By Sahand Moarefy
By partially unwinding the sanctions regime against Iran, the United States has sought to achieve two goals: provide Iran some meaningful level of economic relief such that it carries through with its commitment to scale back its nuclear program, while preserving the U.S.’s architecture of sanctions that target Iran for non-nuclear reasons. Barring any additional actions by policymakers, this paper argues that the United States has unwound sanctions based on legal distinctions that make it unlikely that it can achieve these goals. The paper concludes by sketching possible solutions for U.S. policymakers.
INTRODUCTION
On July 14, 2015, the United States and Iran reached a Joint Comprehensive Plan of Action (“JCPOA”) in which the United States for the first time agreed to lift sanctions on Iran in exchange for constraints on Iran’s nuclear program. Unlike prior instances in which the United States has unwound large-scale sanctions regimes, the United States only committed to lift a limited set of sanctions and pledged to enforce the vast complex of Iran sanctions not within the scope of the JCPOA.[1]
By partially unwinding sanctions, the U.S. sought to achieve two goals: provide Iran some meaningful level of economic relief such that it carries through with its commitment to scale back its nuclear program, while preserving its architecture of sanctions that target Iran for non-nuclear reasons. To what extent does the structure of the United States’ sanctions commitment under the JCPOA make this possible? While many have analyzed the impact of the deal on the Iran sanctions regime, few have even touched on the question.[2] This paper aims to address it head-on. Barring any additional actions by policymakers, this paper argues that the United States has unwound sanctions on the basis of legal distinctions that make it highly difficult for it to simultaneously provide Iran the economic relief it expects under the JCPOA while leaving the rest of the U.S. sanctions architecture unaffected.
Understanding the structural problems that underlie the United States’ sanctions relief package is important not only for what those problems may say about the viability of the JCPOA, but also because of their implications for sanctions policy in general. Future targets of sanctions may differ from Iran in substantial ways, but insofar as future adversaries pose a multiplicity of threats and policymakers intend to deploy sanctions to counter those threats, policymakers will have to be able to effectively disentangle sanctions that address issues that have been worked out without undermining the rest of the sanctions architecture.
Section I provides an overview of the U.S. sanctions regime against Iran and summarizes the key terms of the JCPOA, including the legal distinctions underlying the United States’ provision of sanctions relief. These are distinctions based on the target of sanctions (“secondary” sanctions against non-U.S. persons which the United States has dismantled and “primary” sanctions against U.S. persons which the U.S. plans to continue to enforce) and the rationale of sanctions (“nuclear”-related sanctions with which the JCPOA does away and “non-nuclear” sanctions which are to remain in place). Altogether, the United States removes only those sanctions which were imposed as a result of Iran’s pursuit of nuclear weapons and which discourage non-U.S. companies from engaging in business with Iran. Sanctions targeting U.S. companies as well as non-nuclear sanctions are to continue in full force.
Section II examines how each of these distinctions problematize the process of unwinding sanctions. By only unwinding secondary sanctions, the JCPOA disregards the extent to which the reluctance of non-U.S. companies to transact with Iran arises from primary sanctions and other non-“secondary” measures. In doing so, the JCPOA gives rise to two alternative, but equally problematic outcomes—(1) one in which these measures continue to dissuade foreign companies from engaging in business in Iran, thereby eliminating the possibility of meaningful economic relief for Iran, and (2) another where non-U.S. companies reenter the Iranian market despite these measures and in so doing render the surviving U.S. sanctions against Iran less forceful and effective. In addition, the distinction between nuclear and non-nuclear sanctions falls short as an organizing principle for lifting sanctions. Among the legal authorities under which the U.S. has enacted sanctions against Iran, none within the purview of the JCPOA exclusively reference Iran’s nuclear program as a rationale. As a result, the United States provides sanctions relief that is inherently over inclusive.
Section III discusses the path forward. In the short- to medium-term, this section argues that the United States should propose a financial remediation program whereby Iranian banks are given the opportunity to verifiably demonstrate the integrity of their businesses through a system of international inspections. By offering such a program, the United States can start shifting the conversation around the JCPOA’s commitment to economic normalization from one focused on whether the U.S. has given enough sanctions relief to one where economic relief is understood to be contingent on Iran proving the integrity of its financial sector to the international banking community. Iran, not the United States, must assume the burden of proof. This section also discusses what the JCPOA can teach policymakers about devising sanctions regimes that are easier to unwind on a piecemeal basis. As a starting point, policymakers can rationalize sanctions by predicating them in terms of precisely defined policy grounds that focus on specific categories of business activity.
I. OVERVIEW OF THE IRAN SANCTIONS REGIME AND THE JCPOA
A. Legal Background
The United States government has sanctioned Iran primarily through three legal mechanisms—congressional statutes, executive orders, and OFAC regulations and designations.[3]
Congressional statutes call on the President to impose specific types of sanctions or, more frequently, list a “menu” of possible sanctions from which the President can pick and choose. Statutory sanctions take the form of stand-alone statutes specifically aimed at Iran, like the Iran Freedom Support Act (“IFCA”) and Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), while others are included as part of the annual defense budget through the National Defense Authorization Act and defense appropriations bills. To permanently unwind these sanctions, Congress must generally take affirmative action. However, sanctions under some statutes, like CISADA, cease to be effective when the President removes Iran’s designation as a state sponsor of terror (discussed below). Almost all statutory sanctions provide the President authority to temporarily waive sanctions under certain conditions, which typically include a determination by the President that such a waiver is in the “national interest.”
