European finance departments brace for new Iran sanctions

A year ago this week, French energy company Total SA announced a contract with National Iranian Oil Co. and other partners in a crucial development and production phase of South Pars, billed as the world's largest gas field.

The multibillion-dollar project — designed to produce the equivalent of up to 400,000 barrels of oil per day and intended to supply gas to the Iranian market starting in 2021 — was a key element in Total's strategy to expand in the Middle East.

"We are proud and honoured to be the first international company to sign an IPC [Iranian petroleum contract], which offers an attractive commercial framework, following the 2015 international nuclear accord (JCPOA) and to therefore contribute to the development of relations between Europe and Iran," Patrick Pouyanné, Total's CEO, said in a statement at the time. "Total will develop the project in strict compliance with applicable national and international laws."

But ten months later, the company's involvement in the project was in jeopardy. US President Donald J. Trump had announced plans to withdraw from the nuclear agreement and reinstate sanctions that could punish companies who do business in Iran, particularly those who need access to US lenders.

That left Total with a choice: Unwind its operations in South Pars or face sizeable penalties and the loss of financing.

Lacking a waiver from the US and considering the financial underpinnings of its business — US banks are involved in more than 90% of its financing operations, US shareholders represent more than 30% of its shareholdings, and US assets represent more than $10 billion of the capital it has employed — Total chose to stand down, losing tens of millions of euros in the process.

"Total has always been clear that it cannot afford to be exposed to any secondary sanction, which might include the loss of financing in dollars by US banks for its worldwide operations," the company said in a statement in May, days after Trump announced his plans to pull out of the agreement.

Total's dilemma is not unique. Many European businesses find themselves in a precarious bind with billions of dollars of business at risk after the US's decision to abandon the nuclear deal. Companies such as Peugeot, Airbus, Volkswagen, Maersk, and dozens of others are now under intense pressure to definitively clarify their positions and liabilities in the face of US constraints. 

"European companies with exposure to US markets and the US financial system face a stark choice: Do they risk their US business to continue dealing with Iran, or do they pull out of Iran as soon as possible?" Robert Price, an associate in the Latham & Watkins LLP export controls, economic sanctions, and customs practice in London, said in an email. "If European companies continue to deal with Iran in breach of secondary sanctions, there is a risk that they will be targeted for severe penalties by US authorities."

The Joint Comprehensive Plan of Action (JCPOA) was signed in July 2015. Through it, China, France, Germany, Russia, the UK, and the US agreed to lift economic sanctions on Iran. Iran, in return, would begin to unwind its nuclear weapons capabilities.

For most companies, the heart of the issue with the US's decision to pull out of the deal is continued access to the American financial system. The new rules announced by the Trump administration make clear that any company doing business in Iran and passing money through the American financial system faces stiff penalties.

"The most extreme penalty for noncompliance with US secondary sanctions is that a European company could be shut out of the US financial system," Price said. "For example, a European company could be prevented from processing financial transactions that touch the US banking system, its property could be blocked, and it could be refused authorisations to do business in the US."

Financial managers now play a key role in shaping how companies respond to the new Iranian reality and how they will move forward in preventing significant loss. But they'll need to move quickly as US sanctions, and related penalties, are set to be in full effect by November of this year.

"CFOs should help their companies conduct risk assessments on possible touch points with Iran, which could include direct dealings with Iran that were previously authorised under the JCPOA, investments with counterparties who are engaged in activities in Iran, or third-party distributor arrangements," Ama Adams, a partner in the international risk practice at Ropes & Gray LLP's Washington office, said in an email.

Financial managers will have to act conclusively in the coming months, but that is a significant challenge in the face of mounting uncertainty.

"The biggest difficulty is working out what is permissible and what isn't permitted because it's now quite complicated," said Maya Lester QC, barrister at Brick Court Chambers and co-author of europeansanctions.com. "Doing business in Iran is now more complicated and more risky."

Several experts offer guidance on how to navigate this tangled and difficult moment.

Know the law. While the way forward for European companies is opaque and uncertain, the Trump administration has made its legal expectations quite clear. The Office of Foreign Assets Control (OFAC) of the Treasury Department has issued an Iran sanctions-related FAQ, along with the President's National Security Presidential Memorandum (NSPM), that lays out what is now prohibited by the US government.

Adams recommended paying close attention to those rules as companies begin to act.

"CFOs will need to closely monitor guidance from OFAC on winding down operations with Iran to ensure that any efforts to terminate Iran-related business are conducted in accordance with relevant laws," she wrote.

However, for European companies, American laws are just one piece of the puzzle. The EU is considering new laws in response to Trump's decision, including blocking legislation that could theoretically negate American laws and punish companies for observing them. Companies will need to take a global view of the competing legal and regulatory demands and have a full grasp of the law before acting.

Seek help. Gaining an expansive understanding of global legislation in such a short period requires outside assistance. Financial managers should seek out specialists to help them navigate the next few months.

"The first thing they'll do is take advice, if they haven't already, on what they're allowed to do, as of now, and what they're not allowed to do," Lester said. "Whether it's possible for them to carry on doing what they're doing without exposure."

Look for consultants who can offer a sanctions risk assessment, sanctions vendor and partner screening, executive sanctions training, and transaction monitoring procedures.

The price of a misstep in this instance could be disastrous for a company, so it is best to ensure that every step comes with solid advice and counsel. Seeking such assistance is an action many are already taking, according to Price.

Since Trump's announcement, there has been "a surge in demand for advice on the risks associated with the re-imposition of American secondary sanctions" at his firm's sanctions practice, he wrote.

Move fast. Trump's announcement didn't give companies much time to react. After a staggered wind-down, US sanctions will be in full effect 180 days after his May announcement and the US administration has already made it clear that no exemptions will be issued, despite requests from the German, British, and French governments, according to press reports.

Thus, companies will have to make decisions very quickly and financial managers will need to begin shifting financial flows to avoid violations. That decisiveness will be difficult to achieve without clear guidance from the EU and amidst shifting political realities, but, with a clear understanding of the law and sufficient expert advice, it's wholly possible.

Drew Adamek (Andrew.Adamek@aicpa-cima.com) is an FM magazine senior editor.