Can the “Instrument in Support of Trade Exchanges” undermine the United States sanctions? A legal perspective.

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Can the “Instrument in Support of Trade Exchanges”

undermine the United States sanctions? A legal

perspective.

Shahine REZAEI KALANTARI

Thesis

LL.M. International and European Law: International Trade and Investment

Law

2018-2019

Under the supervision of: Mister Vid Prislan Postdoctoral Researcher

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ACKNOWLEDGEMENT

I would like to express my gratitude to the persons that helped me with this paper.

First of all, I would like to thank Vid Prislan for his role of guidance and his very good advice. I would like to also thank all the high-level experts that anonymously gave me some of their precious time in order to help me discover the practical aspects of the subject.

I am also thankful to William for his help in proofreading.

Lastly, I would like to warmly thank my parents for having shared with me the pleasure of learning.

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ABBREVIATIONS

CFR: Code of Federal Regulations EIB: European Investment Bank EU: European Union

E3: United Kingdom, France and Germany FATF: Financial Action Task Force

FTA: Free Trade Agreement ICJ: International Court of Justice

INSTEX: Instrument in Support of Trade Exchanges JCPOA: Joint Comprehensive Plan of Action

OFAC: Office of Foreign Assets Control

SDN: specially designated individuals and entities SPV: Special Purpose Vehicle

STFI: Special Trade and Finance Institute

SWIFT: Society for Worldwide Interbank Financial Telecommunication TFEU: Treaty on the Functioning of the European Union

UK: United Kingdom US: United States

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ABSTRACT

In this paper we analyzed the trade and commercial relations between Europe and Iran in the frame of the United States sanctions via the question of “can the Instrument in Support of Trade Exchanges (INSTEX) undermine the United States sanctions?”. Our analysis is based on a legal perspective. However, sometimes when economic fundament where needed, we entered in that field. The purpose of this paper is to be the most objective possible in a subject that can be highly subjective. For that reason, we refused to touch the (geo)political aspects.

The thesis demonstrates that, from a legal perspective, the INSTEX is currently unable to undermine the US sanctions. Therefore, we concluded that in order to be successful, the legal framework already in place is not enough but it is a strong first step that needs to be perfected.

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Introduction………...12

1. The context……….13

1.1. The US withdrawal from the JCPOA………....13

1.2. European mechanisms in order to enable trade in Iran without facing the

US sanctions………...14

2. The US Sanctions………...16

2.1. Legal basis……….16

2.2. Scope………...17

2.3. Practical impact……….21

2.3.1. On Iran………21 2.3.2. On Europe………...23

2.4. Jurisdiction issues?...26

2.5. Reactions………...27

3. The Instrument in Support of Trade Exchanges (INSTEX)…...29

3.1. Special Purpose Vehicle (SPV)……….29

3.2. Legal principles of international law supporting its creation………30

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3.4. How will it work?...33

3.5. How will disputes be settled?...36

3.6. Its interaction with the US sanctions regime……….37

4. What next?...39

4.1. Next steps for the INSTEX………...39

4.2. Other options……….41

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INTRODUCTION

With a mostly young and educated population of 80 million people, its oil and gas reserves and its historical sites, the Islamic Republic of Iran has a suitable background for attracting foreign businesses and investments.

Nevertheless, that attractiveness has not had the expected outcome. Indeed, foreign businesses seem reluctant to the idea of trading with Iran and the main reason for that is the United States (US) sanctions.

The Joint Comprehensive Plan of Action (JCPOA) – also known as the Iran nuclear deal – had, as one of its main consequences, the lifting of the nuclear related sanctions and the opening of the Iranian market to Western businesses. Immediately, big companies invested into that market.1_{However, the recent US withdrawal from the JCPOA and the subsequent sanctions}

imposed on Iran, put these companies in a difficult position.2

The European signatories to the JCPOA3_{and Iran are also in a difficult position, given that they}

now have the heavy burden of keeping the deal alive despite the US withdrawal.4

As a reaction to that situation, different options have been explored. As a consequence, the Instrument in Support of Trade Exchanges (INSTEX) was created. The INSTEX is an international trade intermediary that provides services to facilitate trade between Europe and Iran.5

1_{For example, Total and Peugeot from France.}

2_{Jack Ewing and Stanley Reed, “European Companies Rushed to Invest in Iran. What Now?” NYTimes (New}

York, 9 May 2018) < https://www.nytimes.com/2018/05/09/business/iran-nuclear-trump-business-europe.html > accessed 25 September 2018.

3_{Germany, the United Kingdom and France.}

4_{Andrew England, ‘Iranian businesses devise creative ways to evade Trump sanctions’ Financial Times}

(Tehran, 21 February 2019)

<https://www.ft.com/content/c3edcca4-3378-11e9-bd3a-8b2a211d90d5?fbclid=IwAR1FMQK3UNJJPqHkPf38oU5FTnrdTB_ye3NtIXrXzR--b4CX7UQnVo64VFY> accessed 24 March 2019 ; Micheal Peel, ‘EU seeks to keep Iran nuclear deal alive despite US pressure’ Financial Times (Brussels, 20 January 2019) < https://www.ft.com/content/a9397224-1c9d-11e9-b126-46fc3ad87c65 > accessed 21 January 2019.

5_{Ellie Geranmayeh & Esfandyar Batmanghelidj, ‘Trading With Iran Via the Special Purpose Vehicle: How It}

Can Work’ B&B (London, 8 February 2019) <https://www.bourseandbazaar.com/articles/2019/2/7/trading-with-iran-via-the-special-purpose-vehicle-how-it-can-work> accessed 13 February 2019.

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But the principal issues remain, and many questions arise on how it can concretely work, what is its real purpose and what will be its final scope.

Indeed, there is little clarity on the details and what is already interesting to note is that for its first step, the INSTEX plans to focus on essential goods such as humanitarian, medical and farm products. In other words, it avoids the US sanctions because these trades are permitted under them.6

Therefore, our research question is “from a legal perspective, is the INSTEX able to undermine the US sanctions?”.

In order to answer that question, we will proceed in four points. First, we will dig into the context in which the INSTEX has been created (1.). Secondly, we will analyze the US sanctions (2.). Thirdly, we will focus on the INSTEX (3.). Finally, we will propose possible next steps (4.).

1. THE CONTEXT

As a first step in our thesis, it is important to explore the context in which were Germany, the United Kingdom (UK) and France (the E3) and Iran when they decided to launch the INSTEX. Therefore, in the following, we will present the US withdrawal from the JCPOA (1.1.) and after the European mechanisms in order to enable trade in Iran without facing the US sanctions (1.2.).

