Much has been said lately about the lack of sufficient banking channels between Iran and the rest of the world, and the spillover effects it is having on Iran’s international economic re-engagement. The Joint Comprehensive Plan of Action (JCPOA), the so-called “nuclear deal,” was implemented in January 2016 and now nearly 6 months have passed since many of the banking-related sanctions on Iran were eased. U.S. Secretary of State John Kerry has been emphatic that there is nothing prohibiting legitimate business with Iran, effectively singling out international banks. Nonetheless, there is still very little electronic wiring taking place in or with Iran. So what’s holding things up?
The reason can be limited to primarily two issues – the hesitation of foreign, non-Iranian banks due to past enforcement of sanctions violations as well as self-evident deficiencies in Iran’s banking system.
One commonly-cited reason for the lack of desire by foreign banks to deal with Iran is heavy penalties imposed on such financial institutions by U.S. government authorities, like the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Justice, for sanctions breaches over the years. The relatively recent cases of BNP Paribas ($8.9 billion), HSBC ($1.9 billion), and ING ($619 million) point to this. These numbers can be terrifying, right? Well, maybe. These penalties were not, by most objective standards, imposed capriciously – the United States has been able to prove intent to violate the law in these cases. Stories abound of “wire stripping” (where references to sanctioned countries and entities were removed from payment instructions to avoid flagging in New York, where most transactions involving U.S. dollars are cleared).
One Chief Sanctions Compliance Counsel at a major European bank that was fined by OFAC told me recently that his employer declined a meeting with Secretary Kerry -due in part to the fact that there is no assurance as to who will be in charge in the United States next year, and that Secretary Kerry’s words are in effect not binding or assuring. Some financial institutions entered into so-called “Deferred Prosecution Agreements” or DPAs whereby they agreed not to deal with Iran for a certain number of years. A number of these financial institutions are evidently still bound by these DPAs.
Although foreign, non-U.S. banks can now deal with Iran within certain parameters, U.S. counterparts generally cannot, unless the underlying transaction is lawful under U.S. law (for example, the sale of certain laptop computers from the United States to Iran). Some experts now say that banks will not deal with Iran until the unilateral U.S. embargo on Iran is repealed. Seeing Cuba as an example, it could easily be years before that happens.
Iran’s Banking System
So assuming that OFAC and the U.S. Department of Justice were to give reliable assurances somehow that they would not punish lawful business with Iran, that would be a green light to non-U.S. banks to deal with the Iranians, right? Probably not. An additional reason for the reluctance of international financial institutions’ reluctance to deal with Iran has been Iran’ own internal banking system. Iran’s banks, it is said, simply lack proper Antimoney Laundering (AML) policies. Indeed, Consumer Due Diligence (CDD) (also known as Know Your Customer or “KYC”) policies are considered nearly non-existent in Iran and the Financial Action Task Force (FATF), a multinational organization aimed at fighting money laundering and terrorist financing has included Iran in its list of “high-risk and non-cooperative jurisdictions,” although in late June it decided to suspend counter-measures against it due to positive steps taken by Iran to combat AML.
Beyond this, even certain Iranian officials have admitted the inadequacies and obsolete nature of Iran’s banking system. More will need to be done, everybody seems to admit. Some in the United States have argued that U.S. experts should be allowed to help the Iranians bolster their compliance policy and adherence to international banking norms. It seems unlikely for now, but could very well happen as transparency and compliance by Iranian banks could certainly help keep the international financial system cleaner, a benefit to all western countries, and many others as well.
All this said, there has been talk of a number of smaller banks, in certain European jurisdictions as well as countries like Turkey and India, initiating transactions relying on the international SWIFT bank messaging system. One western journalist based in the Middle East told me that a recent transaction in Iran was handled electronically through a web of transactions and at a 10% commission. Compare that to the 3% and $15-20 most of us in the United States have to pay for sending money from our computers – a process that generally takes less than about 10 minutes to input!
One theory, which may be the most accurate, is that Iran’s engagement with the global economy will require it to adhere to international standards in a wide array of areas, banking included. This, along with added sanctions relief, can increase the “upside” of western banks dealing with Iran. In other words, the more they can deal with Iran, the more potential profits they would be missing out on if they choose not to deal with it. The question, however, is how much is enough for a major Tier 1 bank to be willing to comb through transactions with Iran to determine whether to facilitate a lawful one, as opposed to a blanket position of universally refusing to deal with that country?