European countries enable Iran trade through first INSTEX transaction and Swiss payment mechanism
3 min read
On 31 March 2020, the Governments of France, Germany, and the United Kingdom (the so-called "E3") confirmed that the first transaction was completed through the Instrument in Support of Trade Exchanges ("INSTEX"), facilitating the export of medical goods from Europe to Iran. According to the E3, more transactions will follow and the mechanism will be further fine-tuned.1
INSTEX, a special purpose vehicle designed to facilitate "legitimate" Iran-related trade by European businesses, was first established by the E3 in January 2019 in response to the re-imposition of US sanctions on Iran after the US withdrawal from the Joint Comprehensive Plan of Action ("JCPOA")2. Because the re-imposed US sanctions target activities of non-US persons3, the stated objective of INSTEX – which additional European countries have recently joined4 – is to mitigate the effect of such sanctions on EU parties.
By applying a netting system to import and export payments in coordination with Iran's Special Trade and Finance Institute ("STFI"), INSTEX was set up to offer European businesses an alternative platform to the traditional financial system so that they can perform legitimate trading with Iran in support of the JCPOA, under which most EU sanctions targeting Iran are lifted. More specifically, the mechanism creates a virtual ledger that offsets any balances in relation to import and export payments, so that payments are only exchanged between European businesses importing and exporting to Iran, and no direct payments to or from Iran are required. STFI mirrors a similar mechanism for the Iranian businesses involved.
The E3 has stated that the scope of transactions through INSTEX will initially focus on trade in food, medicine and medical devices. Certain exemptions apply for supply of humanitarian goods under US sanctions against Iran, which may permit related payments, but certain practical hurdles exist to complete transactions involving such goods as a result of a general reluctance by EU financial institutions to engage in any Iran-related transactions as part of compliance risk mitigation measures.
The INSTEX mechanism is part of the EU and UK's efforts to preserve the JCPOA, which has been put to the test since the US withdrawal, with the most recent development being the E3's triggering of the dispute settlement mechanism under the JCPOA in February 20205. Notably, Switzerland has since launched a Humanitarian Trade Arrangement involving a Swiss payment mechanism for supply of humanitarian goods to Iran6, featuring enhanced due diligence and reporting for participants consistent with guidance published by the US Government in October 20197. It is unclear if this first INSTEX transaction followed similar diligence and reporting requirements, but it marks a small but important first EU step forward under the JCPOA and to ensure Iran receives the humanitarian supplies it needs.
1 See statement by the United Kingdom.
2 See our alert of February 2019.
3 See our alert of November 2018.
4 See Joint Statement on joining INSTEX by Belgium, Denmark, Finland, the Netherlands, Norway and Sweden (29 November 2019) here.
5 See our alert of January 2020.
6 See Swiss statement here.
7 See Financial Channels to Facilitate Humanitarian Trade with Iran and Related Due Diligence and Reporting Expectations (25 October 2019), available here.
George Papaconstantinou (White & Case, Associate, Brussels) contributed to the development of this publication.
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