1.1. THE US WITHDRAWAL FROM THE JCPOA

The JCPOA agreement was reached on 14 July 2015 in Vienna between China, the US, Russia, the UK, France, Germany, the European Union (EU) and Iran. Iran agreed to diminish its

6_{Chase Winter, ‘What is the EU-Iran payment vehicle INSTEX?’ DW (Berlin, 31 January 2019)}

<https://www.dw.com/en/what-is-the-eu-iran-payment-vehicle-instex/a-47306401> accessed 13 February 2019 ; Ellie Geranmayeh & Esfandyar Batmanghelidj, ‘Trading With Iran Via the Special Purpose Vehicle: How It Can Work’ B&B (London, 8 February 2019) <https://www.bourseandbazaar.com/articles/2019/2/7/trading-with-iran-via-the-special-purpose-vehicle-how-it-can-work> accessed 13 February 2019.

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nuclear activities and allowed external inspections7_{in exchange for lifted sanctions.}8

Consequently, western companies used that opportunity in order to engage with Iran.9

Moreover, on 20 July 2015, the United Nations Security Council adopted unanimously the resolution 2231 endorsing the JCPOA.10_{Hence, it seems that, at the time, the JCPOA was}

internationally accepted and supported.

Nevertheless, the US withdrew from the JCPOA on 8 May 2018 and shortly after began to reintroduce sanctions on Iran. Therefore, US officials have travelled the world in order to warn the non-US companies that if they do not stop doing business with Iran, they will be denied access to the US market and its financial sector. As a result, the majority of the European companies in Iran pulled out and, even those that operate in non-sanctioned areas or do not rely on the US, face operational difficulties resulting from the impact of US sanctions on third parties.11_{We will analyze, more in depth, those sanctions in the second part of our paper.}

As a consequence of the US withdrawal and the reintroduction of the sanctions, the EU and Iran have the tough job to find solutions for keeping the JCPOA alive.12

1.2. EUROPEAN MECHANISMS IN ORDER TO ENABLE TRADE IN

IRAN WITHOUT FACING THE US SANCTIONS

On 7 August 2018, in order to minimize the impact of the US sanctions on the EU companies doing legitimate business in Iran, the EU updated its Blocking Statute of 1996 (Council

7_{Inspections done by the International Atomic Energy Agency (IAEA).}

8_{For more information, see the full text of the JCPOA:}

http://www.europarl.europa.eu/cmsdata/122460/full-text-of-the-iran-nuclear-deal.pdf

<https://www.ft.com/content/c3edcca4-3378-11e9-bd3a-8b2a211d90d5?fbclid=IwAR1FMQK3UNJJPqHkPf38oU5FTnrdTB_ye3NtIXrXzR--b4CX7UQnVo64VFY> accessed 24 March 2019.

10_{For more information, see the full text of the resolution 2231: https://undocs.org/S/RES/2231(2015)} 11_{Ellie Geranmayeh, ‘Trump’s Iran sanctions: an explainer on their impact for Europe’, ECFR (London, 12}

September 2018)

<https://www.ecfr.eu/article/commentary_trumps_iran_sanctions_an_explainer_on_their_impact_for_europe> accessed 21 January 2019.

<https://www.ft.com/content/c3edcca4-3378-11e9-bd3a-8b2a211d90d5?fbclid=IwAR1FMQK3UNJJPqHkPf38oU5FTnrdTB_ye3NtIXrXzR--b4CX7UQnVo64VFY> accessed 24 March 2019 ; Micheal Peel, ‘EU seeks to keep Iran nuclear deal alive despite US pressure’ Financial Times (Brussels, 20 January 2019) < https://www.ft.com/content/a9397224-1c9d-11e9-b126-46fc3ad87c65 > accessed 21 January 2019.

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Regulation (EC) No 2271/9613_{) by adding to its scope the extraterritorial sanctions that the US}

is re-imposing on Iran. Indeed, we can read in its article 1 that “This Regulation provides

protection against and counteracts the effects of the extra-territorial application of the laws specified in the Annex of this Regulation’’.

The European Commission describes the Blocking Statute as such: “The Blocking Statute allows EU operators to recover damages arising from US extraterritorial sanctions from the persons causing them and nullifies the effect in the EU of any foreign court rulings based on them. It also forbids EU persons from complying with those sanctions, unless exceptionally authorised to do so by the Commission in case non-compliance seriously damages their interests or the interests of the Union”14_{. We would like to refer to article 5 of the Blocking Regulation}

for the prohibition to comply with the sanctions and to article 6 for the recovering of damages provision.

Nevertheless, the effects in practice are hardly perceived. Indeed, European companies are already pulling out from Iran and it seems that the Statute will not have a concrete impact unless it is fully enforced. This can be done via the implementation of a legal suit before an EU court brought by a company to seek compensation for damages it has suffered as a result of US sanctions. However, there is little precedent for such action. Moreover, the companies can apply for exemptions if they show that ignoring US secondary sanctions would seriously damage their interests (article 5, §2). Therefore, it seems that the Blocking Statute should only be helpful for small European companies with limited presence in the US.15

The issue for the lawyers is that it is not clear how companies can concretely reclaim the damages caused by the application of US sanctions laws. Article 6 of the Blocking Statute does not indicate against whom the action should be made and there is also no indication of if it is possible to bring a claim against a European subsidiary of a US company that has caused the

13_{For more information, see the Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against}

the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31996R2271

14_{For more information, see the European Commission Press Release:}

http://europa.eu/rapid/press-release_IP-18-4805_en.htm

15_{Ellie Geranmayeh, ‘Trump’s Iran sanctions: an explainer on their impact for Europe’, ECFR (London, 12}

September 2018)

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damage to the EU person. Furthermore, while the US government could be sued, the chances of bringing such action are very low because of its sovereign immunity.16

What is also problematic is the fact that each EU Member State has to individually determine the penalties to be imposed if there is a breach of the Blocking Regulation and amend their domestic legislation in a way that enables the enforcement against the EU persons that have complied with US sanctions. Hence, while some countries have not yet enforced the Blocking Statute, there is no uniformity between the penalties in those that did it.17

Consequently, the EU needed to find a stronger solution and it is in that search that the idea to create the INSTEX emerged.

2. THE US SANCTIONS

Now that we presented the context and more precisely the US withdrawal from the JCPOA and the consequent European mechanisms in order to enable trade in Iran without facing the US sanctions, we will enter in a more in depth analyze of these US Sanctions. In order to do that, we will proceed in five steps. First, we will analyze the legal basis of these sanctions (2.1.). Secondly, we will present their scope (2.2.). Thirdly, we will see their practical impact (2.3.). Fourthly, we will examine the probable issues of jurisdiction (2.4.). Lastly, we will introduce the ensuing reactions (2.5.).

2.1. LEGAL BASIS

The principle is that the US Sanctions are imposed by the President via Executive Orders. The main fundament for that is the Trading With the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA18_{). In that matter, the Congress has limited power.}

16_{Neil Hodge, ‘Dealing with US sanctions on Iran’ IBA (London, 29 November 2018)}

<https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=8E695B89-2B89-4681-A5AE-11C92B7EF008> accessed 3 June 2019.

