Mitigating US Sanctions on Iran: The Case for a Humanitarian Special Purpose Vehicle GLOBAL SECURITY POLICY BRIEF

Esfandyar Batmanghelidj & Axel Hellman November 2018 About the Authors

Esfandyar Batmanghelidj is the Founder and Publisher of Bourse & Bazaar, a media company that supports business diplomacy between Europe and Iran through publishing, research, and events. Aside from his contributions to Bourse & Bazaar’s own platform, Esfandyar’s writing on Iranian business and politics has been published in Foreign Policy, Bloomberg Opinion, Al Monitor, Quartz, Defense One, as well as the Iranian periodicals Iran, Etemad, Hamshahri, and Diplomat. His scholarship on Iranian political economy has been published in the Encyclopedia Iranica and the journal Iranian Studies. Esfandyar holds a B.A. in Political Science and Middle Eastern Studies from Columbia University.

Follow Esfandyar on Twitter: @yarbatman | [email protected]

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. Prior to joining the ELN, Axel worked in management consulting in Stockholm, Sweden, and as an external adviser to Oxford Analytica and a London-based political risk start-up. He has previously held positions at the Center for a New American Security (CNAS), the Hudson Institute, and Freedom House. Axel completed a Master’s Degree at St Antony’s College, Oxford, and holds a B.A. in International Relations from King’s College London’s Department of War Studies. He has also studied at Georgetown University in Washington, DC, and MGIMO-University in Moscow.

Follow Axel on Twitter: @axhellman | [email protected]

The opinions articulated in this report represent the views of the authors, and do not necessarily refect the position of the European Leadership Network or any of its members. The ELN’s aim is to encourage debates that will help develop Europe’s capacity to address pressing foreign, defence, and security challenges. ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 1

Mitigating US Sanctions on Iran: The Case for a Humanitarian Special Purpose Vehicle

