The Brussels Times: Legal Status of EU Trade Payment Mechanism With Iran Still Unclear

EU and Iran have agreed to continue trade after the US withdrawal 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, reads an article published by Belgium's leading online daily The Brussels Times.

Following a ministerial meeting on Sept. 24 in New York, the participants welcomed an EU initiative to establish a Special Purpose Vehicle 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 Nov. 4.

The meeting was chaired by EU foreign policy chief, Federica Mogherini, and was attended by E3+2 (France, Germany and the United Kingdom, plus 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 an Oct. 11 press briefing  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 ongoing.

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 an SPV 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 skeptical that such a mechanism will work. European companies can still be sanctioned for trading with Iran and many of them have already decided not to 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 Treasury stated that it “will carefully review alternative measures being considered to circumvent our sanctions.”