The President has also imposed sanctions through executive orders. The President has issued these executive orders based on specific statutory authorities empowering the President to sanction Iran and two general statutory authorities, the International Emergency Economic Powers Act (“IEEPA”) and National Emergencies Act (“NEA”), both of which authorize the President to impose sanctions in the event of “national emergencies.” [4] The orders define the characteristics for designation of the targets of the economic sanctions and delegate authority for their implementation. In most cases, this administrative and enforcement authority has been delegated to the Secretary of the Treasury, acting in consultation with the Secretary of State and other specified cabinet officials.[5]
The Secretary of the Treasury has generally delegated administrative and enforcement authority to the Office of Foreign Assets Control (“OFAC”) within the Treasury Department.[6] OFAC administers Iran sanctions through two sets of implementing regulations—the Iranian Transactions and Sanctions Regulations (“ITSR”) and the Iranian Financial Sanctions Regulations (“IFSR”).[7] The ITSR implements the trade and transaction sanctions and prohibitions concerning Iran and its government, while the IFSR imposes restriction on certain activities by U.S. financial institutions’ non-U.S. subsidiaries and implements secondary economic sanctions against non-U.S. financial institutions.[8] OFAC has also identified and added economic sanctions targets to the Specially Designated Nationals and Blocked Persons List (“SDN List”). OFAC prohibits U.S. persons from taking part in most commercial transactions with SDNs. The SDN list also serves as notice to U.S. persons of their obligation to block any property or interests in property belonging to blocked persons that may come into their possession. Violations can result in both civil and criminal penalties.
Unlike statutory sanctions, the President can usually unilaterally revoke, modify, or supersede his own executive orders or those issued by a predecessor at any time and without explanation. [9] This power also applies to any authority delegated by the President to the Secretary of Treasury or other cabinet officials. However, Congress can curtail the President’s authority to unwind executive orders. For instance, Congress can codify sanctions previously imposed under executive orders and attach waiver conditions. In addition, to the extent that the President has issued executive orders to implement sanctions mandated by statutes specifically targeting Iran, any actions by the President to cease applying those sanctions (including altering executive orders) will have to comply with waiver conditions delineated by the underlying statutes. This same hurdle is absent in cases where the President has imposed sanctions exclusively under the authority of IEEPA and NEA as both statutes empower the President to revoke or modify executive orders based on their authority.[10]
The U.S. government has sanctioned Iran in two other ways that do not neatly fit into the abovementioned categories, but are still worth addressing. First, the Secretary of State, pursuant to his authorities and responsibilities under Section 6(j) of the Export Administration Act of 1979, has designated Iran as a state sponsor of acts of international terrorism. Based off of this designation, various statutes prohibit foreign aid, financing, and trade to Iran.[11] Generally speaking, the President can remove Iran’s designation by certifying to Congress that Iran no longer supports acts of terrorism.[12]
Second, the Financial Crimes Enforcement Network (“FinCEN”), housed within the Treasury Department, has designated Iran as a jurisdiction of primary money laundering concern. FinCEN has made this declaration based on authority delegated to it by the Secretary of the Treasury under section 5318A of the Patriot Act.[13] Pursuant to this section, FinCEN has required domestic financial institutions and financial agencies to take certain special measures to guard against the possibility of facilitating business activity involving Iran. While FinCEN emphasizes that it will consider removing an entity’s designation as a primary laundering concern in the event that it sufficiently rehabilitates its practices, Congress has codified Iran’s designation for purposes of section 5318A in the National Defense Authorization Act in 2012.[14]
B. Evolution of the Iran Sanctions Regime
How these various sanctions against Iran relate to one another can be best understood in light of the context in which they were imposed.
1. 1979 to 2005
The U.S. government first imposed sanctions against Iran following the 1979 Islamic revolution.[15] In response to the takeover of the U.S. Embassy in Tehran, President Carter imposed a ban on Iranian oil imports, followed by Executive Order 12170, in which the President declared a “national emergency” and blocked all $12 billion in Iranian government assets in the United States.[16] President Reagan renewed the sanctions effort in 1984 when he designated Iran as a state sponsor of terror after Iran-sponsored Hezbollah killed 241 U.S. marines in Beirut, Lebanon.[17] Three years later, President Reagan banned all U.S. imports from Iran, including oil, following altercations between U.S. and Iranian vessels in the Persian Gulf.[18]
The 1990s saw an escalation in sanctions in light of continued anxiety about Iran’s support of terrorism along with new concerns regarding Iran’s pursuit of weapons of mass destruction.[19] In October 1992, Congress passed the Iran-Iraq Arms Non-Proliferation Act, which prohibited the transfer of goods or technology related to WMDs and certain types of advanced conventional weapons. In 1994, President Clinton issued Executive Order 12938, which imposed export controls on sensitive WMD technology. A year later, President Clinton further ratcheted up sanctions, barring all trade and investment with Iran under Executive Orders 12957, 12959, and 13059. [20]
In 1996, Congress passed the Iran and Libya Sanctions Act, later retitled the Iran Sanctions Act (“ISA”).[21] The ISA imposed sanctions on any firm that invested in Iran’s energy sector above a certain monetary threshold, marking the first instance in which the United States imposed secondary sanctions against Iran. If companies chose to do business with Iran’s energy sector, they could not also do business with the United States.[22] Congress also enacted sanctions against Iran in the early 2000s, passing the Iran Nonproliferation Act (“INA”) in 2000 and the Iran Nuclear Proliferation Prevention Act (“INPPA”) in 2002. The INA authorized the President to impose sanctions on foreign persons who had engaged in transactions involving Iran’s WMD programs. [23] The INPPA required the U.S. representative to the International Atomic Energy Agency (“IAEA”) to oppose programs that were “inconsistent with nuclear nonproliferation and safety goals of the United States.”[24]
2. 2006 to 2008
Sanctions intensified starting in 2006, when nuclear negotiations collapsed and the IAEA formally found Iran to be in noncompliance with its obligations and referred Iran to the UN Security Council. [25] Along with the United Nations and European Union, which began imposing sanctions of their own, Congress passed the Iran Freedom Support Act (“IFSA”) that September. The IFSA codified the trade and investment embargo imposed under President Clinton’s Executive Orders 12957, 12959, and 13059.[26] In addition, President Bush issued Executive Order 13438 in July 2007, which blocked the property of Iranian individuals and entities determined to have threatened stabilization efforts in Iraq.[27]
At the same time, the U.S. government—with the Treasury Department at the forefront—mounted a campaign aimed specifically at Iran’s financial services sector. Starting in 2006, Treasury officials directly reached out to banks across the world in a concerted effort to persuade them to cut off ties with Iranian banks.[28] The Treasury’s argument boiled down to making clear to banks the “core risk” of doing business in Iran—in the words of Treasury official Danny Glaser, that in any business involving Iran “you cannot be certain that the party with whom you are dealing is not connected to some form of illicit activity.”[29] To the extent that the “core risk” of doing Iranian business materialized, foreign financial institutions would find themselves wrapped up in a sanctioned transaction that would subject them to hefty U.S. regulatory penalties and reputational harm in the international financial marketplace.[30] The Treasury Department paired private sector outreach with more aggressive use of its authority under Executive Order 13224 (passed following the attacks of 9/11) to designate terrorist financiers. From 2006 to 2008, the Treasury Department designated 13 Iranian banks and two non-Iranian banks that it determined had facilitated Iran’s proliferation activities.
