The International Institute for Strategic Studies (IISS)

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1 The International Institute for Strategic Studies (IISS) UN SANCTIONS ON IRAN: PAST AND FUTURE DEVELOPMENTS AMMAN, JORDAN, FEBRUARY 2015 WORKSHOP REPORT In on-going collaboration with the United Nations Panel of Experts on Iran, established pursuant to UN Security Council Resolution 1929 (the Panel ), the International Institute for Strategic Studies (IISS) held a workshop in Amman, Jordan on February 2015 to discuss the challenges of implementing sanctions on Iran and share best practices for compliance. The workshop convened more than 50 government officials and industry representatives from six states in the region along with experts from the UN Panel, North America and the IISS. The meeting was mainly devoted to UN sanctions and export control measures and included sessions on conventional arms transfers and the ongoing negotiations, accompanied by an assessment of potential future sanctions developments. Participants also discussed unilateral sanctions imposed by the EU, the US and Canada many of which have a secondary impact. Summary The four rounds of UN Security Council (UNSC) sanctions on Iran are part of a dual-track strategy of diplomacy and restrictive measures aimed at impeding progress toward a nuclear weapons capability and thus allowing time for negotiations. Reporting of interdictions of Iranian procurement efforts appears to have decreased but it is unclear whether it can be attributed to a change in Iran s behaviour or whether member states are simply wary of negatively impacting the ongoing negotiations. It is a responsibility of the state to ensure national-level compliance; this pertains not only to its territory but also to entities and individuals who are under its jurisdiction. Lack of awareness, knowledge, and appropriate capacity are a common problem among member states. States are often reluctant to share information internally and with external partners, which is crucial to effective export controls, because of the sensitive nature of the information involved. Executed

2 2 properly, it would significantly increase the speed of sanctions implementation. The private sector is important, as it serves as the first line of defence and often bears the consequences. Iran has developed extensive sanctions circumvention efforts with a global reach and employing all modes of transportation. In particular, Iran has sought to procure dual-use goods and below-threshold items, and employed various means of obscuring the end-use and enduser. Methods of concealment have become more sophisticated and complex. In contravention of the UN mandate, Iran also increasingly exports conventional arms. Sanctions are at the very core of the ongoing negotiations, which shows their importance, both symbolically and in practice. In the event of a successful conclusion of the negotiations it is unclear what will become of the sanctions regime. At a minimum it will need to be modified, if not rescinded. If a comprehensive deal is reached, the UNSC will also have to consider the issue of monitoring authorised procurements. United Nations Panel of Experts on Iran The United Nations Panel of Experts on Iran ( Panel ) has a mandate to gather and examine information from member states regarding the implementation of the relevant resolutions, in particular incidences of non-compliance, which are then to be reported to the UN Sanctions Committee (same membership as the Security Council) The Panel comprises eight independent experts and provides yearly reports to the Sanctions Committee, in which more than 40 cases of non-compliance have been recorded thus far. In addition to raising awareness, particularly in the private sector, the Panel is also tasked with carrying out inspections in the instances when a member state has reported a case of presumed non-compliance. The Panel carries out outreach activities as well, often in the form of regional seminars. One message of these seminars is that all countries, not just those in Iran's neighbourhood are potential targets of illicit procurement. United Nations sanctions regime The four rounds of UNSC sanctions on Iran are part of a dual-track strategy of diplomacy and restrictive measures aimed at impeding progress toward an Iranian nuclear weapons capability, thus allowing time for negotiations. Four UNSC sanctions resolutions are in place: UNSCR 1737 (2006) requires Iran to suspend its proliferation-sensitive activities, and its targeted sanctions are meant to prevent transfer of materials for enrichment as well as heavy water and reprocessing activities; all this is accompanied by an assets freeze. UNSCR 1747 (2007) adds an arms embargo to and from Iran, including related material and spare parts, in addition to some financial sanctions.

