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Iran’s Shadow Banking: How Iran Is Using Friends and Allies of the U.S. to Circumvent Sanctions

5:10 PM, Apr 26, 2011 • By AVI JORISCH
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The Dictator

The Dictator

Obtained via Creative Commons

As Iran continues to flout United Nations Security Council resolutions on nuclear proliferation, policy­makers in United States and Europe have come to view tough economic and financial sanctions as perhaps the last peaceful means of bringing the Islamic Republic into line. It’s true that sanc­tions aren’t a silver bullet, but properly targeted they’re a credible shot across the bow that might influ­ence the Iranian regime to change course. Most major financial institutions around the world have chosen to stop providing banking services to Iran. But some branches of designated Iranian banks are still operating in the capitals of some of American’s closest allies, in Europe, Asia and the Middle East. We need our partners to shut them down, lest they undermine the overall sanctions effort. 

Without hard currency, Iran will find it far more difficult to continue its illicit behavior, such as its support of ter­rorist organizations and pursuit of nuclear weapons. Accordingly, the U.N., the EU, and the United States have taken steps to isolate Iranian banks that are suspected of funding such activities via the international financial system. Beginning in 2006, the U.N. ordered member states to cease doing business under any circumstances with Bank Sepah and its affiliates. It also placed restrictions on two other banks, Melli and Saderat. Most recently, the U.N. also designated the First East Export Bank, located in Malaysia. As recently as last month, Australia, Canada and the EU also published a list of illicit Iranian Banks. For its part, the United States has formally desig­nated those named at the U.N., as well as an additional 16 Iranian banks.

In the U.S., the powers needed to take specific action against designated banks, their affiliates, and their assets are largely enshrined in the 2001 Patriot Act and the recently passed 2010 Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA). CISADA compels U.S. financial institutions to certify to the government that they and their customers have no direct or indirect business ties to designated Iranian banks. But CISADA also forces international banks to choose between the US market and doing business with designated Iranian banks. Banks who choose to continue doing business with sanctioned Iranian banks could face serious punishment; the Justice Department can take immediate action, closing down any branches they maintain on U.S. soil, cut off their correspondent account to any U.S. bank, and force a sale of all their U.S. assets. In other words, if you provide Iran with banking services you risk being cut off from the U.S. financial system.

To date, over 80 financial institutions around the globe have either completely cut off or signifi­cantly reduced their relationship with Iran. Major international banks, which in the past provided credit lines to the commodities industry in particular, have stopped supplying financial services to Iran. These include Credit Suisse, Deutsche Bank and UBS AG. And yet even as some of Washington’s international partners claim that they support sanctions they’ve left open certain loopholes that allow Tehran free access to the inter­national financial sector and hard currency. For instance, some European policymakers claim that designated branches can continue to operate in their jurisdictions as long as the transactions relate to contracts signed prior to the U.N. designation. This provision lets Iranian banks keep their business licenses in Europe with the result that these banks continue to operate relatively freely.

It’s time for our allies to close these loopholes, and further strengthen the sanctions regime. We need to apply every peaceful tool we have in stopping Iran’s drive toward a nuclear bomb—for as long as such options are still available to us.

Avi Jorisch is president of the Red Cell Intelligence Group and a former U.S. Treasury Department official. He is also the author of Iran’s Dirty Banking: How the Islamic Republic is Skirting International Financial Sanctions. 

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