Iran: Art Of The Deal Breaker: US Snap Back Sanctions On Iran

Last Updated: 15 May 2018
Article by Ibtissem Lassoued

Iran faces imminent disruption in its international trade ties as the United States (US) has announced that it will withdraw from the Joint Comprehensive Plan of Action (JCPOA), the only existing agreement constraining Iran's nuclear programme, and invoke both primary and secondary snap back sanctions on Iran.

This update provides a brief insight into President Trump's announcement made on 8th May 2018 and the potential effect of re-imposed sanctions on our clients.

What is the US' new position on Iran?

On 8th May 2018, President Trump announced that the US will withdraw from the JCPOA, otherwise known as the Iran Deal (the "Deal"), that had been agreed between the permanent Members of the UN Security Council (UK, China, Russia, France, and the US), the EU, Germany and Iran, on 14th July 2015. The effect of this, as announced, will be a total reversal of the sanctions relief provided under the Deal and full reassertion of all US nuclear-related sanctions applied to Iran before Implementation day (16th January 2016).

President Trump has provided a National Security Presidential Memorandum that issues directions for the preparation for the re-imposition, or snap back, of all US sanctions that had been waived under the Iran Deal.

Re-imposition will be complete, but will not happen on an immediate basis. Rather, the US State Department has revoked the existing statutory waivers on previous sanctions implemented under the Deal and issued new, temporary waivers to permit a limited winding down period, during which businesses must prepare to wind down all trade initiated during the short-lived permission granted by the terms of the Iran Deal.

All prohibited activity will require conclusion by 4th November 2018, at the end of the designated 180-day winding down period. Certain targeted activities will be subject to a shorter 90-day deadline ending on 6th August 2018, including but not limited to dollar bill sales to the Government of Iran, trade in gold and precious metals, trade in Iran's automotive sector, and purchase of Iranian sovereign debt. 

What does this mean for businesses operating out of the Middle East?

The new position of the US is at odds with that of the other signatory parties of the Iran Deal, with the UK, France and Germany already having released a joint statement on 8th May 2018, committing to ensuring that the Iran Deal is upheld. The diversion in approach adopted by major geo-political players adds tensions to an already sensitive situation and will further test both political and business relations in the Middle East.

This situation will likely result in a significant period of precariousness for all those who have business dealings with Iran. The direct effect of the US' position will mean that the secondary sanctions, namely sanctions that impact non-US actors who interact with Iranian entities, will be re-imposed and may lead to non-US actors being subject to censure and punitive action from the US.

This will be a cause of significant concern, adding increased complexity to a difficult situation, and will likely further diminish the legality and practicality of relations with Iran. The convoluted sanctions environment has already had a detrimental impact on Middle Eastern countries' efforts to re-establish trade ties with Iran. According to UAE Government Trade Statistics, for example, the Gulf nation has already suffered a reduction in its trade relations with Iran of 10% year on year since 2014, despite converse intentions to reopen trade routes under the improved access provided by the Deal. This trend will likely become even further pronounced as the web of trade restrictions tightens.

Sanctions are just one element of a turbulent risk environment when dealing with the Iranian market, which is mired by a number of regulatory deficiencies and transparency issues. The Financial Action Task Force (FATF) has been active in driving Iran to address crucial Anti-Money Laundering (AML) and Combating Terrorist Financing (CTF) weaknesses, but tangible progress in this area has been negligible. Iran is included on the FATF's list of high risk and monitored countries, and in its most recent public statement on 23rd February 2018, the global watchdog reiterated the importance of businesses conducting Enhanced Due Diligence (EDD) when dealing with Iranian parties.

The Middle East and North Africa Financial Actions Task Force (MENAFATF), the regional FATF body, closely aligns itself with the advice of the FATF and, as such, has not directed its member countries to deviate from the cautious approach recommended by its international counterpart.

Despite the unilateral nature of US sanctions, and the absence of a corresponding reinstatement of UN sanctions, businesses in the Middle East will still be impacted by the US' extreme action. With an elevated risk of sanctions infractions, the high cost of compliance, and facing the deterrence of secondary sanctions, the US upending the JCPOA will radically undermine the appetite and ability of many businesses, in the Middle East and beyond, to trade with Iran.

Repercussions from the US' withdrawal will not be confined to entities that trade with Iran, as collective fear of punitive measures will osmose into the global financial system. Propounded by the climbing risk levels, the global de-risking phenomenon featured by financial institutions across the world, whereby banks avoid rather than mitigate risk in their business activity, will likely become more pronounced around activity relating to Iran, with further decline expected in Correspondent Banking Relationships (CBRs).

What will happen now?

Whilst the remaining JCPOA signatory parties have stated their intent to adhere and continue with the terms of the Iran Deal, it is unlikely that this will be practicable and it is unclear at this pivotal moment whether the Deal has any chance of survival. The likelihood of any enduring agreement will evaporate should Iran pursue retaliatory action and resume advancement of its nuclear programme. Accordingly, there may be further divergence and instability in regards to the international position in respect of Iran, so continued monitoring will be required for all interested parties.

In light of this uncertainty, it is vital that businesses are cognisant of the added risk and onerous obligations when considering trade with Iran, to ensure that they do not get caught in the chaos of the devolving legal and political situation.

We will continue to update you on the significant developments relating to this subject as they unfold, as well as any immediate concerns for the Middle East.

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