U.S. sanctions on Iran are having a devastating impact on the Iranian people and their ability to access basic humanitarian goods like medicine, basic medical supplies, and food. The international community, including the United Nations, European leaders, human rights organizations, and members of the global health community, have called for the easing of U.S. sanctions given these dire consequences. Nevertheless, the Trump administration has decided to impose yet further sanctions on the country, this time targeting the entirety of the Iranian financial sector. These new measures carry biting secondary sanctions effects that cut off third parties’ access to the U.S. financial sector if they engage with Iran’s financial sector. Since the idea was first floated publicly, many have argued that sanctioning Iran’s financial sector would eviscerate what humanitarian trade has survived the heavy hand of existing U.S. sanctions.
In response, Iran hawks have disputed these concerns, asserting that the United States maintains authorized channels for humanitarian trade even while expanding sanctions. But these claims are, at best, inaccurate and, at worst, willful misrepresentations intended to propagate violence on the people of Iran. Indeed, a basic understanding of the legal landscape of U.S. sanctions leaves little room for debate that “cut[ting] off [Iran’s] financial oxygen” can quite literally mean cutting off the oxygen for many Iranians battling one of the darkest times in their living memory in the midst of the coronavirus pandemic.
New Financial Sector Sanctions
In sanctioning Iran’s financial sector on Oct. 8, 2020, the Trump administration used Executive Order (E.O.) 13902, which authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to sanction “any . . . sector of the Iranian economy,” to target Iran’s financial sector. This idea appears to have first been introduced into public discourse in an Aug. 25, 2020, Wall Street Journal article by Mark Dubowitz and Richard Goldberg urging the Trump administration to “[b]uild an Iranian [s]anctions [w]all” to prevent any future Biden administration from returning to the Joint Comprehensive Plan of Action (JCPOA), the nuclear accord between Iran and the world’s major powers on which President Donald Trump reneged in May 2018. “To land a 12th-round economic knockout,” the article states, “it’s time for Mr. Trump to throw one more punch: Blacklist the entire Iranian financial market.” Shortly after, various Republican lawmakers submitted a letter to Trump, citing the Wall Street Journal article and urging the administration to adopt the measures suggested.
The Legal Authorities at Issue
All Iranian financial institutions are already subject to primary U.S. sanctions pursuant to authorities in E.O. 13599, which blocks the U.S. property and interests in property of the Government of Iran and Iranian financial institutions. U.S. persons are prohibited from engaging in transactions with Iranian financial institutions blocked under E.O. 13599; however, U.S. law expressly provides that non-U.S. persons do not carry sanctions risks for using financial institutions sanctioned solely pursuant to that E.O. Accordingly, sanctions pursuant to E.O. 13599 are not “secondary” in nature, proscribing certain activities by U.S. persons only.
The latest round of sanctions imposed, however, expand upon these more limited measures by imposing secondary sanctions available in E.O. 13902. E.O. 13902, signed on Jan. 10, 2020, is an Iran-specific authority that authorizes the president to block (i.e., freeze) the U.S. property and interests in property of persons operating “in the construction, mining, manufacturing, or textiles sectors of the Iranian economy, or any other sector of the Iranian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State.” It further allows the Secretary of the Treasury to impose the same sanctions on persons determined to “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person” who is subject to such sanctions. Additionally, the E.O. authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to cut off foreign financial institutions that have knowingly conducted or facilitated “a significant financial transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with a targeted sector of the Iranian economy” from the U.S. financial system.
While the E.O. sweeps broadly, Section 11 establishes a carve out for humanitarian trade. Specifically, it provides that the restrictions above will not “apply with respect to any person for conducting or facilitating a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.”
In addition to the above measures, Iran hawks have also pushed the Trump administration to go one step further and designate Iranian banks pursuant to counter-terrorism related authorities in E.O. 13224. E.O. 13224 provides the Secretary of State, in consultation with the Secretary of the Treasury, the authority to block the U.S. property and interests in property of persons who are determined to have committed “acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the United States.” Similar to E.O. 13902, E.O. 13224 also authorizes the imposition of blocking sanctions against persons who are determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Attorney General, “to assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of” persons determined to be subject to E.O. 13224. Unlike E.O. 13902, however, E.O. 13224 does not include a carve out for humanitarian trade, providing no similar exception with respect to transactions involving food, medicine, and medical devices.
On Sept. 20, 2019, the Treasury Department’s Office of Foreign Assets Control (OFAC) designated the Central Bank of Iran (CBI), also known as Bank Markazi, pursuant to the authorities in E.O. 13224. In using these authorities to target Iran’s Central Bank, the Department of the Treasury ensured that transactions with CBI were off limits for foreign persons lest they wished to risk designation and penalties under U.S. law. Then, as now, upon that designation, various experts predicted the humanitarian catastrophe that would result for the Iranian people. Unfortunately, as the coronavirus hit Iran and reports of severe shortages of medicine and medical supplies grew, these concerns were proven accurate.
In response, on Feb. 27, 2020, the Department of the Treasury issued General License No. 8 (GL 8), authorizing humanitarian-related transactions involving CBI that had been prohibited as a result of CBI’s designation under E.O. 13224. In so doing, the United States also announced the finalization of the Swiss Humanitarian Trade Arrangement (SHTA), which it touted as “a voluntary option” for facilitating payments for exports of humanitarian items to Iran “in a manner that ensures the upmost transparency.” Under the mechanism, participating financial institutions are required to undertake onerous enhanced due diligence requirements in order to receive assurance from the Department of the Treasury that they will not be targeted for engaging in humanitarian-related transactions with Iran.
