Erich Ferrari on the 5+1 Nuclear Talks: Iran vs. Sanctions Architects

While the Iranian negotiators sit down to nuclear talks with 5+1 in Vienna this week, Erich Ferrari, a lawyer who provides counsel to those who wish to get off the sanctions list, says the Iranians are very smart and sophisticated negotiators, but on the issue of understanding the sanctions regime and what is being offered to them, they are at a disadvantage, as the Iranian team is hesitant to use sanctions experts outside government circles and therefore does not know how the things proposed to them would play out in practice.

In this interview, details of the sanctions regime against Iran are discussed with Erich Ferrari:


Iranian officials claim that punishing individuals and companies that have violated the existing sanctions represents new sanctions in itself and as such is against the spirit of the Geneva agreement. Is it really against the Geneva agreement?

The new designations and penalties which have come out since entering the Joint Plan of Action are not violations of that agreement per se. The sanctions relief offered in the interim deal is narrowly focused and strictly construed by the U.S. government. The Iranians may view it as bad faith from the perspective of the overall sense of reconciliation that is being sought; however, legally, it does not violate the sanctions relief that was provided.

Having said that, it's important to understand that sanctions are often used to send a political message both abroad as well as domestically. I believe that the new sanctions designations and enforcement actions occurred to appease the U.S. Congress and to show that the administration was not going easy on Iran despite the new relief that was being provided.

Nevertheless, the sanctions are partially suspended, and if the U.S. does not enforce them, what leverage would they have for the final deal?

That's true. They are doing a dance right now. Give Iran too much and you don't incentivize a comprehensive deal. Give them too little and they walk away from the negotiating table.

Does the sanctions relief that came out of the Geneva agreement make business or money transaction easier for Iranian business to operate internationally?

In theory, yes. In practice, not really. The way it is being interpreted is that all activity occurring under that relief must be initiated and completed by July 20, 2014. This gives a very small window in which to develop new business, negotiate on a project, deliver on that project, and finalize payments.

This becomes even more difficult within an area like civil aviation, where OFAC has to license certain exports, because their licensing process is so backlogged and delayed. While the U.S. government may give priority to such licenses, operating under this sanctions relief in such a narrow time frame will prove to be very difficult in practice.

What are the major issues your company deals with in regard to sanctions? Are companies fully aware of obstacles that the sanctions create for them? Or is the U.S. government functional enough in enforcing the limitations and also easing the enforcement of General Licenses?

The major issues we face in relation to Iran stem from financing for activities which are generally authorized, or for which clients receive specific licenses, for the export of food, medicine, and medical devices. Most international banks refuse to process such transactions related to Iran because of supposed restrictions arising concerning bilateral trade as imposed by the Iran Threat Reduction and Syria Human Right Act of 2012. However, humanitarian trade such as that described above does not fall under those restrictions.

So one of our main issues is getting foreign financial institutions to advise on letters of credit from Iranian banks and/or to release funds held in the correspondent accounts at those banks and financial institutions.

For many in Iran, there is no clear picture on how difficult the sanctions have made business and how it has impacted the country's economy. How significant are the sanctions, really, and could Iran's huge economy coexist with them for a long time if there were no nuclear deal and no agreement?

I think the Iranians are very adept at business and at developing strategies to sustain their economy despite facing massive international pressure. They have proven this over the last 35 years. However, it's not only survival that the sanctions seek to restrict; it is the growth of the economy. One can only imagine how strong the Iranian economy would be at this time if it hadn't been dealing with ever-intensifying sanctions. I do believe that the sanctions have had a significant impact, and that in order for Iran's economy to achieve its true potential, a resolution on the nuclear issue and other outstanding issues will have to occur so the pressure of sanctions can be eased.

How big is the sanctions relief compared with the existing sanctions?

Very minimal. It offers some suspension of secondary sanctions, releases a small portion of Iranian funds locked up abroad, and offers expansion of OFAC's already-in-place licensing program for civil aviation exports. The piece on the humanitarian channel has been shrouded in secrecy, so we don't know what actual steps will be taken.

I think parties on both sides, Iran and the U.S., are overestimating the breadth and impact such relief will have. That said, I believe, that it is a good starting point for both sides, and I believe Iran has been holding up to their end of the bargain so far, and the U.S. will become much more flexible if Iran continues to do so.

