As Iran Faces Virus, Trump Admin Fails to Use Swiss Channel to Ease Medical Exports

The report is published in partnership with the European Leadership Network.

Just a few days after Iran announced its first deaths from COVID-19 in February, the Trump administration’s Special Envoy for Iran Brian Hook was asked during a briefing for an update on the Swiss Humanitarian Trade Arrangement (SHTA), a payment channel intended to ease the sale of medicine and medical devices by Swiss companies to Iran. Responding to the question, Hook acknowledged that no further exports had been processed since a pilot sale of $2.55 million of medication a month earlier, but insisted that there were “more transactions coming.”

Two months later, over 6,000 Iranians have lost their lives to COVID-19, and the Swiss channel has yet to process any further transactions. 

Since the Trump administration reimposed secondary sanctions on Iran in November 2018, the Swiss government has worked to establish a dedicated banking channel to ease the export of medical supplies to Iran. Switzerland is the second largest supplier of medicine to Iran after the European Union. While technically exempt from sanctions, the sale of medical supplies has been made more difficult as banks refuse to process Iran-related transactions. In a recent client note, former Director of the US Office of Foreign Asset Control (OFAC) John Smith detailed how “the Trump administration’s maximum pressure campaign has likely dissuaded many companies from exporting medicine and medical devices to Iran that they otherwise could.” 

New data from the Swiss Federal Customs Administration makes clear that the export of medicine to Iran has weakened over the last year. As a result of these disruptions, ordinary Iranians face rising prices and shortages of sorely-needed medication, a situation all the more unacceptable during a global pandemic.

As COVID-19 spread in Iran, the Trump administration faced increased pressure to ease humanitarian trade. A statement organized by the European Leadership Network and The Iran Project and signed by 24 former senior officials from the United States and Europe warned that “failure to provide relief could have significant and long-lasting consequences for the reputation of the United States and Europe among the Iranian people.” But the administration has yet to respond to these calls with any sense of urgency, deflecting questions on humanitarian trade by pointing to the channel “set up through the Swiss to help the Iranian people.”

While Swiss officials originally hoped the payment channel would be ready in February 2019, it took nearly a year to complete negotiations with the Trump administration and launch the framework. Hawkish officials, including John Bolton, saw the channel as an unnecessary concession to Iran. The administration also proceeded with new sanctions designations that complicated implementation of the channel, including a move in September 2019 to impose new sanctions on the Central Bank of Iran that eliminated long-standing exemptions allowing the bank to play a role in humanitarian trade. The Swiss channel was only “finalized” by the US Treasury Department on 27 February, the same day a new general license was issued restoring key humanitarian exemptions for Iran’s central bank. 

The failure to process further transactions through the channel over the last three months is surprising given the reported interest among “dozens” of Swiss companies. But the Trump administration has failed to address two key impediments. 

First, companies wishing to use the channel are faced with extraordinary reporting requirements. European officials have likened these requirements to a “fishing expedition” for information about Iran’s financial sector. Rather than simply revive the arrangement that enabled Swiss entities to sustain sales of medicine to Iran after the Obama administration imposed devastating financial sanctions on Iran, the Trump administration increased the documentation and reporting requirements, demanding unprecedented disclosures by Swiss companies on the financial holdings of the Iranian banks from which they expect to receive payment. Even if Swiss exporters are prepared to overcome these hurdles, the channel is obviously ill-suited as a means to ease trade during a global pandemic when purchases of medical supplies need to be made quickly and reliably. Peter Harrell, who worked on Iran sanctions in the Obama administration, has argued that the Treasury Department ought to “temporarily relax some of the most oversight stringent requirements for this” in light of COVID-19.

Second, the Trump administration apparently failed to ensure that there was sufficient liquidity available to allow Iranian importers to pay their Swiss suppliers, leaving Swiss officials in a lurch. The Central Bank of Iran is believed to maintain CHF 50 million in reserves at Banque de Commerce et de Placements (BCP), the bank which has long played a central role in Swiss-Iran bilateral trade and around which SHTA has been designed. In addition, several Iranian private sector banks also hold funds at BCP. A rough estimate of the combined holdings is CHF 150 million. By comparison, Switzerland’s total exports of pharmaceutical products to Iran in 2019 was just over CHF 150 million.

