When Iran signed a nuclear agreement last year with the US, Britain, France, Germany, Russia and China, Iranian Foreign Minister Javad Zarif hailed the deal as “a triumph of diplomacy.” But ever since the Joint Comprehensive Plan of Action, as the deal is known, was officially implemented in January, Iranian officials have expressed dissatisfaction with the pace and extent of nuclear-related sanctions relief. In April, Supreme Leader Ali Khamenei said that while “on paper” the US allows foreign banks to do business with Iran, “in practice they create Iranophobia so no one does business with Iran.” In May, Vahiollah Seif, head of Iran’s central bank, complained that European businesses remained reluctant to do business with Iran because European banks were still wary of violating remaining US sanctions.
John E. Smith, acting director of the US Treasury’s Office of Foreign Assets Control (OFAC), which enforces US economic and trade sanctions, acknowledges that renewed business flows to Iran have yet to meet Iranian expectations. Nevertheless, US Treasury officials are keen to demonstrate that the US is holding up its end of the bargain.
To make its positions clear, Smith says, OFAC has issued extensive online guidance for those companies wishing to do business with Iran, much of it based on questions OFAC has received about sanctions relief from companies around the world. OFAC officials have also paid visits to business communities abroad. “We have traveled to over 20 countries in Europe, Asia, and the Persian Gulf,” Smith says. “We outline the sanctions relief that we have provided and the sanctions that remain. We also reiterate that it is not in the US government's interest to stand in the way of business that is permitted under the JCPOA.”
Those efforts however, don’t always allay the business community’s fears about getting involved in Iran’s economy. “OFAC has often gone around to talk about the relief that has been afforded, and those efforts in explaining sanctions relief are appreciated,” says Erich Ferrari of Ferrari Associates, a Washington, D.C.-based sanctions lawyer. “But it has been my understanding that, as part of that conversation, there is a discussion of what people can't do, and some of the dangers of doing business with Iran. I would suggest is that when you go in and talk about sanctions relief but then you provide a number of caveats regarding what people can't do, that creates confusion and a difficult situation to navigate.”
Jonathan Schanzer, a former terrorism finance analyst at the US Treasury, who now works at the Foundation For Defense of Democracies, says the current US position on doing business with Iran is almost impossible to sustain. “On the one hand, we are trying to reinforce the fact that Iran is a state sponsor of terrorism that is deserving of US sanctions,” he says. “On the other hand, the Treasury is trying to effectively entourage investment in Iran, pursuant to the nuclear deal. These two positions are at odds with one another, and it is no surprise that many foreign governments and many banks around the world are confused, and many of them are sitting on the sidelines.”
Among the perceived obstacles to foreign companies hoping to do business in Iran are remaining US sanctions that restrict the ability of US citizens and permanent residents to do business with Iran. Those sanctions present a disincentive for foreign businesses with American employees to go into Iran.
Those companies, Smith says, must find ways to recuse US employees from their Iran-related transactions. “When you are a US person, you are expected to follow US law no matter where you are,” Smith says. “It means that when it comes to Iran-related business or any other type of sanctions-related business that would be prohibited by the United States, but which would be allowed in the third country where a US person is operating, that US person should be ‘walled off’ from that part of the company’s business. That person should not be put in the position of having to deal with business activity that would be prohibited for them to engage in.”
That process, however, may not be as simple as it sounds. “That concept seems pretty straightforward on its face, but it's not always.” Ferrari says. “The question is, how can you effectively wall someone off, and how can you replace [people where necessary]? What if there is a chief financial officer who needs to look at spreadsheets? What about the management of funds, some of which may be Iran-related, for operations throughout a multinational corporation?” Many businesses simply decide these dilemmas are too thorny to be worth solving.
Another common fear businesses express is that they may be penalized for unwittingly doing business with Islamic Revolutionary Guards Corps, a powerful military and security institution established after the Islamic Revolution of 1979. The Revolutionary Guards enjoy extensive influence throughout much of Iran’s economy, but remain under both US and EU sanctions. Here, Smith says, is where Iran’s lack of transparency is the real issue. But the question of transparency, he says, is not limited to Revolutionary Guards. “Companies want guarantees and assurances that the Iranian business they are dealing with is not going to agree to one thing, but actually, do something else. That is a foundation for business trust around the world.”
Ferrari acknowledges the transparency dilemma. “We find in doing our due diligence that you find one company that may be owned by a consortium, and one of those companies is owned by another five companies. There is a lot of drilling down that needs to take place to discover who what we call the ‘ultimate beneficial owners’ are.”
But for Schanzer, the question of transparency in Iran comes second to the question of terrorism finance. “There are plenty of reasons to be concerned about getting into business with Iran, but Iran's main problem is that it's a state sponsor of terrorism, and the most prolific one in the world at that. The biggest problem is that the major institutions in the country, like the Islamic Revolutionary Guards Corps, control so many of the business interests over there. It is nearly impossible to ask the West to engage with Iran without exposing individuals to elements that are involved in illicit activity.”
Iran, meanwhile, continues to urge OFAC to go further. Vahiollah Seif has expressed hopes that OFAC will issue guidelines encouraging European banks to be more receptive to Iran. That, however, may be beyond OFAC’s remit. “OFAC has issued plenty of guidance to outline the sanctions that have been lifted and the sanctions that remain,” Smith says. “We are here to clearly articulate the rules so that businesses can make their own decisions.”
The problem there, Ferrari says, is that that decision-making process is so risky. “Businesses are dealing with a strict liability sanctions regime,” he says. “If they get it wrong, they could face liability.” And while businesses can pursue guidance direct from OFAC, that can be an ordeal in itself. “You have to go to them and submit what you want to do in writing, and then they consider it over a period — usually it will take months — and in that time opportunities are lost. The way the rules are written is such that there is ambiguity, and that causes a lot of people just to throw their hands up.”
But Iran, Smith says, has more influence than OFAC does when it comes to encouraging foreign businesses to get involved in Iran. “The government of Iran alone has the ability to cease provocative behavior, eliminate missile launches and any other destabilizing activities in the region that will worry foreign investors. The government of Iran really holds the key.”
Schanzer agrees, up to a point. If Iran was to cease acting as a state sponsor of terrorism, he says, and was to abandon its support for the Assad regime in Syria, the Houthi movement in Yemen, Shiite militias in Iraq and a range of armed Palestinian groups, it would be more accepted as a legitimate actor in the international community. But, he says, “It should not be the responsibility of the United States to pave the road. That activity needs to stop, in my view, before Iran is allowed back into the formal financial sector and welcomed by financial institutions worldwide.”
Meanwhile, Ferrari says, OFAC’s message is mixed. “OFAC says, 'We're not going to stand in the way of lawful business as long as US persons aren't involved, but guess what, Iran is doing X, Y and Z. With one sentence they are saying we are not going to stand in the way of companies doing that, but investors should be wary because of Iran's intransigence across a variety of other categories. People hear this and they are like, ‘So I can do business, but Iran is really bad, does that mean we shouldn't do business?’ These are the kinds of questions we get on a daily basis as a result.”