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«Implications of a Nuclear Agreement with Iran Mark Dubowitz Executive Director Foundation for Defense of Democracies Center on Sanctions and Illicit ...»

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Following years of individual designations of Iranian and foreign financial institutions for involvement in the illicit financing of nuclear, ballistic missile, and terrorist activities, 36 Treasury David Cohen, “The Law and Policy of Iran Sanctions,” Remarks before the New York University School of Law, September 12, 2012. (http://www.treasury.gov/press-center/press-releases/Pages/tg1706.aspx) Robin Wright, “Stuart Levey’s War,” The New York Times, November 2, 2008.

(http://www.nytimes.com/2008/11/02/magazine/02IRAN-t.html?pagewanted=all&_r=0) Treasury designated 23 Iranian and Iranian-allied foreign financial institutions as “proliferation supporting entities” under Executive Order 13382 and sanctioned Bank Saderat as a “terrorism supporting entity” under Executive Order 13224. U.S. Department of the Treasury, Press Release, “Treasury Cuts Iran’s Bank Saderat Off from U.S. Financial System,” September 8, 2006; (http://www.treasury.gov/press-center/press-releases/Pages/hp87.aspx) & U.S.

Foundation for Defense of Democracies www.defenddemocracy.org Mark Dubowitz July 23, 2015 issued a finding in November 2011 under Section 311 of the USA PATRIOT Act that Iran, as well as its entire financial sector including the Central Bank of Iran (CBI), is a “jurisdiction of primary money laundering concern.” 37 Treasury cited Iran’s “support for terrorism,” “pursuit of weapons of mass destruction,” including its financing of nuclear and ballistic missile programs, and the use of “deceptive financial practices to facilitate illicit conduct and evade sanctions.” 38 The entire country’s financial system posed “illicit finance risks for the global financial system.”39 Internationally, the global anti-money laundering and anti-terror finance standards body the Financial Action Task Force (FATF) also warned its members that they should “apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran.” 40 As recently as June 26, 2015, FATF issued a statement warning that Iran’s “failure to address the risk of terrorist financing” poses a “serious threat … to the integrity of the international financial system.”41 The Section 311 finding was conduct-based; it would be appropriate, therefore, to tie the lifting of sanctions on all designated Iranian banks, especially the legislatively-designated Central Bank of Iran, and their readmission onto SWIFT and into the global financial system, to specific changes in the conduct of these Iranian entities across the full range of Iran’s illicit financial activities. However, the JCPOA requires the lifting of financial sanctions—including the SWIFT sanctions—prior to a demonstrable change in Iran’s illicit financial conduct.

In the past, Washington has given “bad banks” access to the global financial system in order to secure a nuclear agreement. In 2005, Treasury issued a Section 311 finding against Macau-based Banco Delta Asia, 42 and within days, North Korean accounts and transactions were frozen or blocked in banking capitals around the world. North Korea refused to make nuclear concessions before sanctions relief and defiantly conducted its first nuclear test.43 The State Department advocated for the release of frozen North Korean funds on good faith, 44 and ultimately prevailed.

Department of the Treasury, Press Release, “Treasury Designates Major Iranian State-Owned Bank,” January 23, 2012. (http://www.treasury.gov/press-center/press-releases/Pages/tg1397.aspx) U.S. Department of the Treasury, Press Release, “Finding That the Islamic Republic of Iran is a Jurisdiction of Primary Money Laundering Concern,” November 18, 2011. (http://www.treasury.gov/press-center/pressreleases/Documents/Iran311Finding.pdf) Ibid.

U.S. Department of the Treasury, Press Release, “Fact Sheet: New Sanctions on Iran,” November 21, 2011.

(http://www.treasury.gov/press-center/press-releases/Pages/tg1367.aspx) The Financial Action Task Force, Public Statement, “FATF Public Statement 14 February 2014,” February 14, 2014. (http://www.fatf-gafi.org/countries/d-i/islamicrepublicofiran/documents/public-statement-feb-2014.html) The Financial Action Task Force, Public Statement, “FATF Public Statement 26 June 2015,” June 26, 2015.

(http://www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/documents/public-statement-junehtml).U.S. Department of the Treasury, Press Release, “Treasury Designates Banco Delta Asia as Primary Money Laundering Concern Under USA PATRIOT Act,” September 15, 2005. (http://www.treasury.gov/press-center/pressreleases/Pages/js2720.aspx) David E. Sanger, “North Koreans Say They Tested Nuclear Device,” The New York Times, October 9, 2006.

(http://www.nytimes.com/2006/10/09/world/asia/09korea.html?pagewanted=all) Juan Zarate, Treasury’s War: The Unleashing of a New Era of Financial Warfare, (New York: Public Affairs, 2013), page 258.

Foundation for Defense of Democracies www.defenddemocracy.org Mark Dubowitz July 23, 2015 As a result, however, Washington lost its leverage and its credibility by divorcing the Section 311 finding from the illicit conduct that had prompted the finding in the first place. Undeterred, North Korea moved forward with its nuclear weapons program while continuing to engage in money laundering, counterfeiting, and other financial crimes.





Compromising the integrity of the U.S. and global financial system to conclude a limited agreement with North Korea neither sealed the deal nor protected the system. The JCPOA appears to repeat this same mistake by lifting financial restrictions on bad banks without certifications that Iran’s illicit finance activities have ceased.

The JCPOA stipulates that of the nearly 650 entities that have been designated by the U.S.

