Iran: Doing Business In Iran: The Banking Bottleneck

Last Updated: 1 August 2017
Article by Shahram Safai

Tensions in the Middle East have continued into 2016 as conflicts among global powers and regional powers play out in the region. But 2016 is also the year of hope – the year when peace may begin in Syria and Yemen. This is also the year that the UAE has appointed a Minister of Happiness, and even more relevantly, a Minister of Tolerance. Given such prospects of hope across the region, businesses should be considering whether previous challenges in the region can be transformed into opportunities. One such challenge and opportunity is Iran. The promise of the Iranian market is so alluring that a number of businesses from regional competitor nations are actively pursuing opportunities, despite geopolitical challenges.

Iran has one of the largest economies in the Middle East, and it has the second largest population in the region, with about 80 million people. Iran ranks second in the world in natural gas reserves, and fourth in crude oil reserves. The economy is dominated by direct and indirect revenues from the petroleum and natural gas sectors, although the agricultural manufacturing and service sectors in the country are active. The opportunities in oil, gas, retail, manufacturing, finance, automotive and many other sectors in Iran are vast.

Iran had been under sanctions for over three decades, which are now easing given the implementation earlier in the year of the Joint Comprehensive Plan of Action ("JCPOA") between the P5 +1, the European Union and Iran. In the UAE, much of the previously applicable UN sanctions, which restricted business with Iran, are no longer applicable. As a result, individuals and entities are no longer generally restricted from dealings related to Iran, subject to certain limited remaining sanction regimes (such as those related to US persons, human rights breaches, terrorism and nuclear capable ballistic missiles).

The US Effect

Given the above opportunities and the lifting of sanctions, business in Iran should be prospering significantly since the lifting of such sanctions on 16 January 2016 (Implementation Day). However, this has not happened. The primary reason is that foreign banks are reluctant and nervous to conduct Iran related business. This remains true even after Iranian banks have reconnected to SWIFT (Society for Worldwide Interbank Financial Telecommunication) and stand ready to transfer funds internationally.1 Such reluctance and nervousness on the part of foreign banks stems from warnings from certain US clearing banks in Europe, Asia and the Middle East that their US based dollar accounts would face close scrutiny if they did business with Iran. Such warnings were echoed by US Treasury officials in meetings in the Gulf earlier in the year.2

Indeed, such warnings have been contrary to the spirit of the JCPOA, and also have little to no basis in law. The consequence has been a significant stifling of foreign direct investment and foreign business activity in Iran. Such stifling has been so significant as to cause outcries by not only the Iranians but also the Europeans and others who want to do business in Iran. The US administration's most recent reaction has been to publicly reconfirm that foreign companies could work with Tehran through European banks.3 Also US officials have toured the world to host informal roadshows to help businesses (ironically, to help primarily non-US businesses) understand the maze of Iran related sanctions and how business may be conducted with Iran without penalties.4

Unfortunately, such measures have not alleviated the nervousness of foreign banks and they (including mostly European banks) continue to reject Iran related business, awaiting further clarity which may not be forthcoming until the US election in November 2016. To an extent such rejection is understandable - no bank wants to pay a fine of several billion dollars if indicted by the US government for dealings with Iran.5

The consequence of such banking rejection is that some European and Asian companies pay up to ten percent of the value of a transaction to transfer money via exchange houses or via small developing economy banks.6 There are glimmers of hope, however: smaller banks in Belgium, Germany, Austria, Turkey and India have chosen to step into the fray and handle transactions on behalf of certain customers doing business in Iran.7

Iranian Banking Standards

But there are other hurdles on the horizon: Iranian banking standards and risk management standards. Indeed, as of January 2016, four out of five Iranian banks had not published annual reports for the financial year up to March 2015 and only five out of nine Iranian banks provided an audit report as part of their annual financial statements.8 Many of the banks do not comply with International Financial Reporting Standards (a globally accepted accounting standard). This means that the annual audited accounts of Iranian banks might not be on par with audited accounts of banks in other jurisdictions. In similar fashion, Iranian banks do not have adequate anti-money laundering procedures and Know-Your-Customer systems.

Exacerbating such issues is that the rules used by many Iranian banks for risk management and capital requirements are still only based on Basel I. Most US and European banks are already moving towards compliance with Basel III.

Such lack of standards will cause a wide disconnect between Iranian and foreign banks – a disconnect that can create significant operational hurdles for foreign banks in transacting with Iranian banks. Such transactions are the backbone of an emerging economy and critical to its growth.

The Trillion Toman Challenge

The hurdles to doing business in Iran have been significantly reduced due to the easing of sanctions earlier this year. However, obstacles remain: restrictions on US dollar transactions and restrictions regarding dealings with US persons, as well as certain lingering sanctions; reluctance and nervousness by foreign businesses and banks due to lack of clarity concerning the US Treasury's position on remaining sanctions; and inadequate accounting standards, risk management, and capital requirements at Iranian banks.

However, the opportunities in Iran are far too vast to pass up. The trillion toman challenge is whether and how to participate in such a potentially phenomenal market without taking undue risks.

Footnotes

1. A. Mustafa, 'Iran's Nuclear Deal Emphasis has evaporated', Gulf News 11 April 2016.

2. M. Arnold, 'Iran eyes 'bad banks' to mop up toxic loans', Financial times 9 March 2016.

3. Presstv.com, "US not to give Iran access to its financial system: State Department, 5 April 2016.

4. S. Kerr, G. Dyer, 'US roadshows aim to guide groups through Iran Sanctions maze', Financial Times 5 April 2016.

5. A. Mustafa, 'Iran's Nuclear Deal Emphasis has evaporated', Gulf News 11 April 2016.

6. S. Kerr, G. Dyer, 'US Roadshows aim to guide groups through Iran Sanctions', Financial Times 5 April 2016.

7. Presstv.com, 3 April 2016.

8. M. Arnold, 'British regulations help Iranian banks come in from the cold ', Financial Times 31 January 2016.

Originally published 23 May 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions