Conducting an informal study of European banks’ willingness to re-engage Iran in the post-sanctions era, the Guardian reports that a “majority were unwilling to disclose whether they had plans to deal with Iran, a few said there was no change in their existing policy, and…Standard Chartered…issued a statement to make clear it was not dealing with anyone or any entity that had anything to do with Iran.” As one senior European banker cited by The Guardian said, “I have yet to find one Tier-1 European investment bank that wants to go back into Iran.”

Not a hopeful sign for an Iran seeking to re-integrate with the global financial system.

A major problem is surviving U.S. sanctions authorities that target hundreds of Iranian persons and entities for support for terrorism or human rights violations or ties to Iranian Revolutionary Guards Corps (“IRGC”). On top of that, European bankers are reported to be complaining about the opaqueness (and the length!) of OFAC’s latest guidance related to the lifting of secondary, nuclear-related U.S. sanctions targeting Iran.

I am not entirely unsympathetic to their complaints. While it is clear that OFAC spent a great deal of time and effort on its latest round of guidance and FAQs following the Joint Comprehensive Plan of Action (“JCPOA”), it is less obvious that this guidance resolve the most serious concerns of global financial institutions. That could be partially chalked up to the problems that linger in Iran-related dealings as a result of non-nuclear sanctions that have survived the JCPOA – a problem that the USG will contend is Iran’s — but I think it is also emblematic of the lack of consultation with the private sector that continues to plague OFAC’s efforts.

Take a look at FAQ # C.11, which answers the question as to whether foreign banks will be exposed to sanctions for transacting with Iranian financial institutions if those Iranian financial institutions have banking relationships with Iranian persons or entities on OFAC’s SDN List. OFAC responds:

Beginning on Implementation Day, non-U.S., non-Iranian financial institutions engaging in transactions with Iranian financial institutions (including the CBI) not appearing on the SDN List will not be exposed to sanctions as a result of those Iranian financial institutions engaging in transactions or banking relationships involving Iranian individuals or entities, including financial institutions, on the SDN List…

However, OFAC notes that this is only true so long as:

…the non-U.S., non-Iranian financial institution does not conduct or facilitate, and is not otherwise involved in, those specific transactions or banking relationships with the individuals and entities on the SDN List.

Providing an example, OFAC states that:

…a European-headquartered bank that transacts with the CBI or any other non-designated Iranian financial institution is not subject to secondary sanctions – even if the CBI separately has banking relationships with individuals or entities on the SDN List – provided that the European bank is not involved with any of the CBI’s transactions involving individuals or entities that remain on the SDN List.

This sounds like a clear rule, but the trouble is that a number of different fact-patterns might arise that could render the rule’s application ambiguous or unfeasible. For example, let’s say that an Iranian financial institution opens a correspondent account at a European-headquartered bank from which it makes and receives payments on behalf of its Iranian clients, thereby facilitating Iran’s re-integration in the currents of international trade. (This is first and foremost what Iranian banks are interested in – lots of private Iranian banks were never disconnected from SWIFT but were unable to utilize the payment messaging service because their European counterparts were closing or otherwise suspending the operation of their correspondent banking relationships from which payments could be effectuated and payment messaging be utilized.)

The rule that OFAC has laid down would seem to bar the European-headquartered financial institution from making or receiving payments from the Iranian bank’s correspondent account if those payments are at the behest of (or otherwise benefit) an Iranian person or entity currently on OFAC’s SDN List. As such, while the European-headquartered bank is not liable for engaging in transactions with the Central Bank of Iran or any other non-designated Iranian financial institution based solely on the fact that the CBI or the non-designated Iranian banks have banking relationships with Iranian persons on the SDN List, the European-headquartered bank does need to be considerate of those banking relationships in order to ensure that the U.S.-designated clients of the Iranian bank do not use or otherwise benefit from transactions with or correspondent banking relationships between the European-headquartered bank and the non-designated Iranian bank. Failure to do so could expose the European-headquartered financial institutions to secondary sanctions for facilitating or effectuating significant transactions with designated Iranian persons or entities.

Thus, while OFAC has laid down a clear rule, its application will prove problematic for European or other foreign financial institutions interested in re-engaging with non-designated Iranian banks. The price will potentially remain a steep one for foreign banks resuming transactions or correspondent banking relationships with Iranian financial institutions. The fact that Iran expects to be re-integrated into the global financial community – from which it was so abruptly expelled starting in the late 2000s – only underlines a possible source of tension between the JCPOA parties in the future, as surviving U.S. sanctions authorities frighten off potential customers for Iran.

To take a more egregious example, however, look at FAQ # M.2 – which asks “what level of due diligence is expected from industry since there is no relief for the IRGC in the JCPOA, given the IRGC plays a significant role in the Iranian economy.”

I can tell you that this is a serious question that has cross-sector appeal from industry leaders. Foreign business eagerly wants to know how it can do business in Iran if the U.S. threatens to impose sanctions on parties for engaging with the IRGC or any of its agents or affiliates – especially in consideration of the fat that Iran lacks beneficial ownership reporting requirements. In particular, people want to know what kind of due diligence is expected of them to ensure that their dealings in Iran do not have a nexus to the IRGC or its agents or affiliates, so that they are insulated from any potential exposure to U.S. sanctions.

Being such a high-demand question, one would have expected OFAC’s answer to be better than this:

After Implementation Day, non-U.S. persons who knowingly conduct significant financial transactions with Iranian or Iran-related persons on the SDN List, including the IRGC, continue to be exposed to sanctions.

OFAC recommends that a person considering business in Iran or with Iranian persons conduct due diligence sufficient to ensure that it is not knowingly engaging in transactions with the IRGC or other Iranian or Iran-related persons on the SDN List…and keep records documenting that due diligence. U.S. persons may refer to FAQ 116 for additional guidance on compliance expectations for intermediary banks.

To make a shorter version of this:

Q:       What kind of due diligence does OFAC expect when it comes to ensuring its Iranian counter-parties do not have a nexus to the IRGC or the IRGC’s agents or affiliates?

OFAC:    Sufficient due diligence.

That is a silly answer providing no real insight into OFAC’s expectations. It is difficult to engage in trade-related dealings with Iran without having clarity as to the operative law that will govern transactions there on the U.S. side. No one wants to be exposed to U.S. sanctions liabilities, so the least that OFAC could do is provide actual clarification as to its due diligence expectations. Not only will foreign firms adopt those expectations to avoid sanctions liabilities, but U.S. policy interests – i.e., in ensuring that the IRGC or its agents or affiliates do not benefit from Iran’s re-integration in the global economic order – are much more likely to be satisfied.

That’s why I am not at all surprised by the results of the Guardian’s informal survey. The road to Iran is a treacherous one with many potential pitfalls and, despite its best intentions, OFAC has not made the way any easier to climb for foreign banks interested in resuming transactions with Iranian parties.