Finally, in November 2008, the Treasury Department revoked authorization for U-turn transfers involving Iran. With this authority, U.S. banks had been able to process dollar transactions for Iranian entities simply for the purposes of clearing those transactions; without it, foreign banks doing business with Iran were effectively unable to facilitate any Iran-related transactions in dollars.[31]
By the end of 2008, over 80 banks around the world had curtailed their Iran businesses.[32] What is important to note regarding the Treasury’s financial campaign is that it not only utilized the legal authority of designations and the threat of regulatory penalties to dissuade foreign banks from transacting with Iranian banks; the Treasury also elevated the risk assessment of foreign financial institutions looking to do business in Iran by identifying specific risks underlying Iranian transactions that could compromise the integrity of banks’ financial controls. This is a point to which this paper will return in Sections II and III.
In addition, as the Treasury’s campaign against Iran’s financial services sector escalated, other government actors entered the fray. Various U.S. authorities began aggressively pursuing foreign banks that had violated sanctions, imposing nine-figure fines and in certain instances limiting banks’ access to U.S. markets. Frequently, these punishments were imposed as part of deferred prosecution agreements, characterized by one commentator as agreements pursuant to which “corporate defendants pay fines, don’t dispute what they’ve done wrong, and promise to reform—all with the threat looming of a potential future criminal indictment” if they don’t follow through on their promise to reform.[33]
The Treasury Department also applied the principles of its “campaign of financial isolation” to other sectors of Iran’s economy.[34] In late 2008, the Treasury designated Iran’s main shipping line and Iran’s national oil company, the Islamic Republic of Iran Shipping Lines and National Iranian Oil Company (“NIOC”), under Executive Order 13382. [35] Another post-9/11 Executive Order, Executive Order 13382 empowers the Treasury Department to block the property of WMD proliferators and supporters.[36] Treasury officials also directly reached out to insurance companies, “highlighting the need for insurance executives to be suspicious of what was being insured for Iran as well as the importance of applying additional due diligence.”[37]
While not as active as the Treasury Department, the State Department also began to use its authority under Executive Order 13382 to designate several significant Iranian entities. In March 2007, the State Department designated the Defense Industries Organization of Iran as part of the United States’ implementation of United Nations Security Council Resolution 1737.[38] In October 2007, State designated the Islamic Revolutionary Guard Corps (“IRGC”), Iran’s most powerful military organization and a major player in Iran’s economy.[39]
3. 2009 to 2012
The sanctions effort went through a short hiatus in 2009 when the new Presidential administration of Barack Obama tried to renew negotiations with Iran regarding its nuclear program.[40] When these overtures failed, the effort re-intensified. The Treasury Department stepped up its financial campaign against Iran, designating additional Iranian banks in 2010. [41] A year later, Treasury designated the Central Bank of Iran along with the entire Iranian banking sector as a primary money laundering concern under Section 311 of the Patriot Act. [42]
The Department of Justice and state regulators also escalated the campaign of enforcement actions against foreign banks with business operations involving Iran. Among the most notable cases were London-based Standard Chartered’s $340 million settlement with the New York Department of Financial Services in 2012 (plus an additional $300 million penalty and restrictions on its U.S. business operations for not remediating “anti-money laundering compliance problems” in 2013) and the French banking giant BNP Paribas’s $8.97 billion settlement with the U.S. government, along with the suspensions of the bank’s New York dollar-clearing operations for one year.
Congress also played a more active role. From 2010 to 2012, Congress passed four statutes mandating the imposition of sanctions against Iran and entities transacting with Iran, which the President implemented in a series of Executive Orders. Collectively, these statutes expanded the scope of secondary sanctions against Iran and codified Executive Branch designations of Iranian entities.