Introduction European counterparts, at least rhetorically. US and European ofcials have publicly Announcing the US withdrawal from declared that the Iranian people should be the Joint Comprehensive Plan of Action spared from the pain of economic sanctions. (JCPOA), President Donald Trump promised Senior ofcials in the Trump administration to institute “the highest level of economic emphasize that the “fnancial war” against sanction” against Iran. Upon its withdrawal, Iran is targeted against the country’s political the Trump administration launched a and military leadership and not its ordinary “maximum pressure” campaign, reimposing citizens. In a recent speech, Secretary of State all secondary sanctions lifted as part of the Pompeo implored the global community to nuclear deal whilst targeting new Iranian “make no mistake” and to understand that persons and companies. “[American] sanctions and our economic pressure are directed at the regime and its The European Union and a quorum of its malign proxies, not at the Iranian people.” member states are now attempting to salvage Pompeo explained that the United States the deal. They must strive to sustain the maintains “humanitarian exemptions to all deal’s economic benefts for Iran even with of our statutory sanctions that are being re- US secondary sanctions in place. As part of imposed, and have a range of authorizations this effort, the European parties to the JCPOA in place to allow for certain activities that (France, Germany, the United Kingdom, and beneft the Iranian people.” the European Union) recently announced the launch of a special purpose vehicle (SPV), a Such statements point to one potential area of payment mechanism described by EU High cooperation between Europe and the United Representative Federica Mogherini as “a States: ensuring that humanitarian trade legal entity to facilitate legitimate fnancial with Iran can persist even under stringent transactions with Iran.” US sanctions. In this context, humanitarian trade pertains to the export of food items, While the Europeans see these efforts as agricultural commodities, medicine, and necessary to sustain the nuclear agreement medical supplies and is broadly accepted and protect Europe’s ability to maintain to be exempt from sanctions. Trade in most legitimate trade with Iran, the SPV is seen consumer goods is also exempted. by the Trump administration as an attempt to evade US sanctions and undermine US Despite these exemptions, the imposition of foreign policy and fnancial primacy. In secondary sanctions restricts trade in these public statements issued in the wake of goods by making the necessary fnancial Mogherini’s announcement, US Secretary of services more difcult to access. Such State Mike Pompeo and National Security indirect restrictions on humanitarian trade Adviser John Bolton described the SPV as a commonly result from sanctions campaigns “counterproductive” tool aimed at supporting and have been observed in a wide range of Iran’s military campaigns in the Middle East, cases such as Iraq, North Korea, Cuba and and questioned Europe’s ability to bring the Myanmar. As noted by Richard Nephew, a new legal entity into operation. former Obama administration ofcial and a principal architect of the Iran sanctions There is one issue on which US ofcials program, while there has been an increasing have been in consistent agreement with their effort among policymakers to avoid “the 2 MITIGATING US SANCTIONS ON IRAN: THE CASE FOR AN H-SPV curtailment of humanitarian trade… the as suggested in this paper, would enable intention of sanctions is always to make the EU and European governments to the new status quo uncomfortable and sustain vital trade with Iran and challenge unpleasant for the target.” More simply, US characterization of the SPV as a tool for Nephew makes clear that “sanctions are a sanctions evasion, while holding the Trump form of violence.” administration accountable to its promises to the people of Iran. The case for the H-SPV, and In an effort to minimize this “violence” the recommendations set out in this paper and to support its commercial actors that are informed by two months of consultations wish to trade with Iran, the foreign and with stakeholders in Europe and Iran as economic ministers of France, Germany, well as insights gathered during the 5th and the United Kingdom wrote to Secretary Europe-Iran Forum, a round table meeting of Pompeo and Secretary of Treasury Mnuchin European and Iranian business leaders and in May demanding that “the extraterritorial government ofcials convened by Bourse & effects of US secondary sanctions will not Bazaar in Paris, France on November 14. This be enforced on EU entities and individuals, report also builds on a study of the “banking and the United States will thus respect architecture” that underpins Europe-Iran our political decision and the good faith of trade, published by the authors in May 2018. economic operators within EU legal territory.” They included specifc requests for “public confrmation of areas of business that Europe’s SPV Gambit are exempt from US secondary sanctions, such as pharmaceuticals, healthcare” and The motivation behind the establishment of a “exemptions to maintain banking channels special purpose vehicle for Iran transactions and fnancing channels with Iran.” According stems from the extraterritorial reach of US the French economy minister, Bruno Le Maire, fnancial sanctions. Now that US secondary the request was rejected. sanctions on Iran have been re-imposed, fnancial institutions face signifcant fnes if “The limited number of they inadvertently facilitate transactions on behalf of designated entities. Banks that fall viable banking channels is foul of sanctions also risk losing access to the foremost restriction on US fnancial markets, “a death penalty for any modern bank,” in the words of the US Treasury Iranian trade.” Department’s former Under Secretary for Terrorism and Financial Intelligence David Despite this, US ofcials have continued to S. Cohen. As a result, the number of global promise that humanitarian trade will continue fnancial institutions willing to facilitate unfettered. Indeed, US trade with Iran, which business with Iran has reduced signifcantly, is almost exclusively humanitarian in nature, even relative to the fall in general commercial has risen markedly since Trump withdrew interest in Iran. The limited number of viable from the JCPOA in May, though it remains banking channels is the foremost restriction below Obama-era averages over the course on Iranian trade with Europe, China, India, and of his administration. In a briefng to reporters Turkey among other global markets. ahead of the re-imposition of US sanctions, Pompeo reiterated that “our actions today While European governments have indicated are targeted at the regime, not the people of that they will continue to support the small Iran.” number of banks that are presently facilitating Iran-related transactions, a separate process Europe needs to hold the US to its word. has been launched to sustain Europe-Iran Establishing a humanitarian SPV (H-SPV), trade while reducing the overall dependence ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 3 on fnancial channels. The EU and E3, as “The SPV will be most parties to the JCPOA, have committed to establishing an SPV to facilitate trade valuable if it truly serves between Europe and Iran while minimizing to blunt the reach of US the need for fnancial transactions between extraterritorial sanctions.” the fnancial systems of the two markets. Importantly, while the SPV is primarily a Presently, European authorities are focused European initiative whose success will on the establishment of a single SPV. Under depend on European leadership, it will remain US sanctions authorities, and based on open to other countries. In announcing guidelines issued on the implementation the scheduled launch of the SPV, EU High by the relevant authorities, the US Representative Federica Mogherini drove Treasury Department could target entities home this point by noting that the vehicle participating in the SPV, even if it does not “could be opened to other partners in the involve fnancial channels going through the world.” Recent reports suggest that China, a United States. In a recent briefng, Special key market for Iranian exports, is interested Representative for Iran, Brian Hook stated in utilizing the European SPV or replicating that the “US will not hesitate to sanction any its approach. sanctionable activity in connection with our Iran sanctions regime” suggesting that the While many technical details have yet to SPV will be targeted if it facilitates what the be agreed, the general scheme of the SPV US considers sanctionable trade, such as calls for a state-owned company which will purchases of Iranian oil. On this basis, Europe count several European countries among faces a dilemma in establishing the SPV. The its shareholders. The SPV would have its mechanism will be most valuable if it truly own staff which would be responsible for serves to blunt the reach of US extraterritorial keeping a ledger of trade with Iran in order sanctions. But the facilitation of what the US to provide what can be termed a “netting” considers sanctionable trade through the or “compensation” service to European SPV will make the use of the mechanism, exporters. This