Iranian authorities are reluctant to draw down these reserves, which would be nearly impossible to replenish while the country remains under “maximum pressure” sanctions. In a revealing interview from last December, Brian Hook suggested that Iran maintains access to just 10 percent of its foreign currency reserves. Notably, Iran’s central bank governor, Abdolnasser Hemmati, has suggested that Iran’s request for an emergency loan from the International Monetary Fund (IMF) could help address liquidity issues facing SHTA, stating that the IMF loan could be paid out via the Swiss channel in order to assuage concerns voiced by the Trump administration over the potential misuse of funds. 

The successful operationalization of SHTA requires Iranian buy-in. Authorities in Tehran will be concerned about funneling critical trade of medical supplies through a channel made unreliable due to precarious access to financial resources. Meanwhile, recent enforcement actions taken against Halkbank in Turkey and the Industrial Bank of Korea—two banks that have historically supported humanitarian trade but which failed to maintain rigorous compliance standards—will test the resolve of executives at BCP. In another warning shot, OFAC last week announced a $7.8 million settlement agreement with Swiss technology firm SITA, which inadvertently used US-based servers to provide baggage handling services to an Iranian airline making it the “the first company to pay a large settlement merely for routing otherwise lawful transactions through U.S. computer servers.”

The troubled launch of the Swiss channel offers a cautionary tale for other countries seeking to ease humanitarian trade with Iran through good faith engagement with the Trump administration. Since November of last year, the South Korean government has been in discussions with the Trump administration over measures that could revive falling humanitarian exports to Iran. In December 2019, Korean pharmaceutical exports to Iran were down 47 percent year-on-year. Recently, Korean authorities announced that they had made some headway and that they are working to establish the Korean Humanitarian Trade Arrangement, an analogue of the Swiss channel that would be built around Woori Bank. 

The Swiss government is advising the Korean government on how to meet the stringent requirements set-forth by officials in Washington. While South Korea is not a major exporter of pharmaceutical products to Iran, it is a former buyer of Iranian oil and Iran maintains significant reserves in the country. One possible solution to the liquidity problems facing SHTA may be to allow Iran’s central bank to draw on reserves held in South Korea in order to make payments to Swiss exporters. In March, Iranian Foreign Ministry Spokesperson Abbas Mousavi complained that the United States was “creating an obstacle for the transfer of Iran’s financial resources into the channel,” and cited an effort to draw “other financial resources in various countries” for use in SHTA. 

Against this backdrop, references made by Trump administration officials to SHTA as evidence of efforts to protect humanitarian trade with Iran have been deceptive, if not deceitful. The Treasury Department’s recent reply to congresswoman Alexandria Occasio-Cortez’s letter warning of sanctions impacts on Iran's COVID-19 response, tellingly omits any reference to the Swiss channel, suggesting that the administration is aware that their failure to operationalize the channel during the COVID-19 crisis undermines voiced commitments to humanitarian trade. 

Swiss officials should be applauded for continuing to pursue operationalization of the channel despite the hurdles put in front of them. They remain confident that further transactions will be made soon and note progress on a solution that would give Iran freer use of its foreign currency reserves. But the Trump administration abjectly failed to ensure its much-touted channel eased Iran’s access to medical supplies at the moment of greatest need for the Iranian people.

Photo: State Department

Iran's Urgent IMF Loan Request Challenges Trump Policy

This article was originally published by Responsible Statecraft.

For the first time in 60 years, Iran has requested a loan from the International Monetary Fund (IMF), seeking emergency financing to support its efforts to combat COVID-19. On March 4, the IMF announced that it would make available up to $50 billion in financial assistance through its Rapid Financing Instrument (RFI), a facility targeting “low-income and emerging markets.”