Starting with the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), Congress toughened up ISA sanctions, imposed secondary sanctions on foreign banks who transacted with the IRGC and facilitated WMD or terrorism-related transactions involving designated Iranian banks, and sanctioned Iranian individuals involved in the crackdown surrounding the 2009 Presidential election.[43] In December 2011, Congress included Iran sanctions in the National Defense Authorization Act for the Fiscal Year 2012 (“NDAA 2012”). The statute codified the designation of Iran as a country of primary money laundering concern and imposed outright secondary sanctions on foreign banks engaged in any type of business with the Central Bank of Iran or other designated Iranian financial institution. [44] The next month, Congress passed the Iran Threat Reduction and Syria Human Rights Act (“ITRSHRA”), which further ratcheted up ISA sanctions and imposed secondary sanctions on foreign companies who provided shipping services to transport goods related to proliferation and terrorism or supplied underwriting services to NIOC or the National Iranian Tanker Company (“NITC”). [45] In addition, the ITRSHRA imposed liability on U.S. parent companies for the actions of their foreign subsidiaries and called on the Treasury Department to determine whether NIOC and NITC were IRGC affiliates (and thus subject to CISADA’s sanctions on the IRGC). In September 2012, the Treasury submitted a report to Congress in which it determined that NIOC and NITC were in fact IRGC affiliates.[46] Finally, in December 2012, Congress passed the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”) as a subtitle to that year’s National Defense Authorization Act. The IFCA markedly expanded the breath of secondary sanctions to include all business activities involving Iran’s energy, shipping, and shipbuilding sectors, sales of industrial materials from Iran, and the provision of underwriting services to Iranian entities already sanctioned under other legal authorities. [47]
The U.S. was not alone in imposing new, tougher sanctions on Iran. In June 2010, the United Nations Security Council approved Resolution 1929, which built on the three Iran sanctions resolutions passed during the Bush administration.[48] The European Union also put in place aggressive measures, banning all Iranian oil imports in 2011 and designating over one hundred entities for their involvement in Iranian proliferation activities. [49] Even governments that were usually not amenable to Western financial pressure began to bar transactions involving Iran in light of the difficulties U.S. and European sanctions created for businesses within their jurisdiction to reliably transact with Iranian entities. For example, in January 2011, India’s central bank prohibited local companies from doing business with the Tehran-based Asian Clearing Union, an exporter of Iranian oil, “[i]n view of the difficulties being experienced by importers/exporters in payments to/receipts from Iran.” [50]
C. The JCPOA
1. Background
In March 2013, the United States and Iran began a series of secret bilateral talks regarding Iran’s nuclear program. Full-scale negotiations restarted after the election of President Hassan Rouhani in June 2013, which included Iran and the U.N.’s five permanent members (China, France, Russia, the United States, and the United Kingdom) plus Germany (the “P5+1”). On November 24, 2013, the parties agreed to an interim agreement, followed by a framework agreement in April 2015. The parties struck a final agreement on July 15, 2015. Pursuant to the JCPOA, Iran agreed to restrictions on its nuclear program in exchange for sanctions relief from the P5+1.
2. Sanctions Commitments of the P5+1
In general, the P5+1 committed to lift all United Nations Security Council sanctions as well as all multilateral and national sanctions related to Iran’s nuclear program.[51] With the exception of the United States, this amounted to an unwinding of most of the Iran sanctions put in place by the members of the P5+1. The seven United Nation Security Council resolutions lifted by the JCPOA represent all of the U.N. resolutions imposing sanctions against Iran. Accordingly, China and Russia completely dismantled their Iran sanctions regimes as they had only implemented those sanctions that were mandated by the U.N. Security Council. Most of the European Union’s sanctions against Iran also piggybacked off of U.N. Security Council resolutions. As a result, the few Iran sanctions retained by the E.U. following the implementation of the JCPOA—the embargo on sales to Iran of arms, missile technology, other proliferation-sensitive items, and gear for internal repression—are largely insignificant from a commercial standpoint .[52]
The United States took on a more limited approach to sanctions unwinding based on two distinctions. First, the United States promised to only lift secondary sanctions—that is, sanctions that seek to discourage nonU.S. parties from doing business with Iran under threat of being denied access to the United States market—as opposed to primary sanctions prohibiting economic activity involving U.S. persons or goods.[53] This means that all sanctions lifted by the JCPOA continue to apply in full force to U.S. persons, with the exception of three narrow categories of business activity.[54] In other words, the general trade and investment embargo imposed under E.O. 12959 and codified in the IFSA continues to prohibit U.S. persons from transacting with Iranian entities.
Second, the United States committed to only lift “nuclear-related” sanctions on non-U.S. persons. Rather than refer to the legal rationale underlying a particular set of sanctions (a subject discussed later in this paper), these sanctions primarily encompass measures taken by the U.S. government following the collapse of nuclear talks with Iran in the mid-2000s. Accordingly, the U.S. has removed 385 Iranian individuals and entities from the SDN list, decreasing the number of Iranian SDNs by approximately two-thirds.[55] This includes 13 Iranian financial institutions, such as the Central Bank of Iran and Bank Melli, as well as NIOC, NITC, and IRISL. In addition, the U.S. government committed to cease applying the broad secondary sanctions mandated under the IFCA, ITRSHRA, NDAA 2012, and section 5 of the ISA (which includes the amendments to the statute under the ITRSHRA and CISADA). On January 16, 2016, the President implemented this step by exercising his waiver authority under these statutes (which allow him to waive sanctions when doing so in the “national interest”) and revoking the executive orders implementing sanctions.
