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October 22, 2013 Inquiry & Analysis Series No. 1028

Violations Of Iranian Sanctions: The Role Of Multi-National Banks

October 22, 2013 | By Dr. Nimrod Raphaeli
Iran | Inquiry & Analysis Series No. 1028

Introduction

Since 1987, the United States has imposed a broad range of sanctions targeting Iran, such as financial, trade and investment sanctions that were intended to deter it from expanding its nuclear program, supporting terrorism and continuing its human rights abuses. The United Nations and the European Union, as well as other countries, have also imposed sanctions to pressure Iran to suspend the development of its nuclear program and end its support of terrorism.[1]

The U.S. government administers and enforces economic sanctions programs primarily against countries and groups of individuals such as terrorists, through either comprehensive or selective action, using the blocking of assets and trade restrictions to accomplish its foreign policy and national security goals. Unless permitted by the Office of Foreign Assets Control (OFAC) of the Treasury (ministry of finance) no U.S. person, regardless of location, may sell, supply, export, or have re-exported on their behalf any goods, technology or services to Iran or to the Government of Iran.[2]

In recent years, these economic sanctions have also been enforced against non-U.S. companies if it is determined that they have sufficient contact with the United States. The regulations represent a significant expansion of extraterritorial applications of U.S. sanctions for the non-U.S. subsidiaries of U.S. banks and businesses. Financial institutions became increasingly liable for prosecution even if there were no U.S. citizens involved in a transaction, or even if it did not take place in the U.S.[3]

The United Nations and the European Union as well as other countries have also imposed sanctions to pressure Iran to suspend the development of its nuclear program and end its support for terrorism. The United Nations Security Council has adopted several resolutions targeting Iran between 2006 and 2010.[4]

The Ban On Iranian Banks

The ban on Iranian banks' accessing the U.S. financial system that has been enforced since November 2011 has affected Iran's ability to trade freely on the international market. The biggest blow to the Iranian banking system was the decision by the EU and the U.S. in 2012 to deny the Central Bank of Iran and a dozen other firm's access to the SWIFT system.[5]

Sanctions Violations

Sanctions are often porous. No sanctions, military, political or economic, have ever been immune to violations by those who seek to profit from other peoples' predicaments or hardships, and the sanctions on Iran are no exception. The violators, however, were none other than some of the largest multi-national banks and what has come to the surface may just be a fraction of the extent of the problem. The motive in this case is strictly greed and "a quick buck."

This paper shall seek to highlight some of the evidence that has surfaced regarding the role of these banks in aiding and abetting Iran to circumvent the economic sanctions imposed by the United Nations, the United States and the European Union. The fines levied from the banks involved in violating the sanctions on Iran are equally staggering.

Criminal Proceedings

From 2009 to 2012, the U.S. Justice Department pursued criminal investigations against seven major multi-national banks for potential violations of sanctions. In most cases, criminal investigations were resolved through settlements that involved monetary forfeitures and deferred prosecution agreements. The actions against foreign banks taken by the U.S. regulators are embedded in the Comprehensive Iran Accountability, Sanctions, and Divestment Act of 2010 (CISADA) as well as a number of executive orders issued by the President of the United States. CISADA authorized the imposition of sanctions on foreign financial institutions that facilitated certain activities or financial transactions by a variety of Iranian institutions.

In 2012, Congress passed the Iran Threat Reduction and Syria Human Rights Act of 2012 to strengthen Iran sanctions laws for the purpose of compelling Iran to abandon its pursuit of nuclear weapons and other threatening activities. The Act expanded sanctions in a number of area including sanctions relating to Iran's energy sector.[6]

Under CISADA, the U.S. Treasury has since 2010 conducted outreach to more than 145 foreign financial institutions in more than 60 countries as well as to foreign governments, regulators, and other trade groups and associations.[7] The civil penalty for violating the Iran financial sanctions regulations may be as much as $250,000 per violation or twice the amount of the transaction, whichever is greater.[8]

The following table provides a sample of banks penalized, and the amount of penalty:


Source: GAO Report, p. 24

Reasons Behind The Forfeitures And Fines

The purpose of the penalty is the reduction of the likelihood an offender will continue to engage in criminal behavior.

The biggest fine was imposed in December 2012 on HSBC, the largest bank in Europe. In fact, the total fine levied against the bank was $1.9 billion over allegations of money laundering and sanction violations on Iran and other blacklisted countries. The fine was severe but it was meant as a warning by the U.S. Justice Department, which negotiated the fine with HSBC, that even the biggest institutions would be held accountable. It also meant that any transaction that violated the U.S. sanction policy can trigger prosecution.

