Implementing the Iran deal: Will banks do business?

By Tom Keatinge, Andrea Berger | November 10, 2015

“Adoption Day” for the Joint Comprehensive Plan of Action between the P5+1 group and Iran arrived on October 18. In line with the terms of the deal, the United States and European Union have made legal and regulatory preparations for agreed sanctions-lifting, which will take effect on “Implementation Day” (likely in early 2016) once the International Atomic Energy Agency verifies that Iran has scaled back its nuclear activities as required. Brussels has introduced Regulations 1861 and 1862, which amended previous restrictive measures against Iran, and Washington has outlined sanctions waivers to take effect on Implementation Day.

Expectations in Iran and elsewhere are high. Already there is palpable excitement among foreign companies and their (mainly European) political cheerleaders, who anticipate renewed access to the lucrative Iranian gas and oil markets as well as a population of 80 million people eager to consume foreign products once again. Judging from the frequency and character of visiting economic delegations from EU nations, reinvigorated trade with Europe appears to be a particular priority for both European and Iranian officials.

It has become clear, however, that substantial practical difficulties await the P5+1’s efforts to afford Iran previously denied commercial opportunities.

The potential for increased trade and financial flows are an important part of Iran holding up its end of the new bargain, and that revival depends largely on the willingness of banks to reconnect Iran to the broader global financial system. This involves re-establishing trade finance links and renegotiating loans for project finance and construction. The practicalities are straightforward in theory: The SWIFT financial messaging service will reconnect with Iranian entities removed from the sanctions list, Iranian and international banks will restore ties severed when Iran was cut out of the international financial system in 2012, and international banks will refresh their vetting procedures for Iranian clients and transactions.

But interviews with banks and insurance providers in Europe indicate that, on the whole, there is little appetite to facilitate this process of re-engagement, at least for now.

Following the expansion of US and EU sanctions on Iran in 2011 and 2012, financial institutions across Europe broke off their relationships with Iranian clients and refused to process payments connected with the country. While some business could have continued, financial institutions favored across-the-board cuts over nuanced risk analysis as they became wary of the substantial reach of the US Office of Foreign Assets Control and US prosecutors with few qualms for imposing billion-dollar fines on banks whose internal practices they deemed insufficiently robust to catch sanctions evaders. Thus, under the current sanctions regime (that is, the one that ends on Implementation Day), banks have grown accustomed to avoiding risk by not dealing with Iran at all—a black-and-white approach to compliance.

For financial institutions with clients eager to exploit opportunities in Iran, it is no surprise that the road ahead looks fraught with risk and complication. Many remain wary of the complex legal environment arising from the new agreement and fear risks associated with misunderstanding new regulations—or encountering a “snapback” situation in which UN sanctions are re-imposed, with EU sanctions likely to follow suit. They must also consider the continuation of sanctions tied to missiles, weapons, terrorism, and human rights, not to mention extraterritorial provisions that make certain US sanctions applicable worldwide. In 2012, the UK-based banks HSBC and Standard Chartered paid US authorities $1.9 billion and $327 million, respectively, for violating US money laundering and sanctions regulations, including those on Iran. Earlier this year, the Paris-based bank BNP Paribas agreed to an unprecedented sanctions-related settlement of $8.9 billion.

Aside from direct punishments, banks also fear risks associated with Iran’s changing and possibly unstable situation. What happens to contracts between European and Iranian companies in the event of a “snapback” at the UN level? While no “snapback” clause for EU sanctions was written into the new regulations, a serious breach by Tehran could garner enough support in Brussels to re-impose stronger sanctions at the regional level. The note in the new EU legislation that “adequate protection for the execution of contracts concluded in accordance with the [Joint Comprehensive Plan of Action] while sanctions relief was in force will be provided” has yet to be clarified by authorities. Until it is, the lack of a clear grandfathering provision will leave financial institutions reluctant to enter into major agreements.

One final, fundamental issue remains. The highly influential Financial Action Task Force describes Iran as an area of ongoing risk for substantial money laundering and terrorism financing. In fact, Iran sits in the task force’s highest category of risk, with no obvious improvement in sight. At its most recent plenary in Paris, the group noted that it “remains particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system.” The task force not only advises jurisdictions to consider adding more safeguards or strengthening those already in existence, but threatens to call for further action soon. Other international indicators generally agree with this assessment: Iran ranks at the top of the Basel Institute’s index for money laundering and terrorism finance risk and scores poorly on both Transparency International’s most recent Corruption Perceptions Index and the World Bank’s “ease of doing business” ranking.

Thus while the agreement struck in Vienna in July paves the way, in theory, for the reintegration of Iran into the global economy, the financial sector will need considerable reassurance before anyone can capitalize on the diplomats’ hard-won progress. 

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