Iran’s request for financial assistance reflects the acute challenges the country faces in its efforts to control the country’s COVID-19 outbreak—over 14,000 Iranians have been infected according to official statistics. The government has mobilized extensive resources to try to respond to the public health crisis, but the Iranian economy is being pushed to a breaking point. Iran is seeking $5 billion in emergency assistance from the IMF, funding that could dramatically improve the prognosis not only for the Iranian economy, but also the health and wellbeing of the Iranian public.

As medical professor Abbas Kebriaeezadeh and recently explained, Iran is struggling to replenish inventories of medicine and medical equipment both because of supply chain disruptions related to border closures and other related restrictions as well as underlying weakness in Iran’s access to the international financial system that make payments cumbersome to complete. Short term aid from the World Health Organization and European governments, as well as countries such as China, Japan, and Qatar, has helped Iran meet immediate needs for supplies. But as the outbreak continues, and as other countries begin to confront their own public health crises, Iran will need to rely on commercial sources of medicine and medical equipment.

However, even if Iran is able to find suppliers that are able to speedily and reliably dispatch these much-needed goods, the country would still face a balance of payments problem—precisely the problem that the IMF’s RFI facility is supposed to solve. Trade data for February, before the outbreak arrived in Iran, point to significant vulnerability as Iran’s non-oil trade deficit reached $1.68 billion on the back of $4.33 billion in imports and just $2.65 billion in exports.

Since the Trump administration eliminated waivers permitting the purchase of Iranian oil in May 2018, Iran has struggled to earn the dollars and euros that are needed to keep its economy supplied with advanced goods. Consequently, over the 18 months, Iran has seen inflation reach as high as 40 percent, straining the finances of ordinary households and pushing as many as 1.6 million Iranians below the poverty line.

Iran’s economy will be hit hard by the various efforts to contain the country’s COVID-19 outbreak. Of particular concern for Iranian economists, among them Masoud Nili, a long-time advisor to the Rouhani administration, is how the skyrocketing cost of healthcare will force the central bank to pump liquidity into the economy, causing a situation Nili calls “inflationary coronavirus.” A shortage of foreign currency will make inflation worse, as the rial continues to lose value relative to other currencies. A loan from the IMF would help Iran’s central banks keep importers of foreign medicine and medical goods supplied with foreign currency, thereby easing inflationary pressures.

Importantly, Iran would not necessarily receive the IMF loan in Iran. More practically, the funds would be deposited into dollar and euro-denominated accounts controlled by the Central Bank of Iran, but maintained in Europe. So few Iranian banks maintain correspondent accounts in Europe that bringing the IMF assistance back to Iran, only to allocate it to commercial banks to be transferred on behalf of clients to suppliers in Europe, would add significant time and expense to the urgent transactions. Depositing the funds in Europe would also eliminate the risk of their misuse—financial regulators will be able to track Iran’s use of the loan within the European financial system. The loan isn’t being paid in cash, after all.

Moreover, given that the funds would likely remain in Europe, the U.S. Treasury Department could insist on oversight of the IMF loan, including the review of due diligence documentation that would be required in each instance where funds originating from the IMF are being paid into the account of a European pharmaceutical or medical equipment supplier—the suppliers have a clear interest in ensuring their sale of goods is fully compliant with U.S. secondary sanctions.

This type of oversight would not be dissimilar to the compliance framework behind the Swiss Humanitarian Trade Arrangement (SHTA), a payments channel created after the Swiss government sought clearer authorizations from the Trump administration to maintain the sale of medicine and medical equipment to Iran by Swiss firms, which include some of the world’s largest suppliers of these goods.

In light of the balance of payments problem and more fundamental issues in cross-border payments, 11 European governments have backed a trade mechanism called INSTEX. But this mechanism was created after requests made to the Trump administration for clarifications around humanitarian trade with Iran were rebuffed. Given the significant role played by the United States in the IMF, the Trump administration would need to effectively approve any financial assistance given to Iran by the IMF—the political and legal issues around an IMF loan to Iran therefore have more in common with the Swiss arrangement.

