Iran’s Broken Financial System


Tehran hasn’t benefited much from the nuclear deal. But the real problem is its own economy.

The Iran nuclear deal was destined to be controversial in its negotiation, conclusion and implementation. Nowhere is the deal more complex than in the area of sanctions relief. But blaming sanctions for the failure of a windfall for Iran to materialize — as critics and supporters alike are saying — misplaces attribution and undermines prospects for the deal’s success.

Iran has already received some benefit from the nuclear deal. The stabilization of its economy, which began after President Hassan Rouhani was elected, has permitted some reforms and economic regeneration. But expectations of the deal were high and have yet to be satisfied. Iranians have struggled to access $100 billion of their assets unfrozen under the nuclear deal; even Secretary of State John Kerry says they have wrangled only $3 billion of this sum. Moreover, most foreign companies and banks are hanging back, unwilling to do deals in such a high-risk jurisdiction.

The finger-pointing has already begun: Iranian critics of the deal blame Rouhani and his diplomats for having been suckered. In the United States, some critics are crowing that Iran’s struggles prove that had President Barack Obama stayed the course on sanctions, Iran would be collapsing. And, they decry any indication that the Obama administration should expand sanctions relief for Iran to aid Iranian reformers and ensure the nuclear deal is sustained.

The reality is that Iran was always going to have trouble reconnecting with the global economy thanks to systemic weaknesses in its economy and its regulatory structure. No amount of sanctions relief would change that. But the U.S. still should work with Iran to overcome those problems and reap benefits from the deal. Further isolating Iran’s banking system would serve only to undermine the nuclear deal and potentially damage the U.S. financial system.

Fundamental economic challenges in Iran run deep. Basic banking problems — including corruption and illiquidity of banks, and banks’ inability to follow modern standards for financial disclosure, taxation, capital requirements and due diligence — exist in many emerging markets. But Iran is an extreme example because of what the International Monetary Fund has called a “high” number of nonperforming loans, weak central bank liquidity, and a history of supporting terrorism and allowing security services to involve themselves in the financial system (complicating any due diligence process). Moreover, a cumbersome bureaucracy and regulatory regime help make Iran No. 118 on the World Bank’s ease of doing business index.

Iran has augmented these difficulties by involving its banking sector in ongoing regional destabilization in countries such as Yemen and Syria. Supporters of the deal cannot argue that Iran has abandoned its support for terrorism, or that it is reasonable for international investors to be wary about going back there. The incentives for doing so are particularly muted when prolonged low oil prices make Iran’s largest economic sector relatively unattractive.

Iran’s economic troubles are largely its own responsibility, but residual U.S. sanctions — particularly those that threaten foreign banks’ access to the United States if they do business with actors in Iran who have been found to support terrorism or violate human rights — just make them worse. This was also true during the period of the most intensive sanctions implementation several years ago. But, by taking Iranian complaints about sanctions at face value, deal supporters and critics are strengthening Iran’s case that the United States is to blame for the limited benefits Iran is receiving from the deal. But for that, the fault largely falls on the Iranian regime.

That said, the United States can and should do more to ensure that Iran gets what it paid for. This is essential to keep the deal — and its nuclear constraints — in place. The U.S. should allow its citizens and companies to help Iran clean up its financial system by providing advice to prevent money-laundering and implement reporting requirements on suspicious transactions, as the international Financial Action Task Force has urged Iran to do. The administration should also help foreign companies manage their responsibilities for due diligence in Iran by ensuring their access to U.S. expertise and guidance. Leaders of the U.S. Treasury and State departments should also urge their European and Asian counterparts to more publicly and intensively help companies understand how to do business with Tehran while avoiding entanglement with illicit, corrupt actors there.
For its part, Congress should oversee the deal, ensuring that it delivers the security benefits the White House promised to the American people. Lawmakers should avoid refighting the battles over the accord of the past year by attempting to pass cynical new sanctions legislation.

