How Europe Can Help Iran Fight COVID-19

This analysis was originally published by the European Council on Foreign Relations.

Iran became an early epicentre of the COVID-19 outbreak due to its close political and economic relations with China. Yet the Iranian healthcare sector overwhelmingly depends on European medicine and medical devices—products that China has been unable to replace. While the European Union and its member states must prioritize their own fight against the virus, they should also protect this important humanitarian connection with Iran.

The Iranian healthcare system is reliant on long-standing relations with European suppliers to see it through the crisis. If there is a grave breakdown in either this supply chain or Iran’s healthcare sector, it will spell trouble for Europe. Given that Iran continues to be the epicenter of the pandemic in a fragile Middle East, the coronavirus is likely to lead to increased refugee flows (particularly among Afghan communities) to Europe. Despite their conflicting opinions on the leadership in Tehran, Europe’s Iranian diaspora community – who, until recently, often travelled to Iran – broadly agree on the need for enhanced humanitarian assistance to Iran, which could save hundreds of thousands of people.

Following two years of recession linked to systematic mismanagement, falling oil prices, and the unique pressure created by US sanctions, Iran’s government is facing extreme trade-offs between the optimal public healthcare response and the need to prevent a full-blown economic crisis. These sanctions hamper Iran’s immediate response to COVID-19.. Despite their humanitarian exemptions, the measures make the import of medicine and medical equipment – as well as the raw materials needed to produce many of these goods in Iran – both slower and more expensive. This erodes the capacity of the Iranian healthcare system to replenish its inventories as Iran’s outbreak moves into its third month. Moreover, the Iranian government cannot afford the type of economic stimulus packages that governments across the globe have implemented to reduce the impact of lockdowns.

While the US has made general offers to send aid to Iran, leaders in Tehran will perceivethem as disingenuous for so long as the sanctions are in place. Given the sharp downturn in US-Iranian relations under the Trump administration, it is unrealistic to think that either the United States will provide full sanctions relief or that Iran will accept aid from a country it believes to be pursuing regime change in Tehran. Although the more hard-line elements within the Iranian system are suspicious of European assistance (as recently reflected in Iran’s sudden rejection of aid from Médecins Sans Frontières), there is some breathing room for the country to cooperate with Europe on this front.

Building on recent announcements by the EU, France, the United Kingdom, and Germany, European governments should continue to provide financial assistance and other aid to Iran’s public healthcare system and trusted NGO partners working in the country. European companies can also boost humanitarian trade via the Instrument in Support of Trade Exchanges (INSTEX) – which has now processed its first transaction, targeting Iran’s core public healthcare needs in the fight against COVID-19..

The European Commission has implemented export controls on key items in the fight against COVID-19, to minimize shortages in Europe. This move puts Iran and other low-income and developing countries at even greater risk, given their significant reliance on European exports. Rather than cut these supply chains, which forces Iran to turn to China and Russia, the EU should explore whether Iran could ramp up its production of basic medical equipment, such as surgical masks, to help meet demand in Europe. This would allow European manufacturers to focus on the production of more advanced items, such as face shields – the surplus of which it could/ sell to Iran.

Most importantly, European governments and the EU should press the US to strengthen the humanitarian exemptions in its sanctions. European leaders should urge the US Treasury to expand and clarify the scope of these exemptions to directly include products Iran needs to combat COVID-19 effectively. Such clarification, which could take the form of a “white list” of goods, should allow European companies to apply General License No. 8, under which the Central Bank of Iran can help facilitate humanitarian trade.

Given the unprecedented humanitarian fallout from the COVID-19 crisis, European governments should also urge the US administration to issue comfort letters to European banks that already conduct enhanced due diligence on trade with Iran. This would help reassure these banks that the US Office of Foreign Assets Control will not penalise them for providing payment channels to exporters of humanitarian goods. The Trump administration recently took the unprecedented step of issuing such a letter to Swiss bank BCP under the Swiss Humanitarian Trade Arrangement. As former US official Richard Newphew has argues, the US could provide similar letters to manufacturers and transport firms, helping reassure companies across the entire medical supply chain that they can facilitate sales to Iran.

