDD. FDD is a Washington-based nonpartisan research institute focusing on national security and foreign policy.