Bourse & Bazar - The Trump administration has imposed successive rounds of economic sanctions targeting nearly all productive sectors of Iran�s economy. These sanctions have been imposed with conflicting objectives in mind, up to and including regime change. But a new wave of restrictive measures now under consideration would have the practical effect of totally severing Iran�s economy from Europe, critically undermining humanitarian trade with Iran. Considering Europe�s renewed motivation to inaugurate INSTEX�the special purpose vehicle through which Europe and Iran will facilitate non-sanctioned trade�the Trump administration�s action could undermine months of high-level diplomatic efforts to save the nuclear accord by entirely eviscerating the limited leverage that Europe possesses with respect to Iran moving forward. This is the likely intention.

Section 311 and Iran

Section 311 of the USA Patriot Act�which was enacted in response to the September 11, 2001 terrorist attacks on the United States�provides authority for the Secretary of the Treasury to designate a foreign jurisdiction, institution, class of transactions, or type of account to be of �primary money laundering concern� and thereby requiring US financial institutions to take �special measures� with respect to them. This authority has been used in relation to foreign countries such as Burma, North Korea, and Ukraine, as well as foreign financial institutions such as ABLV Bank, Banco Delta Asia, Bank of Dandong, and the Lebanese Canadian Bank. The �special measures� imposed with respect to each �money laundering concern� can range from certain minimal record-keeping and reporting requirements to a total ban on the maintenance of correspondent or payable-through accounts.

In November 2011, as part of its own campaign to ramp up the sanctions pressure on Iran, the Obama administration found Iran to be a jurisdiction of primary money laundering concern and proposed the imposition of the fifth special measure pursuant to Section 311. This �special measure� prohibits the opening or maintaining of a correspondent or payable-through account by a US bank for a foreign financial institution if the correspondent account involves Iran in any manner. In addition, the fifth �special measure� requires US banks to apply �special due diligence� with respect to all of their correspondent accounts to ensure that such accounts are not used indirectly to provide services to an Iranian financial institution.

The proposed rule never took effect during the Obama administration�s tenure, as the growing sanctions pressure on Iran made finalization of the rule superfluous and little more than a bureaucratic headache. The Obama administration had accomplished the intended purpose of the rule regardless, as Iran�s banking sector was left isolated and ostracized on the global stage�its reputation muddied by the Section 311 finding and the proposed rule. Once negotiations commenced between the US and Iran with respect to Iran�s nuclear program, the Section 311 rule-making was thrust aside�the Obama administration more immediately focused more on how to lift sanctions than how to impose additional ones.

Treasury�s New Move

But Section 311 rule-making appears to be back with a vengeance. The Trump administration is mulling the issuance of a �Final Rule� that would give the Section 311 designation the force of law. In doing so, the administration would impose the fifth special measure with respect to Iran. The administration�s outside enablers are quickly laying the public groundwork for Treasury�s imminent action. The effects could prove dramatic.

The most significant result of such rule-making could well be the total cessation of humanitarian trade with Iran, as those few foreign banks that maintain accounts for non-designated Iranian banks to facilitate legitimate trade with Iran�including humanitarian trade�shutter such accounts in order to avoid the onerous scrutiny of their US correspondents.

Under the proposed rule, US banks would be required to undertake �special due diligence� with respect to correspondent accounts maintained on behalf of foreign financial institutions. Such �special due diligence� does not require that US banks close the accounts of foreign banks that themselves maintain accounts for Iranian banks so long as such banks do not permit Iran indirect access to the US correspondent account. But US banks are unlikely to narrowly tailor their conduct to the precise nuances of law and will show reluctance to continue banking foreign correspondents that themselves bank Iran. As a result, European banks that maintain accounts on behalf of Iranian financial institutions are likely to take steps to shutter such accounts so as to sustain their own accounts at US banks.

The US Treasury Department is fully aware as to how European banks will react if the proposed rule is finalized, having long used scare tactics to undermine Iran�s banking links to the outside world, so the likely consequences of the proposed rule should be considered the intended ones. This fact provides further evidence that key figures in the Trump administration are seeking to constrict humanitarian trade with Iran, as they seek to foment conflict with Iran or within its borders.

Moreover, no one seriously believes that the proposed Section 311 action will lead Iran to remediation. In fact, the opposite is likely true. When compared to other financial sectors in the developing world, the deficiencies in Iran�s legal regime have often been grossly exaggerated, at times more the consequence of the U.S.�s punishing sanctions than their cause. As Iran continues to take steps consistent with the Action Plan agreed to with the Financial Action Task Force (FATF), Treasury�s action will have the effect of convincing Iran to end its remediation project before the global watchdog, as any such remediation will have negligible benefit in the face of Iran�s designation by the United States.

Will Europe Muster a Response?

Considering European efforts to promote non-sanctioned trade with Iran through the newly-minted INSTEX, the Trump administration�s pending action could not be more concerning. Just as Europe�s leaders work to convince Iran to forget the promised dividends of the nuclear accord and to stick to their own nuclear-related commitments thereunder for a minimum of trade ties, the Trump administration is threatening to hobble INSTEX and thereby undo months of intensive high-level diplomacy. Such an outcome would show Iran just how bound Europe is to American sanctions and how little power and influence Europe exercises within its own borders, much less without. Defying domestic laws such as the blocking regulation in order to comply with US sanctions targeting Iran, Europe�s commercial actors have made clear where power lies in the global economy.

If Europe has any self-regard for its economic sovereignty, it will be sure to publicly and privately warn Washington of the consequences of imposing the fifth special measure�not just to the nuclear accord or the humanitarian situation inside Iran, but also to the transatlantic relationship.

Those in power in the United States envision a world in which Europe has no place but in thrall to Washington. While Iran might not prove sufficiently consequential to Europe to inspire a fight back, the lesson that the Trump administration (and others in Washington) will draw from this episode will be applied more broadly�and more consequentially�to Russia, where European interests are much more significant. If Europe cedes all the ground now, it will have little to defend later.