Hitch in the deal with Iran

U.S. companies are eager to resume business relations with Iran once economic sanctions are lifted. But there’s a hitch, and it puts our economy and national security at risk.

If Iran meets the conditions to lift sanctions, the U.S. agrees to lift sanctions only on “non-U.S. persons.”  Sanctions that bar “U.S. persons” from dealing with Iran will remain.  With few exceptions, our companies may not steer towards any business dealings with Iranian companies.  Although we must refrain, businesses based abroad may compete to enter the Iranian market. 

{mosads}Foreign businesses assume Iran will qualify for sanctions to lift on what the deal calls “Implementation Day.”  On that day, foreign companies in manufacturing, shipping, and banking will be able to sign deals with all Iranians.  European companies, in particular, will be unconstrained by any sanctions that target Iran – not even sanctions that target Iranian instigators of terrorist acts.  

And they are not waiting until then to get a leg up.  As in a sailing race, European companies are tacking toward the starting line and appear willing to risk crossing it early (before sanctions officially lift).  Their risks are minimal.

Trade missions from Europe to Teheran have sailed under their governments’ approval with plenipotentiaries at the helm:  Britain’s Foreign Secretary; Germany’s Economy Minister and Vice Chancellor.  Businesses participating appear unconcerned whether their activities violate their country’s laws or the EU’s sanctions. Dispelling doubts that Britons were free to deal, Britain’s Foreign Secretary announced in Teheran that “business negotiations can start to take place well ahead” of the official lifting of sanctions.  The U.S. government has not challenged that statement.  Its silence suggests acquiescence.

U.S. companies cannot yet set sail for Iran.  The reason?  Even after Implementation Day, “U.S. persons” without an overseas subsidiary or affiliate will remain subject to the Iranian Transaction and Sanctions Regulations (“ITSR”).  If we perform or sign contracts, facilitate commercial dealings, or even enter into preliminary negotiations, we risk violating the ITSR.  Transactions that transgress may rack up violations at each stage of performance.  And, where activities involve recurrent performance like shipping or payment processing — infractions mount and penalties multiply.  And worse, closing a cross-border acquisition of a European enterprise that has contracts with the Government of Iran also may violate the ITSR. 

You ask: “You can’t be serious?”  We are.  Look at the “hitch” in footnote 6 to Annex II to the Iran agreement:

“The sanctions that the United States will cease to apply [on Implementation Day] … are those directed towards non-U.S. persons.”       

U.S. businesses have not complained – probably because they have not noticed this hitch.

Who can blame them?  Official comments on the deal have disclosed little, speaking only in the coded terms of regulations that few of us can decipher.  “Nuclear-related” sanctions lift; “terrorism” and “human rights-related” sanctions continue.

Due to the hitch, the lifting of sanctions is honeycombed with risks for U.S. companies. Demarcations between prohibited and permitted dealings will make dealings more risky. The hitch makes it hard for U.S. companies to know “who can do what?” or, “who is a ‘non-U.S. person’ for this purpose?”

Domestic firms without overseas affiliates will look to the agreement’s loophole to do future business deals beyond the scope of the ITSR. The U.S. commits to license “non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran” that are “consistent” with the agreement.  But be aware: if your firm’s overseas affiliate has “U.S. persons” on its board of directors, among its C-level officers, or as limited partners, those individuals risk violating the ITSR if they authorize it to deal with an Iranian company.

The loophole will exert an inexorable pull on our companies.  It invites domestic companies with overseas affiliates to relocate facilities and activities offshore, or, where firms lack overseas affiliates, to acquire ownership or control of “non-U.S. persons” to do deals. 

Such maneuvers will generate rogue waves that U.S.-based businesses may ride to offshore jurisdictions.  Will offshore flows motivate more corporate tax inversions?  Will lucrative clearing and settlement of dollar denominated transactions be pushed offshore?  Will traders move to foreign currencies? Non-U.S. financial institutions will have no duty to report suspicious, illegal, or sanctions-violating activities to U.S. authorities – this reporting is vital to U.S. national security. 

Treasury’s Office of Foreign Asset Controls (“OFAC”) plans to issue guidance on what we can and cannot do from Implementation Day forward.  OFAC may address questions for which the Iran agreement provides no reliable answer.  These include:  How can re-insurers cover shipments of Iranian oil?  How can a U.S. firm acquire a European company that has long-term contracts with Iranian counterparties? 

Businesses contemplating deals with Iran, or with Europeans who will deal with Iran, have an urgent need for clarity.  Will OFAC issue general licenses that clarify the “sea-lanes” of permissible commerce?  Will OFAC’s guidance come swiftly enough to avoid losing business to offshore competitors?  Will offshore companies with substantial U.S. operations echo BP’s reported concern about avoiding dealings with Iran that might trigger an OFAC investigation?

Whatever the near and long term outcome of votes on the deal with Iran and on sanctions that target Iran, Members of Congress on both sides of the aisle should assess the hard choices that U.S. companies will face when sanctions lift for everyone else.  Congress can require Treasury and OFAC to ensure that arrival at Implementation Day will not push business and financial services offshore to the detriment of our nation’s economy and national security. 

Hughes is the university scholar and fellow in Commercial Law at the Maurer School of Law, Indiana University. Trope is a partner in the New York City offices of Trope and Schramm LLP.