Why have countries stopped doing business with Iran because of U.S. sanctions even when Iran has offered them great deals? And how can countries like China and Russia get away with doing business with Iran?

The recent rounds of U.S. sanctions that have been issued since 2010 have been what we call "secondary sanctions." These types of sanctions target foreign parties engaged in activity with Iran. The authorities that have been provided to OFAC as a result of these secondary sanctions authorities allow them to cut off access to the U.S. and its financial system if they are engaged in some type of sanctionable offense. Regardless of the deals that Iran may give to them, the overwhelming majority of these countries and firms cannot sustain losing their access to the U.S., which is home to the world's largest economy.

For China and Russia, they are larger international players, economically speaking, and they have more leverage than other countries, and as such, they are less concerned with U.S. ramifications than other countries may be. That said, a Chinese bank, Kunlun Bank, has faced U.S. secondary sanctions as a result of its transactions with Iran, so neither of these countries are completely un-impacted from the imposition of sanctions on their banks and firms.

Some people in Iran call the sanctions illegal. From the legal perspective, are these sanctions illegal, considering that a part of the sanctions were adopted by the UN Security Council?

No, they are not illegal. What people don't understand is that the U.S. imposes sanctions which identify targets (such as Iran); however, the prohibitions are actually imposed against U.S. persons engaging in transactions with Iran or foreign parties. In short, the U.S. is just closing off access to itself by implementing sanctions. The U.S. has the legal right to close off its own financial system if it so chooses. The only reason it has such a widespread impact is because of the position the U.S. holds in the global economy. Since it is the biggest economic power, many transactions occur through the U.S. financial system. If someone is shut out of it, it has a major impact.

Also, it is important to note that sanctions leverage the private sector. As such, many times it is the private sector internationally that is actually effectuating the sanctions, without the U.S. having to actually penalize or designate anyone. Even when new laws are passed, the private sector seeks to come into compliance with them even before the first designations under those authorities occur.

OFAC has been issuing General Licenses for different purposes, like letting Iranians have access to technical software and hardware for personal use. How does this work in practice, considering that doing financial transactions with Iran is extremely difficult? Is it easy for companies to use the General Licenses to do business, or, as the sanctions are very complicated, do many of them prefer not to even go near it?

Due to the problems with processing the financial transactions, it still remains difficult. In some sense, it's even more difficult because without a specific OFAC license in hand, many parties necessary to the transaction (banks, shippers, insurance, etc.) don't want to get close to it. There is too much risk imposed with Iran-related transactions for a lot of U.S. companies to want to get involved. Those that do still have difficulty in processing the financial transactions.

Is it worth it for small- or average-sized companies to start business with Iran that fits the General Licenses and risk stepping over the boundaries?

I think it is. They just need to develop confidence in the financial channels that will be used. There are a number of very important transactions that are authorized, and the Iranians have the money to pay for those transactions. It's just a matter of finding out how to get the money to the U.S. exporters. It's not impossible, just increasingly difficult.

How easy is it to deal with the bureaucracy of sanctions in the U.S.? Are the people who are involved with the sanctions aware of all sides of the issue?

It's not very easy. There are some people that are very understanding; there are others who are not. I would say that the people working on sanctions at the State Department have been great to work with. They really understand the issues and are very concerned that sanctions are being implemented in such a way to avoid harm to the Iranian people. OFAC is also good; however, they are more focused on enforcement, so they are stricter on these issues.

I remember in the first round of the Geneva talks, Dr. Zarif mentioned that they didn't have any experts on sanctions on their side, although it seems that the delegation was accompanied by sanctions experts in the next round of negotiations. What does a "sanctions expert" mean? And what do they do? And why is their presence vital in such negotiations

I would take that term to mean someone who does understand how the sanctions actually apply, what they restrict, what they allow, and what legal authorities are in place to ease them. I have commented on this recently, that the U.S. had an entire team of not just sanctions experts but the architects of many of the current sanctions programs with them during the round of technical talks. In addition, I am aware that Treasury Department lawyers assigned to OFAC were available by phone to participate in those discussions if need be. I have not been able to get a clear answer on whom Iran invited to participate as their sanctions experts; however, I have asked around, and none of the people in the private sector who are typically considered to be "sanctions experts" were invited to assist Iran, nor was their counsel sought. It seems to me that the U.S. had a strong advantage in the technical talks, because they had so much expertise on their side.

