Europe Takes Steps to Bypass U.S. Sanctions on Iran

Last month, foreign ministers from the E3 (France, Germany, and the United Kingdom) heralded the creation of a long-awaited alternative payments system for transactions with Iran. By doing so, Europe is acting on its pledge to keep the Iran nuclear deal alive by shielding certain transactions with Iran from U.S. sanctions.

Taken at face value, the E3’s Instrument for Supporting Trade Exchanges, or INSTEX, mechanism serves to support “legitimate trade” between Europe and Iran consisting of non-sanctionable goods like food and medicine. INSTEX also aims to add new countries to its payments system over time. While trade in permitted goods does not threaten American sanctions on Iran, such a channel has the potential to be abused and expanded, posing a serious risk to the Iran sanctions regime and to Washington’s coercive economic power.

Risks aside, INSTEX is legally redundant; by definition, it is already permissible for non-U.S. firms to engage in non-sanctionable trade. When restoring sanctions on November 5, the U.S. Treasury reiterated that humanitarian transactions with Iran could continue. Similarly, SWIFT, the financial messaging service, facilitates humanitarian transactions. Moreover, countries that have received sanctions exemptions to purchase Iranian oil will once again be depositing their payments to Iran in escrow accounts to promote trade in non-sanctionable goods. Given Iran’s access to such means and funding, the shortage of basic consumer goods at home is only due to the regime failing to prioritize the needs of its own people.

The risk of abuse related to INSTEX stems from Iran’s ongoing employment of deceptive financial practices. A 2018 Treasury advisory noted that Tehran “has long used front and shell companies to exploit financial systems around the world to generate revenues and transfer funds in support of malign conduct.” Iran has had no qualms engaging in fraudulent activity on the soil of countries like Germany that are spearheading the effort to assist Iran.

Should the E3 proceed to use INSTEX, they will be responsible if the channel is abused. As Treasury Under Secretary Sigal Mandelker warned last year, “You may think your clients and counterparties are legitimate companies. But they may in fact be part of the Iranian regime’s deceptive schemes to fund terrorism and human rights abuses.” By setting up this channel, the E3 is actively exposing its companies to the risks of supporting Iran’s malign activities.

There is also a risk that the E3 could either grow INSTEX or employ it to conduct sanctionable transactions. Indeed, the longer it functions, the more comfortable Europe may be in using such mechanisms to undermine U.S. secondary sanctions, which target non-U.S. persons that transact with sanctioned targets.

Accordingly, the Treasury Department has been “closely following reports” about attempts to sidestep U.S. sanctions and is no doubt ready to enforce its authorities in case companies step over the line. But more needs to be done to stop Europe from harboring a potential illicit finance vehicle. First, European companies should refuse to use INSTEX. These firms must recognize the risk of doing business with a country that routinely deceives its business partners to fund malign activities. Second, instead of working to establish a tool to undermine U.S. sanctions, the E3 should join the United States in taking action to counter Iran’s proliferation of ballistic missiles and support for terrorism. Now is the time for trans-Atlantic unity on Iran; INSTEX is a step in the wrong direction.

Eric B. Lorber, a former senior advisor in the Office of Terrorism and Financial Intelligence at the Treasury Department, is the senior director of the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD), where Behnam Ben Taleblu is a research fellow focusing on Iran. The views expressed are those of the authors and do not purport to reflect the official policy or views of the Department of the Treasury or the U.S. Government. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.