News & Press: Sanctions

In Iran nuclear deal, compliance challenges rise when ‘secondary sanctions’ on banks fall

Thursday, April 16, 2015  
Posted by: Brian Monroe
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The deal between the United States and Iran to reduce its nuclear enrichment, facilities and thwart alleged proliferation goals could create new compliance conundrums for banks as certain sanctions roll back, allowing new entry points to the financial system for licit and illicit aims.

The deal announced April 2 still has to be finalized by June and faces hurdles in Congress and from Iran, which has stated publicly that it wants all sanctions dropped immediately. Conversely, government officials have stated that such rollbacks would come in tranches.

The US and EU would remove certain nuclear-related sanctions on Iran after a United Nations watchdog ensures it has met the various criteria tied to numbers of centrifuges, overall enrichment and concentrations and the opening up of all facilities to inspectors.

Some experts have stated it would take Iran as long as six months to implement the tenets of the deal.

The easing of restrictions would allow billions of dollars in Iranian foreign currency to be repatriated back to its central bank and would allow foreign banks to engage in a broader array of transactions and trade and other financing deals without fears of being locked out of the US financial system by their US correspondents, said Kenneth Katzman, a specialist in Middle Eastern Affairs for the Congressional Research Service.

“What will be pulled back are the secondary sanctions on European and Asian banks from doing business with, say, a blacklisted Iranian bank,” if the transactions are tied to civilian uses, such as energy or trade finance, he said, and the bank is not designated for ties to terror groups, criminals or weapons.

In addition, Katzman said, Iran will likely also again gain access to SWIFT, the global financial messaging body that disengaged Iran in March 2012 after US congressional pressure and advocacy groups stated at that time it was helping the country evade US and EU sanctions.

The Belgium-based, member-owned cooperative connects more than 10,500 banks, financial institutions and companies in 215 countries and territories, according to its website.

If Iran gets access to SWIFT and new trade and transaction partners, it could also mean new due diligence and compliance tactics should be adopted to ensure direct and indirect connections are secure.

US banks and large foreign institutions with correspondent relationships with banks in countries near Iran, the country’s historical trading partners or institutions participating in legal energy deals should consider requesting more compliance information from their foreign portals, including how they are vetting and filtering customers, Katzman said.

“Banks are doing a lot of that now, but it’s important to make sure there is no Iranian involvement and transactions coming in through correspondents and other affiliates overseas,” Katzman said. “With sanctions pulling back, some banks might ease up on that scrutiny, figuring Iran is not an outcast anymore.”

Sanctions have nudged Iran to capitulate, in some ways more friend, less foe

That is a marked change from sanctions ratcheting ever higher for Iran in recent years.

For decades, the US had few if any diplomatic relations with Iran, releasing sanctions to punish the regime for everything from supporting terror groups to human rights abuses and weapons of mass destruction through various laws, executive orders and mandates, a foreign policy play that has increased in frequency and aggressiveness since 2010.

The initiatives have focused on several key areas of US concern expected to bring the most change in the Islamic theocracy, including banning or blocking Iranian assets, US trade and investment in Iran, the energy sector, weapons and nuclear proliferation and targeted financial measures against the central bank and a bevy of designated banks.

As well, even banks not specifically named are off limits to US and foreign banks with US correspondent relationships due to the US Treasury naming Iran a “primary money laundering concern” in 2011 and other actions that punish foreign banks for engaging in transactions with sanctioned Iranian institutions and entities. It dubbed Iran a State Sponsor of Terror in 1984.

Even so, that strategy has to be rethought in the current global geopolitical climate.

The US has to balance delicate dynamics in Iran, in some points both friend and foe, says Katzman.

The US is worried any reduction of sanctions against Iran could embolden the country’s support of Houthi rebels in Yemen and forces loyal to Bashar Al Assad in Syria and Hizbollah, while having a common enemy in the Islamic State, which has seized large swaths of Iraq and Syria and committed countless atrocities against soldiers and civilians.

But the sanctions have worked, Katzman wrote in a March 9 report.

International sanctions on “Iran’s key energy and financial sectors harmed Iran’s economy and arguably contributed to Iran’s acceptance of restrictions on expanding its nuclear program in exchange for modest sanctions relief,” he noted.

For example, the economic pressure has caused: Iran’s crude oil exports to fall to about 1.1 million barrels per day (mbd) at the end of 2013, from about 2.5 million barrels per day in 2011 and Iran’s economy to shrink by about five percent in 2013 as Iran’s private sector reduced operations and many of its loans became delinquent, Katzman wrote.

Even with sanctions easing, banks still fear regulatory, reputational risks tied to Iran

Those sobering figures likely contributed to why the recalcitrant regime chose to come to the negotiating table.

As part of the deal, Iran would lower its total of some 19,000 centrifuges down to just more than 6,100, with only around 5,000 allowed to spin and enrich uranium over the next decade. The tubular machines enrich uranium for power, but can also be used to create nuclear weapons.

Along with dropping the overall number of working centrifuges, they will also only be able to enrich uranium to just under 3.7 percent for 15 years, a figure high enough to meet the general power needs of Iran, but not be able to craft nuclear bombs.

Iran won’t also build new enrichment facilities during that timeframe and will continue to dilute its stockpile of 20 percent enriched uranium, falling over that same period from 10,000 kilograms to 300 kilograms.

If the deal goes through, Iran will be able to repatriate $130 billion in hard currency being held abroad it has not been able to bring back, mostly in South Korean and Japanese banks, Katzman said.

But don’t expect a flood of international banks trying to get in on the ground floor when these and other sanctions pull back, even in the clearly legal areas, he said.

There are persistent due diligence and risk calibration challenges in doing any deals tied to Iran because it can be difficult to get transactional histories of individuals or beneficial ownership details of companies or, going a layer deeper, if a firm is doing business on behalf of sanctioned group or more nebulous sub-entities.

“It’s not going to be like a light switch turning on when Iran gets more access to financing,” Katzman said, adding that sanctions on Iranian entities tied to proliferation, terrorism, and on related designated financial institutions will still be in place. “A lot of banks will be very trepidatious, hesitant to open up to Iran fearing the risk and being named and shamed.”

Hear an interview with Ken Katzman here:



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