In June 2012, OFAC announced an $819 million settlement with ING Direct Bank NV for transactions with Iran totaling $1.6 billion. In the case of Credit Suisse Bank, the U.S. has determined that from 1995 through 2006, the bank "deliberately removed material information, such as customer names, bank names and addresses, from payment messages so that the wire transfer would pass undetected through filters in U.S. banks." Credit Suisse also provided its Iranian clients with a pamphlet that provided detailed payment instructions on how to avoid triggering the OFAC filter.[9]

In the case of Standard Chartered (Hong Kong), the fine of $340 million was levied by New York's Department of Financial Services for "the omission of Iranian customer information from U.S. dollar messages sent to U.S. institutions."[10] The New York state authorities additionally fined a major auditing firm, Deloitte, $10 million for its poor oversight in monitoring Standard Charterer's compliance with sanctions restrictions.[11] Additionally, U.S. Federal regulators imposed an additional fine of $330 million for "failing to comply with sanctions against Iran."[12] The bank was accused of laundering as much as $250 billion illegally to Iranian entities like the Central Bank of Iran, Bank Melli, and Bank Saderat.[13]

RBS and the U.S. Justice Department reached an agreement in 2010 to settle charges that ABN Amro Holding NV, the Dutch lender RBS acquired in 2007, had conspired to defraud the U.S. by engaging in transactions with state sponsors of terrorism. The firm was subject to a deferred-prosecution agreement, which required a forfeiture of $500 million.[14]

Barclays Bank paid $298 million to settle charges that it has altered financial records: (a) omitted foreign banks' names from payment messages, and (b) routed certain payments through an internal account so they would appear to be coming from Barclays rather than a bank in Iran.

There were other banks, some multinational banks, such as JP Morgan Chase Bank, the largest American bank by assets, which was fined in August 2011 $88.3 million for, among other things, the transfer of 32,000 ounces of gold to the benefit of an Iranian bank.

The U.S. Treasury imposed sanctions on two foreign financial institutions – the Bank of Kunlun (China) and Elaf Islamic Bank (Iraq) – for "knowingly facilitating significant transactions and providing financial services for designated [meaning under sanction] Iranian banks for directly accessing the U.S. financial system."[15] According to Iraqi source, four Iraqi banks were involved in violations of the sanctions on Iran. According to the source, banks and intermediaries charge $33,000 for the illegal transfer of $1 million, a large fee given that perhaps billions of dollars are illegally transferred.[16]

New York State, which licenses banks to operate in the city of New York's financial district, fined Japan's largest bank, Tokyo Mitsubishi-UJF, $250 million for handling money transfers that violated sanctions on Iran, Sudan and Myanmar. Regulators say employees of the bank were instructed to remove information from wire transfers that would have identified the transactions as violating U.S. sanctions. The illegal transfers totaled $100 billion over a five-year period from 2002-2007, and involved 28,000 illegal transactions.[17]

The two largest French banks were also under investigation. BNP Paribas SA, France's largest bank, said as recently as March 2012 that it was cooperating with U.S. authorities regarding payments involving countries, individuals or entities subject to U.S. economic sanctions. A similar statement was made by Credit Agricole (SA).[18]

Commerzbank AG said in 2010 that it was cooperating with U.S. authorities on an investigation of transactions involving Iran. Germany's second largest bank said at the time that it couldn't assess the outcome of the investigation or how much it might cost. [19]

Stripping And U-Turn Transactions

Many of the banks were accused of engaging in the practice of "stripping" – namely removing or substituting information contained in payment or trade finance instructions in order to prevent association of the transaction with the a sanctioned entity, person or corporation.

The U-turn regulation basically allows the banks in the U.S. to make transactions with Iranian entities by transferring money from Iranian clients to non-Iranian banks in foreign countries, up until 2008. Since then the practice has been declared illegal, but a number of banks continued the practice, which triggered U.S. legal action.

Reasons For Heavy Fines

According to Eric Volkman and Robert Sims, attorneys with the international law firm Latham & Watkins, the major reason the United States has been able to impose such payouts is because "few institutions have chosen to contest claims, weighing the cost of paying an agreed upon fine versus taking their chances in court, where they could still end up paying astronomical fines, but also see their reputations irreparably damaged by an indictment."[20] The long-term harm could be even greater if they were to lose access the profitable U.S. financial markets or if they were subjected to criminal prosecution.

Iranian Bank Fights Back

Iran's Bank Mellat, the country's largest commercial bank, sued both UK and European regulators claiming that banning it from operating in Britain and Europe was done on flawed evidence and the bank won in both instances. The bank also claimed that it had done everything it could to sever any links with the nuclear program. It also complained that it had not been given a chance to challenge the blacklisting decision beforehand, and that it was unfair that the U.K. Treasury was citing secret evidence which they have not allowed to see.

