Doing business with Iran – sanctions and compliance

July 2017 | FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

July 2017 Issue

During the US presidential election campaign, then-candidate Donald Trump was fiercely critical of the Obama administration for the 2015 nuclear deal struck with Iran. However, president Trump’s stance toward the former pariah state appears to be changing. He recently notified Congress that Iran is complying with the terms of the 2015 deal and that the US has extended sanctions relief to the country – an important step in the development of the Iranian economy. Though the US has introduced narrow new penalties on Iranian individuals for supporting the ballistic missile programme, the new administration is continuing the pact agreed by president Obama.

The deal agreed between Iran, the US, the UK, France, Germany, Russia and China – the Joint Comprehensive Plan of Action – may have eased economic sanctions, but it has not seen Iran welcomed back fully into the international community. It is still on the State Department’s list of state sponsors of terrorism for its support of anti-Israel groups, and is still subject to non-nuclear sanctions, including for alleged human rights abuses and for its backing of Syrian president Bashar Assad’s government.

Though there has been a small-scale increase in investment from non-US oil & engineering companies, the deal to exempt them from sanctions for doing business with Iran has not generated the financial windfall that many had hoped. Indeed, Iran attracted just $3.6bn worth of foreign investment in 2016. Furthermore, unemployment stands at more than 12 percent. Geopolitical uncertainty in the region and the attitude of the new US administration toward the Joint Comprehensive Plan of Action have made international banks reluctant to engage with Iran.

However, there are signs that mindsets are beginning to shift. In April, Farhad Taqizadeh-Hesari, an economist and a senior associate to the head of Asian Development Bank Institute, told Iran’s domestic media that Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Mizuho Bank had already begun transacting with Iranian banks. The relationship between Japan and Iran will also be reinforced by the establishment of a $10bn credit line, a 130 percent increase in Japan’s imports of oil products from Iran and an agreement to support mutual investments and bilateral trade.

“If the Iranian economy is to benefit from sanctions relief, more must be done to improve relations with companies and investors outside of the country.”

This could be a crucial development. International banks had been complaining that the remaining US sanctions – particularly a ban on any US dollar transactions – were obstructing business with Tehran. In May, the World Bank Doing Business 2017 report ranked Iran 120th out of 190 in its ease of doing business index and 16th out of 25 countries in the Middle East and North Africa region. If the Iranian economy is to benefit from sanctions relief, more must be done to improve relations with companies and investors outside of the country. To date, the rush of activity and investment forecast when sanctions were lifted has failed to materialise. While the outlook may be improving, as evidenced by the Japanese bank deal, progress is slow.

Companies looking to enter the Iranian market need to consider a number of issues. Chiefly, they must be mindful of sanctions related to human rights, the proliferation of restricted goods and technology and Iran’s alleged support for terrorism. They must also be aware of whether the product or material they want to trade is restricted within Iran, and how payments will be made. US dollar transactions remain prohibited. Companies must also be aware of whether their proposed activity is subject to US sanctions, trade regulations or export controls. Internal compliance checks must be strong enough to assess the suitability of potential counterparties, factor in US secondary sanctions, and protect company personnel and business operations from sanctions risk.

The re-election of Iranian president Hassan Rouhani has been welcomed by the business community, both within Iran and externally. His moderate outlook helped him win 57 percent of the vote and he is seen as a president who will actively engage with foreign investors and attempt to boost international trade. Iran’s relationship with the US will be a key determinant of success.

There are upsides to investing in Iran. The economy is set to grow by 3.3 percent in 2017, according to the International Monetary Fund and Mr Rouhani has attracted some foreign investment since he was elected in 2013. Reducing the state’s influence over the economy will be a vital step toward attracting external investment. The role of the private sector will also be crucial to Iran’s future economic prosperity. Furthermore, the country’s well educated and youthful population, its developed industrial base and its infrastructure project opportunities are attractive.

Investors must take a long term view and strengthen their internal sanctions compliance teams and functions. Finding the right local partner will also be key to gaining a foothold in the economy. Due diligence procedures will be particularly important when entering a challenging but potentially rewarding market like Iran.

Richard Summerfield