One of the central critiques of the recently agreed-to Joint Comprehensive Plan of Action (“JCPOA”) is that under the agreement, Iran will receive a $100-$150 billion windfall that it may use in part to support Hezbollah, increase its backing of Bashar al-Assad, or fund myriad other regional mischief. If there were no deal or Congress were able to block the implementation of a deal, the argument goes, then Iran would be unable to access this money for nefarious purposes. The problem with this proposal is that it represents a misunderstanding of the disposition of Iran’s overseas assets and what would happen to them in a no-deal scenario. In reality, there is a reasonable case to be made that Iran would be able to access a significant portion of these funds were the deal to fall through.

A common mistake made in discussing Iran’s overseas assets is that they are “frozen.” A far better description would be that while a small percentage of these funds are truly frozen, most are restricted. In 2012, Congress passed the Iran Threat Reduction and Syria Human Rights Act (“TRA”), which contained a provision requiring that financial institutions processing payments for the importation of Iranian oil to deposit these funds in special escrow accounts. This money could not be repatriated to Iran, but could be used for bilateral trade between Iran and the importing country, or for humanitarian exports to Iran. The reason that such a significant amount of money remains is that Iran is simply unable to purchase enough goods from the countries that were authorized to purchase its oil; China, India, Turkey, Japan, South Korea, and Taiwan. While other countries surely hold some frozen Iran

Of these six countries, China has always imported the most Iranian oil and therefore controls the highest percentage of Iran’s assets. According to one report, as of 2012 a single Chinese financial institution, Bank of Kunlun, held over $22 billion in Iranian money. By comparison, the United States writ large currently controls around $2 billion in frozen Iran funds, according to the Treasury Department’s most recent Terrorist Asset Report.

The reason that China has thus far largely complied with the TRA restrictions is two-fold. First, China has a legitimate interest in making sure Iran does not attain a nuclear weapon and has generally played a constructive role as a member of the P5+1. It has however reiterated that despite it de-facto compliance with U.S. secondary sanctions, in principal it fundamentally rejects the extraterritorial application of U.S. law. Second, the TRA provisions were beneficial to Chinese exporters, who enjoyed a largely captive market to ship its goods and could be paid in yuan.

It’s important to recognize that the effectiveness of U.S. extraterritorial sanctions is in large part due to the fact that their implementation was in support of a widely shared international objective – ensuring the peaceful nature of Iran’s nuclear program. But it’s important to realize that of a basic level, extraterritorial sanctions subvert the foreign and economic policy prerogatives of allies and trading partners to those of the United States. If these interests were totally aligned, there would be no need for U.S. pressure on foreign companies to isolate Iran. Indeed, the United States Department of Commerce has an entire Office of Antiboycott Compliance.

Were the U.S. to have walked away from a deal that was acceptable to other members of the P5+1, China, along with the other oil importers, might conclude that no deal is possible due to U.S. intransigence and move to secure their own economic interests in the Iranian market. This scenario also applies should Congress prohibit the President from upholding U.S. commitments under the JCPOA. Countries may weaken requirements to access restricted funds, which could then move illicitly to front companies run by the IRGC Qods Force. Turkey in particular has a long history of helping Iran access supposedly restricted funds. Restricted assets could be used to fund development projects that would normally come out of the government budget. This would free up money for other uses, including funding the terrorism and regional adventurism that JCPOA critics fear.

Normally, the U.S. response to a sanctions violation such as the improper use of restricted funds would be to designate the bank in question, blocking its access to the U.S. financial system. The problem in this case is that Bank of Kunlun is already under sanctions. The Treasury Department has zero leverage over what Kunlun does with that money. Likewise, were other countries to move funds to banks with little or no exposure to the U.S. financial system, there is not a great deal that Treasury can do to force compliance with extraterritorial sanctions.

While sanctions are often presented as a panacea, they are not. Policymakers deciding whether to support or oppose the JCPOA should develop an appreciation for the limitations of going extraterritorial. As evidenced by the opposition to the Helms Burton and Iran Sanctions Acts in 1996, countries do not always react as the U.S. would prefer. With the viability of a nuclear deal with Iran hanging in the balance, no one is served by oversimplifying what a deal means for Iran’s restricted assets.