means that the SPV would especially in its unproven form, a risky bet for identify companies that wish to make European companies. payments or transfer funds to Iran and companies that wish to receive payments European governments ought to develop or repatriate funds from Iran. Through the capacities of the SPV by creating its ledger oversight, the SPV would help separate vehicles for sanctionable and coordinate payments so that exporters can non-sanctionable trade. By frst launching be paid from funds outside of Iran while a humanitarian mechanism—the H-SPV— importers can be paid by funds within Iran. Europe will be able to strike a balance In this way, trade can be conducted without between advancing the principle of transactions between European and Iranian economic sovereignty, while ensuring the banks. While an SPV with this basic design new mechanism can be used by European will be established “sooner rather than later,” businesses to boost trade with Iran— according to Mogherini, it is unlikely it will especially in vital food and medicine—as be operational until early next year, possibly soon as possible. by January 17, the three year anniversary of JCPOA implementation. Even then, the The Urgency of Humanitarian Trade initial volume of trade it can support will be minimal. It is also unclear to what extent Europe’s ability to keep Iran in the nuclear European companies will feel comfortable deal will depend largely on the success of using the mechanism. efforts to spare the Iranian people from the 4 MITIGATING US SANCTIONS ON IRAN: THE CASE FOR AN H-SPV harm of US secondary sanctions. Even before Just as in the previous period of secondary the reimposition of sanctions on November sanctions application, exemptions for 4, reports of medicine shortages and rising humanitarian trade are proving insufcient costs of food pointed to the pernicious effect to sustain the import of foodstuffs and of the sanctions. In a recent speech, President medicines to Iran at sufcient volumes. The Rouhani acknowledged that the Iranian latest OFAC guidelines stipulate that “Broadly people were facing mounting pressure, speaking, transactions for the sale of stating that the members of his government agricultural commodities, food, medicine, or “understand people are suffering and medical devices to Iran are not sanctionable under pressure. People’s lives, in particular unless they involve persons on the SDN List those on a fxed income, are very difcult.” that have been designated in connection with While the Iranian government is seeking to Iran’s support for international terrorism or ameliorate this pressure with policies such proliferation of weapons of mass destruction.” as expanded welfare handouts, in the same This means that so long as an Iranian bank speech Rouhani drew a link between the has not been designated under a terrorism effort to blunt the effect of sanctions and or proliferation related authority, and remains the European project to establish an SPV, exempt from secondary sanctions, European describing European efforts in the face of US and even American companies should be antagonism as a “rare victory.” able to conduct transactions pursuant to humanitarian trade with the bank. Such Despite considerable domestic capacity, Iran banks also remain connected to the SWIFT is not self-sufcient in the production of food bank messaging system. or medicine. Over the last decade, the average reliance on imports as a proportion of total However, of the four Iranian banks that have domestic consumption was 28 percent for in recent years facilitated the lion share barley, 70 percent for corn, 48 percent for of humanitarian trade with Iran—Parsian rice, and 28 percent for wheat. As such, the Bank, Middle East Bank, Pasargad Bank, consumption of essential foodstuffs remains and Saman Bank—only three remain viable susceptible to import supply shocks despite for that purpose. In September of this year, boosting of domestic production. Parsian was declared a Specially Designated Global Terrorist (SDGT) by the US Treasury. Likewise, while 70 percent of Iran’s This terrorism designation, which was pharmaceutical market is controlled by local made on loose grounds that made many companies, Iran imports many of the raw sanctions attorneys “nervous,” rendered materials used to produce medicines. The Parsian ineligible to conduct humanitarian country also imports most of the advanced trade. Kourosh Parvizian, Parsian’s CEO, therapies used in the treatment of chronic described the new sanctions as a “mistake” illness. Iran is already experiencing shortages that threatened “a bank that handles the of essential medicines such as fever-reducer transactions behind the majority of imports of paracetamol, antimicrobial fuconazole, and foodstuffs, medicine and other humanitarian cancer medication vincristine. The public trade items for the Iranian people.” health implications are dire. Doctors at Iran’s leading children’s cancer charity have warned Following the targeting of Parsian, a private that the “Re-establishment of sanctions, sector enterprise widely considered one of scarcity of drugs due to the reluctance of Iran’s best-run banks, European fnancial pharmaceutical companies to deal with Iran, institutions face the possibility that their and a tremendous increase in oncology drug correspondent banks in Iran could be cut off prices… will inevitably lead to a decrease in by new designations at any time. Moreover, survival of children with cancer.” Trump administration ofcials regularly warn ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 5 companies that “the Iranian regime will deceive anti-money laundering and counter-terrorist your companies, undermine the integrity of fnancing laws and regulations. Iran has your fnancial systems, put your institutions until February 2019 to meet the FATF at risk of our powerful sanctions”. The requirements. European governments have spectre of new designations has dissuaded made it clear that progress in these areas is most European banks from engaging with essentially a prerequisite for any concerted Iranian fnancial institutions. Naser Naghdi, effort to protect banking ties. The pressure the CEO of Darou Pakhsh, a state-owned of US sanctions and weaknesses endemic pharmaceutical company and the country’s in Iran’s fnancial system combine to largest, recently explained in an interview, signifcantly constrain the number of viable “Sometimes companies agree to sell us drugs banking channels between Europe and Iran, but we have no way of paying for them. On making it increasingly difcult for food and one occasion, our money was in the bank for pharmaceutical companies to reliably and four months but the transfer repeatedly got cost-effectively receive payments from Iran. rejected.” German pharmaceutical company Bayer, a longstanding client of Parsian Bank, These challenges are not new. In 2013, has not been able to process payments since Siamak Namazi, who is now imprisoned Parsian was designated. Bayer is now moving in Iran, compiled an infuential report for its accounts to another Iranian fnancial the Wilson Center looking at the effects of institution, though it is unclear if its European sanctions on medical supply shortages in bank will agree to continue facilitating Bayer’s Iran, which were already appearing as US transactions with a lesser-known bank in Iran. sanctions were imposed on Iran. In an op-ed drawn from the report, Namazi explains the “The trade of medical fundamental incompatibility of broad banking sanctions with humanitarian exemptions: supplies is legal in theory and virtually impossible in The system is irrational: There is a blanket waiver to the sanctions to practice.” facilitate humanitarian trade, but other laws restricting fnancial transactions In a November 2 briefng, journalists with Iran make it impossible to pressured US Special Representative for Iran implement that exception. So the Brian Hook on the lack of “safe channels” trade of medical supplies is legal in for humanitarian trade and the pervading theory and virtually impossible in fear that even if companies sell food and practice because Iran cannot pay for medicine in Iran, “they will be targeted by the Western medicine it needs. US sanctions.” Hook’s response was as perfunctory as it was telling, “The burden is Namazi’s report focused on medical supply not on the United States to identify the safe shortages but similar interruptions were channels.” He claimed that the “burden is on visible in the export of foodstuffs to Iran at the Iranian regime” to ensure that its fnancial the time, albeit on a smaller scale. Medical system “complies with international banking exports fared worse than food exports in part standards” and is thus able to facilitate because global trade in food commodities is humanitarian trade. dominated by American companies, which enjoy favoured access to licenses from OFAC Hook’s comments underscore the importance that smoothed their sales to Iran. European of Iran’s continued efforts to reform its fnancial companies dominated the trade in medicine system, principally by enacting the action plan and were less adept at navigating the set forth by the Financial Action Task Force complexities of US export control licensing. (FATF) which calls upon Iran to strengthen 6 MITIGATING US SANCTIONS ON IRAN: THE CASE FOR AN H-SPV

