OFAC Off

Just a few days after U.S. President Donald Trump’s withdrawal from the Iran nuclear deal, France’s economy minister, Bruno Le Maire, gave several interviews in which he stressed that European leaders would be asking themselves, “What can we do to give Europe more financial tools allowing it to be independent from the United States?” Le Maire specifically pointed to the U.S. Treasury’s fearsome Office of Foreign Assets Control (OFAC), which administers and enforces economic and trade sanctions and has levied billions of dollars’ worth of fines on companies such as BNP Paribas, Standard Chartered Bank, and the Chinese telecommunications company ZTE. He wondered aloud, “Why don’t we create the same type of agency in Europe, capable of following the activities of foreign companies and checking if they are respecting European decisions?”

The comment seemed flippant, an economy minister’s way of expressing frustration, and was not viewed as a policy that Europe was about to seriously consider. Yet, a few weeks later, European leaders are still scrambling to implement concrete measures to salvage the Iran nuclear deal, whether by sustaining oil purchases from Iran, instructing the European Investment Bank to make financing available for projects in Iran, or attempting to help multinationals and small and medium-sized enterprises maintain their Iran operations. But consultations with government officials, business leaders, and technical experts make it clear that pursuing individual measures in isolation will be insufficient to mitigate the chilling effect of secondary sanctions imposed by the United States on companies which had sought commercial links with Iran. Europe needs a holistic and institutionalized strategy to push back and achieve two crucial goals.

First, Europe is seeking to protect its economic sovereignty, namely the ability to engage in constructive and legitimate bilateral trade and investment irrespective of unilateral moves by the United States. Second, Europe is seeking to deliver a package of economic measures that protects the quid pro quo at the heart of the Iran nuclear deal. As Iran announces initial steps to ramp up its uranium enrichment — for now within the bounds of the nuclear deal — time is running out.

Seen in this context, Le Maire’s idea of establishing a European Union version of OFAC is not so outlandish. Such an organization would both counterbalance the influence of extraterritorial sanctions from the United States and help European commercial actors to sustain trade with Iran in ways that do not compromise European financial integrity. Its creation would also reassure an Iranian political establishment that is skeptical of European resolve in resisting U.S. sanctions while sending a strong signal to the Trump administration that Europe takes its economic sovereignty seriously. Importantly, the creation of EU-OFAC would not serve to evade U.S. sanctions, but to ensure that those companies that can operate in compliance with U.S. secondary sanctions have access to the necessary banking services. Europe cannot change U.S. sanctions laws and must insist on compliance, but it can change the culture of fear that surrounds even compliant business.

The office in charge of European sanctions policy is buried within the hierarchy of the European External Action Service — its relevant director is four levels below High Representative Federica Mogherini, an unforgivable bureaucratic oversight given how consequential Iran and Russia sanctions have proven to European foreign policy in recent years. Moreover, while sanctions policy is agreed upon at the EU level, its implementation rests with individual member states, a structure that leads to uneven interpretation and implementation.

Due to the EU’s institutional blind spot on sanctions policy, there is no agency in the European Commission that can adequately support so-called gateway banks — those European entities currently acting as intermediaries between the European and Iranian financial systems, on which trade and investment with Iran depend. This group comprises state-owned financial institutions, small private banks, special purpose vehicles, and the European branches of Iranian banks. A new banking architecture is necessary to support these entities, especially when it comes to compliance competencies and legal protections.

In the area of compliance, EU-OFAC would help gateway banks manage due diligence, for which the standards are vague. The guidance issued by the U.S. Treasury on May 8 states that due diligence should both reflect “best practices of the particular industry at issue” and “conform to guidance and expectations of the non-U.S. person’s home country regulators.” There is similar language in the Trump administration’s recently issued statement on Iran sanctions, which calls for due diligence “sufficient to ensure that it is not knowingly engaging in transactions with persons on the [Specially Designated Nationals] list.” The so-called SDN list, compiled by OFAC, details those entities with whom it is prohibited to do business under primary and secondary sanctions.

Presently, there is no clear industry best practice or regulatory guidance in Europe on due diligence. In the event of an inadvertent sanctions violation, where, for example, a bank facilitates a transaction linked to an SDN, European banks cannot be confident that OFAC will consider their due diligence work sufficient and thereby offer leniency. This issue is particularly acute given the aggressive posture toward sanctions enforcement being taken by the Trump administration. But the creation of an EU-OFAC could give banks and the companies they serve greater confidence in their ability to conduct business in a manner compliant with U.S. primary and secondary sanctions.

EU-OFAC could establish clear guidelines and certifications for due diligence, following the example of EU member state export control authorities. During the sanctions period of 2006 to 2015, a handful of multinational companies were able to maintain operations in Iran because they were engaged in sensitive business. In order to sell dual-use equipment — such as telecommunications technology — to Iran, these companies were required to secure licenses from their national export control authorities. These licenses, granted on the basis of a government certification of enhanced due diligence, gave banks greater comfort.

