Bourse and Bazaar | Esfandyar Batmanghelidj: The Treasury Department has announced that it will operationalize a financial channel to ease humanitarian trade with Iran, after acknowledging to European officials that recent sanctions imposed on the Central Bank of Iran (CBI) risked encumbering trade in food and medicine.
The channel, which was originally expected to become operational in February 2019, was first was first proposed by the Swiss government in the aftermath of the Trump administration’s reimposition of secondary sanctions on Iran in November of last year.
Switzerland is a leading exporter of pharmaceutical products to Iran. The Swiss government had sought to safeguard its bilateral trade by seeking legal clarity from the Treasury Department on behalf of Swiss banks. But the National Security Council, then led by John Bolton, blocked its operationalization despite support for the channel within the State Department.
The new announcement expands the scope of the channel to include any American or foreign financial institution engaged in humanitarian trade with Iran. This expanded scope and the timing of the move likely reflect concerns over the impact to humanitarian trade resulting from the Trump administration’s move to designate Iran’s central bank under a terrorism authority. That sanctions designation eliminated a long-standing exemption permitting a role for CBI in trade in food and medicine.
Over the last few weeks, European multinationals involved in the sale of humanitarian goods to Iran have been scrambling to understand the impact of the new designation on CBI. The Treasury Department failed to issue guidance in the aftermath of the designation to inform changes to compliance policies.
In particular, European companies engaged in the sale of food and pharmaceuticals were unclear as to whether the reliance of their customers on foreign currency allocations made by the Central Bank of Iran constitutes exposure to the new designation. Bourse & Bazaar contacted treasury managers and compliance officers at six European multinational companies in the days following the designation of the central bank. All refused to provide comment, but confirmed that the new sanctions had triggered internal reviews.
The move to finally launch the humanitarian channel appears to be an attempt to manage the unintended consequences of CBI’s terrorism designation. Over the last few weeks, European officials raised concerns with American counterparts about the impact of humanitarian trade. Speaking on background, a European official confirmed to Bourse & Bazaar that U.S. officials had described the launch of the humanitarian channel as a way to assuage those concerns.
Under the new framework, financial institutions which accept payments related to the sale of food and medicine to Iran will be permitted to “seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.” For years, European banks have sought “comfort letters” from the Office of Foreign Assets Control (OFAC) for humanitarian trade. It has been OFAC policy not to provide such letters and humanitarian transactions are not eligible for the licensing process due to the exempt nature of the trade. In this regard, the new framework represents a significant shift in policy.
But the new framework may introduce more problems than it solves. In order to receive such comfort letters, the financial institutions must undertake an enhanced due diligence process, reporting to Treasury “a great deal of information on a monthly basis.” The due diligence requirements go far beyond what has been considered the industry standard process for companies engaged in trade with Iran. Considering the significant costs and administrative burdens of such reporting, the requirement will likely limit the uptake of the new framework to those financial institutions engaged in the greatest volume of humanitarian trade with Iran.
The reporting requirements will also raise concerns among Iranian banks. Among the information requested by the Treasury Department are the “monthly statement balances with the value, currency, and balance date of any account of an Iranian financial institution” held at the foreign bank and used for humanitarian trade.
Concurrently with its announcement of the new channel, the Treasury Department identified Iran as “a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act.” As Tyler Cullis warned in Bourse & Bazaar in July, this move could independently have a devastating impact on humanitarian trade:
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.
It is unclear whether companies can opt not to seek comfort letters through the new framework. Some financial institutions may prefer to maintain trade without the additional legal clarity as they have done since the reimposition of secondary sanctions last year, relying on the existing general licenses issued by the Treasury Department to permit humanitarian trade.
But the Treasury Department’s pursuit of “unprecedented transparency into humanitarian trade” and its allegations of Iran’s use of “so-called humanitarian trade to evade sanctions and fund its malign activity,” may see Trump administration officials pressure companies to use the new framework, requiring disclosures of sensitive financial information that will be unacceptable to Iranian banks and companies wary of U.S. intentions. The Trump administration’s latest gesture to ease humanitarian trade may end up doing just the opposite.
The Treasury Department’s announcement may be intended to pre-empt next week’s launch of a major report from Human Rights Watch that is expected to show significant failures on the part of the United States to safeguard humanitarian trade in accordance with its own sanctions policies. The administration continues to claim that its “unprecedented economic pressure” is “not directed at the people of Iran.”