A recent ruling by the International Court becomes increasingly vulnerable to Iranian of Justice, in which the Court found that domestic political turbulence. the Trump administration’s reimposition of sanctions breaches the 1955 Treaty of Amity between Iran and the United States, Towards a Humanitarian SPV has drawn attention to these restrictions. Despite the Trump administration’s forceful The creation of a single, all-encompassing rejection of the ruling, the judgement has SPV may not work as a proper response to brought wider recognition to a simple fact: address the risks to humanitarian trade. since withdrawing from the nuclear deal, Given that Europe must make humanitarian the US has failed to demonstrate how it will trade the foundation of its economic proactively ensure that humanitarian trade relations with Iran and ensure the SPV is ft- with Iran continues “in practice,” an important for-purpose, an H-SPV ought to be devised distinction drawn by the court given that legal frst in accordance with the following criteria: exemptions for such trade exist “in principle.” The ruling refects doubt that the Trump administration will ensure that humanitarian Mandate trade with Iran persists at reasonable and sufcient volumes—reasonable in respect to The frst iteration of the SPV should focus the intention of US sanctions, and sufcient exclusively on humanitarian trade. This will in respect to the basic needs of the Iranian minimize the chances that such so-called economy. H-SPV will be targeted by US authorities and will reduce the political anxiety among “Ensuring sufcient member states that participating in the H-SPV project will strain relations with the Trump humanitarian exports to Iran administration. A declared humanitarian is a political imperative.” purpose will accelerate the willingness and ability of companies to engage with That Iran is a country of relative prosperity the new vehicle, as companies engaged means any sudden degradation in quality in humanitarian trade are those currently of life will be felt acutely by a population conducting trade through precarious th accustomed to plenty. In this way, ensuring fnancial channels. Speaking at the 5 sufcient humanitarian exports to Iran is a Europe-Iran Forum, a manager at one of the political imperative not just for the Iranian largest European pharmaceutical companies government but also for the parties to the made it clear that his company would not JCPOA, as Iranian public sentiment about be able to use an SPV mechanism unless the nuclear deal and broader diplomatic it were expressly devoted to humanitarian engagement risks turning negative in the trade. His warning to policymakers was face of sanctions pain. The Iranian public is echoed by several attorneys present at the struggling to “answer the question of why meeting, who noted that an SPV that boasted sanctions are being re-imposed and why they a declared humanitarian purpose and strong must suffer.” There is a growing fear that due diligence protocols, would be far easier “suffering is unconditional and permanent, to recommend to clients as an appropriate unrelated to their actions as citizens mechanism through which to conduct trade. (who voted for Hassan Rouhani) or their government (which achieved the nuclear deal) or the international community (which Function vowed to stand up to the United States).” As these fears grow, Iranian and European Policymakers and business leaders envision leaders look impotent and the JCPOA different models for how the SPV would ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 7 improve the fow of goods and payments. models, government ownership of the H-SPV Policymakers seem inclined to establish would enable direct compliance oversight the SPV according to a “compensation” by member state regulators to ensure or “netting” model. Following this model, that the know-your-customer and know- the H-SPV would serve as the coordinator your-transaction due diligence conducted of humanitarian trade payments between in support of the facilitated transactions Europe and Iran, receiving documentation meets standards. Such oversight would for a given transaction from the exporter be similar to that exercised by the Obama and importer, conducting due diligence, and administration as part of the humanitarian issuing payment instructions to the importer trade channel established pursuant to the according to a ledger of trade. In such a initial sanctions relief granted under the Joint model, the H-SPV would serve to facilitate Plan of Action (JPOA) in 2013. Exercising money transfer without the movement of such oversight could also provide Europe funds between the European and Iranian valuable experience that could be useful fnancial systems, reducing pressure in the creation of an EU-OFAC, a European on banks. However, in more advanced, equivalent to the US Treasury Department’s alternate model, the H-SPV would serve sanctions ofce. as a counterparty in the fow of goods and payments between exporters and imports. In such a “back-to-back” model, an Iranian Participants importer would be receiving goods and making its payment from a European state- While the H-SPV would be foremost owned entity, while a European company intended to serve European companies, would avoid having an Iranian counterparty the mechanism could be opened to other in its trades. While there are factors such trading partners, such as China and India, as aftersales liability to consider, the back- as repeatedly suggested by Mogherini. But to-back model refects how many European the humanitarian dimension of the proposed companies are presently structuring their mechanism would also allow a more trade with Iran, using smaller intermediaries ambitious turn of economic diplomacy. In in jurisdictions with banks willing to receive its efforts to facilitate humanitarian trade, payments from Iran, as well as how Iranian the Trump administration will encounter companies have historically traded with similar challenges regarding the overall the government trading houses of Asian reluctance of banks to engage with Iran- countries. See the diagram on next page for related transactions. Europe could invite the more details. United States to participate in the H-SPV in recognition of a shared commitment In both the compensation and back-to- to ensure that the Iranian people are not back models, the focus of the H-SPV on unduly harmed by sanctions. Iran would humanitarian trade opens the possibility likely welcome such a move as it could be of a direct link with European fnancial characterized as an acknowledgement on the institutions, including European central part of US authorities that a more proactive banks. Such a link could be used to offset and pragmatic approach to humanitarian the trade defcit between Europe and Iran trade is required, beyond placing the burden in non-oil trade, and increase the value and solely on European and Iranian stakeholders volume of trade that can be facilitated by to establish viable channels. US participation compensation through use of Iranian foreign could also extend to increased visibility on exchange reserves in Europe. In the back- the due diligence conducted in support of to-back model, these links would allow facilitated transactions, further reassuring the H-SPV to send and receive payments all parties of the compliant nature of the from its own accounts. Importantly, in both ensuing trade. 8 MITIGATING US SANCTIONS ON IRAN: THE CASE FOR AN H-SPV ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 9 10 MITIGATING US SANCTIONS ON IRAN: THE CASE FOR AN H-SPV

