Iran's supreme leader, Ayatollah Ali Khamenei, did not enter into Tuesday's historic deal with six world powers to reset relations with the West. It was the promise of more than $100 billion in sanctions relief, rather, that greased the wheels of the recently completed diplomacy in Vienna. And though the windfall of cash will certainly strengthen its position, the real prize for Iran was regaining access to a little-known, but ubiquitous banking system that has been off-limits to the country since March 2012.
SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is the electronic bloodstream of the global financial system. It is a member-owned cooperative comprising the most powerful financial institutions in the world, which allows more than 10,800 financial companies worldwide to communicate securely. It's hard to find a bank that doesn't use SWIFT to communicate with other banks — unless, of course, you've lived in Iran for the past few years.
SWIFT disconnected 15 Iranian banks from its system in 2012 after coming under pressure from both the United States and the European Union at the height of the effort to curb Iran's nuclear ambitions. It was a major blow to Tehran. Sure, it was how Iran sold oil, but it was also how Iranian banks moved money. According to SWIFT's annual review, Iranian financial institutions used SWIFT more than 2 million times in 2010. These transactions, according to the Wall Street Journal, amounted to $35 billion in trade with Europe alone.
SWIFT is now poised to let those 15 banned Iranian banks, including the Central Bank of Iran, back in. But the move is controversial, to put it mildly. The system is subject to EU laws and international banking standards, which are unambiguous about terrorism finance. Deal or no deal, Iran remains a threat because of its past financing of terrorist networks. As recently as this past June, the Financial Action Task Force, a global anti-money laundering and anti-terrorism finance standards body, warned that Iran's "failure to address the risk of terrorist financing" poses a "serious threat ... to the integrity of the international financial system."
Even U.S. President Barack Obama at his press conference this week acknowledged Iran's "support for terrorism" and "its use of proxies to destabilize parts of the Middle East." With Iran re-connected to SWIFT, it will be poised to more easily move funds to terrorists' coffers, foment conflict around the region, and possibly even procure equipment for a clandestine weapons program, should it choose to violate the nuclear deal.
"De-SWIFTing" Iran did not happen without controversy. But under congressional pressure, Obama administration and EU officials eventually agreed to take the step in mid-2012. Around the same time, the White House began its back channel nuclear negotiations with Iran. This was no coincidence: Cut off from the formal financial sector, Iran was desperate for a way back in. The Obama administration saw this as an opportunity. Secret talks led to public negotiations in October 2013 and the announcement of an interim agreement one month later.
So long as the Iranians continued to engage in dialogue, the P5+1 world powers agreed to provide sanctions relief. Direct sanctions relief under the Joint Plan of Action, the interim deal signed in November 2013, yielded the Iranian regime a total of $11.9 billion from frozen oil revenues, allowing the country to replenish its dwindling foreign exchange reserves. This contributed to a modest economic recovery in 2014 and 2015, but the pressure from sanctions remained, and Iran's economy remained stymied.
"Without SWIFT, there was nowhere to spend [the sanctions relief]," one U.S. government official told us in April. "The Iranians have been complaining to us throughout the JPOA process that sanctions relief means little without the ability to bank."
It is no coincidence, then, that the deal explicitly calls for the banks that were originally banned from SWIFT to be allowed back into the system. SWIFT issued a release on Tuesday afternoon in response to the announcement, stating that it "is aware of the Joint Comprehensive Plan of Action and the potential sanctions relief this may entail."
For the time being, however, the financial messaging service noted that "all the current EU sanctions remain in place.... Any decision to lift sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators."
In plain English, SWIFT is putting the onus on the EU to assume the burden of the decision of whether Iran will be reintegrated into its system. So, upon "Implementation Day" — when the International Atomic Energy Agency verifies that Iran has fulfilled the implementation of specified nuclear measures — the EU will be obliged to order SWIFT to readmit Iran's banks.
While Iran's readmission to SWIFT is underway, Iranian banks will also get a boost from a provision in the agreement that calls for the United States to delist the Central Bank of Iran. This is no small matter. In 2011, invoking Section 311 of the Patriot Act, the U.S. Treasury took the extraordinary step of designating 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 "deceptive financial practices" as reasons for the action. It specifically 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."
With the Central Bank no longer in the vise-like grip of the U.S. Treasury, and with SWIFT messages flowing, Iran's financial sector will soon be operating at pre-sanctions levels. The nuclear deal also lifts sanctions on 23 Iranian banks designated for proliferation financing — including both nuclear and ballistic missile activity. Only Bank Saderat, designated for its role in facilitating the financing of terrorist groups, will remain on the Treasury's blacklist. This will give Khamenei bragging rights for having survived the most crippling cocktail of financial sanctions in modern history. Loyalists to the ayatollah are framing this as a victory for the revolution in their ongoing struggle against America.
While supporters of the agreement might argue that the deal represents good news for the Iranian people, regardless of how the regime sees it, plugging Iran back into the formal financial sector poses a danger to the U.S.-led global financial system. The sanctions were put in place to combat Iranian money laundering and terrorism finance based on evidence that met strict legal criteria. That is all set to disappear. In other words, the measures required of the United States in the new Iran deal directly contradict the Obama administration's own Patriot Act finding.
To make matters worse, the agreement just reached in Vienna grants more than $100 billion in cash to Iran, which could flow to the coffers of terrorist groups and rogue actors like Hezbollah, Hamas, Palestinian Islamic Jihad, the Houthis, and Syrian President Bashar al-Assad's regime in Damascus. At the president's press conference on Wednesday, Obama dismissed this fear, claiming the money would not be a "game-changer" for Iran. It's hard to understand his logic: This infusion of cash will relieve budgetary constraints for a country already spending at least $6 billion annually to support Assad. For a country with only $20 billion in fully accessible foreign exchange reserves prior to November 2013, this is hugely significant.
More importantly, the relaxed banking standards will grant the Iranian regime the ability to move its money anywhere in the world. With EU sanctions also set to be lifted on Iran's Islamic Revolutionary Guard Corps, major IRGC companies and banks, and the Quds Force, the IRGC's extraterritorial terrorist arm, Europe will become an economic free zone for Iran's terrorist activity.
These concerns about Iran using its new sanctions relief windfall to send money to terrorists will bedevil U.S. leaders for years to come. The integrity of the formal financial sector is now pitted against the White House's desire for a diplomatic victory. This is a battle that the Obama administration may win for the next year and a half — but one that a future U.S. president may want to revisit, if Iran remains a leading state sponsor of terrorism into 2017.
But Iran has an insurance policy. The nuclear deal grants the Iranians their own "snapbacks" against a future president's attempt to reimpose SWIFT sanctions on terrorism grounds. The agreement is clear on this: "Iran has stated that if sanctions are reinstated in whole or in part, Iran will treat that as grounds to cease performing its commitments ... in whole or in part." So, while SWIFT snapbacks remain a theoretical tool of coercion, Tehran could trump that with threats of nuclear escalation, a move that is backed by the language of the agreement.
Iran's readmission to SWIFT is among the more dangerous aspects of the deal, making the enforcement of terrorism financing laws in the face of Iranian intimidation a monumental challenge for the next president and his or her economic warriors in the U.S. Treasury.