3 3 UNSCR 1803 (2008) imposes a travel ban and requires financial vigilance, in particular with respect to certain banks, and adds the element of inspections at sea. UNSCR 1929 (2010) extends the prohibition of arms exports to Iran to related material and ballistic missiles; paragraph 13 provides a catch-all clause and additional financial sanctions are imposed, with a focus on insurance, which has proven to have a great impact. It also requires additional vigilance with respect to certain Iranian entities, such as the Islamic Republic of Iran Shipping Lines (IRISL) and the Islamic Revolutionary Guard Corps (IRGC). It also creates the Panel of Experts. Iran s illicit procurement to date Despite sanctions, Iran has continued to illicitly procure items required for its prohibited nuclear and missile programmes, including alloys, carbon fibre, inverters and gyroscopes. But sanctions have made procurement more difficult, costly, and risky. In response, Iran's procurement patterns have significantly changed, using much more complex routes and involving multiple countries, multiple intermediaries and complex dissimulation. Expanded modes of transportation include foreign shipping lines, air cargo and land transportation. Iran uses its diaspora and front companies in neighbouring countries; it has become more adept at obscuring end-user, and has often attempted to procure below-threshold items which do not meet the technical criteria of prohibited items. Iran uses a wide array of financing methods, from barter, to payments in advance, to using small Iranian banks to facilitate transactions. Of late, reporting by member states of Iranian procurement efforts appears to have decreased but it is unclear whether this can be attributed to a change in Iran s behaviour or whether member states are simply wary of negatively impacting the ongoing negotiations. Impact of the Sanctions Regime The impact of sanctions is difficult to measure, in part because UN sanctions are based on, and interconnected, with unilateral measures and the decreased price of oil. That sanctions have an impact is clear by Iran s increasingly complex circumvention patterns, which have not been without their cost and risk to Iran. Sanctions have also played a role in encouraging Iran to engage seriously in negotiations. One area where sanctions have made a tangible, direct impact was the EU decision in 2012 to cut Iran off from the SWIFT system. In many instances transactions stopped altogether. An important indirect impact is the slowing down of the prohibited nuclear and ballistic missile programmes. 1 Some of the cases of alleged sabotage of 1 For example, Iran has been unable to operate advanced-generation centrifuges in significant numbers, produce the full number of uranium fuel pellets needed for the Arak research reactor, or acquire reliable ingredients for solid-fuelled missiles.

4 4 these activities, for example, may be due to procurement of goods of suboptimal quality as Iran purchased below-threshold items to circumvent sanctions. Regional Experiences Participants highlighted the weakness of the sanctions regime at the juncture with legitimate trade. In some countries, imports may have increased due to Iran s use of different routes. Transit countries, including Jordan, face a challenge between monitoring transit and attracting investment. Jordan has also faced some challenges with respect to end-user identification; it has requested help in this area from the United States. Many states in the region also struggle with the technical capabilities necessary for their customs and border agencies to appropriately respond to illicit procurement attempts. Of particular need is the ability to link customs offices into an efficient network. More broadly, the need for information-sharing was highlighted by several participants. A discussion about registering Iranian companies ensued. In Jordan, for instance, there are only ten Iranian companies registered at present; no new ones have been registered since What constitutes an Iranian company, however, is not as straightforward as it may appear. Whether one looks at the direct shareholders and where they are based, or whether layers of ownership are parsed, perhaps in offshore jurisdictions, it may lead to different conclusions. Since a third party is sometimes involved, this determination is often challenging. In the United Arab Emirates (UAE), for instance, the situation has changed in recent years, particularly since It is very difficult for companies to operate in the free zones if the real owners are Iranians; even if only a portion of the company is controlled by an Iranian, the application will likely be rejected on the grounds of national security. As one participant put it, in the UAE everything that is Iranian must be handled differently or not at all. Iranian citizenship is not the only criterion: being born in Iran tends to be sufficient grounds for a rejection of applications. Even companies that were legitimately registered many years ago but had Iranian shareholders at some point, face some difficulties. In Jordan, too, this information is carefully analysed previous citizenship, for instance, is an important factor. Many participants voiced concerns about the inadvertent consequences of the sanctions regime, where the fear of non-compliance has led to what could amount to discrimination of Iranian citizens. One speaker noted, however, that this is partly because Iran has intentionally comingled legitimate and illicit trade. An example given was the Post Bank of Iran providing financial services to, and acting on behalf of the sanctioned Bank Sepah.