Development government now considers it necessary to intervene could indicate that these While an SPV focused on sanctionable trade Swiss banks are more reluctant to engage by the US is unlikely to develop far beyond with Iranian companies due to the Trump the netting service currently envisioned, administration’s aggressive stance on all the H-SPV could develop in terms of its Iran-related commerce. Faced with the same mandate and function. First, the H-SPV challenges across its larger jurisdiction, could be used to facilitate European trade European governments must reconceive the with any country in which banking ties are SPV project to properly address the likelihood restricted. The government of Cuba has that the few banking channels that sustained already expressed its interest in the SPV humanitarian trade in the previous sanctions mechanism to EU ofcials. The H-SPV could period may not persist for much longer. bolster an independent European trade policy, ensuring that European companies “The H-SPV ultimately can export the vital goods and services even if in contravention of US policy. Second, the advances the cause of function of the H-SPV could be expanded to European and Iranian develop into a “gateway bank” which serves as an intermediary between the Iranian and economic sovereignty.” European fnancial systems. While securing Devising the H-SPV in accordance with these the necessary regulatory approvals is a criteria would help Europe achieve several time and resource intensive process, the goals: advantage of establishing a dedicated, state- owned bank for humanitarian trade would be Deliver more relief, more quickly. Launching to vastly increase the volume of humanitarian the H-SPV would allow Europe to more trade through the provision of merchant quickly demonstrate its ability to sustain vital banking services such as the issuance of trade with Iran in the face of US sanctions. letters of credit. Rather than rely on a small The H-SPV can be brought online faster, number of Iran-friendly European banks or more reliably, and with a clearer direct impact on a channel established between central on the wellbeing of the Iranian people than a banks, the H-SPV itself could become a full- mechanism for general trade. service merchant bank, the same role played successfully by state banks in China and Advance the cause of economic sovereignty. India during the previous round of sanctions, While it could be argued that designing a although without the specifc attention to mechanism to avoid sanctionable trade sanctions-exempt trade. would refect acquiescence to US sanctions, the H-SPV ultimately advances the cause of The immediate challenges facing European and Iranian economic sovereignty. humanitarian trade are so signifcant The granting of Signifcant Reduction that the Swiss government has recently Exemption (SRE) oil waivers by the US opened negotiations with the US over the serves to lock Iran into specifc humanitarian establishment of a specifc banking channel. channels as oil payments made by Home to several major pharmaceuticals customers are placed in escrow accounts manufacturers, food companies, and and can only be used for sanctions-exempt commodities traders, Switzerland is perhaps trade. The development of the H-SPV would Iran’s single most important partner in give Iran the choice of whether or not to humanitarian trade. Under the Obama-era spend its accrued foreign exchange. The sanctions, several Swiss banks maintained H-SPV would enable Iranian private sector ties with the likes of Parsian, Middle East frms to use their fnancial resources within Bank, Saman, and Pasargad. That the Swiss ESFANDYAR BATMANGHELIDJ & AXEL HELLMAN 11

