The Joint Comprehensive Plan of Action (JCPOA), a milestone diplomatic agreement reached on 14 July 2015 between the US, UK, Russia, China, France and Germany (P5+1), and Iran, to tightly regulate Iran’s nuclear development programme in exchange for sanctions relief, came into force to much fanfare on 16 January 2016. The implementation of the agreement, which occurs on “Implementation Day”, means that Iran is no longer subject to crippling economic sanctions by the United Nations Security Council, the European Union and (to some extent) the United States. As a result its industries may now reconnect with the international community be that through the export of oil, gas and petrochemicals or, crucially, through the provision and receipt of financial services on a global basis.
Iran: The last frontier
In 2005, Goldman Sachs named Iran as a member of the “Next Eleven”, a country with the potential of becoming one of the world’s largest economies in the 21st Century. Iran is the second-largest economy in the MENA region after Saudi Arabia and the second-most populous nation in the MENA region, with a population of around 80 million people. With 60 per cent of its population under the age of 30, Iran is a country that is young, well-educated and upwardly mobile; a demographic dividend that brings with it enormous potential. It is estimated that Iran requires investment in excess of US$200 billion to develop its infrastructure, oil and gas, power, mining, construction, finance, automobile and aviation sectors.
Living in the shadow of world sanctions
The US has imposed sanctions against Iran for the last 35 years, ever since the 1979 Revolution and the ensuing Iran hostage crisis. In the 1990s, the US instituted an almost outright embargo on Iran, features of which continue to the present day. Conversely, Europe maintained positive relations with Iran until 2006-2007 when the International Atomic Energy Agency (IAEA) identified breaches of Iran’s non-proliferation obligations. In response, the EU, in tandem with the United Nations, commenced a policy of ever tougher economic sanctions on Iran. In 2012, with the passing of Council Regulation (EU) No 267/2012 (EU Regulation 267), the EU imposed some of its toughest sanctions ever against a country and brought the EU position within a whisker of the approach adopted by the US.
The election of President Rouhani of Iran in August 2013 signalled a renewed desire to reverse crippling sanctions and, on 23 November 2013, the P5+1 agreed to an initial six month freeze and reduction of certain trade sanctions pending a final deal on the country’s nuclear programme. This window began on 20 January 2014 and was extended a number of times up to Implementation Day under the JCPOA on 16 January 2016.
Iran, post sanctions
Under the terms of the JCPOA, as adopted in the EU by Council Regulation (EU) 2015/1861 and Council Regulation (EU) 2015/1862 which amend EU Regulation 267, the following key EU sanctions on the Iranian economy and financial industry have been suspended or terminated as of Implementation Day:
- Restrictions on financial transfers to and from non-listed Iranian persons have ended. Under the previous regime most transfers of funds between EU and Iranian financial institutions exceeding certain thresholds required the prior approval of EU competent authorities
- 34 individuals and 298 entities are no longer subject to the asset freeze provisions of EU Regulation 267 including many major Iranian credit and financial institutions
- Banking activities between Iran and the EU are now permissible including the establishment of correspondent banking relationships with Iranian banks and the opening of bank accounts in Iran by EU financial institutions
- EU financial and credit institutions are permitted to open representative offices, branches or subsidiaries in Iran and establish joint ventures with Iranian financial or credit institutions
- The provision of insurance and reinsurance to non-listed entities is permissible
- The supply of specialised financial messaging services is permitted for non-listed Iranian institutions
- The purchase of crude oil and petroleum products, petrochemical products from Iran and the provision of related services to these industries is now permissible
- Shipping, ship-building and transport sectors, including businesses engaged in aviation and operating cargo vessels and oil tankers in Iran are now open for investment by EU persons
- Transactions in public or public-guaranteed bonds with Iranian non-listed entities are now permissible
However many sanctions under the much watered-down version of EU Regulation 267, mostly relating to Iran’s nuclear industry, remain in place and will do until the aptly named “Termination Day” under the JCPOA occurs on approximately the tenth anniversary of the deal. During this interim period the following restrictions on Iran continue to apply:
- Ban on investment in uranium mining and production of nuclear material and technology in Iran and between EU and Iranian persons including export and import ban on goods and technology related to nuclear enrichment or nuclear weapon systems, subject to a prior authorisation procedure
- Export and import ban on arms and goods on the EU Common Military List including weapons, military vehicles, ammunition and arms related materials
- Exports ban on materials relevant to the development of nuclear weapons delivery systems in Iran including military and ballistic missile programmes and other goods on the Missile Technology Control Regime list
- Sale, supply and export of “Enterprise Resource Planning” software designed specifically for use in the nuclear and military industries and the supply of relate services remains prohibited subject to an authorisations procedure
- Sale, supply and export of certain graphite and raw or semi-finished metals and the provisions of associated services is restricted, subject to a prior authorisation procedure
- Visa bans on persons designated by the UN or associated with or providing support for Iran's proliferationsensitive nuclear activities or for the development of nuclear weapon delivery systems. A number of humanitarian exemptions are made to the visa ban. Those individuals are also subject to an asset freeze.
- Asset freeze on entities associated with Iran's proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems, for instance by acquiring prohibited goods and other non-proliferation sanctions, remains in place following Implementation Day. Humanitarian exemptions also apply to the asset freeze
- No specialised financial messaging services may be provided to the persons and entities subject to an asset freeze
Furthermore sanctions regimes covering terrorism and human rights violations by Iran’s government (principally under Council Regulation (EU) 359/2011) remain entirely unchanged by JCPOA.