5 5 Export controls: challenges and best practices Sanctions and export controls are inextricably linked without one, the other cannot be properly implemented and tested, and the weak points cannot be identified. The role of export controls, contrary to what it may seem, is not only to create a control mechanism, but, as a Panel expert pointed out, to also facilitate legitimate trade. It is a responsibility of the state to ensure compliance on the national level; this pertains not only to its territory but also to entities and individuals under its jurisdiction. For controls to remain effective they need to be continuously updated and authorities need to be informed of changes without delay. Interagency cooperation plays a vital role in this regard, as does an appropriate administrative structure and training; adjusting licensing parameters as well as risk management systems; creating a process which will enable the identification of sensitive goods that are below the technical threshold; end-user checks; and information-sharing. The enforcement of export controls should include inspections of all cargo to and from Iran, with special vigilance with respect to certain entities. In the realm of enforcement, reporting is crucial - not only with respect to reports on the implementation of requirements and individual implementation measures but also incidents of alleged noncompliance. As participants pointed out, reporting requirements are unclear at times, which exacerbates the problem. Export controls in themselves face a number of challenges. At the root of some of these challenges is the nature of controlled goods; dual-use items tend to be particularly problematic in this respect. Moreover, because the relevant resolutions are a product of compromise, their language is often ambiguous. It is up to the member states to make the determination, which challenges the universality of the sanctions regime. Lack of awareness, knowledge, expertise and appropriate capacity is also a common problem among member states. Information-sharing is often difficult because of the sensitive nature of the information involved. Executed properly, it would significantly increase the speed of implementation and allow member states to react more promptly. Interagency cooperation mechanisms can be created on the basis of existing mechanisms; they should, however, include all relevant actors, not only those traditionally involved in export controls. The private sector should also be involved, from manufacturers to distributors, to freight forwarders. One example of interagency cooperation worth noting is Saudi Arabia s Permanent National Committee, chaired by the Ministry of Foreign Affairs and composed of the Ministries of: Defence, Interior, Finance, Commerce, Justice, Transport and Higher Education, as well as the Saudi Arabia Monetary Agency, Saudi Customs, General Intelligence Presidency, Ports Authority Agency, Civil Aviation Commission and the King Abdulaziz City for Science and Technology. So-called below-threshold items are of significant concern. This term refers to items that do not meet the technical threshold of a prohibited item; often these items are not controlled in any way. They should be covered, however, by catch-all controls. Member states are required to make a determination themselves and seize the item if they conclude that it would make a

6 6 contribution to Iran s sanctioned programmes. However, there is no consensus with respect to the technical threshold. As one answer, some member states have created lists of so-called chokepoint items, which focus on rare items, items produced by a very limited number of manufactures, or whose technical specifications are very high. Because of those characteristics, it is relatively easy to identify such items and stop their exports. As a Panel expert pointed out, it is important not to focus solely on the quantity of the procured items: Iran has in the past attempted to procure the same item from different suppliers in limited numbers each, in order not to arouse suspicions. To make the proper determination, the potential end use and end-user need to be considered as well. Another challenge highlighted by a Jordanian participant was the issue of transhipment of nonsanctioned goods through Iran. One of Jordan s transportation routes used to lead through Syria; with the current turmoil there, Jordan now faces the challenge of finding an alternative route. Use of the Transports Internationaux Routiers system helps ensure proper identification. Yet it remains the responsibility of the national customs agency to ensure that the shipped goods reach the correct destination and in their proper form. This may be challenging, considering that there exists a possibility of a container being opened in Iran, and sensitive items illegally concealed there in the process. One solution suggested was the applications of seals and double-checking the contents of the containers, preferably in the presence of the manufacturer or the distributor themselves. Investigating Instances of Non-Compliance Upon seizing a suspicious shipment, a state is required to report to the UN s 1737 Sanctions Committee. Then, ideally, the Panel would be invited to carry out an investigation, with the member state providing all relevant documentation and briefings on the interdicted items; in some instances, samples of items are sent to the Panel. The Panel s subsequent factual reporting passes no judgement on the state, whose identity can be omitted in the reports that are made public. Member states should not perceive an uncovered circumvention as any sign of laxity on their part and avoid reporting; to the contrary, reported interdictions are a demonstration of enforcement vigilance. Although some states are reluctant to report on cases while legal proceedings are under way, other states see no reason not to delay reporting to the UN for this reason, which greatly facilitates Panel s work. The Panel faces a number of challenges in its investigations. It is sometimes invited to conduct an inspection with the items no longer physically available returned to the sender or raw materials having been already processed. In other instances, access to appropriate documentation can be challenging. In other cases, identifying the individuals or entities involved is difficult, which is exacerbated by the fact that freight forwarders and trading companies have often not been designated by the UN. Many shipments have been stopped on the basis of intelligence provided by third parties to which the Panel does not have access.