Iran to pay for humanitarian imports from institutional arrangements that accompany Europe, in effect, conducting “business as them. Insofar as mechanisms such as the usual.” If Iran can indeed continue to import H-SPV can serve to prevent the collateral a meaningful volume of food, medicine, and damage of fnancial sanctions, they could consumer goods from Europe in the face of become part of sanctions best practice. US sanctions, the foundation of Europe-Iran trade ties will be immunized from the effect of US sanctions. Of course, the creation of Conclusion the H-SPV could be followed by the creation of a second mechanism to focus on trade in One of the challenges facing European goods other than food and medicine. policymakers is that the urgency of their efforts to sustain the benefts of the Iran “The H-SPV would serve as nuclear deal is inextricably tied to questions over Europe’s role within the political and a test of the US commitment economic order principally dominated by the to protect humanitarian US. The creation of an SPV-type mechanism could be seen as a matter of great strategic trade.” importance, but policymakers must realize that the SPV itself is frst and foremost a Test US commitment to humanitarian trade. mechanism for use by the small number of The H-SPV would serve as a test of the US European companies that are desperately commitment to protect humanitarian trade. trying to maintain their commercial activities If the US accepts to join the H-SPV, Europe in Iran. Shedding some of the grand strategic will have effectively addressed the issue of considerations should enable European compliance fears that might linger around policymakers to view the SPV undertaking any Iran-specifc mechanism. If the US more pragmatically, and understand that an refuses, Europe will be further justifed in initial focus on humanitarian trade via an pressuring US authorities for licenses and H-SPV is not just the tactical choice but also other measures that will provide comfort a humanitarian imperative. to its banks regarding the SPV. Importantly, the negotiations around the H-SPV could serve as an opportunity to de-escalate the transatlantic rift over Iran sanctions. The US could opt not to join the SPV, yet still endorse the concept of a European mechanism that sustains trade without inherently weakening the overall architecture of US sanctions.

