Turkish Law Blog
Buyer Beware: Note to Turkish Companies Doing Business in Iran
The Evolving Relationship between Iran and Turkey
Ever since the US withdrew from the Iran nuclear deal in May 2018 and re-imposed secondary sanctions against Iran in November 2018, anxious Turkish entrepreneurs have been lobbying the Turkish government to find solutions that would allow them to avoid these sanctions. The Turkish business world sees the cultural and geographic proximity of the two countries as a pathway for more significant economic opportunities in light of reduced international investment resulting from US sanctions. To that end, on December 2018, the two governments set a target of $30-billion for their annual trade and, on June 2019, agreed to form a “strategic partnership” to boost existing bilateral trade.
At first glance, the apparent opportunities from this partnership appear to be rather tempting for Turkish businesses. However, at a time when tensions between Ankara and Washington are rising over a number of issues, including Turkey’s purchase of Russian-made S-400 air defense systems and resulting ejection from the F-35 Joint Strike Fighter program, there are risks for Turkish companies engaging with Iran.
In May 2018, President Trump pulled the US out of the Joint Comprehensive Plan of Action, (“JCPOA”), popularly known as the “Iran nuclear deal”. The deal, which had been in effect since January 2016, was designed to afford Iran economic relief by waiving extraterritorial “secondary” sanctions targeting that country in exchange for Iran’s agreement to curb its nuclear program and allow international inspections to ensure compliance. This relief had the effect of opening up Iran for investment and economic trade with non-US partners (although “primary” sanctions restricting US persons and companies from dealing with Iran remained in place).
In furtherance of the President’s May 2018 announcement, the Trump administration fully re-imposed sanctions on Iran that had been waived under the JCPOA in two phases, with the second phase of “snapback sanctions” taking effect on November 5, 2018. The other signatories to the JCPOA – China, France, Russia, United Kingdom, and the European Union – have attempted to find solutions to bypass the US secondary sanctions for EU companies to continue doing business in Iran. In particular, the European signatories have attempted to form a “special purpose vehicle” – called the Instrument in Support of Trade Exchanges (“INSTEX”) – that would facilitate trade with Iran without using US dollars or the SWIFT financial messaging service to avoid triggering US sanctions. The Turkish government also signaled its intention to explore establishing a similar trade mechanism.
The Turkish Government protested against the sanctions by issuing a public statement via Foreign Minister Mevlut Cavusoglu: “We do not accept unilateral sanctions and impositions on how we build our relationship with our neighbors.” Turkey may also entertain the EU option of enacting national laws, such as a Blocking Statute, to encourage Turkish companies to disregard the US sanctions. However, such an approach would violate US laws and risk the blacklisting of Turkish companies.
What are US Secondary Sanctions?
US “primary” sanctions restrictions are triggered when there is a “US nexus” to the transaction – that is, the transaction takes place in the US or involves US persons, US products, or US dollars. However, the absence of connection to the U.S alone does not shield Turkish companies from extraterritorial secondary sanctions given the preeminence of the US financial system and strength of the US dollar. Accordingly, it is unlikely that any work-around, such as INSTEX or similar special purpose vehicle, would adequately protect against the threat of secondary sanctions and the consequential isolation from foreign markets.
US secondary sanctions against Iran target specific industries and categories of transactions. The secondary sanctions that fully “snapped back” in November 2018, for example, include transactions involving:
- the purchase or acquisition of US dollar banknotes by the Government of Iran;
- Iran’s trade in gold or precious metals;
- graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
- purchase, sale, or maintenance of funds in Iranian rials;
- Iranian sovereign debt;
- Iran’s automotive sector.
- Iran’s port operators, and shipping and shipbuilding sectors;
- petroleum-related transactions;
- transactions by foreign financial institutions with the Central Bank of Iran and providing specialized financial messaging services (e.g., SWIFT) to the Central Bank of Iran;
- providing underwriting services, insurance, or reinsurance; and
- Iran’s energy sector.
Most recently, on May 8, 2019, the Trump Administration issued secondary sanctions targeting Iran’s iron, steel, aluminum, and copper sectors, and on June 24, 2019, authorized secondary sanctions for transactions involving the Supreme Leader of the Islamic Republic of Iran.
The US maintains several blacklists of sanctioned parties, the most prominent and restrictive of which is the Specially Designated Nationals and Blocked Persons (“SDN”) List. Notably, the SDN List is not a fixed list, and is frequently updated, sometimes on a daily basis. Further, US regulators treat entities that are 50% or more owned by one or more SDNs as subject to sanctions, whether or not those entities are themselves identified on a sanctions list. Compliance with SDN restrictions on Iran is especially complex because the Islamic Revolutionary Guard Corps (“IRGC”), which is subject to SDN restrictions, owns and otherwise controls vast swaths of the Iranian economy.
To trigger secondary sanctions, a transaction must generally be “material” or “significant.” Whether a transaction is “material” or “significant” is a fact-specific analysis that may not yield a clear answer. Ultimately, a company’s risk tolerance may be the final determining factor for whether it decides to engage in a transaction that could potentially trigger secondary sanctions liability.
How could Turkish Companies be Affected by Secondary Sanctions?
A Turkish company engaging in a transaction that potentially violates US-imposed secondary sanctions against Iran is at risk of itself being designated as an SDN by the US. For Turkish companies with US connections (for example, US employees, US customers or suppliers, US dollar accounts, etc.), an SDN designation would essentially cut them off from the US economy. While this consequence may at first not seem significant for a Turkish company without any US connections, an SDN designation would drastically reduce the willingness of other non-US third parties to conduct business with the company. For reputational and other reasons, banks, insurers, and freight forwarders often apply a heightened level of compliance scrutiny that goes beyond the minimum required by the US, and may, therefore, be unwilling to engage even in transactions that are permissible as a matter of law.
With the deteriorating foreign relations between the US and Turkey and the Turkish government’s publicly stated policy seeking to increase economic ties with Iran, Turkish companies should be aware that US regulators are closely scrutinizing Turkish transactions that could involve Iran. Over the years, US government agencies have regularly interdicted transactions that violated US embargoes – both by physically intercepting shipments and electronically blocking funds transactions – including those which sought to evade sanctions in order to divert products to Iran. Because of US surveillance capabilities and sophisticated knowledge of evasion techniques, it is not typically effective for ships to turn off their transmissions systems to avoid detection or use messaging apps to send signals of false locations. Although some entities will likely always continue to attempt to evade US extraterritorial restrictions, at present any form of workaround to engage Iran presents a significant risk of secondary sanctions.
Turkish companies doing business in Iran must gain an in-depth understanding as to ever-evolving changes resulting from US sanctions and seek advice accordingly. Understandably, Turkish companies may be emboldened by their government’s defiantly stated policy for Turkish businesses to continue doing business in Iran. Notwithstanding the encouragement of such “solutions,” Turkish companies should be aware that they could face a risk of secondary sanctions liability and should weigh the decisions to engage in those transactions accordingly.