While the International Monetary Fund reviews Iran’s $5 billion loan request, European governments should press the Trump administration to temporarily allow Tehran to access Iranian foreign currency reserves. In this, the administration could restore the escrow system that enabled Iran to use its accrued oil revenues to purchase humanitarian goods prior to May 2019. These funds (including those in Europe) could be subject to existing enhanced due diligence requirements and spent within the countries in which they are currently located. The funds in Europe could also be linked to INSTEX.

Such US measure could be connected to humanitarian steps by Iran, not least the release of American detainees. In particular, France and the UK – some of whose nationals Tehran has released from prison (either permanently or temporarily) in recent weeks – should stand ready to support these efforts. Europeans actors should emphasize that targeted relief need not change the substance of the Trump administration’s policy on Iran or reduce its leverage in potential negotiations with the country. Should Europe and the US fail to provide relief to Iran in such grave circumstances, this would turn the Iranian public against them for generations. And it would give ammunition to those in Iran who favor confrontation with the West.

Photo: IRNA

Under Trump, US Sale of Medical Goods to Iran Down Nearly 40%

With just two weeks until Trump reimposes secondary sanctions on Iran, administration officials are under increasing pressure to prove that the returning sanctions will not adversely impact humanitarian trade.

Secretary of State Mike Pompeo has declared that “sanctions and economic pressure are directed at the regime and its malign proxies, not at the Iranian people.” But a review of US trade data shows that humanitarian exports from the US to Iran have withered under the Trump administration, lending credence to claims that while sanctions exemptions for humanitarian trade persist in principle, companies are struggling to avail themselves of these exemptions in practice.

In August, US exports to Iran surprisingly surged to nearly USD 150 million dollars, levels not seen since late 2008, when the Bush administration oversaw the sale of a significant volume of wheat to Iran, pushing monthly exports above USD 100 million for several months. The sudden increase in US exports to Iran was even reported upon by Iranian media outlets.

Looking into the content of those exports, just over USD 140 million dollars of the August trade is attributable to the sale of American soybeans to Iran, the number one destination for the crop that month. Due to Trump’s trade war, the export of soybeans to China has collapsed 95 percent, making commodities traders eager to offload supply to Iran.

But August’s sharp increase in exports to Iran remains exceptional for the Trump administration. Looking to data for the twenty months of the Trump presidency, a clear pattern emerges—along with overall trade, the export of humanitarian goods like food and medicine remains significantly lower than average monthly values registered during the Obama years.

Isolating humanitarian trade within United States Census Bureau export data can be done by analyzing twenty-one of ninety-nine standard “Schedule B” commodity codes, used to categorize trade in live animals, cereals, food oils, pharmaceuticals, and medical devices, among other goods that may fall under sanctions exempt or readily licensed trade.

Looking to the average monthly export value for goods in these categories, the Trump administration’s average of USD 15.4 million is actually about 6 percent higher than the monthly average of 14.5 million dollars registered during the Obama years. However, the Trump average is significantly distorted by the bumper trade in soybeans during July and August. When excluding these two months from the calculation of the Trump average, the monthly export value falls to just USD 7.1 million dollars, about half the level seen during the Obama years.

The significant decline in humanitarian trade is also evidenced by looking to the median monthly export value, which may better account for the natural volatility in US exports to Iran. In the 96 months of the Obama presidency, the median value of humanitarian exports to Iran was USD 9.4 million dollars per month. In the 20 months of the Trump presidency so far, the same figure has fallen to USD 5.8 million dollars per month, a 40 percent reduction.

The most regular kind of humanitarian trade between the US and Iran is the export of pharmaceutical goods. There was just a single month during the whole Obama presidency in which no exports of pharmaceutical products to Iran were registered. Likewise, pharmaceutical exports to Iran have so far been registered in every month of the Trump presidency. However, even in this routine trade, the Trump administration is falling short.

Under Obama, the United States exported an average of USD 2.1 million in pharmaceutical products to Iran each month. Under Trump, that monthly average export value has collapsed to just USD 720,000, a paltry one-third of the former level.