In this way, by calling upon the IMF to provide it access to a facility that the fund has offered to all similar countries confronting COVID-19, Iran is effectively asking the fund’s leadership to seek such an approval from the Trump administration in order to open the kind of financial channel that Iran’s central bank has found increasingly difficult to maintain. In the two years since the Trump administration launch its “maximum pressure” sanctions campaign, Iran has struggled to freely access the ample foreign currency reserves—valued at around $70 billion—that it maintains in accounts around the world. This is in large part due to the hesitance of central banks, including European central banks, the Bank of Japan, and the Reserve Bank of India, to invite scrutiny from U.S. sanctions enforcement authorities and possibly compromise their ties with the U.S. financial system. If, because of these longstanding impediments, the IMF fails to provide Iran financial assistance that it makes available to countries in similar situations, the fund’s reputation will take a hit, as the fact of effective American control over its operations is laid bare.

It is unlikely that Iran will receive an IMF loan, but interestingly the official request comes just days after the Treasury Department clarified authorizations that permit financial dealings with the Central Bank of Iran in order to facilitate humanitarian trade — further evidence that administration officials do not see systemic issues related to terrorist financing or money laundering stemming from Iran’s humanitarian trade. The latest clarifications became necessary after an unprecedented move to sanction Iran’s central bank under new authorities in September had been widely perceived to eliminate the longstanding humanitarian exemption.

Clearly, there is a discussion-taking place within the Trump administration about the acceptable level of isolation for Iran’s central bank, especially if that isolation harms the Iranian people. While Iran is unable to directly engage with the Trump administration over these issues given the lack of diplomatic ties and ongoing political tensions, the outreach to the IMF can be seen as an effort to help shape the internal debate over these policies at the State Department and Treasury Department. Iran’s request is legitimate, its economic needs are acute, and the stakes could not be higher. Iran should get this loan.

Photo: IRNA

Treasury Department Makes Unprecedented Iran Sanctions Move

On Thursday, Swiss authorities announced that they had processed a pilot transaction through the Swiss Humanitarian Trade Arrangement (SHTA), a new payment channel that intends to ease the sale of food and medicine to Iran by Swiss companies. Work on this channel began in late 2018 following the Trump administration’s reimposition of secondary sanctions on Iran.

Expectations around the mechanism should be tempered with caution. The Trump administration dragged its feet for over a year before supporting the mechanism, despite clear evidence that sanctions were causing humanitarian harm. Additionally, Iranians might be reluctant to use the mechanism. There are concerns that some of the conditions imposed on the SHTA by the Treasury Department could be used as a part of a “fishing expedition” for information that could be used to interfere with routine trade.

But hidden in the mechanics of SHTA’s initial 2.3 million-euro transaction is an unprecedented provision that could help address growing concerns that the Trump administration’s “maximum pressure” sanctions campaign will be impossible to lift even in the aftermath of new negotiations with Iran.

The relevant provision is hidden in the jargon of a statement issued last October describing Treasury’s framework for SHTA: “Provided that foreign financial institutions commit to implement stringent, enhanced due-diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.”

A press release on the SHTA released by Swiss authorities confirms that the initial transaction was processed on the basis that the Treasury Department “has given the necessary assurances to the Swiss bank involved for this specific transaction.”

Such assurances, when provided in written form, are called “letters of comfort.” This is likely the first ever transaction in which the department addressed the concerns of a foreign financial institution by providing a letter of comfort, despite the fact that the transaction was technically sanctions exempt.

This is highly significant, given that the architects of the Trump administration's Iran policy have spoken publicly about their efforts to build a “sanctions wall.” Building the wall involves creating a web of complex designations related to Iran’s role as a “state sponsor of terrorism, including its terror-financing central bank; its missile program, which is progressing toward an intercontinental ballistic missile; and its human-rights abuses and corruption.” The intention is to heighten the risk perception of banks and businesses in order to keep them from doing business with Iran even if a new deal is stuck.