Protect diplomacy in the age of fnancial warfare. Finally, the H-SPV could prove innovative from the standpoint of sanctions policy. In a world where the imposition of unilateral sanctions looks increasingly likely, the development of the H-SPV model could help the international community protect countries from unjustifed fnancial warfare and ensure that diplomacy remains attractive for the targeted country. “Smart” sanctions policy must encompass not just the sanctions themselves, but also the mechanisms and 12 MITIGATING US SANCTIONSMITIGATING ON IRAN: US A SANCTIONSHUMANITARIAN ON IRAN: SPECIAL THE CASE PURPOSE FOR AN VEHICLE H-SPV

Endnotes 8 “US Rejects European Call for Iran Sanctions Waiver.” Bourse & Bazaar, July 16, 2018. https://www. 1 “Remarks by President Trump on the Joint bourseandbazaar.com/news-1/2018/7/16/us-rejects- Comprehensive Plan of Action.” White House. May european-call-for-iran-sanctions-waiver. 8, 2018. https://www.whitehouse.gov/briefngs- statements/remarks-president-trump-joint- 9 Batmanghelidj, Esfandyar. “Under Trump, comprehensive-plan-action/. US Sale of Medical Goods to Iran Down Nearly 40%.” Bourse & Bazaar, October 22, 2018. https:// 2 “Remarks by HR/VP Mogherini following a www.bourseandbazaar.com/articles/2018/10/22/ Ministerial Meeting of E3/EU 2 and Iran.” European under-trump-us-sale-of-medical-goods-to-iran-down- Union External Action. September 24, 2018. https:// nearly-40. to-iran-down-nearly-40 eeas.europa.eu/headquarters/headquarters- homepage/51040/remarks-hrvp-mogherini- 10 “Briefng on Iran Sanctions.” U.S. Department following-ministerial-meeting-e3eu-2-and-iran_en. of State. November 2, 2018. https://www.state.gov/ secretary/remarks/2018/11/287090.htm. 3 Harris, Gardiner. “Bolton Warns of ‘Terrible Consequences’ for Those Doing Business with Iran.” 11 Batmanghelidj, Esfandyar, and Axel Hellman. The New York Times, September 25, 2018. https:// “Europe, Iran, and Economic Sovereignty: A New www.nytimes.com/2018/09/25/world/middleeast/ Banking Architecture in Response to US Sanctions.” bolton-threatens-business-iran.html. European Leadership Network. June 7, 2018. https:// www.europeanleadershipnetwork.org/report/europe- 4 “Remarks at the United Against Nuclear iran-and-economic-sovereignty-a-new-banking- Iran Summit.” U.S. Department of State. September architecture-in-response-to-us-sanctions/. 25, 2018. https://www.state.gov/secretary/ remarks/2018/09/286216.htm. 12 “Written Testimony of David S. Cohen Under Secretary for Terrorism and Financial Intelligence 5 “Clarifying Guidance: Humanitarian United States Department of the Treasury.” United Assistance and Related Exports to the Iranian States Senate Committee on Foreign Relations. People.” U.S. Department of The Treasury. February January 21, 2015. https://www.foreign.senate.gov/ 6, 2016. https://www.treasury.gov/resource-center/ imo/media/doc/Cohen_Testimony1.pdf. sanctions/Programs/Documents/hum_exp_iran. pdf. 13 “Remarks by HR/VP Mogherini following a Ministerial Meeting of E3/EU 2 and Iran.” European 6 Nephew, Richard. The Art of Sanctions: A Union External Action. September 24, 2018. https:// View from the Field. New York: Columbia University eeas.europa.eu/headquarters/headquarters- Press, 2018. (9) homepage/51040/remarks-hrvp-mogherini-following- ministerial-meeting-e3eu-2-and-iran_en. 7 “Letter to Steven Mnuchin and Mike Pompeo on JCPOA.” UK Foreign and Commonwealth 14 Motamedi, Maziar. “China Unexpectedly Offce. June 4, 2018. https://assets.publishing. Gambles on European Mechanism to Sustain Iran service.gov.uk/government/uploads/system/ Trade.” Bourse & Bazaar, November 1, 2018. https:// uploads/attachment_data/file/714262/Joint_E3_ www.bourseandbazaar.com/articles/2018/10/31/ letter_on_JCPoA.pdf. 12 MITIGATING US SANCTIONS ON IRAN: A HUMANITARIAN SPECIAL PURPOSE VEHICLE ESFANDYARESANAR BATMANGHELIDJATMANGHELI & AXELAEL HELLMAN 131