The Cyprus-Iran connection and Turquoise Variable Capital Investment Fund PLC
Harneys is the only international law firm with a presence in Cyprus. We advise on all aspects of the Cypriot financial services and nascent funds industry and offer unparalleled experience in working with the Cypriot governmental and regulatory authorities.
Cyprus is a member state of the EU and, in line with the Union’s Common Foreign and Security Policy, has fully implemented EU Regulation 267 as well as all other applicable EU and UN sanctions on Iran over the years. EU sanctions aside, Cyprus – like Germany, Italy and France within the EU – has nevertheless sought to maintain positive bilateral and diplomatic relations with Iran. Cyprus maintains an Embassy in Tehran and Iran maintains an Embassy in Nicosia. In addition a Bilateral Investment Treaty was signed between Iran and Cyprus in 2009 and an Agreement for the prevention of double taxation was signed more recently in 2015. Both treaties are in force between the two countries.
Turquoise Variable Capital Investment Fund PLC
Even prior to the relaxation of sanctions on Iran on Implementation Day, Harneys, together with Turquoise Partners – one of the foremost Iranian investment houses – worked tirelessly during 2015 to bring a new product to the market to satisfy investor demand for exposure to Iran post sanctions. That product is Turquoise Variable Capital Investment Fund PLC (Turquoise Fund), the first EU-approved Iran-oriented alternative investment fund. Turquoise Fund was launched at the turn of the year and invests in blue-chip sanctions compliant securities listed on the Tehran Stock Exchange. Turquoise Fund has been authorised in Cyprus as an alternative investment fund in full compliance with the requirements of the EU’s Alternative Investment Fund Managers Directive (2011/61/EU – the AIFMD) and applicable sanctions for institutional investment into Iran.
Under the AIFMD its manager, Fortified Capital Limited of Cyprus working with both Turquoise Partners and Charlemagne Capital of the UK, will have the right to market fund units to professional investors from across the European Economic Area, comprising all 28 EU member states plus Iceland, Liechtenstein and Norway. Through Turquoise Fund professional investors have, for the first time in many years, the opportunity to add exposure to the Tehran Stock Exchange through an EU fund vehicle subject to robust regulation and compliance. Turquoise Fund was able to benefit from the Cyprus’ government’s desire to stimulate trade with Iran with an eye to the market following Implementation Day as well as from quality on the ground back office support including ATG Fund Services Limited of Nicosia (administrator) and Who Trades Limited (depositary).
Iran and the UK Overseas Territories
Harneys advises extensively on the laws of numerous UK overseas territories which comprise lynchpins of the global institutional financial services and funds industry; jurisdictions including the Cayman Islands, Bermuda and the British Virgin Islands. In the following section we refer to these jurisdictions as the United Kingdom Overseas Territories (UKOTs).
Unlike the UK most UKOTs are not within the EU or subject directly to Iranian sanctions issued by the European Council, including EU Regulation 267. However the UKOTs must nevertheless abide by UK foreign policy which means that the EU Common Foreign and Security Policy is implemented – in general terms – within them by the back door, through the use of imperial measures issued in London and known as Orders in Council. In this way the spirit of EU Regulation 267 has been implemented in the UKOTs through the Iran (Restrictive Measures) (Overseas Territories) Order 2012 (2012 Order). The sanctions regime on Iran for human rights abuses under Council Regulation (EU) 359/2011 has been implemented in the UKOTs under Iran (Restrictive Measures) (Overseas Territories) Order 2011. As a qualification to the above, it should be noted that Bermuda additionally implements national legislation to bring the Orders into force locally.
As this article went to press we continue to await new Orders in Council (likely to be released towards the end of the first quarter of 2016) which will implement Iran sanctions roll-back in the UKOTs. Until this time the law in the UKOTs, under the 2012 Order, reflects in substance the position in the EU pre-Implementation Day.
Continuing obstacles to sanctions roll-back - US extra-territorialism and the global banking network
Irrespective of EU or UN sanctions on Iran, financial and credit institutions in the EU and beyond have become particularly weary of offending US extra-territorial ‘secondary sanctions’ designed to penalise foreign (non-US) persons that cause US persons to breach the US embargo on Iran. Eye-watering penalties imposed on blue chip institutions for unwittingly processing US dollar denominated transactions outbound from or inbound to Iran through US correspondent banking relationships have caused the global banking fraternity to take a conservative view to sanctions roll-back post Implementation Day. Nevertheless one of the core pledges of the US under the JCPOA was the suspension of secondary sanctions, though primary sanctions continue to remain in place for the time being.
In addition Iranian banks have, since 2012, been frozen out of the SWIFT international interbank messaging system. SWIFT, being a Belgian based institution, fell under the mandate of EU Regulation 267 to restrict functionality of its messaging system to Iranian credit institutions. In consequence a more informal and risky system of exchange houses developed over time to move funds into and out of Iran. Implementation Day means that SWIFT may now once again be permitted to service and accept business from the majority of top Iranian banks, a move which is fundamental to enabling proper investment into the country from institutions keen for exposure to the newest frontier market on the scene.
Food for thought
As the next largest frontier market, Iran is uniquely positioned to present substantial investment opportunities for global institutional and sophisticated investors. Harneys remains at the cutting edge of understanding the myriad rules and regulations (sanctions included) governing trade and investment between the EU/the UKOTs (such as the Cayman Islands and the BVI) and Iran. As we have experienced in Cyprus with the Turquoise Fund, now is the time to explore the exciting possibilities that this new market has to offer. Indeed, it is little wonder that securing a decent hotel room in Tehran is almost impossible these days.