Importantly, in the last few years, the trade in medical devices to Iran has outpaced trade in pharmaceuticals, which may point to Iran succeeding in finding other suppliers of key medications while also boosting domestic production. The shift begins around March 2014, shortly after the January 2014 implementation of the Joint Plan of Action (JPOA)—the precursor of the nuclear deal—in accordance with which the Obama administration began to expand secondary sanctions relief for humanitarian trade, including pharmaceutical exports to Iran. It is likely that European exports continue to offset the fall in American exports, including the reexport of American-made products from European divisions of American companies.

However, when adding medical devices and equipment into an overall calculation of exports of medical goods, the picture remains dire. During the Obama years, the US exported an average of USD 6.3 million in medical goods each month. In the first 20 months of the Trump administration, that figure has fallen to USD 4.6 million, a significant 37 percent drop.  

The decline of medical exports to Iran is unlikely to reflect falling Iranian demand. There were no exports of medical devices or equipment to Iran during the first nine months of the Trump presidency. But in October 2017, the same month when Trump “decertified” the JCPOA nuclear deal, exports of medical devices and equipment began again, and have recently reached the highest monthly level since 2015, despite the fact that the sharp devaluation of the real has made such imports much more expensive. Add to this the clear evidence from Iran that sanctions are beginning to result in shortages in key medicines and foodstuffs, and it is obvious that there remains significant scope for the Trump administration to expand its humanitarian trade with Iran.

It would seem that the Trump administration has reached a kind of crossroads when it comes to its strategy for humanitarian trade with Iran. It has publicly insisted that it will allow trade to flow and export volumes in the last few months are more consistent with the decade-long pattern of exports in food and medicine sustained by the US concurrently with the imposition of secondary sanctions.

At the same time, moves such as the recent sanctions targeting Parsian Bank, suggest that the administration is unwilling to send reliable signals to those companies and financial institutions engaged in vital humanitarian trade with Iran. Whether the administration will make good on its own reassurances and meet its moral obligation to facilitate humanitarian trade with Iran remains to be seen.

Photo Credit: IRNA

New Sanctions on Iran’s Parsian Bank Threaten Humanitarian Trade

On Tuesday, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) applied new sanctions on “at least 20 corporations and financial institutions” associated with the Bonyad Taavon Basij, encompassing activities in “Iran’s automotive, mining, metals, and banking industries.”

While the designation of bonyads, which are best understood as holding companies, has been a common feature of US sanctions policy for over a decade, yesterday’s action actually reflects a significant break with sanctions policy under the Obama administration. Included among the targeted entities is Parsian Bank, one of Iran’s leading private sector banks and a vital conduit for trade with Europe, especially humanitarian trade.

In the previous sanctions period, Parsian had been among the Iranian banks that were not subject to secondary sanctions despite being designated along with the rest of the Iranian financial system. This was due to the fact that the Treasury Department had no derogatory information at the time to suggest the bank was engaged or linked to terrorist financing. Indeed, Parsian, established in 2001, has a reputation as among the most trustworthy and well-managed Iranian banks.

Now, US authorities consider Parsian a Specially Designated Global Terrorist (SDGT), a kind of designation shared with the Qods Force of the Islamic Revolutionary Guard Corps (IRGC) among other state and quasi-state groups. The bank is now subject to secondary sanctions, meaning that non-US persons which conduct business with the bank are open to the risk of being sanctioned themselves.

In this way, the new sanctions designation has substantiated fears that had been rising among senior bankers in Iran. There was growing concern that the Trump administration would go beyond the designations of the previous US administration when placing Iran’s banks under secondary sanctions once again. Concerns first rose when OFAC issued its first guidance document following President Trump’s withdraw from the Iran nuclear deal on May 8. The guidance left it ambiguous as to how banks such as Parsian, previously exempt from secondary sanctions, would be treated.

Iranian bankers will also be dismayed that the new designation has come after Iran has made notable progress in passing legislation in accordance to the FATF action plan, which seeks to improve the integrity of Iran’s financial system. A crucial FATF plenary meeting takes place this week in Paris during which Iran’s progress will be evaluated. Further efforts on FATF reform will be hard to justify for domestic stakeholders if banks like Parsian are to be blacklisted by the US Treasury.

