Yesterday, the UK reissued an updated version of their “Doing Business in Iran” guide for import/export trade. Here’s the section on the risks for UK businesses trading with Iran, including statements about the most recent US, EU and UK changes:
5. Challenges and risks of doing business in Iran
5.1 US withdrawal from JCPoA
On 8 May 2018, the President of the United States of America announced the withdrawal of the US from the Joint Comprehensive Plan of Action, otherwise known as the Iran Nuclear Deal.
Read the full statement issued by the US government.
In a joint statement, the leaders of the UK, France and Germany emphasised their continued commitment to the JCPoA. As such, the UK government continues to fully support expanding our trade relationship with Iran and encourages UK businesses to take advantage of the commercial opportunities that arise.
On 7 August 2018 the existing EU Blocking Regulation was updated to include re-introduced US sanctions on Iran following their withdrawal from the JCPoA. This aims to protect EU companies doing legitimate business with Iran from the impact of US extra-territorial sanctions. The EU Commission has issued online guidance relating this regulation.
On 2 November 2018, the Foreign and Finance Ministers of France, Germany and the UK issued a statement reiterating their support for the JCPoA.
As of 5 November 2018, US nuclear-related sanctions have been re-imposed on Iran.
Consult guidance issued by the US Office of Foreign Assets Control (OFAC) on the US Department of the Treasury website if you have any queries relating to US sanctions.
The UK government continues to fully support expanding our trade relationship with Iran and encourages UK businesses to take advantage of the commercial opportunities that arise.
The UK fully implements UN, EU and UK domestic sanctions law. The re-imposition of the US sanctions against Iran may have commercial and legal implications for UK businesses and individuals dealing with Iran. Where necessary, legal advice should be sought.
EU and UN nuclear sanctions continue to be suspended, as detailed in the JCPoA.
Read the full text of the agreement and annexes. However, some sanctions remain in place, in particular sanctions related to human rights, proliferation and Iran’s support for terrorism.
5.2 Business challenges in Iran
Despite the lifting of many sanctions, Iran can be a difficult place to do business. UK businesses looking to trade or invest in Iran should be aware of:
- sanctions that remain in place, trade regulations and export controls, and ensure all trade activity is sanctions compliant
- political exposure, via connections with current or former government organisations or individuals that remain sanctioned
- terrorist financing or financial crime, such as money-laundering, bribery or fraud
- risk to a company’s reputation through work with people or organisations allegedly involved in human rights violations, corruption or litigation
Breaching sanctions is illegal. UK businesses need to carefully determine what risks they might want to take on the less clear-cut issues of political or reputational risk, and ensure that they undertake appropriate and adequate levels of due diligence.
5.3 Bureaucracy in Iran
Iran is a highly centralised country and the government regulates nearly all activities. Basic requests can require complex forms, administrative processes and stamps of approval and these can lead to delays.
5.4 Political risks in Iran
The division between public and private sectors in Iran is often blurred by the presence of a number of semi-autonomous organisations closely aligned to the state.
Most prominent among these are charitable foundations known as bonyads or setads, many of which are now equivalent to large business conglomerates. Some large religious organisations and even branches of the military also function as bonyads. These political and economic links could be of concern to investors.
5.5 Sanctions on Iran
Sanctions that remain in place will continue to limit what UK businesses can legally do in Iran.
Sanctions remaining in place include:
- EU sanctions against a small number of Iranian banks and as well as individuals and other organisations
- arms embargo restricting export of goods, software or technology on the UK military lists
- human rights sanctions
- US sanctions
Check the HM Treasury Consolidated List of Targets to see which organisations and individuals are subject to an asset freeze. It is worth noting that it is your responsibility to find out whether sanctions still affect you.
You must ensure that any proposed agreements do not deal, either directly or indirectly, with a designated entity either in the supply of material or services or in the payment route used.
You are not allowed to make funds and economic resources available to sanctioned entities, directly or indirectly, without a licence. To deal with an entity subject to financial sanctions you must contact HM Treasury with information about the proposed dealings and the relevant grounds for licensing. HM Treasury would then consider whether a licence can be issued.
Applications for a licence with respect to financial sanctions should be made to the Office of Financial Sanctions Implementation:
Businesses should consider seeking legal advice on whether they could be affected in the event some or all sanctions were re-imposed on Iran. This situation has been described as a ‘snapback’, where some or all sanctions could potentially be re-imposed in the event of significant non-performance by Iran of its JCPOA commitments.
It should be noted that snapback is a measure of last resort. In the event of a significant non-performance and after having exhausted all recourse possibilities under the dispute resolution mechanism, the snapback will be considered by the other JCPoAparticipants.
US sanctions on Iran
US primary sanctions on Iran remain in place. This means that British businesses must consider their US connections, including the presence of employees holding US citizenship or green cards, before undertaking Iran-related activity.
British businesses may still be subject to US secondary sanctions relating to individuals or entities remaining on the Special Designated Nations (SDN) list. This includes the Iranian Revolutionary Guard Corps (IRGC).
The sanctions remaining in force also prevent Iran-related transactions from passing through the US financial system. This complicates payments into and out of Iran.
