U.S. Sends Europe a Mixed Message on Iran Sanctions

Is it possible that billions in contracts won't help the military hardliners?

Open for business.

Photographer: Kaveh Kazemi/Getty Images

Since reaching the nuclear agreement that lifted economic sanctions on Iran, President Barack Obama has pledged to continue to punish foreign companies that do business with the regime's powerful Islamic Revolutionary Guards Corps. 

In theory, this will chill European investment in Iran because the IRGC, along with its front businesses, controls major portions of Iran's economy in vital sectors such as oil, construction and banking. But despite recent reports of billions of dollars worth of new European investment in Iran, the U.S. Treasury Department has seen no evidence that European companies are conducting transactions with the IRGC. Many sanctions experts question whether this is really possible.

On Thursday, John Smith, the acting director of Treasury's Office of Foreign Assets Control, had a testy exchange before the House Committee on Foreign Affairs. Asked repeatedly by Representative Brad Sherman, a Democrat who opposed the Iran deal, which European companies have been sanctioned for doing business with the Revolutionary Guards, Smith couldn't name any. "I have not seen evidence of European actors continuing to do business with the IRGC," he said.

Emanuele Ottolenghi, a senior fellow at the Foundation for the Defense of Democracies and an expert on Iran sanctions, was skeptical. "There is overwhelming evidence that European businesses lining up to trade with Iran will be transacting with the IRGC," he said.

Matthew Levitt, a former Treasury official with the Washington Institute for Near East Policy, told me Smith could be "technically right," but only if one doesn't count the many front companies behind which the IRGC hides: "There is no way that major business investment is done in Iran without at some point touching the Iranian Revolutionary Guard Corps and their business enterprises."

Richard Nephew, a former State Department official who helped coordinate sanctions on Iran, conceded, "there are very few areas of the Iranian economy that the IRGC is not touching in some fashion." But he also said he believed Smith, who has "access to the totality of U.S. information," and that critics should too, "unless they can prove it beyond making assertions about bank-shot relationships."

Ottolenghi, however, said there is hard evidence that European companies have already conducted significant transactions with at least one company linked to the IRGC, Mahan Air. In 2011, the Treasury Department sanctioned the airline for its role in transporting weapons and personnel to Syria. While the U.S. removed the Interpol red notice -- basically, an arrest warrant -- on the company's managing director last month as part of the deal to free U.S. prisoners in Iran, the airline remains under "secondary sanctions," which punish third-country actors doing business with targeted entities or people.

Ottolenghi pointed out that several European companies have already begun providing ground services for Mahan Air flights landing at European airports. These include the Swedish firm Aviator and Airport Handling of Italy, which mentions Mahan as a client on its website

Sherman brought up Mahan Air at Thursday's congressional hearing. While Smith said that several parts of the U.S. government were working to stop Mahan Air flights from landing in European airports, his office had found no evidence of any European bank doing business with the airline.

Sherman was flabbergasted. "We're relying on the executive branch to enforce this deal because you are able to monitor what Iran does," he said. "And here's an example where you have a major airline doing business in dozens of cities and you can't find them doing business with a single bank."

Smith's testimony illuminates a paradox of Obama's post-deal Iran policy. On the one hand, the agreement lifts a number of sanctions on Iran's banks and companies, and even has language encouraging investment in its economy. Iran's president, Hassan Rouhani, emphasized this element of the deal last month when he visited London, Paris and Rome and signed new investment deals worth billions of dollars. Telling European companies they cannot provide ground services for Iran's second-biggest airline would undermine the goal of reintegrating Iran into the global economy.

At the same time, top Obama officials have repeatedly said existing sanctions against Iran for its human rights abuses, development of ballistic missiles and support for terrorism will be enforced. This is no small matter. Since agreeing in July to the nuclear deal, Iran has stepped up its support for Syria's dictator, conducted missile tests that violated a United Nations resolution, and waged a crackdown against internal dissent at home. Earlier this month, Iran's most powerful religious body disqualified hundreds of candidates aligned with Rouhani, who is considered a moderate, from running in elections later this month. 

The acting undersecretary of the Treasury for terrorism and financial intelligence, Adam Szubin, has sent a warning out to banks and businesses all over the world to be careful not to engage the Revolutionary Guard Corps or its front companies.  

"A foreign bank that conducts or facilitates a significant financial transaction with Iran’s Mahan Air, the IRGC-controlled construction firm Khatam al-Anbiya, or Bank Saderat, will risk losing its access to the U.S. financial system, and this is not affected by the nuclear deal,” Szubin told Congress in August.

In December, Szubin said in a speech at the Atlantic Council: "After implementation day, non-U.S. persons who knowingly facilitate significant transactions with a designated Iran-linked entity or individual risk losing access to the U.S. market."

Particularly now, foreign businesses and banks are watching the Treasury closely to gauge exactly how risky these transactions really are. If Smith's testimony Thursday is any indication, then it seems doing business with the IRGC is a pretty safe bet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.