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Latest U.S. sanctions on Iran, an unprecedented banking crisis

The U.S. Department of the Treasury announced, 16th of October, that its Office of Foreign Assets Control (OFAC) “took action against a vast network of businesses providing financial support to the Basij”, which it defined as a “paramilitary force subordinate to Iran’s Revolutionary Guard Corps (IRGC)”.

When designating entities or individuals, OFAC has a plethora of Executive Orders (E.O.) to choose from, ranging from Human Rights violations to malign cyber-activities. Yet, it is through Executive Order 13224 that many sanctions have indirectly targeted the IRGC. E.O. 13224 allows the U.S. government to not only go after the assets of terrorist organisations but also to disrupt the financial support network behind such organisations.

To this date, the U.S. Treasury has fallen short of designating the IRGC as a foreign terrorist organisation, although calls for such a designation have mounted with Trump’s presidency. Instead, OFAC has found indirect ways to target the corps’ economic and military power. In 2007, OFAC designated the IRGC’s elite Qods force under E.O. 13224, not for being a terrorist organisation, but for supporting already designated terrorist groups like Hamas and Hezbollah. In 2017, it was the IRGC itself that was designated under the same E.O. for being tied to the Qods Force. Now, it is the Basij’s turn to be designated pursuant to E.O. 13224 for its links to the IRGC and the Qods Force. In other words, chains of relations have for long been used by OFAC to apply sanctions on a growing number of Iranian entities and nationals.

While the designation of the Qods Force, IRGC and Basij under E.O. 13224 might not raise eyebrows considering their links to terrorism, some businesses designated on Tuesday are so loosely tied to the aforementioned entities and terror activities that the new sanctions pose to set an overly stringent standard for due diligence in countries like Iran. The most surprising designated entities since Tuesday are famous high street banks, two of them privately-held: Sina Bank and Parsian Bank. According to Bourse and Bazaar, Parsian Bank is among a select group of privately-held Iranian banks that have successfully complied with international financial rules, notably those set by the Financial Action Task Force (FATF). This has put the bank in a position to work with multinational companies to conduct their local banking needs, service the financial needs of the Diaspora and partner with foreign banks. It is highly unlikely that any of these clients could have suspected their bank of having incriminating links to the Basij. Indeed, the chain of relations linking the bank to the Basij is so elongated that at least seven entities exist between Parsian Bank and the Basij. Legal experts have voiced their concerns regarding this latest development in U.S. sanctions. The new precedent set by the new sanctions shows that the U.S. government is ready to go at great lengths to make any kind of business with Iran sanctionable, as no amount of due diligence is now capable of ensuring compliance with U.S. sanctions.

Many of the designated entities have released statements reassuring stakeholders that they would not be impacted by the new sanctions. For instance, Parsian Bank stated that its operations would not be impacted by the new sanctions, given that it has eschewed dollar transactions for a long time and only transacts with European or Asian partners in their local currencies. Yet, such reassuring statements do not take into account the power of American secondary sanctions. From now on, any person or legal entity dealing with Parsian Bank could potentially become subject to fines and other sanctions by the U.S. government, unless theoretically the bank removes itself from the chain of relations linking it to the Basij. This development is particularly significant considering that staying in touch with the international financial system is one of president Rouhani’s main objective. Iran is in the last stage of approving financial reforms required by FATF, an action which could guarantee the country an almost unfettered access to the international financial system.

Considering this, the recent designations make legitimate financial transactions with some of the rare rule-compliant Iranian banks all the more difficult, and they bring another obstacle in front of Rouhani’s roadmap for Iran’s global financial integration.

Now it remains to be seen why the U.S. Treasury has decided to resort to such actions. One possible answer could be found in the gradual understanding in Washington that the oil sanctions operative on the 5th of November are unlikely to drop Iran’s crude exports to zero. Therefore, doubling down on entities possibly tied to the IRGC seems to be the alternative way found by the Trump administration to increase pressure on the Islamic Republic. Another way to look at these

sanctions targeting significant Iranian banks is the high possibility that for this round of sanctions, the U.S. will be unlikely to encourage the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to target Iranian banks like it did in 2012. In other words, the U.S. is seeking to financially isolate Iran by its own means.

Sources:

U.S. Department of the Treasury, 16 October 2018, “Treasury Sanctions Vast Financial Network Supporting Iranian Paramilitary Force That Recruits and Trains Child Soldiers”

Bourse and Bazaar, Esfandyar Batmanghelidj, 16 October 2018, “New Sanctions on Iran’s Parsian Bank Threaten Humanitarian Trade”

/”تحریم های آمریکا تاثیری درفعالیت های بانک پارسیان نخواهد داشت“ ,2018 Parsian Bank, 17 October “American Sanctions will not impact Parsian Bank’s operations”

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