Almost one year since ’Implementation Day’ of the Joint Comprehensive Plan of Action (JCPOA) on 16 January 2016, when the sanctions on Iran were relieved by the EU, the UN and Germany, Iran’s economy has benefitted from some growth in international trade. Foreign direct investment has increased with interest in oil & gas, transport and aviation and Iran is considered the third most lucrative place for investment in the Middle East after the UAE and Saudi Arabia.
Oil exports have increased from 1.3 barrels per day to 2.3 million barrels per day. However the price of oil has fallen, meaning that Iran’s export revenues have not greatly increased. Air travel which was affected by sanctions has increased including the return of British airlines and a number of British companies established in Iran such as British Petroleum, Vodafone and Debenhams. The period of sanctions has made Iran innovative resulting in a surge of diversified goods and services across Iran’s borders. There are vast opportunities of investment including in infrastructure, renewable energy, bio-technology, pharmaceuticals, retail and mining.
According to the World Bank, further investment opportunities should materialise in 2017 and 2018 when more foreign financial institutions will resume their banking activities with Iran’s banks. The remaining financial and banking related sanctions (particularly those imposed by the US) are still major hurdles preventing Iran fully engaging with international trade and investment.
US guidance on sanctions
On Implementation Day, the U.S. Department of the Treasury’s Office of Foreign Assets Control (‘OFAC’) issued guidance to help foreign financial institutions navigate their day-to-day transactions with Iranian financial institutions. It did so by publishing a list of Frequently Asked Questions (‘FAQs’). These FAQs were an attempt to explain some of the difficulties arising from the complex US legislative framework under the JCPOA. However, significant confusion remains; and many European and foreign banks are reluctant to resume normal banking activities with Iran as a result of the remaining US sanctions.
On 10 October 2016, OFAC updated its guidance for the banking sector to provide further clarity to financial institutions. These updated FAQs do not constitute a relaxation of US sanctions but are merely a guide, setting out how foreign banks might reengage with Iran whilst avoiding falling foul of the current sanctions regime. The rest of this article discusses the clarification provided in the updated FAQs.
US Financial and Banking Sanctions
US financial institutions may engage in banking transactions with foreign financial institutions, which are non US and non-Iranian (an FFI) that open and maintain correspondent banking facilities with Iranian financial institutions not on the Specially Designated Nationals list (‘SDN List’). Those on the SDN list have their assets frozen under US sanctions, and U.S. persons are generally prohibited from dealing with them.
A correspondent account is an account operated by a financial institution that provides services on behalf of another financial institution. Correspondent banks used by domestic banks to service transactions that either originate or are completed in foreign countries, acting as a domestic bank's agent abroad. Domestic banks use correspondent banks to access foreign financial markets and to service their client accounts without opening branches abroad.
US financial institutions are able to open and maintain correspondent banking accounts with foreign institutions which have existing correspondent relationships with Iranian institutions.
Non-US banks remain prohibited from processing Iran related transactions through the US financial system, or involving a US person, unless they have a specific exemption or authorisation from OFAC.
Transactions denominated in US dollars can be cleared by FFIs and foreign incorporated subsidiaries of US financial institutions that involve Iran or persons ordinarily resident in Iran, provided that such transactions do not directly involve the US financial system, or US persons or companies (and, of course, are not on the SDN list).
The current sanctions do not prohibit FFIs from setting up dollar accounts on behalf of Iranian banks to process dollar payments, provided that there is no direct or indirect involvement with the US financial system.
Foreign Entities owned or controlled by US Persons
If a US individual beneficially owns or controls 50% or more interest in a foreign entity, such as a company, that foreign entity is allowed to engage in transactions with Iran only through General Licence H.
General Licence H allows a foreign entity owned or controlled by a US person to deal directly with Iran only so long as the US person has no direct involvement with Iran. The US person can update its business policies to allow a foreign subsidiary to enter into any transaction with Iran, but not have any direct involvement in that transaction.
However, if foreign entities under the laws of a foreign jurisdiction are publicly traded, or their ownership interests are widely dispersed, OFAC does not regard them to be owned or controlled by a US person and so the restrictions of General Licence H do not apply to these entities.
Due diligence for Foreign Entities owned or controlled by US Persons
It is not necessarily a breach of the sanctions regime for a foreign entity owned or controlled by a US person to engage in transactions with a company that is not on the SDN list but that is minority owned, or that is controlled by an Iranian or Iran-related person on the SDN list.
However, OFAC recommends exercising caution in such circumstances to ensure that such transactions do not involve Iranian or Iran-related persons on the SDN list. The risk for a foreign entity owned or controlled by a US person would be if the transaction helps an Iranian individual on the SDN list and the consequences would be more severe if non-US person had actual knowledge.
Checking the names of Iranian business partners against the SDN list is an expected step, but is not conclusive to discharge the due diligence obligations required of a foreign entity owned or controlled by a US person. OFAC generally requires that a foreign entity owned or controlled by a US person carries out due diligence procedures which conform to internal risk-assessment and overall compliance policies, based on best practices in the relevant industry and conform to the guidance and expectations of regulators in the non-U.S. entity’s home jurisdiction.
OFAC expects a non-US financial institution to carry out due diligence on its own customers but not necessarily on Iranian customers unless there is a reason to believe that further compliance steps are necessary.
There is now some further clarity on how foreign financial institutions, and foreign entities owned or controlled by a US person can currently operate in the shadow of the US sanctions regime. However, there remains a great deal of uncertainty about the practical application of the sanctions, and with criminal penalties for breach for the individuals concerned, it is imperative for foreign financial institutions and foreign entities owned or controlled by a US person to seek expert legal advice prior to entering any transactions or starting any relationships which run any risk of falling foul of the sanctions.
At this time, however, institutions and entities with US links must above all keep their ties with Iran under review, but the long-term opportunities for investment in Iran look promising.
Should you have any questions about this, please contact our Iran Desk..