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I-Ran Away: Commercial Reasons For Turning Away From Involvements With Iran

1 December 2013

Without Prejudice

Since about 2007, both the United Nations Security Council and the United Nations General Assembly have placed sanctions on Iran because of the country's continued refusal to comply with international obligations regarding its nuclear programme.

In 2010 the United Nations Security Council strengthened the already existing sanctions on Iran. The various resolutions restate the UN's longstanding demand that Iran suspend its nuclear enrichment programme and other proscribed nuclear activities.

The sanctions placed on Iran are, however, not considered to be "full sanctions" as not all trade with Iran is sanctioned under the various UN resolutions. Rather, the sanctions placed on Iran are in relation to members of the UN supplying, selling, transferring directly or indirectly from their territories, or by their nationals or using their flag vessels or aircraft to, or for the use in or benefit of, Iran, which could contribute to Iran's enrichment-related reprocessing or heavy water-related activities, or to the development of nuclear weapon delivery systems.

In addition to the sanctions of trade against Iran, the UN Security Council requested that all member states prohibit new banking relationships, including the opening of any new branches of Iranian banks, joint ventures and correspondent banking relationships if there is a suspected link to proliferation. Member states were also requested to prohibit their own financial institutions from opening branches in Iran should there be a suspected link to proliferation. And member states are further requested that should the final receiver of any funds in this regard be an Iranian entity, irrespective who the initial beneficiary of the funds are, those funds are not to be transferred to that entity.

South Africa, as a member state of the United Nations, is obliged to ensure that it complies with the resolutions passed in order to fulfil its obligations to the organisation.

The question, however, is whether a South African entity may contract with an Iranian entity having regard to the UN sanctions.

The simple answer would be that provided the dealings with the Iranian entity do not breach any of the sanctions placed on Iran by the United Nations, a South African entity is entitled to and not prohibited from concluding agreements with an Iranian entity. However, the answer is not that simple.

In addition to the UN sanctions, the United States of America and the European Union (EU) have their own sanction measures in place, which go beyond the United Nation sanctions. Even though it is the South African government's policy only to enforce the UN sanctions, the US and the EU sanctions are directly relevant on both a legal and political level.

The extent of the US and the EU sanctions will be discussed separately.

The US Sanctions

The US maintains two sets of sanctions against Iran, namely:

1.1..1 Sanctions which are applicable to US Persons only; and

1.1..2 Sanctions applicable to non-US Persons.

US Persons (being citizens of the US, any person or entity in the territory of the US or any entity organised under the laws of the US) have been generally prohibited from engaging in virtually any transaction having a connection with Iran. These sanctions have been legislated in terms of US laws and are subject to frequent change.

Since 2010 the US has been introducing legislation, which provides for potentially severe penalties to be applied against foreign persons who are involved in certain areas of trade with Iran. The legislation applies extra-territorially and allows the US to take punitive measures against foreign companies that deal with the Iranian military and government. The legislation allows the US to freeze any US-based assets that the foreign company may have in order to pressurise it to end its relations with the Iran.

The US has sanctioned any dealing with Iranian banks.

The EU Sanctions

Like the US sanctions, the EU sanctions go far beyond the sanctions placed on Iran in terms of the United Nations Resolutions. The EU sanctions, like the US sanctions, prohibit, in general, any dealing with Iran.

The EU sanctions apply to:

1.1..1 any transactions carried out, in part or in whole, in the EU irrespective of whether the parties are EU Persons or not; and

1.1..2 transactions carried out world-wide, if one or more of the parties are EU Persons.

Again in terms of the EU sanctions, dealings with certain Iranian banks and insurers are sanctioned.

What does this mean for South Africa?

In theory, there is no reason for a South African entity not to contract with an Iranian entity provided that the UN resolutions are not breached.

Having said this, however, it is important to note that most members of the UN tend to follow the trends and trajectories of the EU and US sanctions as these are the countries that draft the UN Security Council resolutions.

Even though the South African government has not placed any of its own sanctions against Iran, many South African financial institutions refuse to take part in any business in Iran. The reason for this is that the parameters of the EU and US sanctions are not clear and are constantly shifting; as such, financial institutions with assets or interests in the US and EU do not want to breach the sanctions imposed on Iran by them.

This has the potential of a South African entity being placed in breach of any potential agreement between it and the Iranian entity and would expose it to possible litigation or arbitration.

In addition, and should a financial institution agree to transfer funds due by a South African entity to an Iranian entity, South Africa does not have any banking agreements or relations with Iran. There have been reported situations where South African companies lose money as neither the Iranian nor the South African bank can clear the money flowing into or out of Iran, as the case may be.

In conclusion, a South African entity wanting to contract with an Iranian entity should not conclude any agreement lightly. Should the South African entity have any assets within the US and/or the EU, it must be remembered that a breach of either the US or EU sanctions could result in the freezing of the South African entity's assets in those countries. Furthermore, the South African entity could expose itself to possible litigation as it may not be able to perform its obligations fully under the agreement.

On a political level, by concluding agreements and conducting business in Iran, the South African entity may be isolating itself from doing business in the EU and the US as those countries will, in all likelihood, refuse to permit business to be conducted with an entity involved in Iran.

This article was written prior to the agreement reached between Iran and six world powers in Geneva. In exchange for a curb on Iran's nuclear programme, some sanctions would be lifted. However, there seems to be some confusion as to what was agreed. Watch this space — Editor.

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