In summary, to the extent that they do not transact with the entities designated in the SDN list (a much shorter list post-JCPOA) foreign companies are no longer prohibited from engaging in most types of business activities involving Iran. These include transactions with Iranian banks and the Central Bank of Iran, such as the use of financial messaging services by Iranian entities; the provision of underwriting services and insurance; transactions involving Iran’s energy sector; transactions with Iran’s shipping and shipbuilding sectors and port operators; trade in gold and other previous metals; trade in graphite, raw or semi-finished metals and software for integrating industrial processes; sale of goods and services used in Iran’s automotive sector; and the acquisition of nuclear-related commodities and services for nuclear activities contemplated in the JCPOA.[56]
II. THE JCPOA’S PROBLEMATIC CONSTRUCT OF SANCTIONS RELIEF
A. Assessing How Successfully the United States Has Unwound Sanctions
To determine how successfully the U.S. has unwound sanctions, we must first define what we mean by success. One component of success is enabling Iran to enjoy some meaningful level of economic relief such that it would be incentivized to carry through with its obligations under the JCPOA. Various factors drove Iran to agree to a deal, but it is generally accepted that the possibility of relief from the “crippling sanctions” of the 2000s (using the words of a former adviser to Iran’s nuclear negotiating team) played the decisive role in bringing Iran to the negotiating table.[57] Although studies definitively showing a causal relationship between sanctions and Iranian economic activity are hard to find, the few that exist show that, by the early 2010s, sanctions had effectively isolated Iran from international markets. From 2011 to 2013, Iran’s crude oil exports fell from about 2.5 million barrels per day to about 1.1 million barrels, an approximately 60% decrease.[58] Iran’s economy also shrank by 9% from 2012 to 2014, before stabilizing in 2015 as a result of modest sanctions relief under the interim nuclear agreement that went into effect on January 20, 2014. [59]
Iranians particularly wanted relief from the aggressive financial sector sanctions that disconnected Iran’s banking sector from the international financial system. By the end of 2008, over eighty banks around the world had shut down their Iran businesses. Four years later, sanctions had made inaccessible about $120 billion in Iranian reserves held in banks abroad and the central bank’s reserves were depleted, having declined to the tune of $110 billion.[60] Iran’s currency, the rial, also suffered in the face of greater restrictions on banking transactions with Iran, falling by about 80% from 2010 to the summer of 2012.[61] Iranian leaders, often prone to downplaying the effects of sanctions in the media, publicly acknowledged the devastating impact of sanctions on Iranian banks, with President Ahmadinejad noting at one point that “[o]ur banks cannot make international transactions anymore.”[62]
That the Iranians signed onto the JCPOA with the expectation that sanctions relief would translate into meaningful economic relief is underscored by paragraphs 29 and viii of the JCPOA. While the U.S. government has specifically identified the sanctions that it has committed to remove under the JCPOA, paragraph 29 of the JCPOA also states:
The EU and its Member States and the United States, consistent with their respective laws, will refrain from any policy specifically intended to directly and adversely affect the normalisation of trade and economic relations with Iran inconsistent with their commitments not to undermine the successful implementation of this JCPOA.[63]
In addition, paragraph viii of the Preamble notes:
The [P5+1] and Iran commit to implement this JCPOA in good faith and in a constructive atmosphere, based on mutual respect, and to refrain from any action inconsistent with the letter, spirit and intent of this JCPOA that would undermine its successful implementation.[64]
How broadly or narrowly one should read these commitments is an open question, but the presence of this general language at a minimum demonstrates that Iran does not see the United States’ end of the bargain as simply limited to dismantling specific legal authorities under which sanctions have been promulgated. Instead, sanctions relief is intended to provide a baseline level of economic normalization that the United States is prohibited from undercutting by engaging in actions that violate the “spirit and intent” of the JPCOA.[65]
At the same time, the U.S. government intends to continue vigorously enforcing sanctions that are not covered by the JCPOA. Over the past four decades, the United States has put in place a wide-ranging number of sanctions against Iran, many of which have been imposed for reasons unrelated to Iran’s nuclear program. Accordingly, one must also assess the success of the United States’ sanctions commitment by evaluating the extent to which that commitment does not detract from the efficacy of the rest of the United States’ Iran sanctions regime. Indeed, the White House has pitched the JCPOA to lawmakers and the public by stressing the partial nature of sanctions relief, highlighting how it has gone about differentiating between the sanctions it has unwound and those that it has preserved. Thus, an unnamed administration official began the first conference call with reporters regarding the JCPOA by emphasizing that the U.S. would continue to enforce primary sanctions. “Let me be clear about what we will not be relieving,” the official stressed, “[w]e are not removing our trade embargo on Iran. U.S. persons and banks will still be generally prohibited from all dealings with Iranian companies, including investing in Iran, facilitating cleared country trade with Iran.”[66] Similarly, the White House, in a memorandum on the JCPOA published the day after the signing of the deal, insisted from the outset that “we will offer relief only from nuclear-related sanctions” and that “we will be keeping in place other unilateral sanctions that relate to non-nuclear issues, such as support for terrorism and human rights abuses.”[67] In light of these assurances, the United States can only succeed in effectuating sanctions relief under the JCPOA if it does not compromise the effectiveness of its other sanctions against Iran.
B. The Problematic Construct of Secondary Sanctions Relief
Under this rubric of success, the United States’ differentiation between primary and secondary sanctions falls short. For this distinction to work as an organizing principle for lifting sanctions, non-U.S. companies will have to renew their commercial ties with Iran on some material level (thereby providing the Iranians the economic relief they anticipate) without detracting from the rest of the U.S. sanctions regime. These outcomes are unlikely to occur simultaneously. This can be illustrated most simplistically as a conceptual matter: if Iran manages to renew commercial relationships with foreign businesses, it will by definition have less incentive and need to develop commercial relations with the United States, thereby taking away from the bite of U.S. primary sanctions.