17_{Ibid; see also Esfandyar Batmanghelidj & Axel Hellman ‘Europe, Iran and Economic Sovereignty: A New}

Banking Architecture in Response to US Sanctions’ (European Leadership Network 2018).

18_{Every year, the President of the US declares a national emergency with respect to Iran in order to enable the}

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Indeed, it “will sometimes enact legislation that purports to impose sanctions directly, or at least specifically instructs the President what actions he may take with respect to imposing sanctions on a particular country or entity. However, the executive branch has traditionally taken the position that the imposition of sanctions is a foreign affairs power, and thus Congressional action is merely advisory”19_.

The administration, regulation and enforcement of the U.S. economic and trade sanctions are done by the Office of Foreign Assets Control20_{(OFAC). It especially supervises, imposes}

penalties, sometimes grants licenses in order to engage in activities that are in the frame of the sanctions, promulgates regulations in which are embodied the US sanctions programs, lists specially designated individuals and entities (SDN) and updates regularly that list.21

Hence, we can already note that while – as we will see in the following – the US sanctions have an international scope, they are legally grounded in domestic law.

2.2. SCOPE

The outer limit of the US sanctions is always something very difficult to determine because the sanctions programs are different in scope and change regularly. Furthermore, the SDN list also expands routinely. For example, in 2008, the SDN list was modified around 50 times (in other words, nearly once a week).22

It is also important to note that the US combines primary and secondary sanctions on Iran. While the primary sanctions apply when there is a link with the US, the secondary sanctions “involve additional economic restrictions designed to inhibit non-U.S. citizens and companies abroad from doing business with a target of primary U.S. sanctions”23_.

19_{Scott Maberry, 'Overview of U.S. Economic Sanctions.' (2008) 17(1) Currents: Int'l Trade LJ 52.} 20_{It is a financial intelligence and enforcement agency of the US Department of Treasury.}

21_{Ibid.; Zisha Rizvi, 'U.S. Sanctions - An Overview.' (2016) 3(1) Ct Uncourt 2.}

22_{Scott Maberry, 'Overview of U.S. Economic Sanctions.' (2008) 17(1) Currents: Int'l Trade LJ 52.} 23_{Jeffrey Meyer, 'Second Thoughts on Secondary Sanctions.' (2009) 30(3) U Pa J Int'l L 905; see also}

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Concerning more precisely the comprehensive economic embargo imposed on Iran. It applies to “US Persons” which is defined by the §560.314, Title 3124_{of the Code of Federal Regulations}

(CFR) as “any United States citizen, permanent resident alien, entity organized under the laws

of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States’’.

These persons must comply with the compliance procedures set out by the OFAC.25

Consequently, the “US Persons” cannot export to or transact with Iran. Included in the interdiction are both the direct transaction (for example, sending a product from the US to Iran) and the indirect transaction (for example, sending a product from the US to Europe and after exporting it to Iran).26

In addition, the §560.204, Title 31 of the CFR states that

“(…) the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation,

reexportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that:

(a) Such goods, technology, or services are intended specifically for supply,

transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran; or (b) Such goods, technology, or services are intended specifically for use in the

production of, for commingling with, or for incorporation into goods, technology, or services to be directly or indirectly supplied, transshipped, or reexported exclusively or predominantly to Iran or the Government of Iran.’’.

Therefore, we can notice that the US sanctions prohibits even the “export of services” to Iran. According to the §560.410, Title 31 of the CFR

24_{This Title 31 is called ‘’Money and Finance: Treasury” and its Part 560 contains the “Iranian Transactions and}

Sanctions Regulations”.

25_{Zisha Rizvi, 'U.S. Sanctions - An Overview.' (2016) 3(1) Ct Uncourt 2.}

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‘’(a) The prohibition on the exportation, reexportation, sale or supply of services contained in §560.204 applies to services performed on behalf of a person in Iran or the Government of Iran or where the benefit of such services is otherwise received in Iran, if such services are performed:

(1) In the United States, or

(2) Outside the United States by a United States person, including by an overseas branch of an entity located in the United States.

(b) The benefit of services performed anywhere in the world on behalf of the Government of Iran is presumed to be received in Iran.

(c) The prohibitions on transactions involving blocked property contained in §560.211 apply to services performed in the United States or by U.S. persons, wherever located, including by an overseas branch of an entity located in the United States:

(1) On behalf of or for the benefit of the Government of Iran, an Iranian financial

institution, or any other person whose property and interests in property are blocked pursuant to §560.211; or

(2) With respect to property interests of the Government of Iran, an Iranian financial institution, or any other person whose property and interests in property are blocked pursuant to §560.211.

(…)’’.

In practice, the definition of export of services evolves over time, but we can cite the provision of marketing, business, or consulting services as examples.27

Furthermore, the §560.403 add that “the prohibitions in §§560.204, 560.206, and 560.208 apply

to export, reexport or supply transactions which require a transshipment or transit of goods or technology through Iran to third countries”. Hence, for example, if goods have as a final

destination Muscat but go through Iran, that will amount to an infringement of the US sanctions.

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It is also interesting to note that the §560.208, Title 31 of the CFR prohibits facilitation of any transaction that would not be allowed under the US sanction if conducted by a party subject to these US sanctions.28

The §560.206 is likewise illustrative of the broad scope of the US sanctions. It states that

“(a) (…) no United States person, wherever located, may engage in any transaction or dealing in or related to:

(1) Goods or services of Iranian origin or owned or controlled by the Government of Iran; or

(2) Goods, technology, or services for exportation, reexportation, sale or supply, directly or indirectly, to Iran or the Government of Iran.

(b) For purposes of paragraph (a) of this section, the term transaction or dealing includes but is not limited to purchasing, selling, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing.’’.

Those provisions are just examples. Indeed, the Title 31, Part 560 of the CFR contains numerous broad interdictions such as, for instance, the prohibition of importations of goods or services from Iran (§560.201) and of investments (§560.207; to combine with the §560.316, which gives the definition of “new investment”29_).

In parallel, via the Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) the OFAC proscriptions are applicable to non-US entities that are owned or controlled by a US entity.30

28_{“Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any}

license or permit granted prior to May 7, 1995, no United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States.’’; this provision is to combine with the §560.417, Title 31 of the CFR.

29_{The term “investment” is interpreted in an extremely broad manner, indeed, even deposits in an Iranian bank}

account are considered as an illegal investment.

30_{‘‘(b) PROHIBITION.—Not later than 60 days after the date of the enactment of this Act, the President shall}

prohibit an entity owned or controlled by a United States person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited by an order or regulation issued pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) if the transaction were engaged in by a United States person or in the United States.‘’ ; the authorization for the

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Moreover, it is also important to always keep an eye on the SDN list published by the OFAC and also take into account that if an entity is owned by more than 50% by an SDN, that entity will also be considered as an SDN.31

This situation is, therefore, very difficult and unclear for international companies. A nice illustration of that can be found on the webpage in which the OFAC listed its Frequently Asked Questions concerning the US sanctions on Iran. Indeed, are listed on that webpage no less than 671 questions, which are amended from time to time.32

Hence, because of the numerous connections between multinational companies, most of the big US companies have determined that it is impossible to do business in sanctioned countries33

even if the business operation is perfectly legal.