The stakes are high, not just for U.S. national security but for our economic security as well. One particularly dangerous proposal in Congress would restrict the use of dollars by foreign banks. If enacted, this could diminish the attractiveness of the U.S. financial system to foreign businesses. The current preferred global use of the dollar for lending, trade, investing and storage of value, is a tremendous benefit to the U.S. economy, but it is not a god-given right. It is a function of an international system that U.S. leaders helped to create, fund and sustain in no small part through the rigorous practice of economic openness, competitiveness, soundness and the ubiquity of the dollar. If U.S. leaders give away this advantage, aided by imposition of proposed new global rules for the dollar tied to Iran, the advantage may be impossible to recapture.

At present, sanctions are not a core problem with the nuclear deal. But U.S. policymakers risk making them so and undermining nuclear diplomacy if they mistakenly ascribe too much of Iran’s economic woes to Western sanctions. They also risk American economic power if they abuse this asset with new international restrictions on the use of the dollar. As we implement the Iran nuclear deal, ensure that it is strongly enforced and soundly monitored, we must remember that though the economic and security stakes for Iran are significant, they may be no less so for us, as well.

Elizabeth Rosenberg is director of the Energy, Economics and Security Program at the Center for a New American Security. Richard Nephew is a senior research scholar at the Columbia/SIPA Center on Global

Iran Faces Financial Hurdles for Airbus Orders

Banks ‘shy’ of funding big deals with Tehran, says Airbus sales chief

DUBLIN—Concerns in the financial community about doing deals in Iran are hampering Airbus Group SE’s ability to close a multibillion-dollar aircraft pact with Tehran, the European plane maker’s head of sales said Wednesday.
“We have to find ways to get money out of Iran through the banking system,” said John Leahy, Airbus chief operating officer for customers. While progress has been made, it has been slower than expected, Mr. Leahy said.
Even as the U.S. and European governments are now looking to foster transactions, banks remain reluctant to do deals after facing fines imposed by U.S. regulators on lenders when Western sanctions on Tehran were in place.
“They are all very shy,” Mr. Leahy said.

Iran, with a population of more than 80 million and pent-up demand for travel after years of isolation, represents one of a few large untapped markets for new planes. Mr. Leahy said Iran has “an ancient fleet” that needs replacing and will enjoy growth as the country’s economy recovers.

IranAir Chief Executive Farhad Parvaresh acknowledged that the banking issue is one of the biggest hurdles to closing plane deals.The airline also is discussing a potential order with Boeing Co. , the world’s largest plane maker by deliveries. IranAir has now met twice with the U.S. company and talks are progressing, Mr. Parvaresh said in an interview. He wouldn’t say when a deal might be sealed.

International banking limits on Iran were lifted this year in return for Tehran limiting its nuclear program, though U.S. restrictions remain. The U.S. is maintaining sanctions over Iran’s ballistic missile program and support for terrorism, a charge Tehran denies.

Oil companies also have struggled to line up big banks to back deals. In some cases, they have resorted to barter arrangements or using smaller banks. And that approach is also serving plane makers.
Franco-Italian turboprop maker ATR is putting together a mix of banks and lessors to help finance the euro-denominated sale of 40 of its planes to Iran, said ATR’s chief executive, Patrick de Castelbajac. The company hopes to deliver the first of its regional planes by the end of the year.

The Airbus deal is far larger, though, making it more difficult to work without big financial institutions. Iran announced a deal to buy 118 airliners from Airbus valued at $27 billion at list price. The deal, which hasn’t been completed yet, includes aircraft as diverse as Airbus single-aisle planes and 12 of its flagship A380 superjumbos, which carry a list price of $432.6 million each, though buyers typically get discounts.