More fundamentally, however, the JCPOA misses two things. First, in assuming that secondary sanctions relief will push foreign businesses to reenter the Iranian market and that the primary sanctions regime will remain unaffected, the United States does not take into account the fact that primary sanctions also target the U.S. operations of foreign-based entities and that much of their efficacy derives from this scope. Indeed, the JCPOA disregards the extent to which non-U.S. companies have stopped transacting with Iranian entities due to the U.S’s prohibition on dollar-clearing transactions and regulatory enforcement actions, both of which are part of the U.S. primary sanctions regime and continue to be in full force following the signing of the JCPOA. Thus, foreign businesses will either continue to remain on the sidelines, thereby foreclosing the possibility of meaningful economic relief, or re-renter the Iranian market despite these measures, making them by definition less effective measures by which to influence international business activity. Furthermore, to make such a move in Iranian markets, rational business actors seeking to re-enter the Iranian market will likely try to find ways to decrease their vulnerability to U.S. primary sanctions, including decreasing their exposure to the U.S. financial system. This would not only take away from the dissuasive force of the dollar-clearing ban and regulatory enforcement actions; it would also undermine the primary sanctions regime as a whole.
Secondly, the JCPOA does not deal with the U.S. Treasury’s campaign to “convince” international actors to stop doing business with Iran by highlighting the underlying riskiness of such activity. This likely means that foreign banks will either continue to avoid the Iranian market (again decreasing the likelihood that the Iranians will get the economic relief they expect) or enter the Iranian market in spite of Treasury’s arguments, which would involve them discounting those arguments and thus undermine the credibility of Treasury officials in applying the same type of financial suasion in the future.
1. The Secondary Sanctions Lifted by the JCPOA
Under the JCPOA, the United States has lifted sanctions as to non-U.S. persons by de-listing entities from the SDN list and dismantling legal authorities prohibiting certain types of business activities involving Iran. Since the de-listing of an entity simply means that a foreign business is no longer completely barred from transacting with that entity, what really gives meaning to the United States’ sanctions commitment are the withdrawal of the legal authorities that limited the scope of permissible business activities with un-designated entities.[68]
These authorities comprise of four congressional statutes—the IFCA, ITRSHRA, NDAA 2012, and section 5 of the ISA (which includes the amendments to the statute under the ITRSHRA and CISADA)—along with five executive orders implementing the sanctions mandated under the statutes. In aggregate, these statutes sought to discourage foreign companies from transacting with Iranian entities by imposing three types of sanctions: correspondent or payable-through account sanctions, blocking sanctions, and menu-based sanctions.
Correspondent or payable-through account sanctions targeted foreign financial institutions that did business in Iran by prohibiting them from maintaining a correspondent account or a payable-through account in the United States. Such accounts allow a foreign bank to authorize a U.S. bank to act as its agent in managing its financial affairs in the United States.[69] In particular, a foreign bank with correspondent and payable-through accounts at a U.S. bank empowers the U.S. bank to provide credit, deposit, collection, clearing, and payment services to U.S. customers in the foreign bank’s name. [70] Thus, by maintaining correspondent and payable-through accounts in the United States bank, foreign banks are able conduct business in the United States without a physical presence and access the U.S. dollars.[71]
Blocking sanctions referred to the prohibitions on transactions involving the property interests of foreign persons doing business with Iran when those interests were within the United States or came within the possession or control of a U.S. person. Blocking is another word for “freezing” and is a means for controlling the property of a sanctioned person; title to the blocked property remains with the sanctioned person, but the exercise of powers and privileges normally associated with ownership is prohibited without authorization from OFAC.[72] Blocking immediately imposes an across-the-board bar on transfers or dealings of any kind with regard to the property.[73] As a result, pre-JCPOA, a foreign company doing business with Iran ran the risk that it would lose the ability to use, access, or transfer all of its property within the United States.
Finally, menu-based sanctions were sanctions prescribed by Congress in a “menu” from which Congress directed the President to implement a certain number of sanctions. For example, Section 1245(a) of the IFCA (waived under the JCPOA with respect to non-U.S. persons) directed the President to “impose 5 or more of the sanctions described in section 6(a) of the [ISA]” on persons who sell, supply, or transfer graphite, raw or semi-finished metals to or from Iran.[74] In the case of the JCPOA, all the menu-based sanctions waived by the U.S. government were the 13 types of sanctions listed in section 6(a) of the ISA, which primarily included prohibitions on government loan assistance and the ability to engage in business activity in the United States.[75] Before the signing of the JCPOA, a foreign entity who ran afoul of these sanctions faced the possibility that it would be completely closed off from the U.S. marketplace.
2. The Dollar-Clearing Ban and Enforcement Actions
While the JCPOA lifted virtually all of the United States’ secondary sanctions, it did not remove or in way deal with two non-secondary legal measures that played a critical role in isolating Iran from international markets—the prohibition on banks in the United States from effecting dollar-clearing transactions on behalf Iranian entities and the slew of U.S. enforcement actions in the mid-2000s against multinational banks with business ties to Iran.