Alongside Pasargad Bank, Middle East Bank, and Saman Bank, Parsian was among the few Iranian financial institutions with standards reflective of FATF requirements for anti-money laundering and combatting terrorist financing procedures. These banks were therefore those entrusted by multinational companies to handle local banking needs. Even compliant trade would be impossible for these companies if all Iranian financial institutions are off-limit. A local bank is necessary for basic commercial operations.

According to Tyler Cullis, a sanctions lawyer with the Washington firm Ferrari & Associates, “Today’s designation action had everything to do with sending a signal to the world that all business with Iran is potentially sanctionable.”

In Cullis’ assessment, the links between Parsian and the entity at the heart of the new designations are unusually distant, suggesting a political motive “to inform the private sector that no amount of due diligence” is adequate—a departure from the more practical stance taken by OFAC in the past.

“Treasury designated Bank Parsian for providing material support to an Iranian entity that was seven layers removed from the Basij. It is unlikely that any reasonable amount of due diligence would have apprised Bank Parsian of the fact that it may have been engaged in sanctionable conduct under U.S. law,” Cullis notes.  

The day before the new designation was issued, Special Envoy for Iran Brian Hook was in Luxembourg, meeting with European foreign ministers. On his agenda was a structured dialogue about humanitarian trade. Cognizant of the risks posed by returning US sanctions to their effort to keep Iran in the nuclear deal, European leaders have been seeking clarity on humanitarian trade since June. No concrete assurances have been issued to date. The issue has also caught the attention of the International Court of Justice, which recently ruled that unless the United States lifts restrictions on humanitarian trade with Iran, it will find itself in violation of international law.

While the State Department has given lip service to the issue of humanitarian trade, with Secretary of State Pompeo offering assurances that “sanctions and economic pressure are directed at the regime and its malign proxies, not at the Iranian people,” the designation of Parsian suggests that the Treasury Department is not on the same page. Not only is the Parsian designation peripheral to the action against Bonyad Taavon Basij, but eliminating the ability of the bank to engage in humanitarian trade surely outweighs the value of its designation from the standpoint of minimizing terrorist finance threats. Iranians are already suffering in the face of shortages of medicine, an area of trade in which Parsian was highly active.

Treasury Secretary Steven Mnuchin’s statement, issued alongside the new designations, does make reference to “real world humanitarian consequences” but only insofar as “business entanglements with the Bonyad Taavon Basij network… fuel the Iranian regime’s violent ambitions across the Middle East.”

All too aware of their own government’s malign activities, the Iranian people await the Trump administration’s reckoning with the true humanitarian consequences of its own policies.

Photo Credit: Parsian Bank

Fears Grow That Trump Sanctions Will Throttle Iran's Humanitarian Trade

The second and final sanctions deadline of November 4 is drawing near. After this date, unilateral US sanctions on Iran’s financial sector will once again come into force. According to Iranian bankers and government officials, this could mean that Iran struggles to import humanitarian goods, including basic foodstuffs.

The sale of essential foodstuffs and medicine to Iran is exempt from sanctions, giving latitude to US officials to reiterate their claims that sanctions are targeted and not intended to hurt the Iranian people. However, while no direct legal barriers might exist for trade in humanitarian goods, potential restrictions slapped on banks that facilitate the necessary transactions might yet cause problems.

Prior to the nuclear deal, Iran’s private sector banks were exempt from secondary sanctions and thereby to be able to handle humanitarian trade payments. As sanctions are set to be reimposed, ambiguities about the scope of the returning restrictions forthcoming from the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury have left bank leaders and government officials in Iran with more questions than answers.

To understand the growing fears around the maintenance of humanitarian trade, Bourse & Bazaar spoke to several senior bankers and government officials in Iran and executives from global trading companies who are key stakeholders in this trade. All requested to remain unnamed given the sensitive subject matter.  

A veteran banker and a board member of a major Iranian private bank described two possible scenarios. "U.S. officials have said they aim to reinstate sanctions that were lifted as a result of the nuclear deal. If we use this as the basis, the interpretation is that private banks that were previously exempt from secondary sanctions and any foreign banks working with them on humanitarian trade will once again be exempt," he said.

But he warned that this time may very well be different given that the US has hardened its rhetoric and promised “maximum pressure” from the sanctions. "Your guess is as good as mine,” he quipped.