airbusAirbus sales chief John Leahy, pictured at a press conference in Paris in January, said on Wednesday that financing problems are complicating IranAir’s attempts to upgrade its fleet of aircraft. PHOTO: BLOOMBERG NEWS
“If you don’t sort it out, there aren’t going to be any deals done,” Mr. Leahy said. The delay is limiting Airbus’s ability to quickly satisfy some of IranAir’s most immediate demands, he indicated. Planes are available for delivery, but the number has dwindled.
The reluctance of bankers isn’t the only obstacle to completing agreements for jetliner sales. Airbus and others are still awaiting approval from the U.S. Treasury’s Office of Foreign Assets Control to sell their planes, which have U.S. content. Mr. de Castalbajac said a decision was expected months ago. The U.S. government is facing a flood of license applications, not just for aircraft deals, he said.
Airbus commercial airplane boss Fabrice Brégier said Tuesday the company was making progress securing the export licenses for the deal, but more work is needed. He remained optimistic the deal would be completed this year.
IranAir’s Mr. Parvaresh said he was hopeful that after the export licenses are issued, banks would feel more comfortable financing such deals.
Write to Robert Wall at



Kerry’s Peculiar Message About Iran for European Banks

Why is Washington pushing banks like mine to do what is still illegal for American banks?


May 12, 2016

U.S. Secretary of State John Kerry met Thursday in London with a group of European financial institutions for a discussion about “Iranian banking matters.” The meeting, which followed repeated complaints by Iranian officials that they aren’t getting the benefit of the bargain under the nuclear deal, was an effort by the State Department to persuade major non-U.S. banks that doing Iran-related business is not only permitted following the relaxation of Iran sanctions, but is actually encouraged.

The irony will not be lost on these financial institutions. Most of them were similarly gathered almost 10 years ago by U.S. Treasury Secretary Henry Paulson to discuss Iranian banking matters, but that discussion focused on protecting the integrity of the global financial system against the risk posed by Iran.
In the decade that followed, the George W. Bush and Obama administrations, as well as the U.K. and other governments, the European Union and the United Nations, all imposed extensive sanctions targeting Iran’s illicit and deceptive conduct. Banks were briefed extensively and repeatedly by the U.S. Treasury Department on the details of Iran’s conduct. The Financial Action Task Force (FATF), the global standard-setting body for anti-money-laundering and counterterrorist financing, warned about the financial-crime risks posed by Iran as a jurisdiction. The result: Iran became a financial pariah.

No one has claimed that Iran has ceased to engage in much of the same conduct for which it was sanctioned, including actively supporting terrorism and building and testing ballistic missiles. But now Washington is pushing non-U.S. banks to do what it is still illegal for American banks to do.
This is a very odd position for the U.S. government to be taking.

On the one hand, Washington is continuing to prohibit American banks and companies from doing Iran-related business. In February, FATF reaffirmed its prior concerns about the “serious threat” Iran poses to the international financial system, urging countries to apply effective countermeasures. The U.S. Treasury Department’s designation of Iran, including its central bank and financial institutions, as a primary money-laundering concern also still stands. As part of that designation, Treasury determined that “the international financial system [is] increasingly vulnerable to the risk that otherwise responsible financial institutions will unwittingly participate in Iran’s illicit activities.”

On the other hand, Mr. Kerry wants non-U.S. banks to do business with Iran without a U.S. repudiation of its prior statements about the associated financial-crime risks. There are no assurances as to how such activity would subsequently be viewed by U.S. regulatory and law-enforcement authorities, which might seek to take enforcement action against banks that enter the Iranian market and run afoul of complicated U.S. restrictions. The State Department neither controls nor plays any meaningful role in the enforcement decisions of these authorities.
Washington has warned repeatedly that the Islamic Revolutionary Guard Corps controls broad swaths of the Iranian economy. The IRGC remains sanctioned by both the U.S. and the EU because of the central role it plays in Iran’s illicit conduct. When the U.S., EU, and U.N. removed sanctions from several hundred Iranian banks and companies, there were no assurances that the conduct of those banks and companies had changed.

This will present a challenge for European banks. HSBC is endeavoring to implement consistent and high standards across its global operations, designed to combat financial crime and prevent abuse by illicit actors. We have more work to do, but achieving that objective is one of our highest priorities. This approach is rightly expected by our regulators, including in the U.K. and the U.S.

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. Governments can lift sanctions, but the private sector is still responsible for managing its own risk and no doubt will be held accountable if it falls short.
Mr. Levey is chief legal officer of HSBC Holdings, and was the undersecretary for terrorism and financial intelligence at the U.S. Treasury Department (2004-11).

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