Legal status of EU payment mechanism for trade with Iran still unclear

The EU and Iran agreed to continue trade after the us withdraws from the nuclear deal.

To circumvent US sanctions they recently announced a plan for maintaining payment channels outside the banking system which could be targeted by the sanctions. Whether it is legally and practically feasible is still an open question.

Following a ministerial meeting on 24 September in New York, the participants welcomed an EU initiative to establish a so-called Special Purpose Vehicle (SPV) to facilitate payments related to Iran’s exports (including oil) and imports. The US waiver against sanctions on Iranian oil, which dominates its exports, will expire on 4 November.

The meeting was chaired by the EU foreign policy chief Federica Mogherini and was attended by the E3+2 (France, Germany, United Kingdom, China and Russia) and Iran at the level of foreign ministers. Mogherini was optimistic after the meeting and thought that the new mechanism could be ready in November.

For the time being the work is in a preparatory phase and no details about the planned mechanism have been disclosed.

Asked by the Brussels Times at yesterday’s press briefing (11 October) in Brussels whether EU had verified the legality of the new payment mechanism, a spokesperson for the European External Action Service replied that Mogherini had been clear and only confirmed that the work was still on-going.

A source in the European Central Bank said that so far there has been no formal consultation on the plan. “Usually we are consulted on planned legal acts that concern the financial sector but not on other legislative acts and not on initiatives that are outside the formal EU decision making processes.”

As a Special Purpose Vehicle would not be a bank, it does not require a banking license from the central bank. It is reportedly supposed to work as a barter system, where Iranian oil would be traded for European goods without money being exchanged.

Some analysts are sceptical that such a mechanism will work. European companies can still be sanctioned for trading with Iran and many of them have already decided not take any risks.

The companies will have no way of getting money in and out of the mechanism, whatever its construction, without involving the banks. The banks can then in their turn face US penalties. The US treasure stated that it “will carefully review alternative measures being considered to circumvent our sanctions.”

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