UK export controls on Iran
When a UK business exports certain goods, services and technology to Iran, strict controls remain in place throughout the entire process. In addition to the items on the UK Military List and EU Dual Use controls, there are a number of national UK controls on the export of some goods software and technology to Iran. These include:
- certain telecommunications equipment
- certain marine vessels
- related technology
It is essential to conduct due diligence on ‘end use’.
Items on the UK Military List are covered by the EU Arms Embargo, and none of these listed items can be exported. Items on the dual use list require an export licence. There are also EU and international controls. Remaining sanctions mean that some items are completely prohibited from export. All controls apply to ‘intangible’ transfers such as technology and software or technical assistance.
Nuclear-related activities can only be authorised if they have been approved in advance by the UN Security Council through the newly-established procurement channel. A UK business wishing to supply these goods or services to Iran, or to accept an investment by an Iranian person, must seek a licence from the Export Control Organisation (ECO) in DIT.
ECO will consider the application and where appropriate seek the required authorisation from the UN.
5.6 State regulation of Iran’s economy
The dominance of the state in Iran’s economy means that it has complex regulations, often giving consumer and employee protection precedence over ease of doing business.
Government enforcement can be ineffective, allowing companies to take advantage of informal networks to win business.
Foreign businesses operating in Iran may also find their actions opposed by vested political and economic interests.
5.7 Corruption in Iran
Iran is ranked low in both the Corruption Perceptions Index and the Ease of Doing Business Ranking.
Before you engage in business in Iran ensure you’ve carried out due diligence measures. Seek legal advice if you have any doubts about whether you’re exposed to compliance or reputational risks.
Iran’s bribery and corruption regulation is covered in several non-specific laws, but it is drawing up corruption and transparency measures.
You should ensure you take the necessary steps to comply with the requirements of the UK Bribery Act.
5.8 Banking and finance in Iran
On the whole, banks in the UK remain cautious of facilitating Iran-related transactions, due to remaining sanctions on Iran and the cost of fulfilling compliance requirements. As a result, many European banks including those in the UK may judge that re-engaging with Iranian entities falls outside of their risk appetite, except in a few cases for existing customers.
This presents a challenge for UK business seeking banking services to facilitate trade with Iran. This could include services such as processing transactions, trade finance, and lending facilities.
The UK government is working with the US government to address the issues that banks and business have raised. This has already resulted in clearer guidance from OFAC, and we are continuing to work with US authorities to get further clear guidance and reassurance for banks and business.
Iran will also need to make progress to meet international regulatory standards and to build confidence with international banks for them to re-engage in Iran-related business.
Following the lifting of many financial and economic sanctions, Iran’s financial institutions are starting to work with the international banking system. Banking changes include:
- more than 30 Iranian banks are reconnected to Society for Worldwide Interbank Financial Telecommunication (SWIFT) network
- more than 200 international banks have started correspondent relations with Iranian banks
- Iranian banks have opened more than 400 accounts with non-Iranian banks
- some banks are seeking to either open foreign branches or start relationships with international banks
- some Asian and Middle Eastern banks are beginning operations within Iran
The Iranian government is reforming its financial system, but banking problems remain due to:
- non-performing loans, which are estimated to make up 15% to 40% of total lending
- low levels of liquidity means banks and businesses find it hard to get credit
- the presence of a large “shadow” banking sector, accounting for as much as 25% of all banking activity
- banking systems, processes and skills do not meet international standards for anti-money laundering and counter terrorist finance nor for “know your customer” standards
5.9 Exchange rates in Iran
Banking and money transfer problems in Iran are exacerbated by the unpredictable exchange rate for the Iranian rial.
The rial (IRR) has been volatile in recent years and has seen marked depreciation due to high inflation and international sanctions. The rate of depreciation is showing signs of slowing down, however.
There are currently 2 foreign exchange rates used in Iran – a market rate and an official rate, set and maintained by the Central Bank of Iran (CBI).
CBI policy is trying to unify the exchange rates by allowing the official rate to depreciate gradually until it meets the market rate. The annual depreciation of the dollar to rial should not exceed more than 10% per year.
There are indications that a local ‘forwards market’ may be created to allow businesses to reduce risk in the rial exchange rate.
When large sums of foreign capital are transferred in and out of the country, it is conducted by the CBI at the official exchange rate.
Smaller sums of money can be handled in the private exchange market, with transactions conducted at the market rate.
Removing money from Iran through the CBI is by the Iranian securities market law. This allows the CBI to only transfer foreign capital in 4-monthly instalments over the course of one year, rather than a single lump sum.
Capital invested under Iran’s Foreign Investment Protection and Promotion Act can only be removed from the country after a 3-month notice period and only if there are no outstanding fees owed.
Transfer of profits and dividends out of the country are subject to the approval of the Minister of Finance, and only allowed after outstanding fees or taxes are deducted.
5.10 Finance for exporting to Iran
UKEF, the UK’s export credit agency, has reintroduced cover to support UK companies seeking to compete for business in Iran.
Cover is now available on a case-by-case basis in Pounds Sterling and Euros for exports in all sectors, including early priority areas such as aerospace, financial and professional advisory services, infrastructure, technology and oil and gas sectors.
UKEF will also consider applications for direct lending to purchasers of British exports to Iran.
UKEF is only prepared to consider sterling or euro denominated contracts to reduce risks due to continuing US sanctions on Iran.
UKEF can support UK firms to win export contracts provided the transaction meets minimum risk standards.