7 7 Risk indicators identified by the Panel include: Reluctance by the customer to share information on end-use and end-user; Inconsistency between enquiries and the customer s business activities; Inconsistency between the technical properties of the items of interest and the technical capability of the destination country; Potential purchasers with little or no relevant business background; Offers of abnormally favourable terms of payment; Purchasers eagerness to acquire products despite unfamiliarity with their properties; Refusal to accept standard post-sales services, such as installation, maintenance or training; Enquiries which lack specific dates by when delivery is necessary; Trading or transportation companies named as consignees; Unusual transportation routes for export, or unusually remote destination; and Use of postal address by purchaser. Impact on the private sector The role of the private sector cannot be underestimated, as it serves as the first line of defence and often bears the consequences. Compared to when the sanctions were first adopted, channels of communication have been established between the private sector and many national authorities, and effective internal compliance procedures have been implemented. Ultimately, the private sector should be viewed as a partner by the authorities. It is important to remember that sometimes lapses in export controls happen by genuine accident and excessive punishment in such instances may create a disincentive for the private sector to share information with the authorities. Instead, the private sector can be rewarded for such cooperation, for example through favourable licensing regimes. Conventional arms transfers In clear contravention of UNSC resolutions, Iran has exported conventional arms to several countries, most prominently Syria, Yemen, and states in Africa; Bahrain and Iraq have also been mentioned. It is worth noting that the transfer of arms includes import, export, re-export, temporary transfer, trans-shipment, transit, transport, leases, loans and gifts of conventional arms, as well as the transfer of title or control over the equipment and the physical movement of the equipment into or from a national territory. One Panel expert pointed out a problem with the imprecision of the usual Arabic translation of procurement which denotes the very narrow scope of purchase rather than the broader action of obtaining something by whatever means. The prohibition of exports from Iran pertains to all arms and material, while in the case of export to Iran, only major items are prohibited: battle tanks, armoured combat vehicles, large-calibre artillery systems, combat aircraft, attack helicopters missiles and missile launchers.

8 8 Most Panel inspections to date have involved goods shipped from Iran. In those efforts, Iran has used many concealment methods, which have become more complex and increasingly sophisticated. Initially, means of transportation under Iranian control were the primary method; now Iran employs foreign vessels. Evasion tactics include forging relevant documents, hiding the consignee, using the bill of lading with different names, using consignees which are hard to trace, or freight forwarders. Iran has also employed physical concealment, hiding sensitive goods behind items consistent with the cargo declaration; for example: missiles declared as cement, comingled with milk powder or stones. Another method is obscuring the container identification and tracking through the use of Iran s own containers with unconventional labelling numbers, which makes it impossible to track the shipment through commercial databases. Transhipment ports and free trade ports are a weak link in controlling the movement of prohibited items, making it difficult to properly trace the shipping routes of illicit cargo. EU and Canadian sanctions Since 2005, concerns about Iran s nuclear programme have dominated the country s relationship with the European Union (EU). Going well beyond the universal obligation to apply UN sanctions, the EU has targeted Iran s financial, energy and transportation sectors. These are the toughest EU measures applied to any country. Importantly, they apply not only within the EU and to EU nationals, but also to any entity incorporated under EU jurisdiction. This impacts any business carried out in part or in whole in the EU, which in effect touches any transactions denominated in euro as it would have to be cleared through European banks. EU blacklists are also significantly broader compared to UN sanctions. Under the latter, only 43 individuals and 78 entities have been designated. By comparison, the United Kingdom alone has designated 472 entities whose assets are subject to freeze. Sanctions imposed on Iran by the EU magnified in In January, the assets of the Central Bank of Iran were frozen. Then, Iran s access to SWIFT was cut off, followed by a ban on imports of Iranian oil and natural gas. Subsequently, transactions between the EU and Iranian banks were banned, unless previous authorisation has been given. Although this last measure contains exceptions for goods like medicine, in practice many banks are unwilling to accept any transactions, fearful of the associated risks. Iran used to be the EU s first trading partner; after the sanctions have been applied, it is now fourth. Under the Joint Plan of Action (JPOA) in November 2013, EU suspended sanctions pertaining to insurance of transport of crude oil, petrochemical products and related services, as well as gold and precious metals. Cases have been brought against EU designations, charging that the EU failed to provide evidence sufficient to establish a link. The EU courts have often agreed the evidence must be shared with the lawyers of the designated firm; member states, however, are reluctant to do so because such information is usually based on intelligence. In most instances the EU either appealed the decision or re-imposed designation citing new grounds. Nevertheless, these litigation cases present a serious impediment to EU sanctions because when courts rule in

