While the Trump administration asserts that Iran is violating the spirit of the Joint Comprehensive Plan of Action (JCPOA), Iran says the United States is violating the letter by trying to inhibit foreign business with the Islamic Republic and in particular, the return of tier one foreign banks.
On July 12, the National Security and Foreign Policy Committee of the Iranian parliament published a report accusing the US of intimidating major foreign financial institutions from doing business with Iran.
“Even though the JCPOA clearly calls for sanctions relief, unfortunately, the P5+1 countries [the US, Russia, China, France, Britain and Germany] seem not willing to implement the given promises in the agreement,” the report says. It says the excuse given is that regulations of the Financial Action Task Force (FATF), a global financing watchdog against money laundering and terrorist financing, and banks’ substandard software cause the problems “but these excuses have no base in reality.”
The report continues, “We should ask how can small-size European banks or other countries do business with Iran but not the large banks? Aren’t they [small and large banks] operating based on the same system and regulations?” The report concludes: “It seems that Iran sanctions have been lifted on paper only and it has to do with the threats emanating from the United States to the European banks. They are afraid of facing heavy penalties in dealing with Iran.”
The report needs to be reviewed in the context of President Hassan Rouhani’s efforts to reintegrate Iran into the international economic community after implementing the JCPOA. In a much-heralded step in this direction, the Rouhani government joined the Terrorist Financing Convention (TFC) in 2015 – a move approved by Iran’s parliament on Aug. 4, 2015 and confirmed the following March by the Guardian Council, a powerful body that vets Iranian legislation for conformance to Islam.
States participating in the TFC are required to enact and implement legislation on anti-money laundering (AML) and combating the financing of terrorism (CFT). FATF monitors compliance.
As widely expected, the first FATF report gave the Iranian banking sector a failing grade. On Feb. 19, 2016, FATF said it was “particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system.” But a few months later, FATF decided to suspend so-called countermeasures against Iran that had discouraged foreign banks from interactions with Iran.
On June 12, 2016, Iran joined the Eurasian Group Combating Money Laundering and Financing of Terrorism, a regional body to assist it with AML and CFT protocols. Western countries including Britain offered to assist three Iranian banks—Persia International Bank, Melli Bank, and Sepah Bank International—to upgrade their policies. The Melli and Sepah banks, once the premier outlets for illicit transactions, announced that they would no longer service accounts connected with the Revolutionary Guards, including that of the giant construction company Khatam Al Anbya. Other major Iranian financial institutions such as Bank Keshavarzi (Agribank) and Bank Maskan (Housing Bank) ceased to handle the Guards’ business as well.
Rouhani was rewarded when, on June 23, 2017, the plenary session of FATF decided to continue its suspension of the countermeasures against Iranian banks – a step pressed by the European Union. By all accounts, the FATF decision should help Iranian banks to develop ties with larger European banks. This step is essential because small banks can extend letters of credit of only $10-20 million. The Iranian government estimates that optimal development and modernization of the economy requires $50 billion in annual foreign investment.
But as the new Majlis report alleged and independent analysts confirm, big European banks are still reluctant to underwrite deals with Iran because of uncertainty surrounding the position of the Trump administration. While the US has recertified Iranian compliance with the JCPOA twice, it has done so grudgingly and there have been reports that Trump wants his advisers to come up with reasons not to do so when next required in October.
Banks worry that if US secondary sanctions are re-imposed, they could face huge fines. They also worry about inadvertently doing business with one of the some 180 Iranian individuals and entities designated for sanctions by the Office of Foreign Assets Control, an entity within the Treasury Department. Just last week, after re-certifying the JCPOA, the Trump administration added 18 individuals and entities to the list.
Neo-conservative groups such as United Against Nuclear Iran (UANI) are also actively trying to frighten foreign companies away from investing in Iran. UANI’s Iran Business Registry boasts that more than 1,000 companies have received letters warning them that “severe legal, financial, and reputational risks associated with Iran business will continue for the foreseeable future—unless and until Iran fundamentally changes its behavior.” Consequently, companies should conclude that “business opportunities in Iran still are not worth the risk.”
UANI and other groups close to Israel’s right-wing government, such as the Foundation for Defense of Democracies, have also lobbied Congress to impose more sanctions on Iran. The Senate in June passed the Countering Iran’s Destabilizing Activities Act of 2017 and a bill combining Iran, Russia and North Korea sanctions is expected to land on President Trump’s desk before Congress leaves for its August recess.
By design and default, the strategy is working. Tarja Cronberg, a former member of the European Parliament in charge of the Iran portfolio, noted that the US Treasury has created the phenomenon of “over-compliance” whereby risk-adverse banks shun transactions with Iran.
“The remaining US sanctions, possible threats of penalties, and the threat of being closed off from American financial markets create fear,” Cronberg said. “Insecurity lingers because of the complex legislative dealings with money laundering, terrorism financing, and the like, as well as risk related to possible new sanctions.”
Several bank officials have confirmed the existence of the “over-compliance” trend. A French banker noted that, “We have abolished certain operations because we fear expensive fines similar to these imposed on BNP Paribas, Crédit Agricole, and Societe Generale Bank Jordan.” A German banker added, “The choice is easy between huge interests in the US compared to complicated and risky ones in Iran.”
The banking issue has come at an importune time for Rouhani and the normalizers. The Revolutionary Guards and other hardline opponents have seized upon these difficulties to promote the notion of toteyeh bozoorg — loosely translated as the “grand conspiracy to deny Iran access to the international banking network.”
The Guards, which are forced to use smaller banks operating outside the FATF protocols and front companies, have pushed back against banking reforms. But the hardliners have used the grand conspiracy charge to challenge Rouhani in a broader sense as well, including unprecedented public heckling during the Quds Day demonstrations in June. An improved economy would help the normalizers to fend off such attacks and to continue to reform Iran’s banking sector.
Farhad Rezaei is a research fellow at Center for Iranian Studies (IRAM) in Ankara where he researches Iran’s foreign policy. His writings have appeared in Harvard-Iran Matters, the National Interest, and Atlantic Council among others. His new book is Iran, Israel and the United States: The Politics of Counter-proliferation, (Lexington Books, Rowman & Littlefield) forthcoming. He tweets at @Farhadrezaeii