He said his bank is currently conducting business as usual but has seen some foreign counterparts take preemptive measures to reduce their transaction volume ahead of the November deadline.

“Some banks are implementing a number of limitations over concerns about what happens next. They are already doing some of the things that will be expected of them once sanctions return on November 5,” he said.

An official at the international department of another major Iranian bank expressed the same feeling of uncertainty, and highlighted concerns  that private sector banks like his will not be spared from secondary sanctions this time around.

“We are already facing issues with imports of some essential goods even before [the November] sanctions snap back,” he said. In his assessment, if the bank becomes subject to secondary sanctions, there is little to nothing Iran’s central bank can do to support them.

While Iranian bankers may feel powerless to prevent the return of secondary sanctions, they are also concerned about risks stemming from an area in which Iranian stakeholders do have control—compliance with the Financial Action Task Force (FATF) action plan, which outlines steps for Iran to improve anti-money laundering and combating financing of terrorism standards.

Iran has until mid-October to demonstrate sufficient progress to the FATF or its already embattled banking system will become more isolated than ever. Time is running out for Iran to pass the required legislation in the face of domestic pushback from local interest groups and persistent lobbying by FATF member states including the US and Israel.

“If we don’t pass the bills related to the FATF, we are effectively sanctioning ourselves,” stated the deputy chairman of one of Iran’s largest private sector banks.

These external and internal threats to routine banking between Europe and Iran could have significant knock-on effects for humanitarian trade.

Speaking on background, an executive at a major multinational commodity company described how even if food sales to Iran remain permitted under US sanctions, the imposition of secondary sanctions on Iran’s private sector banks could make the trade effectively impossible.

The Government Trading Corporation of Iran (GTC), the trading arm of country’s agriculture ministry, confirmed these concerns but insisted that contingency planning is underway.

A senior official involved in foreign trade for GTC said, “We are at the moment implementing measures to ensure that we won’t have problems concerning humanitarian trade.”

The official could not share further details, beyond explaining that any such measures will fall outside the boundaries of the banking system—a likely allusion to the use of barter trade, a method which helped sustain imports in the previous sanctions period.

“We will continue to conduct our business even after November sanctions are in place because we have had the experience of working under sanctions before and the sanctions didn’t stop us,” the official said. “You can be sure that sanctions will only serve to increase costs, not close the way entirely.”

The recent announcement that the European Union would be establishing a special purpose vehicle to facilitate humanitarian trade will offer some encouragement that a significant disruption to food imports can be avoided. But with the sanctions deadline just weeks away, the risks of dangerous supply shocks are rising by the day.

Photo Credit: IRISL

Iran: The Case for Protecting Humanitarian Trade

This article has been republished with permission from the European Council on Foreign Relations. 

A crisis is looming in Iran’s healthcare sector: patients are reporting shortages in life-saving medicine. The situation is expected to worsen once US sanctions on Iran are reimposed in November. European and US companies that can provide the advanced medicine and equipment needed to treat chronic diseases inside Iran are grappling with how to sustain their operations. The goods that are making it into Iran are being sold at soaring prices due to a sharp currency downturn following Donald Trump’s sanctions decision.

Millions of ordinary Iranians are bracing themselves for the impact of these sanctions. The UN special rapporteur for human rights warned that the sanctions will undermine human rights in the country, drive people into poverty, and make imported goods unaffordable. The impact of incoming sanctions on the humanitarian sector contradicts the US administration’s repeated statements in support of the Iranian people.

Iranians experienced similar hardship between 2012-2013 when the United States and Europe introduced the severest of sanctions to pressure Iran to restrict its nuclear program. At the time, the US Treasury provided broad authorization and exceptions for the sale of medicine and medical devices. Yet only a limited number of Western companies managed to operate under these conditions. Many were forced to halt or downsize trade due to disruptions in banking and high operational costs.

A repeat of this situation must be prevented. Unilateral US sanctions must not be allowed to needlessly cause suffering to millions of Iranian citizens. This is especially the case given that Iran continues to implement restrictions on its nuclear program under the 2015 deal. Europe, China, and Russia have also vowed to uphold the agreement.