EU-OFAC could serve the same licensing purpose for a wider scope of business in Iran, reviewing and certifying due diligence just as export control authorities have done in the past. These licenses could be linked to additional measures, such as a compensation scheme (another idea floated by Le Maire) to offset penalties in the case of an inadvertent U.S. sanctions violation. For example, if a European company structures itself to conduct compliant business with Iran and seeks certification from EU-OFAC of its due diligence, but nevertheless ends up being penalized by the United States for unknowingly working with an SDN entity, the company could seek mediation from EU-OFAC with regard to enforcement action by U.S. authorities, as well as compensation from the European Union for any eventual penalty. Moreover, EU-OFAC could also offer companies assistance in seeking waivers or licenses from the U.S. government.

There are also complementary steps that can be taken by the private sector, with the support of EU-OFAC. In Germany, a small group of credit unions have established an “international competence center” to pool resources and centralize expertise on Iran-related transactions. In a recent interview, Patrizia Melfi, the center’s director, said that the banks’ supervisory board had given a green light to continue work with Iran despite the U.S. withdrawal from the Iran deal. In Melfi’s assessment, the imperative is “to be well informed and conduct detailed checks of the companies’ deals.” If these steps are taken and European entities comply with the current export controls in both Europe and the United States, Melfi said, then they won’t face any consequences.

The competence center model shows how better coordination among banks could help boost confidence in compliance throughout the private sector. European leaders should help establish a Europe-wide industry association for banks facilitating Iran transactions. EU-OFAC could play a coordinating role as part of a public-private partnership, helping such an industry body by developing compliance solutions, offering training and technical assistance, and even providing financial support. EU-OFAC could also serve as a partner for Iranian government institutions on collaborative projects focused on financial integrity.

In the area of legal protection, EU-OFAC would need to give gateway banks stronger legal protections within Europe itself. Presently, funds that originated in Iran cannot move freely within the Single Euro Payments Area, as many banks simply refuse these funds. The credit transfer rules set by the European Payments Council allow banks to turn away transfers connected to people or jurisdictions that represent higher sanctions or financial crime risks. For most banks, any link to Iran is a red flag, even if the transaction has been subjected to significant due diligence by the originating bank. Moreover, individuals and companies engaged in Iran trade and investment have experienced the arbitrary closure of their accounts, as European banks seek to avoid the costs of conducting additional “know your customer” due diligence.

For the new banking architecture to function properly, European authorities must work to ensure that Europe’s financial system does not self-sanction by isolating or discriminating against individuals or entities that maintain financial links with Iran. To address the issue of legal protections, the establishment of EU-OFAC could be linked to the planned revival of the so-called blocking regulation, which makes it illegal for European companies to comply with U.S. sanctions. Though largely symbolic in its current guise, the blocking regulation could be strengthened to give European courts more power to punish instances of discrimination or arbitrary denial of services.

European authorities plan to issue new guidance regarding the implementation of the blocking regulation if it is revived in August. This guidance could reflect the role for EU-OFAC in ensuring that the blocking regulation does not merely codify the legal ramifications of European compliance with U.S. sanctions but also more clearly addresses the consequences of European noncompliance with EU law. Presently, the blocking regulation threatens financial penalties for European companies that comply with U.S. secondary sanctions. But these penalties have rarely been used and place companies in the difficult position of weighing the cost of U.S. enforcement action against that of EU penalties. A more effective approach would be to penalize European companies that deny services to European individuals or entities that maintain links with Iran even though they comply with U.S. secondary sanctions.

European authorities could ensure that the blocking regulation is linked to the legal framework that underpins the Single Euro Payments Area, requiring that banks demonstrate legitimate regulatory concerns as grounds for rejecting transfers of Iranian-origin funds from another European financial institution. Any concerns would need to be judged to outweigh the more robust due diligence and licensing protocols put in place by EU-OFAC.

Recently, an unnamed bank in Ireland was fined 20,000 euros, about $23,000, for closing the accounts of an Iranian-born couple in what Ireland’s Workplace Relations Commission determined to be a case of racial discrimination. The bank had closed the accounts citing U.S. sanctions risks, but Irish authorities determined that the bank had “alternative methods to counter money laundering/terrorist financing and US sanction breaches” beyond simply closing the accounts, such as “the implementation of robust IT systems and procedures.” The blocking regulation could draw on the same legal interpretation, prohibiting the denial of service by EU companies in instances where technology and due diligence procedures, especially as devised by EU-OFAC, could satisfy compliance obligations.

Establishing an EU-OFAC that enhances compliance competency and legal protections for gateway banks would have a transformative impact on the ability of European businesses and banks to pursue opportunities in Iran. These measures will be most effective for those companies with a major presence in Iran or that have limited exposure to the U.S. market. But if the EU can support a critical mass of these companies, it could be instrumental in demonstrating European resolve on the issue of economic sovereignty and protecting the promised economic dividends of the nuclear deal.

No doubt, placing such an agency at the center of a new banking architecture will take considerable political effort and coordinated action among the European Commission, European Parliament, and member state governments over the course of the next year. The story of the European Union so far has been one of improbable coordinated action. The defense of the Iran deal could become a compelling new chapter, and EU-OFAC should be its protagonist.