For those who do want to do business in Iran, this problem first surfaced during the Obama administration. In the months immediately following the implementation of the nuclear deal with Iran, U.S. officials toured Europe and encouraged companies to go ahead with their plans for Iran, and financial institutions to process Iran-related payments on behalf of their clients. But companies found themselves hitting a wall as banks remained reticent to offer the required services.

Bankers were anxious about what was and wasn’t allowed, and made their concerns known at a meeting with Secretary of State John Kerry. But the Obama administration resisted calls from European bankers and officials to provide letters of comfort, relying instead on the technical permissions afforded under sanctions relief and their verbal encouragement.

This approach might have sufficed had more time been available for economic operators to develop a new understanding of the compliance risks emanating from Iran, but the election of President Donald Trump and his campaign promises to discard the Iran nuclear deal cut short any such period of recalibration. Had the Obama administration employed comfort letters, more trade and investment could have been completed in the period between the nuclear deal’s implementation and Trump’s inauguration.

Here, the launch of SHTA establishes an important and hopeful precedent, and may improve the prospects of negotiations toward an end to the U.S.-Iranian standoff. Fears of a “sanctions wall” have contributed to Tehran’s unwillingness to enter any talks. But if Trump or any future president credibly combines quick and decisive sanctions relief with letters of comfort, it would be a game-changer for multinational companies engaged in Iran and the banks on which they rely.

Photo: Wikicommons

Swiss Channel for Iran Humanitarian Trade Launches After Lengthy Delay

This press release was issued by the Embassy of Switzerland in Iran.

The Swiss Humanitarian Trade Arrangement (SHTA), a payment mechanism to enable humanitarian goods to be delivered to Iran, is about to be implemented. On 27 January, an initial payment for the shipment of medicines to Iran was approved in the form of a trial run. 

The aim of the Swiss Humanitarian Trade Arrangement (SHTA) is to ensure that exporters and trading companies in the food, pharmaceutical and medical sectors based in Switzerland have a secure payment channel with a Swiss bank through which payments for their exports to Iran are guaranteed. In this way, Switzerland is helping to supply the Iranian population with agricultural commodities, food, medicines and medical equipment. This is in keeping with Switzerland’s humanitarian tradition. 

The SHTA was developed by Switzerland in close cooperation with the relevant authorities in the USA and Iran, as well as with selected Swiss banks and companies. Under the SHTA, the US Department of the Treasury will provide the banks involved with the necessary assurances that the financial transactions can be processed in accordance with US legislation. 

In return, exporters and banks participating in the SHTA will provide SECO with detailed information about their business activities and business partners in Iran, and the transactions they carry out. SECO will verify this information and, in cooperation with the US Treasury Department, ensure that increased due diligence has been exercised in respect of the transactions carried out. To this end, SECO will also make the information received from the banks and exporters available to the US Treasury Department. 

Negotiations on the SHTA are nearing completion. SECO, together with the FDFA and the State Secretariat for International Financial Matters SIF, has been working intensively since the end of 2018 to implement such a humanitarian payment mechanism. The Federal Council approved the implementation of the SHTA in principle on 20 January 2020. 

As a pilot transaction, an initial payment for the shipment of medicines to Iran by a Swiss pharmaceutical company was authorized on 27 January. The shipment consists of cancer drugs and drugs required for organ transplants. The medicines are valued at approximately EUR 2.3 million. As the SHTA is not yet in force, the US Treasury has given the necessary assurances to the Swiss bank involved for this specific transaction.

Since the US withdrew from the nuclear agreement with Iran in May 2018 and reintroduced unilateral US sanctions, it has become increasingly difficult for Swiss exporters to supply humanitarian goods to Iran, although such shipments are in principle not subject to US sanctions. Due to the legal risks associated with US sanctions, hardly any financial institutions are willing to make payments in connection with Iran. The few remaining payment channels are expensive, complex and not very reliable. 

Photo: IRNA