No Such Thing As a Good Iranian Bank?
by Jonathan Schanzer and Mark Dubowitz
With a new round of talks underway this week in Vienna, American officials are brimming with optimism concerning the possibility of a nuclear deal by the summer. Worryingly, Iran appears poised to retain essential elements of its military-nuclear infrastructure. But because Tehran will provide just enough in the way of technical concessions to delay its ability to breakout to a nuclear bomb, it's likely that the White House will unravel the complex sanctions architecture that has kept Iran's economy on its heels.
History will judge whether the president was right to compromise with a regime that has a long track record of nuclear mendacity. But with sanctions relief already granted to Iran in exchange for a nuclear pause, and still more to come, Mr. Obama has already undermined the original rationale for the U.S.-led financial sanctions.
As Treasury Under Secretary David Cohen has explained time and again, a primary goal of the strictures on Iran was to "protect the integrity of the U.S. and international financial systems." So much for that. Companies and banks are now lining up to re-engage with Iran in the event that a nuclear deal is struck. They are working under the assumption that a nuclear deal would expunge Tehran's long rap sheet of financial crimes in support of terrorism and proliferation since 1984, when the Islamic Republic was first listed by the State Department as a State Sponsor of Terrorism. And Washington has not disabused the international financial community of this assumption.
Iran's list of financial crimes is too long to document here, but recent highlights are worth noting. Beginning in 2007, the Treasury designated twenty-three Iranian and Iranian-allied foreign financial institutions as "proliferation supporting entities" under Executive Order 13382 for supporting Iran's nuclear and ballistic missile programs. At least eight of these financial institutions alsoprovided banking services to Iran's Islamic Revolutionary Guard Corps (IRGC), a group designated in 2007 for both terrorism and proliferation. The Treasury also sanctioned Bank Saderat as a "terrorism supporting entity" underExecutive Order 13224 for facilitating fund transfers to Hezbollah, Hamas, Palestinian Islamic Jihad, and other terrorist organizations.
In 2011, invoking Section 311 of the PATRIOT Act, the Treasury struck again with a designation of the entire "Islamic Republic of Iran as a jurisdiction of primary money laundering concern." The Treasury cited Iran's "support for terrorism," "pursuit of weapons of mass destruction," and "the illicit and deceptive financial activities that Iranian financial institutions…engage in to facilitate Iran's illicit conduct and evade sanctions." The Treasury targeted Iran's Central Bank, and made it clear that the entire country's financial system posed "illicit finance risks for the global financial system."
The goal was to push Iran to cease its illicit financial activity. But Tehran instead chose to find ways to circumvent the sanctions. This prompted additional Congressional penalties against foreign financial institutions conducting transactions with the Central Bank of Iran for the purchase of Iranian crude oil (though some waivers were granted).
With the Islamic Republic as defiant as ever, in 2012, the Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, came under intense pressure from the U.S. Congress to target Iran. The member-owned cooperative, which provides some 10,000 financial institutions worldwide with the means to exchange secure electronic financial messages, cut off a great many Iranian banks from its system. It was clear that the move was part of a global effort to convince the Islamic Republic to relinquish its illicit nuclear program. Officially, however, the cooperative cited its commitment to protecting the integrity of the formal financial sector.
The ban from SWIFT was not total, however. The Treasury, in an attempt to leave open a channel for humanitarian funds to reach Iran and to prevent a complete financial meltdown that would unfairly punish the Iranian people, struck a deal with SWIFT to leave a handful of Iranian banks on the system. The Treasury assured the international community it would keep an eye on those banks, and prevent illicit funds from coming through.
Fast-forward two years, and a leaked Turkish prosecutor's report, aimed at exposing corruption in Recep Tayyip Erdogan's AKP government, alleges that Iranian banks used SWIFT for illicit financial transactions (the report included copies of several SWIFT transactions). According to the report, Pasargad Bank, Parsian Bank, Sarmaye Bank, Bank Tose-e-Saderat, Karafarin Bank, and Saman Bank processed transactions for the network of Iranian businessman Reza Zarrab, who stands accused of having processed more than €87 billion in illicit transactions between 2012 and 2013. Four of these banks were not designated by the Treasury, but were prohibited to U.S. persons as entities of the government of Iran. This probably explains why they were allowed to remain in SWIFT.
While the defiant Erdogan government doesn't seem inclined to investigate the matter further, the episode underscores the dangers of giving even one bad bank access to the formal financial sector.
Washington knows these dangers all too well. Wielding its Section 311 authorities, the Treasury designated Macau-based Banco Delta Asia in 2005as part of its campaign against North Korea to prevent Pyongyang from acquiring a nuclear weapon. Within days, North Korean accounts and transactions were frozen or blocked in banking capitals around the world—including Beijing, the lifeline for North Korean capital.
But, as former Treasury official Juan Zarate explains, U.S. diplomats whose priority was securing a nuclear deal with North Korea at all costs undercut that action. Facing a North Korean negotiating team that refused to make concessions before sanctions relief, Foggy Bottom advocated for the release of funds on good faith. They ultimately prevailed, and Chinese banks renewed their financial relationships with Pyongyang. Washington lost its leverage, and an undeterred North Korea went on to conduct its first nuclear test in 2006.
U.S. negotiators currently haggling with Iran should take heed. Compromising the integrity of the U.S. and global financial system in order to get a nuclear deal done neither sealed the deal nor protected the system. Yet, Washington currently appears intent on a deal that could allow bad banks back into the system.
Tehran is hoping that Washington has long forgotten Banco Delta Asia. The country's leaders are also hoping that American officials didn't take the time to read the Turkish prosecutor's report. But both episodes serve as a stark reminder that, until the Islamic Republic renounces terrorism, ends its military-nuclear and ballistic-missile programs, and cleans up the illicit financial activities that have funded this behavior for decades, there is no such thing as a good Iranian bank. The onus is on Iran to prove otherwise.
Jonathan Schanzer is a former terrorism analyst for the U.S. Treasury Department and vice president for research at Foundation for Defense of Democracies (FDD). Mark Dubowitz is executive director of FDD and heads its projects on sanctions and nonproliferation.