May 18, 2016

Access to finance, insurance and due diligence concerns are dissuading businesses from entering Iran

The key barrier for companies looking to do business in Iran following the much heralded sanctions relief of Implementation Day is the lack of access to finance, largely caused by the remaining US sanctions. Broader concerns surround the application of US sanctions to non-US persons and the need for enhanced due diligence on Iranian counterparties, creating further obstacles to trade.

It is not simply the availability of credit that is affecting potential trade with Iran; getting money out of Iran is also a major problem.

In a recent survey carried out by Clyde & Co, 25% of senior executives of business looking to enter the Iranian market listed the remaining US sanctions as their top concern for doing business in Iran, more than any other category. It is understood that this concern relates predominantly to the impact of those sanctions on financial institutions and dollar transactions and consequently the impact on access to finance and the transfer of funds. 

Although there has been significant sanctions relief following Implementation Day, the US sanctions that remain in place are proving a strong disincentive to businesses looking to do business with Iran, and even more so to their financiers. On "Implementation Day" the vast majority of Iran-related EU sanctions and US secondary sanctions were lifted. This means that, broadly, it is permissible for EU persons to trade with Iran subject to certain restrictions including the inability to trade with designated entities. There is also scope for US nationals to legally establish non-US subsidiaries, which would allow US companies to indirectly trade with Iran.

However, US primary sanctions – those US sanctions targeting US persons (both US individuals and entities) – remain in place. This means that virtually all trade, directly or indirectly, with Iran is still prohibited for US persons.  The remaining US sanctions are a concern, not because the US sanctions apply directly but due to the uncertainty amongst exporters and their financiers about the consequences of breaching the remaining sanctions.

Access to credit

To date, European tier one banks have so far shown zero appetite for conducting Iran-related business. This means businesses are unable to access credit to fund their business with Iran and in some cases are unable even to use their bank accounts to effect the transfer of funds generated from Iranian business. The extent of the problem is evidenced by 30% of respondents revealing that they were not comfortable talking to their current banks about their appetite to do business with Iran.  

The high level of regulation involved is proving too arduous for most banks, coupled with concerns over handling Iran related business. In these conditions, while Iran and the UK are keen to develop trade ties, the banks are preventing such ties from being developed at pace and unless they can be encouraged to process payments relating to Iran the opportunity for such ties will fade and the UK will find itself at the back of the queue.

Dollar transactions

It is not simply the availability of credit that is affecting potential trade with Iran; getting money out of Iran is also a major problem. The US dollar is the most liquid currency in the world and is therefore used in lots of global businesses contracts, particularly in the energy and commodities areas.

Nearly all US dollar transactions have to clear via the US banking system. If such transactions are linked to Iran-related business, they will be blocked by the US bank and/or potentially place the clearing bank in breach of sanctions.

Therefore US dollars cannot be used for such business, which is a major problem as a large proportion of international companies conduct their business in dollars. The alternative of trading in a different currency is more expensive, as it can often require hedging.

Lack of insurance cover

Insurers are in a similar position to other businesses and the remaining sanctions are negatively impacting their risk-appetite for doing business with Iran. The survey revealed that just 36% of business said they had been able to get insurance cover for their proposed business activities in Iran.

There are however specialist financial providers set up to specifically help UK exporters by providing them with insurance and guarantees to banks to share the risks of providing export finance.

Due diligence concerns

Another concern is that exporters may unwittingly trade with a designated person or entity. The survey revealed that 58% of businesses looking to enter Iran do not feel confident that they know what level of due diligence is required in order to protect their investments and avoid enforcement action from the regulators.

The remaining US sanctions are not the only problem. There are still a significant number of individuals and entities that are listed by the EU/UK and US (including the Islamic Revolutionary Guard Corp which is heavily involved in the Iranian economy). This creates significant compliance challenges as information on counterparties is not as readily available as in other countries. The risks of getting this wrong are substantial so extra caution is required before entering any contracts and businesses are right to be concerned about their due diligence requirements.

Clyde & Co survey

*100 Senior Executives of a range of UK headquartered international firms, with plans to enter Iran, were surveyed.

Clyde & Co conducted the survey at a seminar in London held in conjunction with the London Chamber of Commerce and Industry on the Iran-related sanctions relief. Talks were given by the following:

  • Rt Hon Jack Straw
  • Peter Bishop, Deputy Chief Executive, London Chamber of Commerce and Industry (LCCI)
  • Nicholas Hopton, Head of Mission, British Embassy Tehran
  • Derek Berman, Deputy Managing Director, Worthy Technologies Limited
  • Julian Lynn, Export Finance Adviser, UKEF
  • Jonathan Bailey, Head of Corporate Affairs, International Airlines Group
  • John Whittaker, Clyde and Co

If you have any questions regarding how the changes following Implementation Day affect your business specifically, please contact a member of our sanctions team or your usual contact at Clyde & Co.