US outlines rules for Iran

By:
Chris Wright
Published on:

Overall clarity still lacking; US financial system firmly out of bounds.

szubin-160x186

A foreign bank that does business with any of those companies or individuals on the OFAC prohibited list faces a total cut-off from the US financial system

Adam Szubin,
Office of Foreign 
Assets Control

As a lifting of sanctions on Iran edges ever closer, September provided two indications of the road ahead for the banking sector. They might be summed up as follows: it’s becoming clear how unclear things are going to be.

On September 16, Adam Szubin, director of the Office of Foreign Assets Control (OFAC) at the US Treasury Department, delivered a keynote speech at the Washington Institute for Near East Policy that spelled out a number of previously opaque elements of the Iran nuclear agreement.

Some of the revelations were simply matters of economic statistics. For example, we now know that the US’s interpretation of Iran’s foreign reserves (commonly estimated as $100 billion to $150 billion) is that it has $50 billion of total usable assets. The rest is either committed to China as collateral for projects (about $20 billion) or represents non-performing loans to Iran’s energy and banking sectors. "They’re simply not available – and, to describe it politely, you’d have to call them book entries only," Szubin said. 

More specifically, though, Szubin said that Iran will not be able to dollarize a foreign payment – accessing the US banking sector for a momentary transaction, or what is sometimes known as a U-turn licence, where an offshore to offshore payment crosses the US threshold for just a second. "That is not in the cards," said Szubin. "That is not part of the relief under the JCPOA [joint comprehensive plan of action]."

Confusion

US banks are still covered by sanctions anyway – Iran cannot directly access the US financial system – and more than 200 Iranian-linked companies and individuals will remain on Szubin’s OFAC prohibited list. These are covered by secondary sanctions, which is where things become a little confusing.

"A foreign bank – a German bank, a Chinese bank, a Singaporean bank – that does business with any of those companies or individuals that I just mentioned faces a total cut-off from the US financial system," Szubin said. "It is a very stark threat, and one that our foreign banking counterparts do not take lightly."

He then specifically named Bank Saderat, one of the largest commercial banks in Iran, and the investment holding company Bonyad Taavon Sepah.

But what about companies within which Saderat is a shareholder? And the Bonyads in Iran hold stakes in dozens, sometimes hundreds of companies. Will they be off limits too?

Another point he clarified was about grandfathering. There are snap-back provisions that allow for all sanctions to be reinstated at any time in the next eight years if any of the partners to the deal believe Iran is reneging on its nuclear commitments. Some in Iran assume that if a foreign company had begun business with, or in, Iran under a no-sanctions regime, and snap-back came back into play, the company would be OK to continue; not so, apparently.

"There is no grandfather clause in the JCPOA that would protect pre-existing contracts against snap-back," Szubin said. "What the deal provides is that business that is done during sanctions relief – business that was legitimately done at a period when sanctions were suspended – will not be retroactively punished should we later on put sanctions back into place."

This has implications for foreign banks thinking of setting up in Iran. Who would do so with this threat over them, that the whole operation could be rendered unusable at any time?

Consequently, while Euromoney knows of numerous fund managers and other portfolio investors who have visited Iran lately, foreign banks have been less visible: it is understood that on a French delegation to Iran in September, which included Total, Peugeot and Airbus, no big French bank attended.

Our policy since 2007 has been not to pursue any
new business with known Iranian entities

Standard Chartered

"Internationally, following several high-profile cases in which large banks have faced fines for breaching sanctions law, banks have been wary of trading with their Iranian counterparts too soon before the JCPOA has been implemented," says Sarosh Zaiwalla, a lawyer who, among others, represents Iran’s Bank Mellat and Bank Tejerat. "Nevertheless, with the lifting of sanctions now imminent, this should not stop foreign entities, such as banks, developing relationships with Iran and exploring the opportunities that exist for investment and growth."

Theoretically, that’s true. But appetite for Iran would hardly have been improved by reports in September that Standard Chartered could face further sanction penalties after allegedly seeking new business with Iranian companies after it had committed to stop doing so in 2007. According to the Financial Times, the US Department of Justice, Manhattan District Attorney, Federal Reserve, New York Department of Financial Services and New York Attorney General are all investigating the bank for potential new sanction breaches.

"Standard Chartered is co-operating with an investigation related to possible violations of US sanctions," the bank said in a statement to Euromoney. "Additional time is needed for the authorities to complete the investigation and determine whether any violations have occurred. Therefore I can’t comment further on the investigation at this time.

"Our policy since 2007 has been not to pursue any new business with known Iranian entities."

There is, though, a sense that the timing of the story, likely to have involved at least one of the US agencies sharing documents with the FT, is not a coincidence.

"This is the way the US will police secondary sanctions, and also use it as a means to scare banks from dealing with Iran for fear of such actions," says one Iran specialist. "This will be a real problem for the Iranians for a long while after the sanctions are lifted."