As a conclusion, we see that the US sanctions on Iran are composed of numerous sources, are quite unstable and extremely broad. We will therefore, as a next step, present the practical impact of these sanctions.

2.3. PRACTICAL IMPACT

Despite being legally grounded in domestic law, the US sanctions have an extremely broad scope and an extraterritorial impact. Indeed, the OFAC has the power to make a claim against every individual or company that has a minor link with the US. In the following, we will analyze the concrete impact of these sanctions on Iran (2.3.1.) and on Europe (2.3.2.).

2.3.1. ON IRAN

On May 2018, the US withdrew from the JCPOA and shortly after began to reintroduce sanctions on Iran. First of all, in June 2018, the US administration revoked or limited general

implementation of the sanctions contained in this provision was given by the Executive Order 13628 of October 9, 2012.

31_{Zisha Rizvi, 'U.S. Sanctions - An Overview.' (2016) 3(1) Ct Uncourt 2; that is the 50% rule.} 32_{For more information, see the “OFAC FAQs: Iran Sanctions”:}

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#630

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licenses previously issued under the JCPOA.34_{After, the US sanctions were reintroduced in}

two steps.

The first one came on 6 August 2018 and covers commercial planes, cars, precious metals, cars, the Iranian government’s purchase of US dollar banknotes and the exchange of Iranian rials (including for funds outside Iran). As we will see in the next point, this step also concerns the European companies that provide associated services, such as shipping in these sectors.35

The second step came on 4 November 2018 and targets Iran’s energy, financial, insurance, shipping and port sectors. Moreover, non-US financial entities’ transactions with the Central Bank of Iran and other designated Iranian banks are also targeted.36

That second step is really the one that has the biggest impact on Iran. Indeed, these sanctions have the consequence to drastically reduce the oil exports and to block Iran’s access to global financial networks.37_{Therefore, the main targets of the sanctions are the oil industry and Iran’s}

Central Bank.38_{In other words, “US punitive sanctions are aimed at Iran's economic heart:}

energy exports. All business with Iranian oil companies will be prohibited, as will insurance of any kind, including policies covering oil shipments. Existing sanctions on Iran's financial sector will also be tightened”39_.

On November 2018, while the US purpose seems to be to stop Iran’s oil exports, it granted temporary import waivers to China, India, Greece, Italy, Turkey, Taiwan, Japan and South Korea in order to keep the price of oil low and to not disrupt the market.40_{Nevertheless, these}

waivers – that allowed the above cited countries to continue their importation of Iranian oil without penalty – were only for six months and the US administration decided to not extend

34_{This includes General License H, which gives the opportunity to US-owned foreign entities to engage in some}

activities involving Iran.

35_{For more information, see the paras. 560.534, 560.535 and 560.536, Title 31 of the CFR.} 36_{For more information, see the para. 560.537.}

September 2018)

38_{Michael Peel, ‘Can Europe’s new financial channel save the Iran nuclear deal?’ Financial Times (Brussels, 4}

February 2019) <https://www.ft.com/content/bd5a5046-27ad-11e9-88a4-c32129756dd8> accessed 24 March 2019.

39_{Matthias von Hein, ‘Iran sanctions: 5 things to know’ DW (Berlin, 5 November 2018)}

<https://www.dw.com/en/iran-sanctions-5-things-to-know/a-46139206> accessed 13 February 2019.

40_{Lesley Wroughton & David Brunnstrom, ‘Three importers cut Iran oil shipments to zero: U.S. envoy’, Reuters}

(Washington, 2 April 2019) <https://www.reuters.com/article/us-iran-sanctions-usa-waivers/three-importers-cut-iran-oil-shipments-to-zero-u-s-envoy-idUSKCN1RE298> accessed 21 April 2019.

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them. Therefore, on 21 April, the US administration announced that those granted import exemptions will have until the 2 May41_{to cease their purchase of Iranian oil or face economic}

penalties against their dollar-denominated banking activities.42

It is also important to note that even if the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgian company, and therefore not subject to the US sanctions or jurisdiction a priori, it has decided to remove Iranian banks from its networks. This decision isolated further the Iranian economy and shows us again the very broad impact of the US sanctions.43

Moreover, on 8 May 2019, the Executive Order 13871 has been issued in order to impose sectorial sanctions on Iranian iron, steel, aluminum and copper.44

As a conclusion, the re-imposition of the US sanctions on Iran and its extraterritorial scope isolated the country, prohibited nearly all transactions, and consequently touches also third countries. In the following, we will see the practical impact of the US sanctions on Europe.

2.3.2. ON EUROPE

Most of the European companies in Iran have already pulled out45_{due to the nature of the US}

sanctions. Indeed, European business executives are answerable to their shareholders and board of directors, and the European governments’ promises to shield them from US sanctions are not sufficient. Also, in 2010-2012, during the last round of US sanctions on Iran, US regulators often investigated European companies. At that period, these investigations resulted in a series

41_{Deadline when the waivers expire.}

42_{Ariel Cohen, ‘Trumps Ends Waiver Grace Period For Iran’s Oil Customers’ Forbes (Washington D.C., 29}

April 2019) <https://www.forbes.com/sites/arielcohen/2019/04/29/trump-ends-waiver-grace-period-for-irans-oil-customers/#296cdb673b62> accessed 10 May 2019.

43_{Annalisa Girardi, ‘INSTEX, A New Channel To Bypass U.S. Sanctions And Trade With Iran’ Forbes (New}

York, 9 April 2019) <https://www.forbes.com/sites/annalisagirardi/2019/04/09/instex-a-new-channel-to-bypass-u-s-sanctions-and-trade-with-iran/#5fafb1e2270f> accessed 18 April 2019; an illustration of the practical impact of this decision can be found in the fact that the Iranian Red Crescent Society had accounts connected to SWIFT, which are now sanctioned and therefore it is not possible anymore to use the accounts for money transfers.

44_{For more information, see the Executive Order 13871 of May 8, 2019 imposing sanctions with respect to the}

iron, steel, aluminum and copper sectors of Iran: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/13871.pdf

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of large fines on the companies and consequently, this had a considerable impact on their calculation of risk.46

In order to present that in the most practical way, we will give concrete illustrations of European entities being impacted by the US sanctions.