The overarching hurdle facing many companies that export medical goods and services to Iran is related to securing banking services and finance to enable such transactions to happen. This includes a recent foreign currency shortage with which to reimburse European companies. The lack of clarity over how the US will enforce its sanctions has exacerbated these problems. For example, while the latest US OFAC guidelines reaffirm that there is broad authorization for humanitarian transactions, there is ambiguity over how extensively the US will use secondary sanctions to target private Iranian banks.

Since the nuclear deal, such banks were clearly exempt from secondary sanctions. That meant that non-US companies could establish ties with such banks to facilitate payments for the sale of humanitarian goods to Iran. Their position is now unclear. The US has outlined plans to sanction the Central Bank of Iran (CBI); but it is inevitable that any local private Iranian bank will have to transact with the CBI. Under the current US sanctions framework it is unclear if this would trigger a designation for that local bank, meaning that European banks would most likely refuse to transact with that entity.

Such uncertainty can effectively block payment channels into Iran and prevent life-saving assistance from reaching doctors and Iranian patients. Indeed, several leading pharmaceutical companies currently engaged in Iran have shared with us their concerns that banks, insurance companies, and distribution channels that have facilitated humanitarian trade with Iran are getting cold feet, fearing they could fall foul of US sanctions. Competing interpretations of the OFAC guidelines also are causing over-compliance by European companies whose board members are reluctant to accept reputational damage in the US even for humanitarian exchanges with Iran.

For Iranians, access to basic healthcare is a constitutionally protected fundamental human right. In recent years, health conditions in Iran have been gradually improving for underprivileged patients. In part this has been due to the easing of international sanctions that have made healthcare products more affordable and easily accessible. President Hassan Rouhani’s government also introduced new reforms that offer healthcare to almost 11 million previously unprotected people.

Treatment for chronic diseases is a major challenge for Iran where successful treatment requires advanced devices, training, and pharmaceuticals that are often provided through Western companies. Protecting access of such companies to Iran is therefore imperative.

As global powers look to salvage the nuclear deal despite the US withdrawal, they should seek to preserve humanitarian trade with Iran. Despite opposing views between Europe and the US on the nuclear agreement, saving the lives of Iranians should not be a topic of debate. Brian Hook, the newly appointed US special representative for Iran, recently stated that the US and Europe should be working together to “find lasting solutions that truly support Iran’s people”. Europe should press the US to fulfill this offer by working to immediately facilitate and remove obstacles to humanitarian trade with Iran.

European governments should urge the US Treasury to quickly clarify the ambiguities created by its latest guidelines and ensure that a reasonable number of Iranian private financial institutions remain exempt from US secondary sanctions. The European Union should double down on efforts to ensure payment channels with Iran are preserved, including Iran’s access to the SWIFT financial messaging service. As a matter of priority it should aim for banks in Europe to remain open for humanitarian trade with Iran. To help foreign companies sustain the profit margins of operations inside Iran, the Iranian government could also offer cost-saving incentives for companies that import medicine and medical goods into the country.

The European Commission recently announced it will provide an €18m economic package for the social benefit of ordinary Iranians. If required, it should introduce similar new provisions after November to bridge any gaps in funding and payment facilities for medicine exported by European companies. This lending mechanism (in euros as opposed to US dollars), should be large enough to at least cover the import of life-saving medicine into Iran and should be flexible enough to respond to new needs. The EU and Iran could also consider establishing a medical fund for donating pharmaceuticals and equipment to Iran. In such instances, no banking transactions will be required and therefore the risks to European companies will be reduced.

The EU could also encourage expanded scientific cooperation with Iran in medical research and training. Relative to many countries in the Middle East, Iran has advanced public and private medical research institutions that are likely to welcome such bilateral cooperation. In fact, Iranian and US scientists have long engaged in successful health diplomacy projects. European governments can support and facilitate such humanitarian-focused projects. Such measures from Europe can demonstrate that their commitment to the humanitarian needs of Iranian people goes beyond rhetoric.

Many Western governments view sanctions as an effective economic tool to alter the actions of adversary states. Yet sanctions have repeatedly hit ordinary people the hardest and resulted in a negative impact on health in the targeted country. The human cost of sanctions in countries such as Iraq, Iran, Syria, and Venezuela has been severe. Going forward, the international community must implement safeguards to fully protect humanitarian sectors of trade. As Europe pledges to demonstrate its commitment to the Iran nuclear deal, it could take a lead in this dialogue and provide concrete solutions.

