Executives jet in to Iran, but legal pitfalls could put brake on investment

Published in Gulf States News, 26 November 2015

The world’s 28th largest economy holds almost as many risks as opportunities for international investors, and questions will persist about doing business in Iran even after sanctions are lifted.

Nothing has yet changed, for all the excitement caused by the agreement to end Iranian sanctions, signed by Tehran and the P5+1 group of six international powers in July. No sanctions have been removed and none will be until the United Nations’ nuclear watchdog, the International Atomic Energy Agency (IAEA), confirms that Iran has met its side of the Joint Comprehensive Plan of Action (JCPOA) by scaling back nuclear activities. When that happens, on the JCPOA’s ‘Implementation Day’, some elements of the trade embargo will be lifted, but many restrictions will remain, as credit insurers and trade financiers have understood since the deal was agreed.

It is not yet clear when Implementation Day will fall, although most expect it to happen in H1 16 – possibly as soon as Q1 16. At that point, there will be two distinct groups of international companies: US firms, for whom not much will change, and European Union companies, who have been flooding into Tehran.

A few areas will be loosened up for corporate America – for Persian carpets or US aircraft parts, for example – but sanctions imposed as a result of Iran’s alleged terrorism-related activity and money laundering will stay; Iran will remain off limits to most US businesses.

The EU will dismantle much of its trade embargo, and US sanctions that sought to prevent third parties from doing business with Iran, known as secondary sanctions, will be removed. Other governments that have broadly followed the EU’s sanctions policy, such as Norway and Switzerland, will probably take a similar position. “US companies are absolutely at a disadvantage as a result of this deal,” said Eytan Fisch, counsel at US law firm Skadden and a former Office of Foreign Assets Control (Ofac) official. “Non- US companies… are going to benefit most from the sanctions relief. They will have the greatest opportunity,” he told GSN.

Businesses that fall between these two groups are in a grey area. Non-US companies that are owned or controlled by US companies or individuals may still be subject to stringent US sanctions. “It is really up to the almost complete discretion of the US government as to what they decide to do,” said Fisch, of this third group. “It’s not clear exactly what will be done. It’s really a big unknown.”

All companies have other issues to navigate. The ban on US dollar transactions with Iran is likely to remain, and US banks will not be able to process most payments involving Iran. The export, or re-export, of any US-made goods to Iran will still be banned. Although European banks will be able to process payments from Iran, many will be cautious about doing so.

“Banks are very much in a wait-and-see scenario,” said British Bankers Association director of financial crime Justine Walker. “How do you really make sure that you carve out your business with Iran in a way that you’re not going to violate your US exposed individuals or business lines? That’s going to take time.”

Many Iranian individuals and companies will remain under US and EU sanctions until the IAEA concludes that Iran is behaving according to the deal. That point, known as ‘Transition Day’, is unlikely to happen for eight years. Among those that continue to be sanctioned will be important economic players, including companies associated with the Iranian Revolutionary Guards Corps (IRGC). The opaque nature of company ownership in Iran means that carrying out background checks on potential partners will be vital (although US due diligence firms may not be able to work on such projects).

Chief executive of London-based law firm W Legal Nigel Kushner said questions remained over companies that are potentially still politically compromised and have previously been placed under sanctions by the EU and UN, as well as Ofac. One example is Tidewater Middle East Company, the main container operator at Iran’s busiest port, Shahid Rajaee at Bandar Abbas, which has been traced to IRGC ownership and operations. “The way I read the asset freeze, it can be argued that any shipment to an Iranian port owned or controlled by Tidewater, or perhaps the Revolutionary Guards, will potentially result in criminal exposure for the shipper or the exporter,” Kushner said. “This issue is absolutely critical and must be addressed and clarified by the EU.”

Tidewater Middle East and associated companies were added to the US Department of the Treasury’s list of specially designated nationals on 23 June 2011, on the basis that it was owned by Mehr-e Eqtesad-e Iranian Investment Company, Mehr Bank and the IRGC, and that it has been used by the IRGC for “illicit shipments”. These companies have no relation whatsoever with giant US international shipping company Tidewater.

There is also the risk that sanctions may be re-imposed if relations between Iran and the west turn sour. Accounting for that ‘snap-back’ will require careful drafting of any contracts, so that international firms can retreat at minimal cost. “It’s imperative that people who jump back into Iran do so with their eyes wide open, knowing the commercial risks,” Kushner concluded. Iranian officials are counseling caution. Deputy oil minister Roknoddin Javadi told Mehr news agency that he expected only five major oil contracts to be signed with international companies before the government’s term ends in August 2017.