Illustration 1: it seems that despite the fact that the US government granted an oil import waiver

to Italy, there was no indication that Italy intended to use the waiver. The main reason for that is that the major banks in Italy were still reluctant to facilitate trade.47_{Indeed, Greece, Italy and}

Taiwan had already halted their import of Iranian oil before the deadline of the waiver.48

Illustration 2: the combination of the US sanctions with the revised EU Blocking Statute put

the shipping and insurance industries in a bad position. Indeed, on the one hand, insurance companies from the EU cannot take the risk of breaching US sanctions. On the other hand, the Blocking Statute forbids EU persons from complying with these US sanctions (unless exceptionally authorized to do so by the Commission, in situations where non-compliance seriously damages their interests or the interests of the Union49_{). Any breach of the Blocking}

Statute can result to penalties and claims for compensation from a party who has suffered losses as a result of the breach (for example, where an EU-based insurer seeks to avoid liability for a claim due to risks from US sanctions, the shipowner could seek compensation for losses from the insurer under the EU Blocking Statute). Hence, that situation forces insurers to exit the Iranian market and to refuse to provide cover for anything that has an Iranian link. Furthermore, even for permissible trade, there will be practical problems because few banks will handle Iran-related transactions. That illustration has certainly the bigger impact in practice knowing that the international shipping industry carries around 90% of the world trade.50

September 2018)

47_{Giacomo Bogo, ‘As Sanctions Impede Business, Where Next for Iran-Italy Relations?’ B&B (London, 24}

January 2019) <https://www.bourseandbazaar.com/articles/2019/1/21/as-sanctions-impede-business-where-next-for-iran-italy-relations> accessed 13 February 2019.

48_{Ariel Cohen, ‘Trumps Ends Waiver Grace Period For Iran’s Oil Customers’ Forbes (Washington D.C., 29}

April 2019) <https://www.forbes.com/sites/arielcohen/2019/04/29/trump-ends-waiver-grace-period-for-irans-oil-customers/#296cdb673b62> accessed 10 May 2019.

49_{There is no precedent for how the Commission will approach such request.}

50_{Michelle Linderman & Cari Stinebower, ‘Iran: sanctions issues facing the international shipping and insurance}

industries’ (2018) WorldECR <https://www.crowell.com/files/201811-Iran-Sanctions-Issues-Facing-The-

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International-Shipping-And-Insurance-Illustration 3: the first step of the reintroduction of the US sanctions on Iran in early August

2018 had already an impact on the German company Daimler. Indeed, after the JCPOA, Daimler did a joint venture with Iran Khodro (the main Iranian vehicle manufacturer and dealer) in order to make and distribute trucks in Iran. Nevertheless, as a consequence of the re-introduced US sanctions, the German multinational automotive corporation decided to stop its activities in Iran.51

Illustration 4: the second step of the reintroduction of the US sanctions on Iran in early

November had a substantial impact on big European energy companies. Indeed, the French company Total and the German Siemens, for example, made a step aside.

Illustration 5: if a European company breaches US sanctions, it will have to pay a severe

penalty. The most famous example of such a severe penalty is the BNP Paribas case. Indeed, in 2014, the French bank BNP Paribas breached the US sanctions and consequently BNP was fined $8.9 billion and obliged to terminate senior executives, and to suspend U.S. dollar clearing operations for one year at business lines in which the misconduct centered.52_{The risk of such a}

severe penalty combined with the extremely broad scope of the US sanctions forms a powerful tool in order to incite the European countries to pull out from Iran.

Moreover, it is important to insist that even if the activity is perfectly legal in the frame of the US sanctions, the fact that Iran’s financial network is isolated from a significant part of the rest of the world, makes it nearly impossible to concretely do the transactions related to the permissible activity.

As a conclusion, the US sanctions on Iran have a concrete and real impact on the daily life of the European companies. In our next point, we will examine the probable issues of jurisdiction.

Industries.pdf?utm_source=linkedin&utm_medium=ClearView&utm_campaign=20181221> accessed 20 January 2019.

51_{Tassilo Hummel, ‘Daimler abandons Iran expansion plans as sanctions bite’, Reuters (Berlin, 7 August 2018)}

<https://www.reuters.com/article/us-iran-nuclear-daimler/daimler-abandons-iran-expansion-plans-as-sanctions-bite-idUSKBN1KS0N8> accessed 23 April 2019.

52_{For more information, see the full press release:}

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2.4. JURISDICTION ISSUES?

Under international law, jurisdiction refers to the power of the States to regulate or impact people, property and circumstances. It is linked to the principle of sovereignty and is usually linked with the territory of the States.53_{Nevertheless, in today’s practice, the territory rule lost}

its hegemony.54

Indeed, via claims made upon the basis of the “effects” doctrine, the US has been able to extend its jurisdiction beyond its own territory because it estimates that a foreign conduct is producing substantial effects within its territory.55_{The US has always claimed such broad scope for its}

actions against Iran. For instance, the Executive Order 12170 of November 14, 1979 already had as its purpose, to block Iranian funds all over the world.56

This is a concrete example of “extraterritoriality”, which refer to the power of a State to extend its jurisdiction beyond its territory. In the Kiobel case, the US Supreme court concluded that the US “may exercise prescriptive jurisdiction to reach claims based on extraterritorial conduct where the defendant is a United States national or the conduct implicates United States security interests of fundamental importance”57_.

Nevertheless, despite its US origin, the effects doctrine has also been used by the European States and by the EU in order to extend their jurisdiction.58_{Moreover, the effects doctrine is}

not a universally accepted fundament for establishing jurisdiction,59_{and repeated and unisonous}

rejections from foreign States of an extraterritorial jurisdictional assertion, may make it illegal under international law.60

53_{Malcolm Shaw, International Law (8th edition, Cambridge University Press 2017), 483-484.}

54_{Cedric Ryngaert, ‘Whither Territoriality? The European Union’s Use of Territoriality to Set Norms with}

Universal Effects’ in Ryngaert et al (eds), What’s Wrong with International Law? (Brill 2015).

55_{Menno Kamminga, ‘Extraterritoriality’ (2012) MPEPIL; Malcolm Shaw, International Law (8th edition,}

Cambridge University Press 2017), 516.

56_{For more information, see the full text of the Executive Order 12170:}

https://www.treasury.gov/resource-center/sanctions/Programs/Documents/Executive%20Order%2012170.pdf

57_{Kiobel v Shell, Brief of the European Commission on Behalf of the European Union as Amicus Curiae in}

Support of Neither Party, 13 June 2012, US Supreme Court.

Universal Effects’ in Ryngaert et al (eds), What’s Wrong with International Law? (Brill 2015); Menno Kamminga, ‘Extraterritoriality’ (2012) MPEPIL.

59_{Menno Kamminga, ‘Extraterritoriality’ (2012) MPEPIL.}

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Therefore, such use of extraterritorial jurisdiction may create issues with the principle of prohibition of interference in another State’s internal affairs, violate its right to territorial integrity and political independence,61_{or put businesses in a delicate position in which they}

have to handle conflicting regulatory demands.62_{More precisely concerning the extraterritorial}

export controls aspects of the US sanctions, some scholars consider such sanctions as being illegal under international law. Others regard them as legal if there is sufficient evidence of a direct security threat.63

As a conclusion, the extraterritorial impact of the US sanctions created some jurisdiction issues and other States reacted to this. We will analyze these reactions in our following point.

