In recent years, the United States has imposed punishing sanctions on Iran’s financial sector. Last week, the U.S. Treasury Department announced new measures intended to hamper Iran’s ability to raise and move funds internationally. Several Western allies have followed suit in an attempt to tighten the noose around the Islamic Republic and curb its ability to achieve nuclearization. Yet a close analysis of Treasury’s action demonstrates that the new sanctions regime is far weaker than existing laws and falls short of the moves that members of Congress are demanding. What is needed is not new measures, but better implementation of existing statutes.
Despite four rounds of sanctions by the United Nations and a concerted effort by many Western allies, a large number of banks around the world continue to do business with Iranian financial institutions that are complicit in supporting terrorist groups and spreading nuclear weapons. The Central Bank of Iran (CBI), for example, still has unfettered access to the international financial sector, even though it has been accused of helping fund Iran’s nuclear weapons program, facilitating money transfers to terrorist organizations, and proliferating weapons of mass destruction.
On November 21, the Obama administration implemented section 311 of the PATRIOT Act, blacklisting Iran and all of its financial institutions. A 311 empowers the government to designate a foreign jurisdiction or institution, a class of foreign transactions, or a foreign account if there are reasonable grounds to conclude that they are of “primary money laundering concern.” To date, the U.S. government has used this provision to designate seventeen jurisdictions and banks.
Yet most lawmakers and policymakers seem unaware that the U.S. Treasury has already blacklisted all of Iran’s financial institutions under similar authorities. Treasury’s Financial Crimes Enforcement Network (FinCEN) effectively took this action in March 2008 when it issued a banking advisory that fingered all Iranian banks and their branches abroad for the “money laundering threat involving illicit Iranian activity.”
According to government insiders, one reason that Treasury implemented section 311 was its past success against North Korea. In September 2005, Macau-based Banco Delta Asia was designated under this section for helping North Korean officials collect surreptitious multimillion-dollar cash deposits and for distributing counterfeit U.S. currency, among other offenses. Since then, North Korea has not found a replacement international banker. But another reason for Treasury’s implementation of 311 was to stave off Congressional calls for stricter enforcement of existing authorities, since in Treasury’s view, such enforcement might harm the U.S. economy
In fact, the Comprehensive Iran Sanctions Accountability and Divestment Act (CISADA), which was signed into law in July 2010, is much stronger than the 311. CISADA specifies that all international banks must choose between the American and the Iranian financial market. Under the act, banks that do business with sanctioned Iranian institutions face serious punishment: the Justice Department can close down any branches they maintain on American soil or force a sale of all their U.S. assets. Congress has called on Treasury to fully implement CISADA, and some members have also asked the administration to officially designate Iran’s CBI for its involvement in terrorism and proliferating weapons of mass destruction. In recent weeks, Treasury has made a less-than-compelling case that if CISADA is fully implemented, or the CBI designated, international financial institutions will pull their assets from the United States.
The financial industry will quickly discover that under section 311, it is not required to do too much. Treasury “does not expect the burden associated with these requirements to be significant.” Domestic financial institutions will simply need to inform any banks to which they provide financial services that U.S. financial institutions are prohibited from doing business with Iran. However, as long as a foreign bank has a firewall policy in place that ensures that U.S. banks are not tainted with Iranian activity, the foreign bank is in the clear. Foreign banks can continue to do business with Iran with impunity; they will not be designated by the U.S. Treasury as institutions doing business with a blacklisted bank.
The announcement concerning section 311 has had some positive effects and spurred selected international action. The UK declared that it was cutting all ties with Iranian banks; Canada is banning exports for the petrochemical, oil, and gas industries; and France is calling for unprecedented sanctions, including freezing the assets of Iran’s central bank and suspending the purchase of Iranian oil.
But rather than enacting a new measure unlikely to have a significant impact on Iran, the Obama administration should fully implement CISADA as quickly as possible. At a minimum, Treasury should start by designating some of the biggest offenders, companies and banks that are doing business with blacklisted Iranian banks, or on their behalf. This would likely cause many of them to cut their ties.
Exerting real economic pressure on Iran’s banking sector is one of the few tools at the West’s disposal, short of the military option. Implementing CISADA, rather than section 311, should be the focus of Congress and the administration. Passing measures that are weaker than existing laws is not only counter-productive, but will be ineffective in hampering Iran’s march towards nuclearization.
Published originally in the Washington Times 5 December 2011