Bloomberg | Esfandyar Batmanghelidj: The Treasury Department’s “letter of comfort” opens a long-delayed Swiss channel.

On Thursday, Swiss authorities announced that they had processed a pilot transaction through the Swiss Humanitarian Trade Arrangement (SHTA), a new payment channel that intends to ease the sale of food and medicine to Iran by Swiss companies. Work on this channel began in late 2018 following the Trump administration’s reimposition of secondary sanctions on Iran.

Expectations around the mechanism should be tempered with caution. The Trump administration dragged its feet for over a year before supporting the mechanism, despite clear evidence that sanctions were causing humanitarian harm. Additionally, Iranians might be reluctant to use the mechanism. There are concerns that some of the conditions imposed on the SHTA by the Treasury Department could be used as a part of a “fishing expedition” for information that could be used to intefere with routine trade.

But hidden in the mechanics of SHTA’s initial 2.3 million-euro transaction is an unprecedented provision that could help address growing concerns that the Trump administration’s “maximum pressure” sanctions campaign will be impossible to lift even in the aftermath of new negotiations with Iran.

But hidden in the mechanics of SHTA’s initial 2.3 million-euro transaction is an unprecedented provision that could help address growing concerns that the Trump administration’s “maximum pressure” sanctions campaign will be impossible to lift even in the aftermath of new negotiations with Iran.

The relevant provision is hidden in the jargon of a statement issued last October describing Treasury’s framework for SHTA: “Provided that foreign financial institutions commit to implement stringent, enhanced due-diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.”

A press release on the SHTA released by Swiss authorities confirms that the initial transaction was processed on the basis that the Treasury Department “has given the necessary assurances to the Swiss bank involved for this specific transaction.”

Such assurances, when provided in written form, are called “letters of comfort.” This is likely the first ever transaction in which the department addressed the concerns of a foreign financial institution by providing a letter of comfort, despite the fact that the transaction was technically sanctions exempt.

This is highly significant, given that the architects of the Trump administration's Iran policy have spoken publicly about their efforts to build a “sanctions wall.” Building the wall involves creating a web of complex designations related to Iran’s role as a “state sponsor of terrorism, including its terror-financing central bank; its missile program, which is progressing toward an intercontinental ballistic missile; and its human-rights abuses and corruption.” The intention is to heighten the risk perception of banks and businesses in order to keep them from doing business with Iran even if a new deal is stuck.

For those who do want to do business in Iran, this problem first surfaced during the Obama administration. In the months immediately following the implementation of the nuclear deal with Iran, U.S. officials toured Europe and encouraged companies to go ahead with their plans for Iran, and financial institutions to process Iran-related payments on behalf of their clients. But companies found themselves hitting a wall as banks remained reticent to offer the required services.

Bankers were anxious about what was and wasn’t allowed, and made their concerns known at a meeting with Secretary of State John Kerry. But the Obama administration resisted calls from European bankers and officials to provide letters of comfort, relying instead on the technical permissions afforded under sanctions relief and their verbal encouragement.

This approach might have sufficed had more time been available for economic operators to develop a new understanding of the compliance risks emanating from Iran, but the election of President Donald Trump and his campaign promises to discard the Iran nuclear deal cut short any such period of recalibration. Had the Obama administration employed comfort letters, more trade and investment could have been completed in the period between the nuclear deal’s implementation and Trump’s inauguration.

Here, the launch of SHTA establishes an important and hopeful precedent, and may improve the prospects of negotiations toward an end to the U.S.-Iranian standoff. Fears of a “sanctions wall” have contributed to Tehran’s unwillingness to enter any talks. But if Trump or any future president credibly combines quick and decisive sanctions relief with letters of comfort, it would be a game-changer for mutinational companies engaged in Iran and the banks on which they rely.