2.5. REACTIONS

Claims have arisen in the context of economic issues whereby the US seeks to apply its law outside its territory in a manner which may precipitate conflicts with other States64_{and, more}

particularly, the adoption of legislation in the US imposing sanctions on Iran has stimulated opposition in view of the extraterritorial reach of such measures.65_{In the following, we will}

expose three main reactions to that.

First, every year, since 1991, the General Assembly of the United Nations (UN) adopts a resolution in order to end the US-led embargo on Cuba – which is relatively similar to the sanctions on Iran in practice. The last adoption to date was done on 1 November 2018 by a recorded vote of 189 in favor to 2 against and no abstentions.“Through the terms of the text, the Assembly reiterated its call upon all States to refrain from promulgating and applying laws and measures of the kind referred to in the text’s preamble, in conformity with their obligations under international law and the Charter of the United Nations, which reaffirm the freedom of trade and navigation. The Assembly also urged States that have and continue to apply such 61_Ibid.

Universal Effects’ in Ryngaert et al (eds), What’s Wrong with International Law? (Brill 2015).

63_{Susan Emmenegger, ‘Extraterritorial Economic Sanctions and their Foundation in International Law’ (2016)}

33(3) AJI&CL 632.

64_{Malcolm Shaw, International Law (8th edition, Cambridge University Press 2017), 515.} 65_{Ibid., 519.}

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laws and measures to take the steps necessary to repeal or invalidate them as soon as possible in accordance with their legal regime”. It is also interesting to note that the representative of Iran spoke to exercise the right of reply.66

Secondly, on 3 October 2018, the International Court of Justice (ICJ) ordered unanimously, as provisional measures, the US to ensure that the reintroduction of the sanctions on Iran does not prevent the country from receiving vital humanitarian and flight-related supplies. That is the consequence of a claim submitted by Iran under the 1955 Treaty of Amity, Economic Relations, and Consular Rights between Iran and the US. Iran requested a stop to the US sanctions reintroduction. Nevertheless, even if the Court agreed with Iran’s claim, it is important to note the decision is narrower than what was asked, as it focuses only on humanitarian needs. The court ordered the US to grant licenses and authorizations and to not allow restrictions on transfers funds related to these goods and services. Indeed, after establishing that it has prima

facie jurisdiction over the case, the court established that there was a risk of irreparable

prejudice with respect to civil aviation and supply of food and medicines in Iran. Particularly, even if the US sanctions provides exceptions for food and medicines, the fact that the US sanctions isolated the Iranian financial network from a significant part of the rest of the world, makes it nearly impossible to concretely benefit from these exceptions.67_{However, we would}

like to insist on the fact that this is only an interim order and that the definitive one is not yet available.68

Lastly, the effects doctrine and the extraterritorial impact of the US sanctions has not satisfied everybody in Europe. The first reaction, in order to block that, was to enact Blocking Statutes as a form of countermeasure against unlawful exercises of extraterritorial jurisdiction.69

Moreover, the EU declared that the fact that the US claims jurisdiction over European

66_{For more information, see the full press release of the last General Assembly adoption on that matter (1}

November 2018): https://www.un.org/press/en/2018/ga12086.doc.htm; generally, it is accepted that economic coercion is not by itself unlawful but it can breach the principle of non-intervention.

67_{Alleged Violations of the 1955 Treaty of Amity, Economic Relations, and Consular Rights (Islamic Republic of}

Iran v. United States of America), Provision Measures, 3 October 2018, ICJ; Damien Charlotin, ‘In A

Provisional Measures Ruling, International Court Of Justice Orders Us To Modify Sanctions Against Iran – And Us Responds That It Will Terminate Treaty’ IAReporter (3 October 2018)

<https://www.iareporter.com/articles/in-a-provisional-measures-ruling-international-court-of-justice-orders-us-to-modify-sanctions-against-iran/> accessed 24 April 2019; for the context, it is important to note that the contracts with the Iranian air companies were heavily affected by the US sanctions.

68_{That sentence was written in July 2019.}

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subsidiaries of US companies and over goods and technology of US origin located outside the US is contrary to the principle of international law.70

Consequently, the US withdrawal from the JCPOA and the subsequent reintroduction of the sanctions created a situation in which a reaction was needed in order to keep the JCPOA deal alive. The strongest reaction, until today, is the creation of the INSTEX, which will be exposed in the next part of our thesis.

3. THE INSTRUMENT IN SUPPORT OF TRADE EXCHANGES

(INSTEX)

In part 2, we presented the US sanctions on Iran and more precisely the fact that despite being legally grounded in domestic law, these sanctions have an international, broad and extraterritorial scope. Moreover, the US sanctions are composed of numerous sources and change on a regular manner. More precisely, the re-imposition of the sanctions isolated Iran and prohibited nearly all transactions. As a consequence, the US sanctions on Iran have a concrete impact on European companies. This situation did not make everyone happy in Europe and therefore they reacted against that. Hence, in order to keep the JCPOA alive in the frame of these US sanctions, the INSTEX was created, which we will expose in this part of our paper.

In that purpose, we will proceed in six steps. After an examination of what is a Special Purpose Vehicle (SPV – 3.1.) and which legal principle of international law supports the creation of the INSTEX (3.2.), we will concretely present its creation (3.3.). Then, we will analyze how it can work (3.4.) and how disputes arising from it can be settled (3.5.). Lastly, we will explore how it will interact with the US sanctions regime (3.6.).

3.1. SPECIAL PURPOSE VEHICLE (SPV)

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From a general corporate law point of view, an SPV is a legal entity and as of the date of its registration, it acquires legal, contractual and procedural capacity on its own name. An SPV is often created to fulfill specific purposes. Generally, the originators use it to form a legal framework for their cooperation. Indeed, the SPV may have different owners and in that case, usually they own equal shares so that they have to make the crucial decisions unanimously.71

Hence, the idea of having a cooperation with the goal of achieving special value is the main reason for creating an SPV.72_{As a consequence, Iran and the E3 were seduced by that idea and} therefore the INSTEX was created which is an SPV. We will analyze in the following part of our paper, the legal principles of international law that supported this creation.

3.2. LEGAL PRINCIPLES OF INTERNATIONAL LAW SUPPORTING

ITS CREATION

The INSTEX is an initiative of the E3 in order to maintain the trade benefits resulting from the JCPOA despite the US withdrawal. Pursuant to the JCPOA, Iran agreed to diminish its nuclear activities and allowed external inspections in exchange for lifted sanctions. In other words, the countries of the nuclear deal, that in the past sanctioned Iranian nuclear activities, agree to normalize trade with Iran. But with the reintroduction of the US sanctions, that engagement to normalize trade with Iran could be a failure. Consequently, we believe that the creation of the INSTEX is supported by the principle of pacta sunt servanda.73

In the preamble of the Vienna Convention on the Law of Treaties (VCLT, 1969) we can read that “the principles of free consent and of good faith and the pacta sunt servanda rule are

universally recognized”. Additionally, in article 26, is stated that “Every treaty in force is binding upon the parties to it and must be performed in good faith’’.

