Last month, Britain, France, and Germany launched a special trade channel that aims to facilitate European business with Iran in a manner not susceptible to U.S. sanctions. However, since U.S. law requires European companies listed on U.S. exchanges to publicly disclose nearly all transactions with Iran, such companies are unlikely to utilize the channel for sanctionable activity.
The new trade channel, which the three European nations have dubbed the Instrument in Support of Trade Exchanges (INSTEX), comes in response to Washington’s withdrawal from the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). The U.S. decision spurred the re-imposition of comprehensive sanctions, leading most European companies to exit Iran. European leaders fear that Tehran will abandon the JCPOA as a result.
But INSTEX faces significant obstacles. Under the Securities Exchange Act of 1934, publicly traded companies must submit quarterly and annual reports of their key financial activities to the Securities and Exchange Commission (SEC). The Iran Threat Reduction and Syria Human Rights Act of 2012 added requirements that all companies traded publicly in the United States, which includes most of Europe’s top firms, disclose their key business activities with Iran. Since then, companies from around the world have filed hundreds of reports describing their business with Iran.
To be sure, many small and mid-sized European companies are not listed on U.S. exchanges, so the SEC disclosure requirements do not apply. Often, such firms have engaged in trade with Iran despite sanctions because they expect the U.S. to focus its enforcement efforts on larger targets.
If European governments allow INSTEX to serve as a conduit for activities sanctionable by the U.S., European companies listed on U.S. exchanges will likely face a legal requirement to publicly disclose their business. If they fail to disclose or falsify a disclosure of sanctionable Iran-related activities, they would probably face the possibility of a civil fine or criminal prosecution.
European leaders appear to recognize this reality. Thus, for now, according to a joint statement by Britain, France, and Germany, INSTEX will allow Europeans to sell goods that are “most essential to the Iranian population,” such as food, medicine, and medical equipment, which Washington already exempts from sanctions. The statement noted, though, that INSTEX would focus on these sectors only “initially,” suggesting that the scope of its transactions could expand in the future.
However, the prospect of U.S. penalties is not the only hurdle confronting U.S.-listed European companies. Disclosure of illicit transactions with Iran could impair a company’s reputation and hence, its bottom line. Likewise, disclosures are also costly in terms of time and resources required to collect data on relevant Iran-related transactions, some of which may be negligible, and may further serve as a deterrent to engaging in sanctionable activities.
The Trump administration has already warned Europeans that any effort to evade U.S. sanctions through a special trade channel will spur significant penalties. The administration could now further pressure Europe by directing the SEC to issue new guidance explicitly reminding companies that use INSTEX of their obligation to report their business with Iran. In the face of this requirement, few European companies listed on U.S. exchanges are likely to take the risk of engaging in sanctionable transactions.
Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where he contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.