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Oct 17, 2018 | 21:08 GMT

5 mins read

U.S.: The Latest Sanctions Against Iran Cast a Wide Secondary Net

The Big Picture

The United States is deepening its efforts to contain Iran's regional influence and weaken its government, and the main tool in its arsenal is economic sanctions. Its latest round of secondary sanctions on Iran-linked entities strikes at companies that even have tenuous links to the main target and threatens to implicate companies that do business with Iran in any way.

What Happened

The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) sanctioned 20 Iranian companies and financial institutions and reclassified nine more as Specially Designated Global Terrorist entities subject to secondary U.S. sanctions. While the Treasury Department's imposition of sanctions on Iran is nothing new, the nuances of this latest move mark a significant escalation in U.S. strategy. The 20 businesses are tied to the Bonyad Taayon Basij network, which has established a number of shell companies in Iran's auto, mining, metals and banking sectors to mask ownership as a way to shield itself from sanctions. OFAC now claims that the companies in this network have dealings across the Middle East and Europe that make them worthy targets. The critical difference between this set of sanctions and earlier ones is that the penalized organizations have multiple — in the most extreme case, seven to eight — degrees of separation from the terrorist entity, which is the Basij or the Islamic Revolutionary Guard Corps (IRGC).

Why It Matters

The shift in OFAC guidelines presents a nightmare for corporate compliance officers trying to practice due diligence in monitoring any links to Iranian entities that could be ensnared in a U.S. sanctions net several transactions down the line. The increasingly hard-line and unilateralist approach to U.S. secondary sanctions policy comes as the European Union is still trying to navigate a web of legal complications in setting up a special-purpose vehicle (SPV) to maintain financial transactions with Iran. OFAC's more stringent guidelines will only further hinder those efforts. Moreover, targeting more reputable Iranian entities such as the privately owned Parsian Bank, the sixth-largest company in Iran, further tightens Iran's ability to maintain financial links for basic humanitarian trade. The White House insists that it is maintaining humanitarian carve-outs in its sanctions against Iran, but the International Court of Justice has sounded the alarm that the current direction of the restrictions could amount to a violation of international law. The White House, however, appears to be less concerned about the humanitarian repercussions of sanctions this time around since a big component of its strategy is to create a groundswell of public dissent across Iran that will either coerce it to negotiate on U.S. terms or drive the country toward regime change.

The OFAC expansion also comes as Iran's political institutions are debating financial reforms that aim to remove it from the international Financial Action Task Force's blacklist and facilitate its financial dealings with willing trading partners. However, if OFAC substantially raises the risk for the European Union and other entities in trying to circumvent a wide U.S. sanctions net, Iranian politicians' motivation to complete the reforms could wane. As a result, Iran will have far fewer options to maintain trade links with the outside world than they did during the last big sanctions wave in 2012 under U.S. President Barack Obama. In addition, the outcome of an internal White House debate over whether to move forward in sanctioning SWIFT, the global financial messaging service, is another potential pressure point that could dry up Iran's external financial links.

Other current and potential sanctions targets of the United States, including China and Russia, will be monitoring the precedent closely as Washington works to sharpen its secondary sanctions tools.

Background

As an illustration of how the latest OFAC sanctions work, take Iran's Sina Bank and Parsian Bank. They are being targeted for providing services to Andisheh Mehvaran Investment Co., which was designated because it is controlled or owned by Iran Zinc Mines Corp., which was designated because it is controlled or owned by Taktar Investment Co., which was designated because it is controlled or owned by Technotar Engineering Co., which was designated because it is controlled or owned by Mehr Eqtesad Iranian Investment Co., which was designated because it is controlled or owned by Mehr Eqtesad Bank, which was designated because it is  controlled or owned by Bonyad Taavon Basij, which was designated because it is controlled or owned by the Basij, which was designated because it is controlled or owned by the IRGC — the last two of which are the core sanction targets for terrorist activities. This amounts to seven degrees of separation between the Iranian bank and the Basij and eight for the IRGC. This effectively sends a message that any financial links with Iran could face secondary U.S. sanctions.

Key Dates

FATF deadline: The Financial Action Task Force is meeting for its regular, plenary meeting from Oct. 14 to 19. By passing legislation to counter money laundering and the financing of terrorism, Iran has been working to remove itself from the task force's blacklist and stave off the reimposition of countermeasures. Four pieces of legislation were passed by parliament before the plenary session; three of those have been approved by the Guardian Council, but only one has been completed.

Nov. 4: U.S. sanctions against Iran's energy sector and central bank transactions are reimposed.

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