by Erich Ferrari
via Sanctions Law
For over a year now, those in the sanctions policy and legal worlds have been discussing the difficulties that food and medicine exports have had in reaching Iran. A large part of this discussion has focused on US sanctions targeting Iran’s financial sector and how that has impacted the ability of exporters to receive payments for the sale of US origin food and medicine. These discussions have not been in vain, as there are many significant problems arising from US sanctions that are directly contributing to the problem. However, one area is often overlooked in this discussion: EU sanctions have also been complicit in causing financial institutions to shy away from dealing with Iran, thereby furthering the inability of exporters to receive payments for their shipments. This is particularly relevant because US sanctions require all payments for authorized activity between Iran and the US to go through third-country banks, and for many years those transactions were facilitated by European banks. Also, there were numerous EU companies that were reexporting US origin food, medicine, and medical devices to Iran and were receiving payments in their European bank accounts for those exports. Those companies now face difficulty in doing so.
In addition to the fear of massive penalties from the US or possibly sanctions, the unwillingness of some EU banks to deal with Iran stems from three EU Council Regulations, EU Council Regulation 961/2010 (25 October 2010),EU Council Regulation 267/2012 (23 March 2012), and EU Council Regulation 1263/2012 (21 December 2012). These regulations require EU banks to consider the product or services and parties involved in a transaction with Iran, as well as whether authorization is required for the transaction and who is obliged to provide for such notice or authorization. Furthermore, unlike in the US, in many cases the EU banks themselves are responsible for obtaining the appropriate license for facilitating the payment and/or providing notice of their facilitation of the payment. This creates a greater burden on the EU banks when dealing with such payments than those placed on their US counterparts.
This burden becomes particularly apparent when comparing what the notice/authorization requirements of the two jurisdictions are. In the US, any amount of food and most types of medicine can be exported to Iran undergeneral license authorization, meaning that there is no need to obtain a license from the Office of Foreign Assets Control (OFAC) or to provide notice to the US government. However, in the EU, the facilitation of transactions related to food and medicine exports does have requirements. Here are how those EU notice/authorization requirements break down:
1) Any transaction under 10,000 € does not need to be reported.
2) Any transaction under 100,000 € requires notice to be provided.
3) Any transaction over 100,000 € requires authorization to be provided.
So while in part EU banks are concerned about facilitating payments with Iran due to fears rooted in the US government’s issuance of massive penalties and settlements against a number of European banks over the past several years, they also have a number of regulatory hoops to jump through when facilitating these payments. It is true that the beneficiary could apply for the license without the EU bank knowing. However, irrespective of the compliance obligations being met, it is believed that many EU banks would refuse the transaction if they knew of its nature and that the beneficiary had acted in such a way.
It would be unimaginable to go into Bank of America and ask them to procure a license from OFAC so that a US exporter client of theirs could engage in trade with Iran and receive payment for such trade. As it stands now, most US banks don’t desire processing a transaction authorized by OFAC even when the account holder has obtained the license themselves, much less when the bank would have to take on the added work of drafting, submitting and waiting on an OFAC license application. And yet, that is exactly what the EU banks are tasked with doing.
So this is all the EU’s fault then, right? Not at all. US sanctions have contributed to the problem in a variety of ways from massive penalties to the wielding of secondary sanctioning authorities.
It should be understood that non-US sanctions, and the way they are crafted, have also contributed to the failure of food and medicine exports in reaching Iran. Since the US has taken the lead on the implementation of sanctions targeting Iran, it should also take the lead on how to address the unintended consequences of those sanctions and their implementation.
Special thanks to Nigel Kushner from W Legal for his insight that contributed to the drafting of this post.
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or firstname.lastname@example.org.