Beginning in November 2008, the U.S. government barred banks in the United States from converting payments into dollars—dollar-clearing—for the benefit of Iranian entities, even when non-Iranian, foreign financial institutions are at both ends of the transactions. An example of a prohibited transaction is the following: Iran sells oil to a nonU.S. customer, who in turn directs its bank, a nonIranian foreign bank, to deposit dollars obtained from a bank in the U.S. into a second nonIranian foreign bank, for the direct or indirect benefit of persons in Iran or the Government of Iran. [76]
As a result, the ban on dollar-clearing transactions creates serious challenges for foreign businesses effectuating deals with Iranian counterparts. Foreign companies rely significantly on dollar-clearing to effectuate international deals as the vast majority of global transactions are priced in US dollars.[77] By one measure, transactions in U.S. dollars account for approximately 85 percent of global trade transactions, even when the parties involved are based outside the United States.[78] Companies trade goods in US dollars, purchase raw materials and supplies in U.S. dollars, and borrow and raise U.S. dollars to fund their purchases and operations. [79] Indeed, before November 2008, the Treasury Department specifically authorized dollar-clearing of Iran-related transactions because almost all oil transactions are priced in dollars and it did not want to significantly disrupt the oil markets, particularly in light of the dependency of many countries (including allies) on Iranian oil. [80]
Second, the JCPOA does not reckon with the effects of the United States’ campaign of devastating enforcement actions against foreign banks doing business with Iran. Starting in 2004, various U.S. authorities began aggressively pursuing foreign banks that had violated sanctions, imposing multi-billion dollar fines and in certain instances limiting banks’ access to U.S. markets. What is important to stress about these actions is that they all involved foreign financial institutions insufficiently walling off their Iran operations from their U.S. businesses, not secondary sanctions violations. All of the United States’ enforcement actions targeted banks that had violated primary sanctions by covering up their transactions with Iranian entities so as to deceive U.S. counterparties or otherwise process those transactions through the U.S. financial system.[81]
These enforcement actions pushed banks to exit their Iran businesses in several ways. First of all, banks entering into deferred prosecution agreements with U.S. authorities often had to explicitly agree to cut off their Iran operations for a specified period of time, frequently ranging from three to five years. Second, many foreign banks who had yet to find themselves in the crosshairs of U.S. authorities reasoned that the potential of a mammoth financial penalty rendered any Iran business prohibitively risky, and decided instead to altogether eliminate their Iran operations. Though a process called “de-risking”, banks made the determination that they would be better served by completely exiting the business line, giving rise to the risk of financial penalties, instead of investing in the technologies and compliance systems to manage that risk.[82]
The JCPOA has not addressed any of these drivers behind banks’ behavior. While it is arguably permissible for parties to engage in dollar-clearing outside of the United States, the structure and economics of the dollar-clearing business mean that dollar-clearing services must invariably be routed through the United States, which goes against the primary sanctions regime.[83] Consequently, many foreign companies continue to express reluctance about re-engaging Iranian businesses. According to Clyde & Co., a London-based law firm, the prohibition on dollar-clearing transactions plays a significant role in explaining why 85% of respondents to a recent survey continue to have a “negative risk appetite” as to the question of renewing ties with Iran.[84] Business people have also publicly made the point. In an interview with Reuters in March, an international banker operating in the Persian Gulf stated that his bank continued to have an aversion to Iranian transactions because of the continued ban on dollar-clearing. “Around 85 percent of trade is in U.S. dollars and if you’re dealing in dollars you cannot risk that by involvement with Iran.”[85]
As for regulatory enforcement actions, OFAC has explicitly stated that the agreement does not alter the terms or conditions of deferred prosecution agreements into which banks may have entered.[86] This means that, barring any actions by the relevant regulatory authorities, foreign banks that have entered into these agreements are legally unable to enter into the Iranian market even if they want to. As for the rest of the banking industry, the JCPOA does nothing to deal with why foreign banks have decided to de-risk themselves from the Iranian market. Not only have regulators not made any indications that they will scale back penalties or other punishments, but the JCPOA did not alter the underlying legal basis upon which they were able to go after banks in the first place—namely, the United States primary sanctions regime against Iran. Insofar as the past decade’s campaign of regulatory actions against banks has scared the industry away from the Iranian market, foreign financial institutions will not find any language in the JCPOA to alleviate that fear.
Thus, the fact that the United States does not deal with the ban on dollar-clearing or the U.S.’s campaign of enforcement actions means that the partial unwinding of sanctions under the JCPOA is unlikely to simultaneously provide Iran the economic relief it expects while leaving the rest of the U.S. sanctions architecture unaffected. If the ban on dollar-clearing transactions and the possibility of enforcement actions continue to dissuade foreign businesses from pursuing business opportunities in Iran, Iran will probably not get the economic relief it anticipates. For many of the foreign banks and businesses who shut down their Iran operations in the late 2000s—and with which Iran hopes to reconnect—these measures prohibitively raise the cost of doing business.
Alternatively, if foreign businesses re-enter the Iranian market, they will have to do so despite these government actions, by definition rendering them a less dissuasive force. More specifically, to the degree that rational business actors seek to pursue Iranian business opportunities, they will have to develop workarounds that decrease their exposure to the United States, making it more difficult for the United States to pressure them by threatening to close them off from the U.S. financial system. To do business with Iran despite the ban on dollar-clearing transactions, foreign companies will have to find ways to effectuate deals in alternative currencies to the dollar. To eliminate their vulnerability to enforcement actions, financial institutions will have to figure out ways to do business with Iranian entities without running afoul of primary sanctions—either by devoting more resources to walling off Iranian transactions from the United States financial system or by simply reducing their exposure to U.S. markets. European and Asian companies have a special incentive to decrease their exposure to U.S. markets in light of the fact that, while the United States has not lifted the ban on dollar-clearing transactions or indicated that it will stop pursuing enforcement actions, the European Union and other states have mostly relaxed their Iran sanctions programs. [87] The different paces at which the United States and the rest of the P5+1 have unwound sanctions means that in the long-term foreign businesses will have an easier time avoiding U.S. markets, thereby diminishing the United States’ ability to effectively levy sanctions in the future.[88]