9 9 favour they often include penalties against the government involved. If EU sanctions are lifted as a result of a diplomatic agreement with Iran, the memory of such penalties may make government reluctant to re-impose sanctions of the same degree in the event the deal is broken. This is an argument for lifting sanctions in stages rather than comprehensively and immediately, if a deal is reached. Canadian sanctions on Iran were also imposed in a gradual fashion, with the implementation of UN sanctions starting in 2007 and unilateral sanctions being imposed in In November 2011, the scope of those sanctions increased in response to the report by the International Atomic Energy Agency delineating its concerns with respect to the so-called possible military dimensions (PMD) of Iran s nuclear programme. All financial transactions with Iran were banned on this occasion. In December 2012, sanctions were additionally imposed on goods destined for the shipbuilding, mining and metal industries, which in Canada s case had a largely symbolic dimension. Another big expansion took place in May This regime remains unaffected by the JPOA. Moreover, it is the position of the Canadian government that the PMD issue should be addressed before any sanctions can be lifted. Canada has established a mechanism under which designated entities and individuals do not have to challenge the designation in courts, but can instead do so through the Ministry of Foreign Affairs; thus far 22 entities and four individuals have been delisted through this procedure. US sanctions The United States imposes two broad categories of sanctions on Iran: primary and secondary measures. Primary sanctions arise largely from the more than a dozen Executive Orders over the past two decades and apply to US persons and transactions subject to US jurisdiction. These measures impose broad prohibitions on imports and exports of goods, services, and technology to or from Iran, both directly and indirectly. Primary sanctions are blocking measures: they eliminate access to all property and assets held in the United States, US financial, commercial and consumer markets, as well as access to the US clearing of transactions in US dollars. More than 700 individuals and entities have been sanctioned under these primary measures. Secondary sanctions have largely arisen from legislation (rather than Executive Orders) initially in the late 1990s with the Iran Libya Sanctions Act, and then more forcefully since 2010 with the Comprehensive Iran Sanctions Accountability and Divestment Act (CISADA) and statutes that have built on CISADA. Secondary measures have had a sweeping effect, restricting much of Iran s global trade. They provide that foreign firms and persons who engage in transactions with certain actors (e.g., designated banks, Iranian specially designated individuals) and/or transactions relating to certain goods (e.g., oil, petrochemicals, gold) or certain Iranian industrial sectors (e.g., automotive, energy, shipping, and shipbuilding can face restrictions on their access to the US financial system. Perhaps the most powerful potential consequence of secondary measures is for foreign financial institutions that risk losing correspondent or payable-through account access to US financial institutions. Whereas the

10 10 primary sanctions regime is largely a strict liability construct (wherein US persons can be penalized regardless the small size of a transaction and even if they had no knowledge of a sanctions violation), secondary measures require knowledge (actually knowing or a reason to know) and materiality (a significance standard with respect to size, number, and frequency of transactions). Over time, primary and secondary U.S. sanctions have begun reinforcing each other and the distinction between Executive Order primary measures and legislative secondary measures has broken down. There is significant overlap between the measures the latticework of U.S. sanctions has become more and more complex. This latticework remains largely unchanged under the sanctions relief provide for in the JPOA which is in place through June 30, 2015 and is designed to provide negotiators more space to come to a final accord. The limited sanctions relief focuses on a few specific areas of trade, such as Iran s petrochemical sector, gold and precious metals, inputs into Iran s automotive sector and crude oil exports. The complexity and diversity of authorities under which sanctions exist means that the unwinding of sanctions will be a challenge. While sanctions based on Executive Orders can be removed fairly easily with the stroke of the presidential pen, sanctions statutes will be more difficult. While most sanctions statutes have provisions for waivers or sunset clauses, some Congressional action will likely be needed in order to finally remove these measures. Prospects for the sanctions regime if a comprehensive deal is reached Sanctions may be the main sticking point of the ongoing negotiations between Iran and the E3+3. Iran wants all sanctions to be lifted entirely and immediately but this would present difficulties. US sanctions can be suspended by the president but only Congress can remove sanctions imposed through legislation. The EU sanctions, in turn, can only be lifted if all 28 member states agree. UN sanctions can be lifted by the Security Council but some members would prefer a staged relaxation. As they argue, because Iran will not be eliminating its enrichment capacity, sanctions should not be removed either, unless proper implementation of an agreement can be verified over time. The re-imposition of sanctions in the event an agreement breaks down would likely be problematic because of divisions in the Security Council. It will also be complicated to devise measures for distinguishing between procurement of items for what would be an allowable but limited enrichment programme and items for activities in excess of the limits. Rapporteur: Paulina Izewicz