The Iran Primer

 

 

            Punitive financial measures represent the strongest non-military tactic available to disrupt Iran’s nuclear program in the short term. They are also the most viable tactic to convince the regime that it cannot afford to carry out destabilizing proliferation activities in the long term. Financial sanctions have proven an effective tool in disrupting the illicit activities of other rogue regimes, like North Korea. But Tehran is even more susceptible to punitive financial measures than Pyongyang because the Islamic Republic is fully integrated in the global financial system. Thus, denying Iran access to it is a powerful tool.

 

 

            In response, Congress passed a bill in April 2006 extending and strengthening the August 1996 Iran Sanctions Act (ISA). (The Clinton administration had weakened ISA in 1999 and 2000 in an attempt to engage the previous reformist government.) A modified version of this bill was signed into law on September 30, 2006, three weeks after the U.S. Treasury Department cut off Iran’s Bank Saderat from the U.S. financial system for transferring funds to terrorist organizations. A round of United Nation sanctions followed on December 23, 2006.

 

 “Targeted” sanctions

 

            Sanctions imposed since 2006 represent a marked improvement over the broad-based, country-wide sanctions levied against Iraq that President Saddam Hussein easily evaded and abused. Targeted sanctions against Iran have been enacted with three goals in mind: First, they aim to disrupt Iran’s illicit activities. Second, they seek to deter third parties from acting as enablers for Iran’s illicit activities. Third, they aim to force Iran to recalculate the cost-benefit ratio of—and reconsider continuing—its illicit activities. Targeted measures have been directed at specific Iranian companies, sectors and individuals engaged in illicit conduct.

 

            Targeted sanctions against Iran are graduated—they have been implemented in stages, each round building on the previous ones in order to gradually constrict the regime’s air supply, leaving it gasping for breath and desperate to acquiesce. The graduated approach, which includes both multilateral and unilateral efforts, is intended not simply to punish, but to encourage the Iranian regime to alter its behavior.

 

           Targeted financial restrictions include blocking “U-turn” transactions. Iranian banks are prohibited from engaging in financial transactions with American banks under sanctions passed after the 1979 seizure of the U.S. Embassy in Tehran. But U.S. banks had been allowed to process certain dollar transactions for Iranian entities simply for the purpose of clearing those transactions. This authorization was referred to as a U-turn exception. It applied as long as no U.S. bank directly debited or credited an account of an Iranian party. In 2006, however, the U.S. Treasury Department denied Bank Saderat access to this U-turn, effectively cutting off its ability to do business in dollars, the international currency for oil markets.

 

          The Treasury Department cited the bank’s ties to terrorism, specifically evidence that Bank Saderat had facilitated Iran’s transfer of millions of dollars to Hezbollah and other extremist groups for several years. The so-called “U-turn license” remained available to all other Iranian banks for the next two years. But in late 2008, after Iran’s illicit activities continued, the Treasury Department ended the U-turn license. This new restriction effectively denied all Iranian banks the ability to use dollars for any transactions related to the international oil economy.

 

            As of September 2010,the Treasury Department had targeted 16 Iranian banks. They include:

 

 

 

 

            Further, Treasury designated Banco Internacional de Desarollo, C.A. (Venezeula) and the Export Development Bank of Iran in October 2008, as well as Post Bank in June 2010.

 

            Islamic Revolutionary Guard Corps (IRGC): The IRGC has also been a major focus of both U.S. and U.N. sanctions. The Revolutionary Guards are deeply involved in the country’s ballistic missile and nuclear and weapons proliferation activities. They also maintain a special branch, called the Qods Force, which provides funds, weapons and training to terrorist groups.

 

            In recent years, the Revolutionary Guards have become one of the largest economic actors in Iran, controlling vast financial assets and resources. Most of the IRGC’s actual funds and assets lie beyond seizure in Iran, but its business and industrial activities—particularly those connected to the oil and gas industries—are heavily dependent on the international financial system. Targeted financial measures against the IRGC represent the kind of regime-hostile, people-friendly initiative that punishes those engaged in offensive behavior, without harming the average Iranian citizen.

