By Mehdi Razmahang, Majid Shakeri
In this view, sanctions on oil, banking, insurance, shipping, petrochemical, construction and automobile sectors are classified as sectoral or thematic sanctions, while sanctions on natural and legal persons are included in sanctions lists under the title of non-sectoral bans.
This article seeks to explain that dividing sanctions into sectoral and non-sectoral ones and formulating an agenda for negotiations based on this classification is wrong from an expert point of view, and that a more accurate view would be to regard the sanctions against figures and entities in a vertical relationship with and as a booster of the sectoral bans.
In other words, the restrictive measures on Iran’s economic sectors and the ones against individuals and entities are not two separate types of sanctions, but the inclusion of Iranian natural and legal persons in the sanctions list is, in fact, one of the most important US strategies to make the bans against the Islamic Republic smarter and more efficient.
In order to put pressure on Iran’s economic sectors, the US ruling system first imposes sanctions against the entire sector either through a law passed by Congress or by issuing an executive order, and then, the Treasury Department’s Office of Foreign Assets Control (OFAC) acts to identify legal and natural persons related to the blacklisted sector based on the legal grounds already created and gradually adds their names to the so-called Specially Designated Nationals And Blocked Persons List (SDN).
That policy has always been on the agenda of the US ruling system, but it gathered steam during the first wave of the sanctions (2010-2013) and was pursued even more forcefully in the course of the second wave (since May 2018, when the US withdrew from the Joint Comprehensive Plan of Action) with the aim of making the restrictions smarter and more efficient.
Especially, on November 5, 2018, a long list of Iranian individuals and entities was added to the US sanctions list, and since then, more and more names have been placed on the list.
The imposition of sanctions on more than 700 figures, entities, ships and aircraft on November 5, 2018, and later, the inclusion of hundreds of Iranian natural and legal persons on the list show that the US administration has focused its attention on smart bans.
The United States’ move toward making the sanctions smarter and increasing their efficiency was due to the fact that blacklisting a whole sector could not be effective without including the names of its key actors on the list.
The most important shortcomings of sectoral sanctions are imposing high costs, especially on partners and allies, lacking efficiency and creating a possibility to circumvent the bans, among others.
On the contrary, however, the inclusion of natural and legal persons associated with the sanctioned sector on the SDN list increases the effectiveness of the sanctions, covers the shortcomings of the sectoral sanctions to some extent, and exerts maximum pressure on the targets.
As a result, the United States has, in recent years, not been separating sectoral sanctions from non-sectoral ones in its pressure campaign against Iran, and has in fact been pushing sanctions packages comprising of sector-individual sanctions against the Iranian economy.
Enacting these sanctions packages involves using two important tools, which should be considered as the two blades of a scissor. The first is the inclusion of Iranian natural and legal persons on the sanctions list and the second is the pursuit of a risk-based approach towards due diligence.
In these sanctions packages, two important things happen when natural and legal persons are placed on the sanctions list.
1) The names of the sanctioned persons are immediately reflected in the supervisory and control lists of banks and institutions active in the field of risks and combating money laundering and organized financial crimes. As a result, foreign natural and legal persons engaged in trade via conventional global mechanisms will no longer be able to interact with the sanctioned figures.
2) Given America’s designing of an intensified due diligence mechanism on the issue of interaction with the Iranian economy, foreign banks and companies will act more cautiously compared to the past.
In recent years, the US administration has placed a special focus on identifying the ultimate beneficiaries in the case of Iran. The US Treasury has, in its guidelines, obliged companies and financial institutions to implement “intensified due diligence” in their dealings with Iranian individuals and entities; This means that foreign firms and banks, in a transaction with an Iranian person, must make sure who is the ultimate beneficiary (the last ring in a business chain) and not to get engaged with a cover person or entity.
But in practice, such certainty is very difficult to achieve, and given the level of OFAC penalties against offending entities, a cost-benefit analysis dissuades foreign companies from such a transaction. Actually, the more the number of Iranian natural and legal persons on the sanctions list, the greater the risk of foreign banks and companies interacting with the Iranian economy.
The explanations above are meant to clarify the important point that sanctions against individuals and entities are separate from sectoral sanctions, but are a factor that strengthen those restrictions and make them more effective; therefore, it would be a strategic mistake to accept that the idea that “sectoral and non-sectoral sanctions have a horizontal relationship, in a way that the all-out removal of the first category (legal removal of sectoral sanctions) and the partial removal of the second category (removal of a group of Iranian natural and legal persons from the sanctions list) could generate significant revenues for the Iranian economy.”
The necessary ground for Iran’s economy to benefit from the removal of the sanctions will be provided only when the following three goals are pursued to neutralize the effects of the US (sector-individual) sanctions packages.
1) The removal of the legal ground for sectoral sanctions, specifically in the following areas: precious and non-precious metals, car manufacturing, shipping and shipbuilding, oil exports, energy (oil production), petrochemicals, insurance (in the field of shipping), civil engineering, mining, textiles, and factory production
2) One-step, basic and maximum review of all the sanctions lists: Only in case of a one-step review of all sanctions lists, it can be expected that the risk index of interaction with Iran’s economy is reduced and, consequently, Iranian natural and legal persons are able to get economic benefits from the sanctions removal. Some specific sanctions lists considered here include those by the US Treasury Department and State Department, as well as the European Union and the United Nations.
3) Substantial change in the performance of the Financial Intelligence Unit of the US Treasury Department (FinCen) regarding the case of Iran: An important goal must be pursued in this regard, and that is re-defining the issue of due customer identification and defining new related rules concerning the procedures of US financial crimes network. The elimination of a risk-based procedure and its replacement with a rule-based procedure, in a way that foreign natural and legal persons are not required to identify all the business interaction chain in their interactions with Iranian natural and legal persons. In the rule-based procedure, the rules stipulate that foreign natural and legal persons who want to do a business with Iran should identify the maximum number of a sequence of customers. This limited identification also protects them from possible future prosecutions and punishments. The important point is that this change of approach in the vital procedure to save the JCPOA needs no revision in the text of the deal. More importantly, FinCen’s current approach in identifying the beneficiaries of the transaction with Iran is, in effect, a gross violation of the JCPOA’s Article 29 and a serious attempt to prevent the normalization of Iran’s trade ties under the accord.
Mehdi Razmahang is an Iranian researcher in the field of sanctions. He holds a PhD in economics.
Majid Shakeri is an Iranian analyst and researcher in the field of financial governance. He can be followed on Twitter via @Majidshakeri8.
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