June 25, 2018
EU-OFAC: A New Mechanism to Help Salvage the Iran Deal
By Axel Hellman
One idea, floated by the French Economy Minister Bruno Le Maire, is the establishment of a European version of the US Treasury’s Office of Foreign Assets Control (OFAC). This EU-OFAC, Le Maire has said, would be “capable of following the activities of foreign companies and checking if they are respecting European decisions.”
As Esfandyar Batmanghelidj and I argue in a joint report, such an authority could assist the European Union in accomplishing two interlinked objectives: supporting the Joint Comprehensive Plan of Action (JCPOA) and promoting greater European economic sovereignty. Creating such a body would be a challenge, but one that European leaders should willingly assume.
In the aftermath of the US withdrawal, European governments and the EU have all reiterated full support of the JCPOA. European leaders understand that sustaining at least a minimum of economic ties with Iran is crucial to preserve the agreement, which they view as critical to nuclear non-proliferation and Europe’s other security concerns regarding the Middle East.
But there is another dimension to the European approach, which relates to economic sovereignty. This can be defined as Europe’s ability to engage in constructive and legitimate bilateral trade and investment with third parties, irrespective of unilateral moves by the United States. This dimension is key to understanding the determination of European leaders to sustain the JCPOA. For them, the nuclear deal impasse is not a singular case in which they have high stakes, but part of a broader challenge to their ability to act independently in international affairs.
The Trump administration’s unilateral approach to many issues, not just Iran, has served as a wake-up call for European officials. They are now seeking to build on the “nine-point plan” that was first sketched following consultations between the foreign ministers of Iran and the European signatories to the deal, and which focused on how to sustain European commerce with Iran. However, progress has been slow, and time is running short before US secondary sanctions come back into force in August and November. The crisis has also contributed to a precipitous fall in the value of the Iranian currency, the rial.
Ali Akbar Salehi, the director of the Atomic Energy Organization of Iran (AEOI), recently told the UN Secretary General that progress on a European solution was inadequate, and also announced that he will launch a plan to increase Iran’s uranium enrichment capacity, although for now within the parameters of the JCPOA.
Iranian frustration over the lack of tangible commercial developments with Europe is understandable. Even before the US exit from the nuclear deal, European business engagement with Iran was widely perceived as being slower than expected. Since the US withdrawal, media coverage has been rife with reports of a European exodus from the Iranian market, including major operators like Total and Maersk.
For many of these businesses, however, the decision to leave is not necessarily a result of their activities in Iran becoming illegal. For those companies that do not have a US nexus and do not deal with sanctioned entities -- so-called Specially Designated Nationals (SDNs) -- the decision to exit the Iranian market is mainly driven by operational considerations. These stem from an inability to secure important services, especially banking, as European financial institutions struggle to navigate the heightened legal and reputational risks that emanate from US primary and secondary sanctions. What is therefore needed to sustain economic exchange is a European-Iranian banking architecture set up to solve operational challenges for multinationals and small and medium-sized enterprises (SMEs) that wish to maintain business with Iran.
At the heart of this issue is a group of institutions that can serve as a “gateway” between the Iranian and European financial systems. Accordingly, a feasible solution must focus on supporting these so-called gateway banks, which can carry out transactions with Iran’s major banks.
At present there is no agency within the EU with the capacity to support gateway banks and oversee a banking architecture. To this end, the creation of a regulatory European authority modeled after OFAC, but with a philosophy geared towards facilitation of trade rather than restriction, would be crucial. Such an agency could support the banking architecture necessary to facilitate trade and investment between Europe and Iran.
In particular, EU-OFAC would pursue measures in two domains: compliance and legal protection. In the area of compliance, it could develop common standards, tools and certification mechanisms for due diligence to enable European businesses and banks to have greater confidence that they are conducting legal commerce and investment. This would address longstanding issues with the interpretive guidance issued by the United States. It could also support collaborative efforts to increase the reliance on and reduce the costs of due diligence among the gateway banks, assist European companies seeking waivers and exemptions from the US, and act as an overall interlocutor between European companies and US authorities.
In terms of legal protection, EU-OFAC could strengthen EU legal protections for entities engaged in Iran trade and investment. This could be done by developing guidelines related to a strengthened blocking regulation, an old statute which prohibits European companies from complying with US sanctions, which the European Commission has taken steps to revive. In its current form, the regulation’s disconnection from both an enforcement power and other better-established legal frameworks means that it lacks teeth. These drawbacks, however, could be alleviated by creating linkages to laws that underpin the Single European Payments Area (SEPA) and to non-discrimination in the provision of banking services. This would ensure that institutions within the wider European banking system could not arbitrarily deny services to gateway banks or European businesses, effectively quarantining them because of their sustained links to Iran.
EU-OFAC would augment existing sanctions powers maintained by the European Commission and member state governments and also serve to better facilitate trade and investment in areas in which Europe wishes to maintain engagement. Accordingly, while the dispute over the JCPOA is the catalyst for its establishment, this new agency could play a much broader role in coordinating EU sanctions policy and defending the bloc’s economic sovereignty.
EU-OFAC could be developed in a manner that reflects a European philosophy supportive of economic engagement with certain high-risk jurisdictions and markets under partial sanctions. Constructed in this way, the authority would both promote the European belief in constructive engagement and be part of a broader initiative to defend the EU’s ability to pursue such engagement independent of the policies of other jurisdictions, especially the world’s biggest -- if declining in relative terms -- economic power.
Axel Hellman is a Policy Fellow at the European Leadership Network (ELN), where his work primarily centres on economic statecraft, U.S. foreign policy, and Russia-West relations. Follow him on Twitter @axhellman.