To Save the Iran Deal, Unleash the Auditors
As President-elect Trump begins to assemble his cabinet, the initial panic around the survival of the Iran Deal has given way to discussions about how exactly deal supporters can work to preserve its achievements. With several vocal opponents of the deal now suggesting that the JCPOA agreement may not be slated for immediate destruction, a window has opened to strengthen and protect the processes of implementation.
In Washington, there is just enough time for a few final executive actions to be taken in order to support implementation of the Iran Deal, and the Obama administration is currently weighing its options. The administration must strike a balance. It must take significant action to signal to Iran, Europe, China, and Russia that the deal continues to be viable, while not doing anything drastic enough to provoke a harsh reaction by the incoming Trump administration.
Perhaps this is exactly why unthreatening consultants, accountants, and auditors might be the unexpected saviors of the Iran Deal. Ten months after Implementation Day, Iran’s economy remains opaque, and the many large investment opportunities that have reached MOU-stage remain contingent on further due diligence and compliance work to ensure all parties, including elusive financiers, are ready to proceed with the transaction.
As it stands, many of the world’s largest advisory companies remain unable to service clients in Iran, leaving too few advisors on the ground working to bring transparency and strategic clarity to both Iranian and international business leaders and investors. For every global management consultancy, accountancy, or communications firm that has been able to establish an Iran desk, two others remain stuck on the sidelines. The challenge is that current US general license policy, in particular General License H, is too ambiguous for the purposes of enabling many major multinational companies to create an Iran market offering that fits within larger corporate structures. Issues around governance, support services, intellectual property, technology, and billing are all unaccommodated under general licensing, making it arbitrary as to whether key stakeholders in a company will decide that it is feasible to offer services to Iran. Some firms, uncomfortable with the ambiguity in General License H, have applied to OFAC for specific licenses, but long delays and difficult dialogue mean that few companies succeed with this channel.
To make an immediate and lasting impact on European efforts to establish economic ties with Iran, thereby increasing the flow of investment anticipated following sanctions relief, the Obama administration must create a new general license with more expansive accommodations for services related to improving transparency in the Iranian economy. Apart from a handful of small service providers, Iran is devoid of professional accountants, management consultants, and public relations advisors that are able to work to international standards. Unleashing the “Big Four” in Iran could be a way to keep the four horsemen of the Trump administration at bay. There are three key reasons why a new general license could fundamentally improve the pace of implementation and the viability of the Iran Deal.
First, such a general license would radically improve transparency in the Iranian economy. Some experts, such as former UK Ambassador to Iran Sir Richard Dalton, have recently called on authorities to develop a “positive list” whereby companies can ascertain “the ownership and control of Iranian state entities, including entities where there is no IRGC (Islamic Revolutionary Guard Corps) presence.” Such a list would be all but impossible to institute under the Trump administration, and it is unclear whether it is even the place of any government to judge the suitability of Iranian companies for partnership. However, if a wider range of companies were able to conduct due diligence work in Iran, a potential positive list would emerge more organically. As companies are vetted by international consultants hired by strategic and financial investors, the findings will become part of the collective knowledge of the business community. It is already commonplace for business leaders to ask one another whether a given company in Iran has a “clean” reputation (Do they run parallel books? Who are the true shareholders?). While client privilege will prevent consultants from disclosing their due diligence findings directly, business leaders who do pass muster would almost certainly exercise their prerogative to market this fact widely. Word-of-mouth would combine with the commercial value of a verified reputation to create a new dynamic in the business community where transparency is paramount.
Second, getting more due diligence experts into Iran would improve the viability of the Iran Deal by diminishing the criticism of anti-deal groups. Since Implementation Day, think tanks like Foundation for Defense of Democracies and advocacy groups like United Against Nuclear Iran have had to adapt their messaging. Acknowledging that attempts to “name and shame” companies that work in Iran no longer deter major multinationals from exploring the market, these groups have recently focused on highlighting that Iran trade and investment is “risky business” and that due diligence must be taken very seriously prior to any actual engagement. The approach makes sense given that due diligence is difficult to complete in Iran—these groups are reminding companies that it is foolhardy to make investments based on leaps of faith. Should world-class due diligence become a more easily accessible service in Iran, leaps of faith would become unnecessary, and this criticism would lose its resonance. Moreover, if globally-reputable advisory firms are able to audit ongoing compliance with regulations, then US and EU authorities would be under less pressure to police whether the implementation of the Iran Deal is benefiting parties such as the IRGC.
Finally, any step to increase transparency in the Iranian economy is likely to help assuage longstanding concerns in the banking community. Major European banks remain unwilling to transact with Iran, but concern over US sanctions is not always the predominant issue. European banks are even unwilling to engage in sanctions-compliant transactions because of wider risk concerns. In effect, Iran is still seen as an economy in which ownership is shrouded and in which money moves freely between the legitimate and illicit sides of the economy. Because so few Iranian companies have undergone significant due diligence, there is very little to counteract this impression. In other markets, major banks rely on the evaluations of the Big Four auditors (EY, PWC, KPMG, and Deloitte) or the Big Three credit rating agencies (Moody’s, Standard & Poor's, and Fitch Ratings) to guide the appropriateness of engaging with particular client transactions.
As in these other markets, Iran needs a holistic approach to compliance where no one entity assumes too much risk for signing off on major transactions. The decision to provide banking services or to facilitate a transaction should depend on input from the compliance department of the client (such as a major multinational corporation), the compliance department of the bank, and the external compliance experts who have conducted due diligence on the Iranian counterparty (given that Iranian firms do not have robust internal compliance functions).
In this way, while Iranian banks work to institute sector-wide reforms including adherence to FATF guidelines, the advisory services of the Big Four, Big Three, or other respected firms could play a critical role in raising the comfort level of major banks in engaging in transactions—at least on a case-by-case basis. Given how important individual transactions by European multinationals such as Airbus, Renault, Total, or Siemens will be to the overall sentiment around the Iran Deal, even a move to increase case-by-case acceptance of Iranian financial engagements could have a major impact.
As US regulators have set expectations regarding the parameters of acceptable commercial activity with Iran by both US and non-US persons, and the requirements for due diligence therein, it behooves regulators to empower businesses to meet those expectations to the fullest ability. In the limited time that remains before the uncertain leadership of President Trump, the Obama administration should strengthen the Iran Deal by unleashing the auditors.