The Supreme Court in the U.K. sided with bank and ordered the UK Treasury to cover legal costs and to begin discussions over damages. The Court ruled that the government's action against Bank Mellat was "arbitrary and irrational" and "disproportionate." It also examined the secret evidence and ruled that it was not "relevant" to the case. As a result, the judgment issued by the court has paved the way for similar actions from scores of Iranian banks and oil companies that may push the total compensation bill in excess of $1.4 billion.[21]

The Luxemburg-based General Court, which hears cases against EU institutions, upheld sanctions against Bank Mellat as well as some of those imposed on the Hamburg-based Europaisch-Iranische Handlesbank that was accused of being a conduit for payments on behalf of the sanctioned Iranian banks. The Court, however, ruled against the freeze on funds belonging to seven companies in Iran's oil and financial services sectors, saying there was not enough evidence to justify the sanctions.[22]

The Impact Of Sanctions On Iran

The sanctions have sharply cut back oil exports, isolated Iran from international banking system, and contributed to a big drop in the value of the national currency. According to the International Atomic Energy Agency, Iran sustained $40 billion in losses in 2012. The toll on the individual Iranian is equally harsh in terms unemployment, inflation, spiraling prices of essential commodities and medicines which quadrupled in price.[23] The World Bank has estimated that inflation in the country reached 39% in August 2013, adding that "official data, however, is widely thought to underestimate actual inflation." Moreover, the World Bank adds: "The currency has lost an estimated 80 percent in value against the dollar between March 2012 and March 2013 and is likely to further depreciate."[24]

Iran is not poor by necessity; it is poor by choice. It ranks second in the world in natural gas and third in oil reserves. Billions of dollars of oil windfall profits were squandered on subsidies (including for gasoline), a vast armament industry, including a clandestine nuclear program, and the financing of terrorism in many hot spots of the world. Many Iranian officials are beginning to concede that the economic sanctions on their country are having crippling effects on the economy, affecting external trade, domestic prices, interest rates, savings, foreign direct investments, and capital flows.

The sanctions on Iran were further aggravated by severe mismanagement under eight years of the regime of President Mahmoud Ahmadinejad. Corruption is rampant, particularly among the mullahs who are in charge of enforcing the rules of doctrinal orthodoxy and religious piety.

Conclusion

The sanctions on Iran have been greatly effective and the multi-national and other banks which engaged in circumventing or violating the sanctions were made to pay heavy fines to deter them and others from otherwise openly ignore the sanctions. However painful the sanctions are, though, they have been far from mortal. For example, the embargo on the export of Iranian oil was mitigated by the special permits extended by the United States to countries such as India, China, Japan, Turkey and South Korea. Iran has also resorted to bartering more and more of its oil, especially with Asian countries, against consumer products.

The question of whether Iran will modify its behavior with regard to its nuclear program in the wake of the debilitating sanctions only time can answer. However, if it fails to do so, sanctions could drive the national economy into a complete dysfunctional state.

And one significant observation: Most of the U.S. sanctions are embodied in acts of Congress. It means that the Administration must seek congressional approval before lifting them in full or in part.

* Dr. Nimrod Raphaeli is senior analyst emeritus at MEMRI.


Endnotes:

[1] This report will rely on published material from banks' supervisory bodies but most significantly on the study by the U.S. Government Accountability Office, Report to the Chairman, Committee on Homeland Security and Government Affairs, U.S. Senate: “Iran: U.S. and International Sanctions Have Adversely Affected the Iranian Economy,” (February 2013). Henceforth, we will refer to it as GAO Report.

[2] Edwardswildman.com, August 2013.

[3] Knowledge.wharton.upenn.edu, March 5, 2013.

[4] GAO Report, pp. 5-6.

[5] Society for Worldwide Interbank Financial Telecommunications provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.

[6] GAO Report, p. 11.

[7] GAO Report p. 18.

[8] GAO Report, p. 21.

[9] GAO Report, p. 25.

[10] GAO Report, p. 23.

[11] ABC.net.au, June 21, 2013.

[12] UK.reuters.com, December 6, 2012.

[14] Bloomberg.com, August 22, 2012.

[15] GAO Report, p. 22

[17] Governor.ny.gov, June 20, 2013.

[19] Bloomberg.com, August 22, 2012.

[20] Knowledge.wharton.upenn.edu, March 5, 2013.

[21] Telegraph.co.uk, August 18, 2013.

[22] Wall Street Journal, September 7-8, 2013.

[23] Aleqt.com, April 17, 2013.

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