Photo Credit: IRNA

Ambiguity in Trump Sanctions Could Put Humanitarian Trade with Iran at Risk

In the years prior to the nuclear deal, when Iran was under broad international sanctions, the country saw shortages in key foodstuffs and life-saving medicines. Despite attestations to the contrary by proponents of the economic blockade, who spoke of its "targeted" nature, international sanctions hurt the Iranian people in cruel ways.

According to Iran's Food and Drug Administration, the list of medicines subject to shortages in Iran extended to 350 drugs in the sanctions period. Shortages were precipitated by a number of factors. Several multinational corporations downsized their operations or withdrew from the Iranian market. Interruptions in banking channels saw payments turn from the use of industry-standard letters of credit and deferred payment terms to cash-in-advance payments using exchange houses. Transaction and operational costs skyrocketed, with costs being passed on to the consumer, whose buying power was eroded by currency devaluation. 

After the lifting of international sanctions as part of the Iran nuclear deal, the situation improved dramatically. Today, the number medicines subject to shortage has dropped to 65 drugs. Yet, it is important to realize that the shortages precipitated by sanctions would have been even worse had it not been for specific carve-outs for humanitarian trade established by the United States’ sanctions enforcement agency, the Office of Foreign Assets Control (OFAC),  part of the Department of Treasury.

As per OFAC’s own guidance on the matter, “the U.S. maintains broad authorizations and exceptions that allow for the sale of food, medicine, and medical devices” to Iran by both U.S. and non-U.S. persons. During the sanctions period, the more committed multinational companies, often those with longstanding ties to the Iranian market, took advantage of these exemptions to maintain their sales to Iran. While a commercial incentive reigned supreme, the Iranian people benefited to the extent that the country was not under a total blockade. 

Now, with U.S. sanctions poised to return, more suffering seems to be on the horizon. The Trump administration has announced that it will be reinstating all primary and secondary sanctions removed as part of the Joint Comprehensive Plan of Action (JCPOA). This total reapplication of sanctions, which is to take place despite Iran’s proven compliance with its commitments under the nuclear deal, has taken many by surprise given its extreme and unjustified breadth. But take a closer look at the mechanics of the so-called “snapback” and what the Trump administration is seeking to do could prove much more dangerous than anything Iran has been subjected to before.

There is exists an important caveat to OFAC’s exemptions for humanitarian transactions with Iran. These sales “do not trigger sanctions under U.S. law… so long as the transaction does not involve certain U.S.-designated persons (such as Iran’s Islamic Revolutionary Guard Corps or a designated Iranian bank) or proscribed conduct.” The emphasis on banks is what matters here. 

Iran’s private sector banks play a vital role in facilitating humanitarian trade. The major multinational corporations selling and manufacturing agricultural commodities (eg. Cargill, Bunge), food (eg. Nestle, Danone), and medicines and medical devices (eg. Sanofi, Novartis, GE Healthcare) depend on these types of banks to access the financial services necessary for day-to-day operations in Iran. 

Importantly, while Iran’s private sector banks were targeted as part of efforts to isolate Iran from the international financial system and were included on the SDN list, this was done under designations for which secondary sanctions did not apply.

Foreign companies and financial institutions were prohibited from transacting with Iranian financial institutions under the Iran Freedom and Counter-Proliferation Act (IFCA) in 2012 and Executive Order 13645 in 2013. However, there was a notable carve-out created for those "Iranian depository institution[s] whose property and interests in property are blocked solely pursuant to E.O. 13599." The Iranian financial institutions included in the E.O. 13599 list include the country's private sector banks. The unique status of the banks on this list partly reflects that these entities maintain higher compliance standards and clearer governance structures, lack exposure to government or IRGC shareholders, and have no known history of financial crime or terrorist financing.

