• Large banking transactions with Iran remain difficult despite new sanctions guidelines
  • Major international banks are still refusing to handle any banking transactions with Iran, despite recent clarifications.

It remains very difficult to do thorough due diligence on Iranian entities

Large transactions remain difficult despite new sanctions guidelines

Major international banks are still refusing to handle any banking transactions with Iran, despite recent clarifications.

“The banks are still too nervous to do business with Iran, given the previous heavy fines imposed,” says Parham Gohari, partner at Dubai­-based Frontier Partners. “The banking community has been waiting for a black and white statement on this matter and what was recently issued is essentially only a clarification, hence no real impact is expected.” The new guidelines from the US Treasury Department’s Office of Foreign Assets Control clarify that US dollar transactions are permitted under certain circumstances, as long as the US financial institution is not directly involved with an Iranian entity and the transactions do not pass through the US financial system.

This means global banks are in theory able to accept Iranian business as long as no sanctioned entity is involved, and maintain relationships with US banks. But for now, the risks are simply too high.

“In reality banks are still afraid to enter the Iranian market and vice versa,” says Atousa Mahmoudpour, head of the Iran desk at Dubai’s Fichte Legal Consultants. “Because a non­US institution thinks that even if it carries out due diligence, if a transaction somehow relates back to a sanctioned person in Iran, or there’s an issue with a US transaction, it can get fined.”

It remains very difficult to do thorough due diligence on Iranian entities.

Poor transparency

Other issues for banks are related to legal frameworks inside Iran, which were not reformed during Iran’s long international isolation.

“Iranian anti­money laundering [AML] and banking laws are quite old – the AML law dates to the 60s,” says Mahmoudpour. “FATF [the Financial Action Taskforce] has given Iran a grace period of 12 months from June 2016 to update this legislation. If that happens it will be much easier and more accepted by banks.”

The US Treasury Department goes further in attributing banks’ reluctance to business conditions in Iran.

“While we are committed to providing clarity on the sanctions issues that are within our control, the reality is that there are factors beyond our control that also continue to slow Iran’s economic engagement – including its destabilising activity in the region as well as corruption and lack of transparency in its financial and business sectors,” said a Treasury spokesperson in response to MEED’s request for comment. “These are issues that have nothing to do with sanctions, and Iran has its own work to do to address these and earn the confidence of international companies and financial institutions.”

The spokesperson also reiterated that the US government would not hinder permissible business activities involving Iran, and that OFAC was publishing updated guidelines and clarifications as necessary.

Foreign banks

The UAE is following the international lead – any Iran­ related transaction in a UAE bank will cause the account holder’s accounts to be frozen immediately, until the bank has investigated the transaction. Companies doing business with Iran have therefore had to find other routes to make and receive payments.

Some banks such as Bank Muscat have returned to the Iranian market, but in Europe, only small privately ­owned institutions are handling banking transactions with Iran.

These include DZ Bank (Germany), Erste Group Bank (Austria), Banque Wormser (France), BCP bank (Switzerland), and EIH Bank (Germany). Many of the banks have pre­existing links to Iran, such as a major shareholder or branches in the country.

The size of the banks puts limits on the transactions companies can carry out with Iranian entities. This will prevent major infrastructure deals becoming reality in the short term.

“In practical terms no foreign financial institution would allow a SWIFT transaction coming through directly from Iran,” says Mahmoudpour.

“Major MoUs [memorandums of understanding] are being signed, but when it comes to the actual money transactions, there are going to be issues when you’re handling billions of dollars. And the larger the amount, the more sophisticated your due diligence has to be.”

“I would give it four to six months, based on what I see in Iran and outside, for things to start rolling,” she predicts.

Key political events such as the US and Iranian elections will be closely watched, and a major deal being concluded would also give confidence to other companies.

“There are a couple of recent positive signs that may play a key role, including the reduction of political risks given support for the continuity of the Rouhani administration,” says Gohari.

For now, companies doing business between Iran and the rest of the world are relying on complex workarounds to open accounts and transfer funds.

By Philippa Wilkinson

This article was originally published on MEED.com and can be found here.

Major banks still refuse Iran business was last modified: January 7th, 2018 by Fichte Legal