Failed Arguments of No Impact on Humanitarian Trade
The Iran hawks behind these new financial sector sanctions have argued that such sanctions will “not impact humanitarian trade” because (1) E.O. 13902 contains an exemption for humanitarian trade; (2) “most humanitarian trade with Iran is facilitated by” CBI and the Department of the Treasury has provided an authorization with respect to CBI’s facilitation of humanitarian trade in GL 8; and (3) the United States has provided an additional authorized channel for humanitarian trade under the SHTA. All of these arguments are specious.
First, despite the existence of the humanitarian exemption in E.O. 13902, the new sanctions will sever any remaining correspondent account relationships held by Iranian banks with their foreign counterparts, undermining Iran’s ability to conduct basic cross-border transactions and to procure the foreign currency reserves necessary to pay for humanitarian imports into the country. The new measures also add yet another layer of complexity to the dizzying web of existing US sanctions, once more increasing compliance costs for companies and financial institutions considering humanitarian-related transactions with Iran. Between navigating the multiple designation authorities applicable to any single Iranian counterparty, and the significant reputational risk and potential penalties associated with a violation of US sanctions, it is no surprise that businesses have been reluctant to conduct business with Iran. The latest round of sanctions will only increase such reticence.
Second, reliance on conducting transactions with CBI, which is the subject of GL 8, also fails because while CBI is a necessary link in the chain of humanitarian trade in Iran, it is on its own not sufficient to ensure adequate access to humanitarian items by Iranians. This is because CBI merely makes available to other Iranian banks the foreign currency necessary for their facilitation of payments on imports of humanitarian items. Under the new sanctions, CBI will lack the foreign currency it needs to facilitate such payments, rendering GL 8 largely ineffectual.
Finally, the Swiss Humanitarian channel is not truly viable for the conduct of sufficient trade to meet the humanitarian needs of the Iranian people. As mentioned above, the SHTA imposes significant compliance and reporting obligations for anyone participating in the mechanism. In announcing the instrument, OFAC explicitly highlighted these enhanced compliance requirements, stating, “[t]he humanitarian mechanism will require foreign governments and financial institutions that choose to participate in the mechanism to conduct enhanced due diligence and provide to Treasury a substantial and unprecedented amount of information, with appropriate disclosure and use restrictions, on a monthly basis.”
Those partaking in the mechanism will be expected to collect, maintain, and report to OFAC the following:
- The information used to identify the Iranian customers of the humanitarian trade and to verify their identities and beneficial ownership;
- The information used by financial institutions to understand the purpose and intended nature of business relationships between the seller and the customer in Iran;
- A monthly balance statement of any account of an Iranian financial institution with which they transact;
- A list of Iranian Specially Designated Nationals (SDNs) with which the Iranian customer indicates it has current business relations;
- Detailed information as to the commercial terms and logistics of the transaction, including information about the ultimate customer, all intermediaries involved in the transaction, and the financial arrangements and shipping and transportation logistics underlying the transaction;
- Written confirmation that the Iranian distributor will not allow the goods to be sold or resold to Iranian SDNs; and
- Additional information regularly obtained by the foreign financial institution in connection with its ongoing due diligence measures to verify the consistency of the transaction with the purposes of the humanitarian channel, among other things.
OFAC has stated it may require additional information beyond those above on a case-by-case basis. Considering these intensive requirements, it is of no surprise that since its establishment in February, the humanitarian channel has only been used once.
Despite the existing authorizations, Iran is currently experiencing significant shortages of needed medicines and medical supplies. Accordingly, reliance on currently existing authorizations is an inadequate basis on which to expand U.S. sanctions.
A Bad Faith Track Record
Despite the Iran hawks’ stated concern for ensuring that Iranians are able to access basic humanitarian items despite broad and biting U.S. sanctions, a review of their track record demonstrates just how feigned such concern is. For example, the Foundation for Defense of Democracies (FDD) – that serves as the de facto Trump administration Iran policy brain trust — forcefully pushed for the designation of CBI under E.O. 13224 despite the unified concerns of U.S. allies, human rights advocates, and public health officials. FDD Senior Policy Analyst Richard Goldberg defended the position then by arguing that Iranians had “plenty of ways” to conduct humanitarian trade “without using the CBI.”
Today, however, FDD openly acknowledges that “most humanitarian trade with Iran is facilitated by the Central Bank of Iran (CBI),” though it fails to provide any information on how CBI will find the funds necessary for facilitating such trade. This acknowledgment rings more abhorrent in light of the fact that FDD opposed the issuance of GL 8 altogether, intimating that allowing Iranians to access humanitarian items in the midst of a global pandemic could be seen by Tehran as “weakness.”
Sanctioning the rest of Iran’s financial sector will carry significant consequences for the Iranian people by eviscerating their access to what limited humanitarian trade is reaching the country. As recently reported, the United States has largely diverged from its European allies in the policies it has adopted with respect to Iran. This began with the U.S. withdrawal from the nuclear accord over European objections. Most recently, this rift was embarrassingly put on display when the United States attempted to snap back U.N. sanctions on Iran and was met with dismissal by 13 of the 15 U.N. Security Council members (aside from the United States, the Dominican Republic was the only country in support).
European allies have also grown increasing frustrated with the U.S. assertion of expansive secondary sanctions authorities that target behavior by non-U.S. persons. Today’s announced actions will only further exacerbate this trans-Atlantic divide, increase the suffering of the Iranian people, and undermine the United States’ standing vis-à-vis its long-term allies.
The views expressed are those of the author and not those of any employer or organization.