The Trump administration has made clear that it intends to re-list all of the entities that had been removed from the SDN list as part of the JCPOA (these entities are listed in the attachments to Annex II of the nuclear deal). What remains unclear is whether Trump’s intended re-listing of these entities means returning them to their precise status prior to the nuclear deal. Legal experts and former government officials are coming to different interpretations of the relevant sanctions guidance.  OFAC’s FAQs document issued following Trump’s announcement of the U.S. withdrawal from the JCPOA addresses precisely this question for entities on the E.O. 13599 list. The entry reads:

Will the persons that were placed on the List of Persons Identified as Blocked Solely Pursuant to Executive Order 13599 (E.O. 13599 List) on JCPOA Implementation Day (January 16, 2016) be put back on the SDN List?

The provided answer is concerning (emphasis added):

No later than November 5, 2018, OFAC expects to move persons identified as meeting the definition of the terms “Government of Iran” or “Iranian financial institution” from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”) to the SDN List. OFAC will not add these persons to the SDN List on May 8, 2018, to allow for the orderly wind down by non-U.S., non-Iranian persons of activities that had been undertaken prior to May 8, 2018, consistent with the U.S. sanctions relief provided for under the JCPOA involving persons on the E.O. 13599 List. The Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked pursuant to E.O. 13599 and section 560.211 of the ITSR, and U.S. persons continue to be broadly prohibited from engaging in transactions or dealing with the Government of Iran and Iranian financial institutions. Beginning on November 5, 2018, activities with most persons moved from the E.O. 13599 List to the SDN List will be subject to secondary sanctions. Such persons will have a notation of “Additional Sanctions Information – Subject to Secondary Sanctions” in their SDN List entry.

The guidance indicates that the entities moved from the E.O. 13599 list to the SDN list “will be subject to secondary sanctions." In practical terms, the guidance can be interpreted to mean that all of Iran’s private sector banks will be listed with a designation more restrictive than was the case prior to the nuclear deal. In this scenario, after November 5, 2018, any company that transacts with Iran’s private sector banks will be exposed to U.S. secondary sanctions.

Several sanctions experts, speaking on background given the sensitivity of the subject, pointed to this concerning lack of clarity. In the assessment of an attorney specializing in U.S. sanctions, "It is not clear whether the mere placement of persons identified on the E.O. 13599 List back on the SDN List will subject private Iranian banks—not otherwise designated pursuant to an authority other than E.O. 13599—to secondary sanctions. If it returns to the pre-JCPOA sanctions, then it will revert to the rules established by IFCA and E.O. 13645." But if the new guidelines do reflect an intention to make secondary sanctions for Iranian banks that were previously exempt, "OFAC has the discretion to do so," the attorney noted. 

This reading was echoed by a former U.S. government official: "One could read [the FAQs] to suggest the pre-JCPOA identifications, which is what E.O. 13599 was created to address, are all becoming SDNs. This would be a significant escalation. Most of the private banks on E.O. 13599 were never subject to secondary sanctions because we never had evidence of bad behavior."

If this interpretation holds, the typical exemptions for humanitarian trade will no longer apply for the multinational companies bringing vital foodstuffs and medicines to Iran. This is because the private sector banks that they have customarily used to facilitate this trade will be considered “a designated Iranian bank" exposing their counter-parties or clients to secondary sanctions. Re-listing Iran’s private sector banks in this manner would prove devastating to humanitarian trade. 

Several major international law firms are advising clients that the re-listing will not exceed the restrictions of the pre-deal designations. In this assessment, the transactions that were not sanctionable pre-JCPOA should not be sanctionable on November 5. The problem is that such a fundamental question, with a direct bearing on humanitarian trade, should not be a matter for interpretation. OFAC has historically offered clear and reliable guidance is these fundamental areas.

It remains possible that OFAC has simply made a mistake in leaving things ambiguous regarding E.O. 13599 entities. In the assessment of many sanctions attorneys, the FAQs released on May 8 are sloppy and incomplete—perhaps an indication of the last-minute nature of their preparation as President Trump announced his decision on the nuclear deal earlier than expected. If this is just an error in the guidance, OFAC must immediately update its FAQs and provide clarity on the matter.

However, if the re-designation is intended as an escalation, and the United States does aim to designate Iran’s private sector banks as SDNs and target their multinational clients with secondary sanctions, the international community must use all available means to compel the Trump administration to restore full and unfettered humanitarian exemptions for Iran trade. Thousands of lives are at stake. 

Photo Credit: IRNA