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Middle EastJanuary 1 2017

Joseph I Lieberman: The case against investing in Iran

Banks that do business with Iran should bear in mind the legal, political, financial and reputational risks to both the company and its employees.
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Joeseph Lieberman

When the Iran nuclear agreement was signed more than a year ago, the country’s hardline regime hoped it would turn around its crippled economy. Western negotiators hoped it would restrict Iran’s nuclear weapons programme while also moderating Iranian behaviour. The agreement has helped the Iranian economy, but contrary to the hopes of the current US administration, Iran’s government remains extremist, expansionist and repressive.

Any company that is currently looking at investing in Iran or doing business with Iranian companies needs to be aware of the risks of violating continuing global business sanctions on Iran. It will also expose its own company and its employees to the risk of kidnapping, and end up helping the Iranian regime, which is the world’s biggest state sponsor of terrorism.

The legal, political, financial and reputational risks of doing business with Iran therefore cannot be ignored.

Sanctions remain

The nuclear deal does not end all sanctions imposed against Iran, its agents and nearly all of its state-owned businesses. US persons and companies remain largely prohibited from doing business there because the bulk of the US trade embargo of Iran remains in place. Non-US persons and entities such as corporations still risk secondary sanctions if they engage in dealings with Iranian or Iranian-related persons or entities on the specially designated nationals or blocked persons designations maintained by the US Department of Treasury. And broad sanctions relating to Iran’s sponsorship of international terrorism and human rights violations remain in effect.

To engage commercially with Iran on any scale is also to become entangled with its Islamic Revolutionary Guard Corps (IRGC), a sanctioned terrorist organisation. This is tantamount to fuelling a lawless regime that actively funds terrorism, commits human rights abuses against its own people, and thrives on unrest in the Middle East in order to project power and intimidate its neighbours.

The IRGC is entrenched in every aspect of Iran’s industrial and commercial economy. It is where the true power in Iran lies, and it is also the engine of Iran’s continuing threat to the rest of the world.

President Hassan Rouhani tries to make Tehran appear law-abiding and committed to international norms, while the IRGC regularly detains British, American, Canadian and French dual nationals, and holds them incommunicado in Iran’s notorious Evin Prison. Take British-Iranian citizen and charity worker Nazanin Zaghari-Ratcliffe as one example. Sentenced to five years in prison on unspecified charges and separated from her two-year-old daughter, her family has been given little information about her condition, despite entreaties from UK prime minister Theresa May.

Cyber crime

That’s not to mention that major companies are particularly vulnerable to Iran’s hacking and cyberwarfare capabilities. The case of jailed Iranian-American businessman Siamak Namazi is illustrative of this problem. At the time of his arrest, he was heading the strategic planning division for Crescent Petroleum, an oil and gas company based in the United Arab Emirates. The IRGC then sent 'phishing' e-mails from Mr Namazi’s e-mail account to hack the e-mail and social media accounts of Obama administration officials, journalists, academics and other business associates, friends and Namazi family members.

Banks are probably the most exposed to these risks. Strong penalties remain in place for institutions that directly or indirectly facilitate prohibited transactions. Many banks have previously been punished and rightly approach Iran with great reluctance. Since 2009, international banks have been fined $15bn for violating US sanctions related to Iran. In light of this history, it is unsurprising that many financial institutions remain hesitant.

The UK's HSBC has been particularly vocal in this regard. Still reeling from a record $1.9bn fine after the bank failed to spot money being laundered from the drug trade in Mexico and other sanctions violations, HSBC is understandably anxious about the impact of transactions connected to Iran. The monitoring process that was enforced alongside the 2012 fine exposed a transaction in 2015 that potentially breached regulations. The case, a loan to a firm exporting miniskirts to Iran, highlights how even minor transactions have the potential to expose a bank to the harsh glare of the regulatory spotlight.

When US secretary of state John Kerry encouraged European banks to actively engage with Iran, he earned a swift rebuke from Stuart Levey, HSBC’S chief legal officer. Mr Levey explained that the IRGC, which continues to control much of the Iranian economy, and operates through innumerable front companies, remains sanctioned by the US and the EU because of the “central role it plays in Iran’s illicit conduct”. Mr Levey rightly pointed out that there had been no assurances from anyone that the IRGC had reformed its behaviour or that Iran’s laws would be enforced any differently.

He went on to say: “Our decisions will be driven by the financial crime risks and the underlying conduct. For these reasons, HSBC has no intention of doing any new business involving Iran.”

Bank fines

HSBC is not alone. Standard Chartered has now paid up to $670m for breaching sanctions with Iran. The UK-based bank was found to have helped Iranian clients skirt US sanctions for more than a decade. And French bank BNP Paribas was ordered to forfeit a record $8.83bn and pay a $140m fine after it was found to have violated existing sanctions affecting Cuba, Sudan and Iran.

The Joint Comprehensive Plan of Action is designed to provide some relief from US sanctions to the Iranian central bank and some other Iranian financial institutions. However, the entire Iranian financial sector is still designated as a jurisdiction for primary money laundering concern by the US government, and it is almost impossible for transactions with Iranian businesses to be structured to avoid breaching such rules.

Any contract a bank undertakes with an Iranian-backed business directly benefits Iran’s financial sector, government or government officials, and therefore aids Tehran’s sponsorship of terrorism and aggression.

In mid-2016, the Financial Action Task Force (FATF) – the international inter-governmental body whose mission is to set standards for combating threats to the international financial system – decided to keep Iran blacklisted, despite perfunctory Iranian attempts to reform its banking sector through the passage of a new anti-money laundering/combating the financing of terrorism law. Iran remains on the FATF's select list of highest risk jurisdictions, alongside North Korea.

David Lipton, managing director of the International Monetary Fund, has also made abundantly clear that if Iran ever wished to reconnect with the global economy, it has to tackle the rampant money laundering and terrorist financing in its banking sector.

Despite some speculation that there would be a softening by the US of the regulations to accommodate Tehran, president Barack Obama has categorically denied that the US would ease rules preventing US dollars from being used in financial transactions with Iran in order to boost that country’s engagement with the rest of the world.

Instead, Mr Obama explained that Iran’s financial difficulties, even after the lifting of sanctions, were due to its continued support of Lebanon’s Hezbollah, illegal ballistic missile tests, and other aggressive behaviour. He stated: “Iran has to understand what every country in the world understands, which is businesses want to go where they feel safe, where they don’t see massive controversy, and where they can be confident that transactions are going to operate normally.”

Mixed message

But the schizophrenic messaging from US leaders makes any bank’s decision about Iran more difficult. Mr Kerry actively encourages European banks on one hand, while Mr Obama stresses uncertainty and risk on the other.

Deutsche Bank, Credit Suisse, Lloyds Banking Group, Royal Bank of Scotland, Société Générale and UBS have all said they would be restricting or avoiding Iranian business. For that, they and the others who have shown similar forbearance should be thanked.

Markus Kerber, director-general of the Federation of German Industries, very pointedly said that any sensible bank wouldn’t go “anywhere near Iran” and wouldn’t even “look the country up on the map”.

For any bank thinking about re-entering Iran, there is no easy or clean route to trouble-free business. Every way you turn, the journey is mired in danger and risk, not only to your own institution, but also to the world.

Joseph I Lieberman is a former US senator from Connecticut and a Democratic vice-presidential nominee. He is chairman of United Against Nuclear Iran. 

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Read more about:  Middle East , Iran