I think their presence is vital. There is an old saying: "You don't know what you don't know." Without that type of expertise, how can one really understand what is being offered, how the manner in which it is being offered will play out in practice, and whether one type of relief requires another type of relief to become practical?

The piece on the financial channel for humanitarian trade and its vagueness is most telling that perhaps there wasn't a clear idea on what to ask for and how to ask for it.

I do believe the Iranians are very smart and sophisticated negotiators, but I believe on that issue they were likely at a disadvantage.

How would this affect the Iranian negotiating team, while the U.S. enjoys the presence of a team of experts on this issue? At the end of the day, they are the ones who drafted and adopted all these sophisticated and complicated rules and restrictions.

Well, they understand the rules and restrictions in place. How can you negotiate the suspension or removal of an extremely complicated myriad of rules, regulations, and statutes without the expertise to understand the interplay between all of these laws and how they play out in practice?

The U.S. had the architects of the current sanctions regime on their side of the table. It's like playing a game against an opponent who wrote the rules of the game.

If you don't have some high-level sanctions expertise on your side, how can you level the playing field?

Iranians have been very hesitant to hire experts that exist out of Iran or out of the governmental circles. Many of those who are in Iran obviously lack the expertise to the level that is needed for such talks.

How important would it be for Iran to hire professionals, whether they are inside the government or not, for technical discussions?

I think it's actually imperative to their efforts. They will continue to be at a significant disadvantage in technical negotiations if they don't hire outside sanctions experts to help them decipher what type of relief can be granted and in what manner it can be granted.

From what you hear in the news or in your conversations and engagements in discussions on sanctions, and particularly in remarks made by Iranian officials, do you think Iranians fully grasp the complexity and the technical aspects of it?

I don't. I think they take a large concept and develop their own understanding of it, without considering the complexities and nuances of what the sanctions mean or what sanctions relief means. Sanctions laws are highly technical, implicate numerous laws, and analyzing them changes with the most minor change in facts or circumstances.

What can Iranians lose if they are not sufficiently equipped to fight against the sanctions?

Well, for example, if they had sanctions experts at the table, they would have known that the new licensing policy for civil aviation would be stymied by OFAC's huge backlog and delays. They could have written into the technical requirements that OFAC license decisions rendered under that new policy had to be made within a short, expedited time frame. That's just one example where expertise and experience could have been useful to the Iranians.

If you don't fully understand how these laws and processes work and the environment in which they occur, then you cannot get the maximum benefit out of the concessions being offered.

Do you know who writes such complicated and sophisticated legal documents and sanctions and how are they being developed and passed by the Congress? I doubt members of the Congress or their staff have been spending the time it takes to read hundreds of pages associated with these bills. For example, what if some conservative right-wing organizations drafted and pushed through the sanctions bill and made it very difficult for Iran to get away from it all anytime soon?

The sanctions come from different places. A lot of the legislation passed by the U.S. Congress does contain some ideas and language taken from groups like The Foundation for Defense of Democracies, United Against a Nuclear Iran, and the American-Israeli Political Action Committee (AIPAC). Other laws, such as the executive orders issuing sanctions, and the actual sanctions regulations implicating the sanctions, are drafted through an interagency process with the Treasury Department, State Department, National Security Council, amongst others. There are a number of very right-wing conservative groups operating in Washington that have been very influential in the imposition of sanctions; however, there is not one organization or group that is solely responsible.

How would all these right-wing organizations impact the language and the tone of the sanctions legislation?

I guess it depends on how you would define "right-wing," but yes, they are typically considered to be hawkish on Iran, and many refer to them as right-wing. It impacts the legislation in that it introduces a great deal of skepticism regarding Iran and how willing Iran actually is to resolve a lot of the issues for which sanctions have been implemented. Their worldview is one that is very distrustful of Iran, so that colors the legislation and the political discourse accordingly.

The Persian version of this interview was published in Iran's Tejarat Farda Weekly in Tehran.