71_{Alex Fomcenco, ‘The Special Purpose Vehicle: A ‘Micro Merger’ or Merely a Way of Cooperation’ (2013) 10}

European Company Law, Issue 1 11.

72_Ibid.

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Moreover, it is important to note that the JCPOA seems to enter under the broad definition of “treaty” in article 1 (a) of the VCLT.74_{Hence, if one of the parties do not perform the JCPOA,}

it will be in breach of its international obligations to the other parties and if that breach is “material” (which could be the case in casu75_{), one of the other parties can invoke the breach}

in order to terminate or suspend the treaty (article 60 VCLT).76_{More precisely, in our case, the}

spirit and the purpose of the treaty could be breached if the normalization of the trade is not achieved and such breach can be contrary to the concept of good faith which, according to the ICJ, is part of the pacta sunt servanda principle.77

As a conclusion, the creation of the INSTEX by the E3 is supported by the pacta sunt servanda principle. In the next part of our thesis, we will examine the creation of the INSTEX in concreto.

3.3. ITS CREATION

The INSTEX is an SPV created in order to keep the JCPOA deal alive after the US withdrawal and the reintroduction of the sanctions. It was created by the E3 after weeks of speculation78

and tries to help facilitate trade with Iran.79_{Indeed, while not explicitly a sanctions-busting}

vehicle, the INSTEX is a consequence of the exclusion of the Iranian banks from the SWIFT banking network and of the pull-out of the international businesses from Iran (which are results

74_{« (a) "Treaty" means an international agreement concluded between States in written form and governed by}

international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation »

75_{We refer to article 60 VCLT for the definition of “material breach”.} 76_{Anthony Aust, ‘Pacta Sunt Servanda’ (2007) MPEPIL.}

77_{Gabčikovo-Nagymaros Project (Hungary v Slovakia), Judgment, 25 September 1997, ICJ, §142: “Article 26}

combines two elements, which are of equal importance. It provides that “Every treaty in force is binding upon the parties to it and must be performed by them in good faith." This latter element, in the Court's view, implies that, in this case, it is the purpose of the Treaty, and the intentions of the parties in concluding it, which should prevail over its literal application. The principle of good faith obliges the Parties to apply it in a reasonable way and in such a manner that its purpose can be realized”.

78_{There were months of technical coordination between Member States led by the European External Action}

Service.

Can Work’ B&B (London, 8 February 2019) <https://www.bourseandbazaar.com/articles/2019/2/7/trading-with-iran-via-the-special-purpose-vehicle-how-it-can-work> accessed 13 February 2019; Michael Peel, ‘Can Europe’s new financial channel save the Iran nuclear deal?’ Financial Times (Brussels, 4 February 2019)

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of the reintroduction of the US sanctions).80_{Hence, the main purpose is to preserve the}

economic benefits that came from the lifting of the sanctions after the JCPOA.81

The INSTEX is an international trade intermediary that provides services to facilitate trade between Europe and Iran. Even though it is not a bank, its main role will be to coordinate payments related to trade with Iran.82

It is important to note that the INSTEX is sovereignly backed by the E3 and hence has a “diplomatic shield” against the sanctions. Indeed, the supervisory board includes senior European diplomats and the E3 governments are the shareholders.83_{Therefore, it is harder for}

the US to directly sanction the INSTEX.

Concretely, the INSTEX is a French-registered limited liability company managed by Per Fischer, a German banker.84_{The supervisory board will be headed by the UK. It is the first}

mechanism only based on € currency and “is intended to be transparent so that participating companies and governments can pool knowledge and experiences”85_.

In order to be fully effective and to succeed in the purposes cited above, an Iranian company matching the INSTEX was also necessary. Consequently, some months after the creation of the INSTEX, the Special Trade and Finance Institute (STFI) was registered in Tehran. The STFI is organized with the ownership of private sector banks and not as a wholly owned State enterprise.86

80_{Lionel Laurent, ‘Europe Tries to Sidestep the U.S. Finance System’ B&B (London, 2 May 2019)}

<https://www.bourseandbazaar.com/articles/2019/5/2/europe-tries-to-sidestep-the-us-finance-system-1> accessed 2 May 2019.

83_Ibid.

85_{Naysan Rafati & Ali Vaez, ‘Europe Tests the Boundaries on Iran’ Foreign Affairs (New York, 4 February}

2019) <https://www.foreignaffairs.com/articles/iran/2019-02-04/europe-tests-boundaries-iran> accessed 18 April 2019.

86_{Esfandyar Batmanghelidj & Sahil Shah, ‘Protecting Europe-Iran Trade to Prevent War: A Provisional}

Assessment of INSTEX’ (European Leadership Network 2019); should be noted that Iran has been advised to accept financial controls under international Financial Action Task Force (FATF) standards aiming to prohibit money laundering and financing of terrorists.

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In the next part of our paper, we will expose how the INSTEX should concretely work.

3.4. HOW WILL IT WORK?

The fact that the INSTEX is the first mechanism only based on € currency87_{and that there are}

no details on how it will work88_{makes it difficult to give a full and exhaustive presentation of}

that today.89_{Nevertheless, in the following, we will present how it should concretely work on}

the basis of the available information.

In that context of broad extraterritorial US sanctions in which the use of the SWIFT banking network is not possible anymore,90_{the purpose of the INSTEX is to facilitate the trade between}

Europe and Iran by reducing the need for direct transactions between the European and Iranian financial systems. Therefore, it will permit the European exporters to receive payments for sales to Iran from funds that are already in Europe, and vice versa.91

An example has been given by the Financial Times: “a European fuel trader buying Iranian oil could be matched with a European manufacturer selling machinery to an Iranian company. The European oil buyer would not pay the Iranian seller but would instead send its payment to the

87_{Therefore, there is no precedent of such mechanism.}

February 2019) <https://www.ft.com/content/bd5a5046-27ad-11e9-88a4-c32129756dd8> accessed 24 March 2019; Ellie Geranmayeh & Esfandyar Batmanghelidj, ‘Trading With Iran Via the Special Purpose Vehicle: How It Can Work’ B&B (London, 8 February 2019) <https://www.bourseandbazaar.com/articles/2019/2/7/trading-with-iran-via-the-special-purpose-vehicle-how-it-can-work> accessed 13 February 2019; Andrew England, ‘Iranian businesses devise creative ways to evade Trump sanctions’ Financial Times (Tehran, 21 February 2019)

<https://www.ft.com/content/c3edcca4-3378-11e9-bd3a-8b2a211d90d5?fbclid=IwAR1FMQK3UNJJPqHkPf38oU5FTnrdTB_ye3NtIXrXzR--b4CX7UQnVo64VFY> accessed 24 March 2019; see also the E3 joint statement on that matter:

https://www.gov.uk/government/news/joint-statement-on-the-new-mechanism-to-facilitate-trade-with-iran

89_{That sentence was written in July 2019.}

90_{Annalisa Girardi, ‘INSTEX, A New Channel To Bypass U.S. Sanctions And Trade With Iran’ Forbes (New}

York, 9 April 2019) <https://www.forbes.com/sites/annalisagirardi/2019/04/09/instex-a-new-channel-to-bypass-u-s-sanctions-and-trade-with-iran/#5fafb1e2270f> accessed 18 April 2019.

