Jonathan Schanzer, Mark Dubowitz
7th March 2012 - The Wall Street Journal
In his speech before the American Israel Public Affairs Committee in Washington on Sunday, President Barack Obama once again promised that the United States would not allow Iran to develop a nuclear weapon.
Sanctions are a key element of the president's strategy to neutralize the Iranian threat. But the Iranian regime continues to find new ways to circumvent U.S. strictures, moving billions of dollars through the global financial system. This has afforded Tehran more time and space to advance its dangerous program.
Mr. Obama must urgently close the loopholes, and only blanket action against all Iranian banks and foreign financial institutions with Iranian business will do the trick. Republican Sen. Mark Kirk and Democratic Rep. Brad Sherman are advancing legislation in the next few days to hone in on the problem areas and try to make American sanctions more airtight.
The new bill will represent the latest in a series of encouraging steps on this front in recent months. In December, Mr. Obama signed new sanctions into law against the Central Bank of Iran. The measure has squeezed the Iranian economy, encumbered oil exports and led to an acute crisis of confidence in the rial, Iran's currency, the value of which fell by half between December 2011 and January 2012 alone.
In February, the U.S. Congress followed up with a bill targeting the global financial gateway known as Swift, a Belgium-based secure financial messaging system for international financial transactions that Iranian banks and financial entities used more than two million times in 2010. These transactions, The Wall Street Journal reported, amounted to $35 billion in trade with Europe alone. The congressional bill is part of a new Iran sanctions legislation package that the U.S. Senate is expected to pass in the next several weeks.
Facing this scrutiny, Swift is now expected to expel the Central Bank of Iran and other Iranian institutions sanctioned by the EU. In a statement last month, Swift noted that the decision "reflects the extraordinary and highly exceptional circumstances of significant multi-lateral international support for the intensification of sanctions against Iran."
But even if Swift takes action, big loopholes remain. In the past, Iran may have used the powerful Luxembourg-based financial services company Clearstream to move its money. Clearstream facilitates international securities trades for over 2,000 institutional customers in more than 100 countries. In 2008, the U.S. Treasury provided information that led to the freezing of more than $2 billion in Iranian central-bank securities held by Citibank in the name of Clearstream.
This followed a 2007 ruling by a U.S. federal court in favor of relatives of those killed in a 1983 Hezbollah attack against a U.S. Marine barracks in Beirut. According to The Journal, Treasury furnished evidence that Iran's central bank had deposited securities with Clearstream, which in turn deposited the money at Citibank. In court filings, Clearstream denied knowledge about whether Iran's central bank was the beneficial owner of securities held through the company. It also argued that regardless of the beneficial ownership, the money was technically Clearstream's property, not Tehran's. The Iranian central bank, however, claimed that the frozen money was indeed Iran's. The case is the subject of ongoing litigation.
Clearstream recently tightened its procedures, possibly out of concern that the Iranian government could be using its services. Last month it warned U.S. account-holders that it would start blocking Iranian securities and other assets that fell under the scope of the sanctions.
But due diligence and risk management are not enough. The U.S. Congress and the European Union should require Clearstream and its competitors to disclose if there are any Iranian assets under their management or any services offered to clients holding Iranian assets, and if so, to disclose those activities to proper authorities who can implement asset freezes or other actions prescribed under applicable sanctions laws.
Even if such a move is taken, illicit finances are like water: They seep through the cracks. The regime in Tehran has recently shifted its assets from its banned banks into scores of entities not subject to sanctions. That's why Congress should pass legislation requiring the Obama administration to sanction every known Iranian financial institution.
The Obama administration has already made the legal case for doing so. In November, the administration announced a finding under Section 311 of the Patriot Act declaring the entire Iranian banking sector a money-laundering risk. This laid the groundwork for an amendment to the 2012 U.S. defense budget, which targeted the Iranian central bank. Congress can now leverage these precedents to target the rest of the Iranian banking sector with relative ease.
New measures will inevitably provoke Iranian countermeasures. You can bet that the regime will erect front companies, hide its fingerprints and find new ways into the financial system.
That is why Congress also should also pass legislation to penalize companies that provide technology or services to the Iranian central bank or any other Iranian financial entity. This would force companies to think twice before helping Iran access a financial gateway.
Finally, Congress should require all foreign financial institutions that do business in the U.S. to report all their transactions with Iranian entities to the Department of the Treasury. No one is better positioned to know who deals with Iran than these foreign banks. If they value their business in the U.S., they should be prepared to come clean about their Iranian deals. They resist at great reputational risk.
Separately, each of these loopholes may appear small. But together, they form a gaping hole in America's sanctions regime. The Obama administration has an opportunity to close them. If they remain open, there's a good chance sanctions will fail—with a nuclear Iran the result.
—Mr. Dubowitz is executive director of the Foundation for Defense of Democracies and head of its Iran Energy Project. Mr. Schanzer, a former terrorism analyst for the U.S. Department of the Treasury, is FDD's vice president for research.