Bloomberg� | Jonathan Stearns and Helene Fouquet: The Trump administration escalated its battle with European allies over the fate of the Iran nuclear accord, threatening penalties against the financial body created by Germany, the U.K. and France to shield trade with the Islamic Republic from U.S. sanctions.


Sigal Mandelker, the Treasury Department�s undersecretary for terrorism and financial intelligence, signaled in a May 7 letter obtained by Bloomberg that INSTEX the European vehicle to sustain trade with Tehran, and anyone associated with it could be barred from the U.S. financial system if it goes into effect.


�I urge you to carefully consider the potential sanctions exposure of INSTEX� Mandelker wrote in the letter to INSTEX President Per Fischer. �Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system.�


Germany, France and the U.K. created INSTEX in January to allow companies to trade with Iran without the use of U.S. dollars or American banks�thus allowing them to get around wide-ranging U.S. sanctions that were imposed after the Trump administration abandoned the 2015 Iran nuclear deal last year.


A senior official involved in the internal debate that led to the letter said the U.S. decided to issue the threat after concluding that European officials, who had earlier downplayed the significance of Instex in conversations with the Trump administration, were far more serious about it than they had initially let on.


The official, who asked not to be identified discussing internal deliberations, said the letter was intended to serve as a warning that the U.S. would punish anyone associated with INSTEX�including businesses, government officials and staff �if they were working to set up a program to help Iran evade U.S. sanctions.


�This is a shot across the bow of a European political establishment committed to using Instex and its sanctions-connected Iranian counterpart to circumvent U.S. measures,� said Mark Dubowitz, the chief executive officer of the Foundation for Defense of Democracies in Washington.


Deceptive Practices


Asked to comment on the letter, the Treasury Department issued a statement saying �entities that transact in trade with the Iranian regime through any means may expose themselves to considerable sanctions risk, and Treasury intends to aggressively enforce our authorities.�


The French Finance Ministry, which handles press queries for INSTEX, had no immediate comment.


European countries broadly opposed Trump�s decision to withdraw from the nuclear accord but have struggled to deliver the economic benefits Iran expected from the deal, known as the Joint Comprehensive Plan of Action, since the U.S. quit. In the meantime, U.S. sanctions have delivered a blow to Iran�s economy, fueling inflation, reducing oil revenue and pressuring President Hassan Rouhani�s government. Instex was supposed to help address that, but so far it has largely failed to get up and running.


Iranian leaders have rejected the U.S. moves while pressuring European nations to accelerate efforts to ensure Iran benefits from staying in the JCPOA. At the same time, Iran has said it will scale back some of its commitments under the accord, signaling it could surpass some limits on enriched-uranium in weeks.


At the heart of the latest U.S. move is the argument that Iran and its central bank use deceptive financial practices and haven�t implemented minimum global safeguards against money laundering and terrorism financing.


Pompeo Warning


Opponents of INSTEX, including Dubowitz�s Foundation for Defense of Democracies, argue that the mechanism is flawed because the Iranian institution designated to work with Instex, the Special Trade and Finance Instrument, has shareholders with links to entities already facing sanctions from the U.S.


During a visit to London on May 8, Secretary of State Michael Pompeo also warned that there was no need for Instex because the U.S. allows for humanitarian and medical products to get into Iran without sanction.


�When transactions move beyond that, it doesn�t matter what vehicle�s out there, if the transaction is sanctionable, we will evaluate it, review it, and if appropriate, levy sanctions against those that were involved in that transaction,� Pompeo said. �It�s very straightforward.