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European manufacturer. At the same time in Iran, the Iranian machinery buyer would not pay the European seller but would instead send its money to the Iranian oil seller”92_.

Therefore, the idea is to have a “mirror image” transaction system in order to replace potentially sanctionable Europe-Iran transactions with transactions that do not pass over the Iranian borders.93_{Hence, the buyers and sellers in Iran and Europe will be paid without making}

transfers into and out of Iran.94

That system – which can be seen as a barter mechanism or a clearing house – reduces the exposure to the US dominated international banking system and consequently limits the risks of being in the US sanctions’ scope.95

Nevertheless, the “INSTEX will need to find a way to balance payments within both overall trade flow and at an operational level, so that payments can be settled in timely fashion – ideally, within 60 days”96_{. Additionally, “INSTEX will expand gradually, accepting clients in a way}

that maintains a general balance in the ledger. At times, INSTEX may need to step in to top up the funds available to pay European exporters. To do so, the mechanism will need working capital. It could raise this capital either through contributions from European countries that are, or are becoming, shareholders in it. INSTEX could also charge a commission fee for the use of its services, thereby creating reserves that it can use to balance trade within a given payment period. Currently, banks that facilitate payments to and from Iran typically charge 2-3 percent

93_Ibid.

94_{Lionel Laurent, ‘Europe Tries to Sidestep the U.S. Finance System’ B&B (London, 2 May 2019)}

<https://www.bourseandbazaar.com/articles/2019/5/2/europe-tries-to-sidestep-the-us-finance-system-1>

accessed 2 May 2019; the author gives also an example of the use of INSTEX: “It’s a complicated system, but in a very simplified form you could imagine having a European trader who wants to buy gas from an Iranian supplier and a European manufacturer who wants to sell aircraft parts to an Iranian company. Instead of the trader paying the Iranians for the gas, they would transfer the money to their fellow European manufacturer (in lieu of payment from its Iranian customer). At the same time, the Iranian aircraft company would pay its compatriot gas supplier for the supplies sent to Europe. Hence no cross-border money flows’’.

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of the transaction’s value, a high fee. INSTEX could reasonably charge a similar fee, thereby generating cash flow”97_.

It is very important to keep in mind that for its first step, the INSTEX will only focus on pharmaceutical, medical devices and agri-food goods.98_{These humanitarian goods are}

exempted from the US sanctions, but in practice the banks are still afraid to finance transactions relating to these.99

Hence, it is not possible today to use the INSTEX for Iranian oil100_{and gas exports – which is}

the main source of revenue for Iran. Currently, the INSTEX will only be useful for small transactions related to humanitarian goods or food. Indeed, it seems that the INSTEX will first work with small and medium-sized companies and therefore trade volume should remain small.101

Expanding the scope of products possible to trade via the INSTEX and open its services to economic operators from third countries are aims in the long term.102_{We will present these}

possible evolutions in the next, and last, chapter of our paper.

As a conclusion, INSTEX’s scope of trade today is very narrow and the way it will concretely work is still unclear. At first sight, the mechanism therefore seems very modest compared to the US sanctions. Moreover, there is no information about dispute settlement. Hence, in the following, we will expose how potential disputes arising from the use of the INSTEX should be resolved.

97_Ibid.

98_{For more information, see the E3 joint statement on that matter:}

https://www.gov.uk/government/news/joint-statement-on-the-new-mechanism-to-facilitate-trade-with-iran; see also Michael Peel, ‘Can Europe’s new financial channel save the Iran nuclear deal?’ Financial Times (Brussels, 4 February 2019)

<https://www.ft.com/content/bd5a5046-27ad-11e9-88a4-c32129756dd8> accessed 24 March 2019 and Andrew England, ‘Iranian businesses devise creative ways to evade Trump sanctions’ Financial Times (Tehran, 21 February 2019)

<https://www.ft.com/content/c3edcca4-3378-11e9-bd3a-8b2a211d90d5?fbclid=IwAR1FMQK3UNJJPqHkPf38oU5FTnrdTB_ye3NtIXrXzR--b4CX7UQnVo64VFY> accessed 24 March 2019.

<https://www.dw.com/en/what-is-the-eu-iran-payment-vehicle-instex/a-47306401> accessed 13 February 2019.

101_Ibid.

102_{For more information, see the E3 joint statement on that matter:}

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3.5. HOW WILL DISPUTES BE SETTLED?

Every business or trade has its risks. Therefore, it is always important to know and to agree with his counterpart on how to resolve the eventual disputes that can arise. Concerning the INSTEX, there is no precedent and no information about dispute settlement. Consequently, we can ask ourselves questions about the type of disputes, the parties to the disputes, the applicable laws, the forum and how to enforce a decision. Some suggestive answers to these questions will be presented below.

What type of disputes? It seems that the INSTEX will only be used for “one shot” trades.103

Therefore, in case of a dispute, it should be a commercial one.

Who are the parties? As the INSTEX is merely an intermediary, we believe that it will not be

a party in case of such a dispute. Indeed, the real actors of trades made via the INSTEX are the companies that use the mechanism. Hence, we consider that these companies will be the parties of disputes occurring from a trade made via the INSTEX.104

What are the applicable laws? When companies have a commercial dispute, the best option for

them is to give consent in order to go in front of an arbitral tribunal and to use the UNCITRAL Arbitration Rules. Indeed, such arbitral tribunal offers them the opportunity to have confidential, neutral, swift and flexible proceedings.105_{They have the power to choose the}

arbitrators (Section II of the UNCITRAL Arbitration Rules) and can also have the one to designate the rules of law applicable to the substance of the dispute (article 35). However, if one of the parties wants to annul the arbitral award, the applicable law will be the domestic law of the State where the arbitral tribunal was seated.106

Where? The extreme flexibility of commercial arbitration gives the power to the parties to

103_{Doing long term investments via the INSTEX seems not possible today.}

104_{In the alternative, if States are involved, we believe that an inter-State dispute settlement mechanism should}

be put in place and that the Iran-US Claims Tribunal can be taken as an example.

105_{Olivier Caprasse, ‘L’arbitrage’ in De Leval G (ed), Manuel de procédure civile (Larcier 2015).}

106_{Ibid; should also be noted the fact that the competent tribunal for the annulation of an arbitral award will be}

Can the “Instrument in Support of Trade Exchanges” undermine the United States sanctions? A legal perspective.