Endnotes 8 “US Rejects European Call for Iran Sanctions china-unexpectedly-gambles-on-european-spv-to- bank-ceo-us-treasury-made-mistake-in-iran-sanctions- Waiver.” Bourse & Bazaar, July 16, 2018. https://www. sustain-iran-trade. designation. 1 “Remarks by President Trump on the Joint bourseandbazaar.com/news-1/2018/7/16/us-rejects- Comprehensive Plan of Action.” White House. May european-call-for-iran-sanctions-waiver. 15 “Remarks by HR/VP Federica Mogherini 22 Tabrizy, Nilo. “Iranians Fear Medicine 8, 2018. https://www.whitehouse.gov/briefngs- upon Arrival to the Foreign Affairs Council.” European Shortages as U.S. Tightens Sanctions.” New York statements/remarks-president-trump-joint- 9 Batmanghelidj, Esfandyar. “Under Trump, Union External Action. November 19, 2018. https:// Times, November 11, 2018. https://www.nytimes. comprehensive-plan-action/. US Sale of Medical Goods to Iran Down Nearly eeas.europa.eu/headquarters/headquarters- com/2018/11/11/world/middleeast/iran-sanctions. 40%.” Bourse & Bazaar, October 22, 2018. https:// homepage/53980/remarks-hrvp-federica-mogherini- html. 2 “Remarks by HR/VP Mogherini following a www.bourseandbazaar.com/articles/2018/10/22/ upon-arrival-foreign-affairs-council_en. Ministerial Meeting of E3/EU 2 and Iran.” European under-trump-us-sale-of-medical-goods-to-iran-down- 23 “Iran’s Deceptive Financial Practices.” Union External Action. September 24, 2018. https:// nearly-40. to-iran-down-nearly-40 16 “Europe Support Against US ‘Rare Victory’ Foundation for Defense of Democracies. June eeas.europa.eu/headquarters/headquarters- for Iran: Rouhani.” Bourse & Bazaar, October 28, 6, 2018. https://s3.us-east-2.amazonaws.com/ homepage/51040/remarks-hrvp-mogherini- 10 “Briefng on Iran Sanctions.” U.S. Department 2018. https://www.bourseandbazaar.com/news- defenddemocracy/uploads/documents/Iran_ following-ministerial-meeting-e3eu-2-and-iran_en. of State. November 2, 2018. https://www.state.gov/ 1/2018/10/28/europe-support-against-us-rare-victory- Financial_Practices_Transcript.pdf. secretary/remarks/2018/11/287090.htm. for-iran-rouhani. 3 Harris, Gardiner. “Bolton Warns of ‘Terrible 24 Borger, Julian, and Saeed Kamali Dehghan. Consequences’ for Those Doing Business with Iran.” 11 Batmanghelidj, Esfandyar, and Axel Hellman. 17 “Country Briefs: Iran.” Food and Agriculture “Iran Unable to Get Life-saving Drugs Due to The New York Times, September 25, 2018. https:// “Europe, Iran, and Economic Sovereignty: A New Organization of the United Nations. July 04, 2018. International Sanctions.” The Guardian, January 13, www.nytimes.com/2018/09/25/world/middleeast/ Banking Architecture in Response to US Sanctions.” http://www.fao.org/giews/countrybrief/country. 2013. https://www.theguardian.com/world/2013/ bolton-threatens-business-iran.html. European Leadership Network. June 7, 2018. https:// jspcodeIRN. jan/13/iran-lifesaving-drugs-international-sanctions. www.europeanleadershipnetwork.org/report/europe- 4 “Remarks at the United Against Nuclear iran-and-economic-sovereignty-a-new-banking- 18 aibafan, ithra, Shabnam emmati, an 25 Cunningham, Erin. “Fresh Sanctions on Iran Iran Summit.” U.S. Department of State. September architecture-in-response-to-us-sanctions/. 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com/2013/03/02/opinion/blocking-medicine-to-iran. html.

29 Becker, Jo. “U.S. Approved Business With Blacklisted Nations.” New York Times, December 23, 2010. https://www.nytimes.com/2010/12/24/ world/24sanctions.html.

30 “UN Court Tells US to Ease Iran Sanctions in Blow for Trump.” Bourse & Bazaar, October 4, 2018. https://www.bourseandbazaar.com/news- 1/2018/10/3/un-court-tells-us-to-ease-iran-sanctions- in-blow-for-trump.

31 Batmanghelidj, Esfandyar. “Helping Iranians To Lead Normal Lives.” LobeLog, November 5, 2018. https://lobelog.com/helping-iranians-to-lead-normal- lives/.

32 “Cuba Eyes EU’s Planned Iran Sanctions- Busting System.” Bourse & Bazaar, November 19, 2018. https://www.bourseandbazaar.com/news- 1/2018/11/19/cuba-eyes-eus-planned-iran-sanctions- busting-system

33 Batmanghelidj, Esfandyar, and Axel Hellman. “Europe, Iran, and Economic Sovereignty: A New Banking Architecture in Response to US Sanctions.” European Leadership Network. June 7, 2018. https:// www.europeanleadershipnetwork.org/report/europe- iran-and-economic-sovereignty-a-new-banking- architecture-in-response-to-us-sanctions/.

34 Shields, Michael. “Swiss Talk with U.S., Iran about Humanitarian Payment Channel for Food, Drugs.” Reuters, November 5, 2018. https://www. reuters.com/article/us-usa-iran-sanctions-swiss/ swiss-talk-with-us-iran-about-humanitarian-payment- channel-for-food-drugs-idUSKCN1NA12Y. eEoenedesetoE works to advance the idea of a cooperative and cohesive Europe and to develop collaborative European capacity to address the pressing foreign, defence and security policy challenges of our time. It does this through its active network of former and emerging European political, military, and diplomatic leaders, through its high-quality research, publications and events, and through its institutional partnerships across Europe, North America, Latin America and the sia-acifc region.

ose is a media company which supports business diplomacy between Europe and Iran through publishing, research, and events. Bourse & Bazaar is the organizer of the Europe-Iran Forum, the leading Iran economic summit, which has been held in London (2014), Geneva (2015), urich (2016, 2017) and Paris (201). The company also organizes a Global Round Table Series, which has convened senior executives and policymakers in Copenhagen, Stockholm, Brussels, Milan, rankfurt, Washington D.C., Moscow, and Tokyo. Bourse & Bazaars news and analysis, opinion polling, and in-depth reports are widely considered among the most authoritative resources for stakeholders seeking to understand the future of trade and investment between Europe and Iran.