 

            Multilateral sanctions against Iran’s financial institutions are an extremely effective tool in the fight against Iran’s illicit activities. For instance, U.N. resolution 1929, passed on June 9, 2010, designated 40 Iranian entities linked to Tehran’s nuclear and ballistic missile programs, including Bank Mellat’s Malaysian subsidiary, First East Export Bank.

 

            Multilateral bodies such as the Financial Action Task Force (FATF) have also been used to target Iran. Based in Paris, FATF is an international organization created in 1989 to establish standards to combat money laundering and terrorism financing. Its membership includes 34 countries and regional groupings. In a series of warnings between 2007 and 2009, FATF instructed its members to urge their financial institutions to use “enhanced due diligence” when dealing with Iran. In 2009, it went further and urged countries to begin developing “countermeasures” to deal with Iran’s illicit financial activities. FATF also dismissed Iran’s purportedly updated financial legislation, calling the changes “skimpy,” noting their “big deficiencies.”

 

           Sanctions are most effective when they are multilateral. But achieving consensus is difficult and the resulting action often represents the lowest common denominator. As such, complementary measures – including regional efforts by bodies such as the European Union and individual actions such as U.S. designations—are critical in raising the risks of doing business with Iran. Unilateral sanctions are felt internationally because of integrated and globalized market forces.

 

           The reputations of international banks, multinational corporations and insurance companies depend on their due diligence. The risks of engaging with an entity that has been publicly exposed for illicit activity often outweigh the potential profit margins. Executives of foreign corporations have opted to stop dealing with unilaterally sanctioned entities, even if they have no explicit legal obligation to do so.

 

            After President Barack Obama signed a unilateral sanctions bill in mid-2010, Lloyd’s of London denied insurance or re-insurance to petroleum shipments destined for Iran. Lloyd’s’ general counsel acknowledged, “The U.S. is an important market for Lloyd’s....Lloyd's will always comply with applicable sanctions.” Iran’s ability to develop its vast—and extremely lucrative—energy reserves has also been hard hit by investment cutbacks following unilateral U.S. and European actions.

 

           U.S. measures have also led to several high-profile cases against major international financial institutions. In early 2009, Lloyds Banking Group was fined $350 million for processing payments that originated in Iran. In December 2009, Credit Suisse Group paid a $536 million settlement over similar charges. In August 2010, Barclays agreed to pay $298 million to settle charges that it altered financial records to hide payments from sanctioned countries, including Iran.

 

 

          The Treasury Department has also embarked on an ambitious information campaign. Senior Treasury officials have met with private sector leaders around the world to outline Iran’s deceptive financial conduct and the risks they pose for banks and businesses. Treasury provided evidence, for example, that Bank Sepah asked other financial institutions to remove its name from transactions when processing them through the international financial system. Informed of the risks, market forces have led many banks and corporations to forgo business with Iranian institutions.

 

           In light of growing evidence, the Paris-based Organization for Economic Cooperation and Development, comprised of the world’s 32 strongest economies, raised Iran’s risk rating in early 2006. In addition, a growing number of banks and corporations wanting to conduct business in the United States have concluded that putting their U.S. business at risk is not worth the investment in Iran.

 

           Financial sanctions targeting Iran have also included offensive and defensive measures. Offensive tactics such as designations target actors engaged in illicit activity, from terrorism to weapons proliferation. The U.S. Treasury Department or its counterparts abroad proactively deny these companies or individuals access to the international financial system.

 

           Defensive tools, on the other hand, protect markets by denying entry to banks, companies or individuals who continue to engage in business with risky entities such as Iran, despite knowing the risks. Section 311 of the U.S.A. Patriot Act, for example, gives the Treasury Department the authority to deny risk-prone entities—defined as entities either exposed or involved in money laundering or terror financing—access to the U.S. financial system. Defensive tools do not aggressively target offending companies or individuals but, rather, serve as stop-gap measures to protect the U.S. financial system from abuse. The consequences of being denied access to one of the most important world markets can be severe.