INSTEX SPV to avoid US sanctions has been set up, but are the EU's efforts futile?

  • In September 2018, Sanctionline reported that the EU was planning on setting up a Special Purpose Vehicle (SPV) in order to facilitate payments between European companies and Iran while avoiding US sanctions. SWIFT’s reluctant agreement to comply with US sanctions on Iran provided further motivation to create the SPV.

    INSTEX, or the Instrument in Support of Trade Exchanges, was set up in January this year by France, Germany and the UK and will receive formal EU approval. INSTEX functions as a barter system, rather than a cross-border payment system like SWIFT, thereby allowing EU companies to avoid the US financial system.

    Despite the US’ warnings for those who wish to use INSTEX, at this stage it seems unlikely the system will be successful. The specific details of how INSTEX will function, legally and technically, are still unclear. For many companies, especially large global corporations, the fear of US sanctions enforcement is much greater than the desire to do business with Iran. Furthermore, Iran itself has expressed its dissatisfaction with the SPV, stating “Iran will never accept their strange and humiliating conditions.” Iran has also criticised the limited scope of INSTEX, which is expected to only be used for humanitarian purposes. Such transactions are already permitted, albeit difficult to process.

  • How do you estimate the role of the SPV as a solution for avoiding legal actions under the Blocking Regulation? Will companies refusing to do business with Iran be forced to use Instex given the so-called protection and anonimous character for the participants of the vehicle?

  • Great question, thank you.

    Historically, there has not been tough enforcement of the Blocking Regulation and thus most impacted by it do not seem to fear it. We speak to many financial institutions and law firms at seminars and conferences and the smaller entities appear more concerned about enforcement than the larger entities. I suspect this is because larger global corporations can more easily argue they have global policies forcing compliance with US sanctions and avoiding a US nexus is almost impossible. The message being passed on at these seminars and conferences is not to fear the Blocking Regulation too much. Whilst the regulation requires Member States to impose penalties which are “effective, proportional and dissuasive”, Member States are unlikely to penalise “their own” for making a reasonable commercial and internal policy decision (which arguably they are entitled to make). The motivation behind the resurrection of the Blocking Statute was to protect those companies who were doing business with Iran, as permitted by the JCPOA, and who wish to continue doing that business. It is unlikely to be proactively enforced on the companies who prefer not to engage with Iran.

    Also, at the moment INSTEX is only anticipated to be used for transactions related to food and medicine so it is not designed for use by everyone to ensure compliance with the Blocking Regulation.

  • Also, no Member State has implemented the Blocking Regulations yet, nor does it appear there is risk appetite to do so. A further point to consider is that complaints/referrals have to be made under the Reg to trigger investigations. Investigations into compliance with the Reg will not habitually take place.