While global companies have by no means started exiting the U.S. market in mass, there is evidence that some foreign businesses have begun exploring ways to decrease their exposure to the U.S. financial system in order to transact with Iran after the signing of the JCPOA. In an interview with the author, a European lawyer noted that some companies have begun working around the United States’ prohibition on dollar-clearing by closing and settling dollar-priced contracts in alternative currencies, such as the euro.[89] In Japan, the Bank of Tokyo-Mitsubishi has announced that it will handle payments by Japanese oil refiners to Iran in both yen and euros and two other Japanese banks have reportedly looked into reinitiating non-dollar wiring services to Iran. [90] Foreign governments have also been responding to the renewed business interest in the Iranian market by actively exploring ways to enable businesses to carry out transactions in alternative currencies. The Government of Pakistan has asked the State Bank of Pakistan to come up with an interim payment mechanism so that Pakistani companies can enter Iran without relying dollars; South Korea is exploring ways to encourage dealings with Iran in its own currency or euros; and Brazil’s trade minister announced in February that his government will look to enable payments in euros and other currencies to and from Iran because “everyone is racing after Iran now…the trade potential is very big.” [91]
Indeed, according to Omar Bashir and Eric Lorber of the Financial Integrity Network, these moves “only continue a recent, larger trend of companies and countries avoiding the U.S. financial system” out of fear of U.S. sanctions. [92] For instance, “many analysts believe that the recent Chinese push to make the renminbi a reserve currency was partly the result of a Chinese desire to ensure that the United States would not be able to bring significant coercive economic leverage to bear on China in the future.” [93] Likewise, Bashir and Lorber discuss the potential that China’s new China International Payment System, a financial messaging network like Brussels-based SWIFT—the global system on which banks rely to coordinate the transfer of trillions of dollars every day—will “insulate the country from the sanctions that proved so powerful against Iran.” [94]
3. Treasury’s Private Outreach to Foreign Banks
The JCPOA also does not address an extra-legal effort on the part of the United States government during the 2000s—namely, Treasury officials’ private outreach to foreign banks and their efforts to persuade banks to cut off their Iran operations by demonstrating the inherent riskiness of transacting with Iran. From 2006 to 2012, Treasury officials directly reached out to over 200 banks in more than 60 countries to convince them to cut off ties with Iranian banks.[95]
Treasury’s argument boiled down to making clear to banks the “core risk” of doing business in Iran, which in the words of Treasury official Danny Glaser was the risk that in any business involving Iran “you cannot be certain that the party with whom you are dealing is not connected to some form of illicit activity.”[96] This risk had several counters, the details of which Glaser described in a House Committee hearing in 2008. One, the Iranian government and designated Iranian entities regularly used “front companies and intermediaries in ostensibly legitimate commercial transactions that [were] actually related to its nuclear and missile programs.”[97] Two, Iranian banks would ask foreign financial institutions “to remove their names when processing transactions” and thus “elude the controls put in place by responsible financial institutions”, potentially involving them in transactions that they other would never engage in. [98] Accordingly, Iranian banks would proceed “undetected as they move money through the international financial system to pay for the Iranian regime’s illicit and terrorist-related activities.”[99] Three, foreign financial institutions could place little faith in Iran’s anti-money laundering (“AML”) regime, which was wrought with substantial deficiencies that hampered Iran’s ability to detect or prevent terrorist financing.[100] Treasury would specifically cite findings by the Financial Action Task Force (“FATF”), an intergovernmental organization dedicated to develop policies to combat money laundering, and the International Monetary Fund (“IMF”), detailing Iran’s AML problems. [101] These included “insufficient criminalization of money laundering, failure to criminalize terrorist financing, lack of AML supervision, lack of financial intelligence unit, lack of sanctions implementation, and lack of international cooperation in AML investigations.”[102]
To the extent that the “core risk” of doing Iranian business materialized, foreign financial institutions would find themselves wrapped up in a sanctioned transaction that would damage their reputations in the international marketplace and make them the target of U.S. enforcement actions—a possibility that, in light of the increasingly punitive fines and other penalties U.S. authorities were imposing on sanctions violators, no bank wanted to entertain.[103] Juan Zarate neatly illustrates Treasury’s emphasis on the inherently suspect nature of Iranian business in an account of one particular meeting between Stuart Levey, then Treasury Under Secretary for Terrorism and Financial Intelligence, and a German bank executive team:
On one occasion, Levey had compiled information about Iran’s use of a German bank to move money for acquisitions for their operations, potentially for the nuclear program. When Levey met with the bank’s CEO and chief compliance officer, he asked them if they knew what was happening in their bank. The compliance officer seemed confident. The CEO less so and worried about what was to come. Levey then calmly explained what the U.S. government knew about Iranian financial transactions and the use of cover payments and front companies to hide the real purpose for their banking. The IRGC was using bank accounts in Europe to acquire nuclear equipment and to develop its missile systems while lining their leaders’ pockets. Levey went on to explain that most banks did not realize this, but that it was happening. The banks thus far had no way to know what was transpiring through Iranian front operations and accounts. Levey then put a file on the table that contained documents detailing those types of transactions happening in that very bank.
After absorbing this revelation, the CEO was stunned, the compliance officer sheepish and worried. The CEO took the documents and thanked Levey for the information. He said he would take the information under consideration and look into the matter. The meeting was over, and it had its effect. The bank began to close its accounts with Iranian customers and curtail its business with Iran.[104]
The JCPOA does not address the effect of this campaign of financial suasion on international banks’ risk assessment of Iran. To be sure, the hefty fines coming out of the “stripping cases” —in which U.S. authorities penalized banks like BNP Paribas for stripping the names of Iranian customers before processing them through the U.S. financial system—are unlikely to lead financial institutions to honor requests to strip the names of their Iranian counterparts. The JCPOA also establishes a legal framework for Iran to pursue a nuclear program and thus allows for legitimate nuclear-related commercial transactions. Nevertheless, the risks that Treasury highlighted in the mid-2000s remain as true today as they did before the JCPOA—by doing business in Iran, foreign banks still open themselves up to the possibility of dealing with front companies and intermediaries engaged in illicit conduct and they cannot count on a robust Iranian AML regime to manage this risk. While the United States now allows foreign financial institutions to transact with Iranian entities as long as they are not SDN’s, the JCPOA does not deal with the bigger elephant in the room—the perception t