The Devil is in the Detail: The Financial Risks to the Economic Success of the Iran Deal

Over the last decade, the US and EU have constructed a complex network of sanctions in response to Iran’s nuclear programme, ensuring the near-total isolation of Iran from global markets. On ‘implementation day’, this network starts to be disassembled and reintegration begin.

Over the last decade, the US and EU have constructed a complex network of sanctions in response to Iran’s nuclear programme, ensuring the near-total isolation of Iran from global markets. On ‘implementation day’, this network starts to be disassembled and reintegration begin.

The EU will now allow the import of Iranian crude oil and gas; the export of key technologies (including certain dual-use items and equipment for the Iranian oil and gas sector); the provision of financial loans and credit; as well as remove asset freezes and travel bans on certain Iranian individuals and entities. The reconnection of several Iranian banks, including the Central Bank of Iran, to SWIFT – the world’s financial messaging system – will also be highly significant. However, although the EU will lift broad sanctions, some entities and individuals will remain designated for their involvement in other proscribed activities, such as ballistic-missile development. These include the Islamic Revolutionary Guards Corps (IRGC) and Ansar Bank.

The US on the other hand, will maintain its primary trade embargo on Iran. As a result, prohibitions on most Iran-related transactions involving US persons will endure beyond implementation day. Through a series of presidential waivers, the US will, however, cease to apply nuclear-related secondary sanctions that, until now, have restricted non-US entities from conducting business by threatening that those companies will themselves be sanctioned. The US will also remove certain Iranian entities and individuals from sanctions lists, although secondary sanctions will continue for ongoing human-rights violations and support of terrorism.

A Lack of Advance Guidance

While the sanctions-lifting process may seem clear, there has been a lack of official guidance on the procedures of sanctions relief so far in the process. This has resulted in confusion and widespread hesitation amongst private-sector companies interested in re-entering the Iranian market. Implementation day marks the first time the EU and US administrations have released a comprehensive guide on the specifics of sanctions relief – far later than many had hoped.

Although guidance from the EU and US authorities is now available, the private sector in both jurisdictions, but especially in Europe, would have benefited greatly from earlier formal advice that would have enabled advance preparations for sanctions lifting. The US guidance was more eagerly awaited than European guidance, as the EU had already published the full text of its sanctions lifting legislation allowing the private sector to analyse those details in advance, whereas US notices of intent to waive sanctions contained few details. As a result, many areas of uncertainty have continued to exist, including the precise definition of a US-controlled entity and the extent of remaining US secondary sanctions. In the near-term, outstanding concerns will dissuade many companies from entering into newly legal business relationships with Iranian counterparts. The practical effect could be that Iran fails to experience the tangible economic benefits it has long been expecting from the deal. 

Not all in the private sector will ‘wait and see’, however, and rapid action by some could in fact create problems. For example, after implementation day, third-party providers of sanctions-screening software to financial institutions will swiftly remove the names of previously designated Iranian entities and individuals from their systems. Many banks might therefore not automatically flag them as transactions are processed – even if they have determined they are not yet prepared to conduct business with Iran. A similar episode occurred in October 2015, when one third-party provider confused ‘adoption day’ in the JCPOA – the date from which the US and EU were required to start preparing their sanctions-lifting legislation – with implementation day, when sanctions are actually lifted. For a short period, banks were exposed to Iran-related risks that they themselves had not accepted. Advance guidance would have allowed for more considered and detailed identification of and planning for such challenges. 

Normalising Economic Relations with Iran 

All parties to the JCPOA committed to implementing it in good faith and in a constructive atmosphere, and to refrain from any policy specifically intended to ... affect the normalisation of trade and economic relations with Iran. This was not intended to apply in the same way to the US as to the EU. Given the enduring US trade embargo on Iran, the JCPOA is structured to allow for greater revival of Euro–Iranian economic relations than in American–Iranian ones. 

Yet, despite the intentional asymmetry in Western private-sector engagement after implementation day, other decisions by the US could dissuade non-US nationals and non-US-controlled entities from transacting with Iranian counterparts. Statements by US officials regarding the clearing of US dollar transactions – the currency of most international trade, including oil – are one example.  In July, US Secretary of the Treasury Jack Lew stated that Iranian banks will not be able to clear US dollars through New York. The nature of remaining US sanctions and the global financial system means that this provision will affect all financial institutions facilitating business with Iran, not just Iranian banks: payments made in US dollars are almost always routed through US-based banks, even if the transactions have no direct connection with US persons or financial institutions. As a result, Iran could still be excluded from any trade of goods and services that has a dollar dimension to it.

How the US Treasury Department will enforce this point is also unclear. Adam Szubin, its Acting Undersecretary for Terrorism and Financial Intelligence, recently stated that should an accidental payment involving an Iranian party go through the US payment system, they would not be penalised if banks were honest and accurate about the incident. This statement could offer some reassurance to non-US financial institutions, though prior experience will limit how much: foreign banks are unlikely to quickly forget the enforcement-happy approaches of US regulators, which have brought billions in fines against banks for their missteps – even ones that were voluntarily disclosed. 

Many have also expressed their concerns about the possibility of ‘snap-back’ of sanctions or the re-designation of previously sanctioned Iranian individuals and entities under other legislation. Numerous Republicans, expressing dissatisfaction with any warming in US relations with Iran, have made it clear that they intend to increase pressure on Iran through other avenues to compensate for the JCPOA’s concessions. These back doors could involve using existing human-rights and terrorism sanctions frameworks, or interpreting the sanctions against the IRGC to affect much larger sections of the Iranian economy, given the IRGC’s widespread involvement in other Iranian political, military, and economic developments. 

An Incomplete Handshake? 

Myriad complications of sanctions relief remain. A lack of early guidance for the private sector, especially in Europe, could result in highly uneven and slow re-engagement with the Iranian market. US disincentives, including restrictions on dollar clearing and the intention of Republican law-makers to restore pressure on Iran through other means, may further compound this trend. This is problematic for the health of the JCPOA as a whole. Not only must the P5+1 perceive they are receiving the benefits they expect in terms of Iranian nuclear roll-back, but Iran too must be satisfied with the gains afforded by sanctions relief. Without a full handshake, Iran’s interest in the deal, and therefore the deal as a whole, is fragile. 

Emil Dall - Research Analyst, Proliferation and Nuclear Policy, RUSI

Andrea Berger - Deputy Director and Senior Research Fellow, Proliferation and Nuclear Policy, RUSI

Tom Keatinge - Director, Centre for Financial Crime and Security Studies, RUSI

Implementation Day: Analysing Iran's Compliance of the Nuclear Deal 


Emil Dall

Associate Fellow

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Andrea Berger

Associate Fellow

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Tom Keatinge

Director, CFCS

Centre for Financial Crime and Security Studies

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