The (Im)precise Language of the Iran Deal

Iran’s ongoing provocative behavior brings the contradiction at the heart of the Iranian nuclear deal into sharp focus: How can we constrain Iran’s provocative actions in other-than-nuclear-enrichment areas when we gave up so much of our leverage as a concession to get it to agree to enrichment restrictions? Congress will wrestle with this dilemma in important upcoming hearings, and while the contradiction was always recognized, the precise ways in which it might play out were obscured by the imprecision in the deal itself. That imprecision is now coming to the surface.

In order to get a deal that had a chance of constraining Iran’s nuclear ambitions, the United States had to make significant concessions on nuclear-related sanctions. At the time, the Obama administration sold the deal with the assurance that the United States would retain enough coercive leverage on Iran to keep the regime in check on these other issues, including the Islamic Republic’s support for international terrorism, human rights abuses, and the development of its ballistic missile programs. And administration spokespeople emphasized again and again that they would be vigilant and vigorous in wielding this coercive leverage.

In the past few weeks, however, the administration has signaled that it is on the cusp of making an additional and unexpected concession to Iran that significantly weakens remaining U.S. leverage: giving Iran backdoor access to financial transactions in dollars. The administration reportedly believes it needs to make this additional concession to honor the spirit of the agreement. Congress is crying foul, asserting that such dollar access was not included in the letter of the original deal and constitutes a gift to Iran that should not be given without additional Iranian concessions. As President Obama himself asked recently: Why should the United States offer additional concessions to honor the spirit of the deal if Iran is not also making additional concessions?

This fight originates from the imprecision of the agreement. Since Implementation Day, the world’s largest banks have continued to steer clear of banking with Iranian clients or companies looking to do business in Iran, in part because they fear running afoul of remaining U.S. sanctions on the Islamic Republic, but also because of the endemic corruption and money laundering problems plaguing its financial system.

This reluctance has caused ripple effects: Major European companies have been unable to find the banking services necessary to do business in Iran, and as a result. Iran has claimed that the United States is not fulfilling its obligations under the agreement. Iran’s claim threatens the deal, and the administration has responded in the last two weeks by trying to find ways to incentivize banks to begin doing business in the Islamic Republic, notably by considering permitting those banks to conduct dollar-based transactions outside of the United States on behalf of companies doing business in Iran.

But the administration cannot do that without violating what Congress believes it was promised in the deal — namely, an Iran without direct or indirect access to the U.S. financial system. When selling the agreement to Congress, administration officials suggested that Iran would not have access to the U.S. financial system or U.S. dollars. For example, in testimony before the Senate Committee on Banking, Housing, and Urban Affairs on September 17, 2015, Acting Undersecretary of the Treasury Adam Szubin assured lawmakers that “no Iranian banks can access the U.S. financial system; not to open an account, not to purchase a security, and not even to execute a dollarized transaction where a split seconds worth of business is done in a New York clearing bank.”

While these statements clearly foreclosed banks being able to conduct so-called “U-Turn transactions” on behalf of Iranian clients, Congress interpreted them as saying that Iran would not enjoy access to the U.S. dollar, either within or outside the United States. Such an understanding was certainly reasonable; giving Iran dollar access would have been a major concession and was not included in any provisions of the agreement, including the extensive Annex II laying out the specific sanctions relief to be provided.

And through key periods, the administration continued to refrain from clarifying this issue. For example, in legal guidance documents released on Implementation Day, the administration asserted that, “[a]fter Implementation Day, foreign financial institutions need to continue to ensure they do not clear U.S. dollar-denominated transactions involving Iran through U.S. financial institutions.”

This implicitly suggested that dollar clearing outside the United States could be permissible, and that foreign financial institutions could engage in such activity. Yet the administration did not satisfyingly confirm this understanding, but rather left it to foreign financial institutions to interpret whether this meant they could conduct dollarized transactions that did not directly involve the U.S. financial system. That may have been the administration’s intention but, spoiler alert: Given global banks’ risk aversion following enforcement actions for doing business in sanctioned countries totaling billions of dollars, none were going to risk doing dollarized transactions that did not touch the U.S. financial system on the basis that the administration implicitly suggested it was permissible.

As a result, when the administration finally began floating the idea of expressly permitting financial institutions to do offshore dollarized transactions on behalf of Iran, Congress was outraged. Many members on both sides of the aisle felt they had been misled by the administration, and that if the administration had been considering granting Iran access to U.S. dollars, it should been more forthcoming with this plan in the summer of 2015 and afterwards, rather than making statements that indicated that Iran would not have access to the benefits of the U.S. financial system.

But this imprecise language has caused more than a fight between the administration and Congress — indeed, it lies at the heart of Iran’s entire claim that the United States is preventing banks from doing permissible business in Iran in contravention of U.S. obligations. Iran’s assertion is predicated on ambiguous language in the agreement, specifically that the United States “make best efforts in good faith to sustain this JCPOA and to prevent interference with the realization of the full benefit by Iran of the sanctions lifting specified.” The Iranians have interpreted this to mean that the United States must takes steps to facilitate banks’ willingness to do business in Iran and help re-integrate Iran into the world financial system. And while dollarized transactions were almost surely not included in the original agreement, because this language is so broad, the Iranians now have a credible claim that such relief falls within the four corners of the agreement.

This lack of precision was not a drafting mistake by the negotiators, however; it was intentional. Former administration negotiators have acknowledged in private that elements of the deal were left ambiguous with the express purpose of allowing the administration to sell the agreement to Congress and the American people, and the Iranian negotiators to sell the agreement to the hardliners back home.

The access to dollars question is not the only area of imprecision in the deal, but it is the one with which Congress is seized at the moment. How the administration resolves its Congress vs. Iran predicament could be a harbinger for how the deal will ultimately succeed or fail in its intended mission.

The vagaries and imprecisions in the deal likely helped the administration score what it considers to be one of its most important foreign policy victories, but at risk to the long-term sustainability of the agreement. All parties will continue to fight over its meaning. And for those in Congress who feel continually misled by the administration on what the deal actually contains, it raises the question of what unwelcome surprises remain to be discovered in the agreement.

Photo credit: THOMAS IMO/Photothek via Getty Images