Treasury for their role in Iran’s nuclear and missile programs or for being owned or controlled by the government of Iran, more than 67 percent will be de-listed from Treasury’s blacklists within 6-12 months. This includes the Central Bank of Iran and most major Iranian financial institutions. After eight years, only 25 percent of the entities that have been designated by Treasury over the past decade will remain sanctioned. Many IRGC businesses that were involved in the procurement of material for Iran’s nuclear and ballistic missile programs will be de-listed as will some of the worst actors involved in Iran’s nuclear weaponization activities. Even worse, the EU will lift all of its counter proliferation sanctions on Iran. Although human rights-related sanctions will remain, and terrorism and Syria-related sanctions will remain on notorious Quds Force commander Qassem Soleimani, 45 sanctions against the Qods Force itself will be lifted (although certain Syria-related sanctions will remain).

What is especially notable about the lifting of designations is that the Obama Administration has provided no evidence to suggest that these individuals, banks, and businesses are no longer engaging in the full range of illicit conduct on which the original designations were based. What evidence, for example, is there for the de-designation of the Central Bank of Iran, which is the main financial conduit for the full range of Iran’s illicit activities, and how does a nuclear agreement resolve its proven role in terrorism and ballistic missile financing, money laundering, deceptive financial activities, and sanctions evasion? In other words, with the dismantlement of much of the Iran sanctions architecture in the wake of a nuclear agreement, the principle upon which Treasury created the sanctions architecture—the protection of the global financial system—is no longer the standard.

SWIFT: CASE STUDY IN THE JCPOA’S PRECIPITOUS SANCTIONS RELIEF

The sanctions relief provided to Iran through its re-admission into the SWIFT financial messaging system is a case study in the scale of precipitous sanctions relief afforded to Iran The Council of the European Union, “Council Implementing Regulation (EU) No 611/2011 of 23 June 2011 Implementing Regulation (EU) No 442/2011 Concerning Restrictive Measures in View of the Situation in Syria,” Official Journal of the European Union, June 24, 2011. (http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:164:0001:0003:EN:PDF); The Council of the European Union, “Council Implementing Regulation (EU) 790/2014 of 22 July 2014 Implementing Article 2(3) of Regulation (EC) No 2580/2001 on specific restrictive measures directed against certain persons and Entities with a View to Combatting Terrorism, and Repealing Implementing Regulation (EU) No 125/2014,” Official Journal of the European Union, July 23, 2014. (http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014R0790)

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under the JCPOA. It is also a cautionary study in how difficult it will be to snap back the most effective economic sanctions.

The JCPOA obligates the United States, European Union, and United Nations to lift sanctions at two specific intervals: On “Implementation Day” when the IAEA verifies that Iran has implemented its nuclear commitments under the JCPOA to reduce its operating centrifuges, reduce its low-enriched uranium stockpile, and modify the Arak heavy-water reactor, among other requirements; and on “Transition Day” in eight years or when the IAEA has reached a “broader conclusion” that Iran’s nuclear program is entirely peaceful, whichever comes first.

This last clause is critical: Even if the IAEA cannot verify the peaceful nature of Iran’s program, Iran will receive additional sanctions relief.

The JCPOA will provide Iran with more than $100 billion in sanctions relief, if you include the funds reportedly tied up in oil escrow accounts, and as much as $150 billion based on figures quoted by President Obama, 46 which presumably includes funds that are legally frozen and those to which banks have been unwilling to provide Iran free access, even though they weren’t under formal sanctions. These funds could flow to the coffers of terrorist groups and rogue actors like Hezbollah, Hamas, Palestinian Islamic Jihad, Iraqi Shiite militias, the Houthis in Yemen, and Syrian President Bashar al-Assad’s regime in Damascus. President Obama has claimed the money would not be a “game-changer” for Iran.47 As Supreme Leader Ali Khamenei, however, stated in a speech less than one week after the JCPOA announcement, “We shall not stop supporting our friends in the region: The meek nation of Palestine, the nation and government of Syria … and the sincere holy warriors of the resistance in Lebanon and Palestine.”48 This infusion of cash will relieve budgetary constraints for a country which had only an estimated $20 billion in fully accessible foreign exchange reserves prior to November 2013 49 but was spending at least $6 billion annually to support Assad.50 The real prize for Iran in the JCPOA sanctions relief package is regaining access to SWIFT, (the Society for Worldwide Interbank Financial Telecommunication) a little-known, but ubiquitous banking system that has been off-limits to the country since March 2012. Iran’s successful negotiation of the lifting of this sanction is a case study in how the JCPOA provides precipitous sanctions relief to Iran prior to a demonstrable change in Iranian financial practices.

Jeffrey Goldberg, “‘Look... It’s My Name on This’: Obama Defends the Iran Nuclear Deal,” The Atlantic, May 21, 2015. (http://www.theatlantic.com/international/archive/2015/05/obama-interview-iran-isis-israel/393782/) Barack Obama, “Press Conference by the President,” Washington, D.C., July 15, 2015.

(https://www.whitehouse.gov/the-press-office/2015/07/15/press-conference-president) “Iran Press Review 20 July,” Foundation for Defense of Democracies, July 20, 2015.

(http://www.defenddemocracy.org/iran-press-review-20-july) Mark Dubowitz & Rachel Ziemba, “When Will Iran Run Out of Money?,” Foundation for Defense of Democracies & Roubini Global Economics, October 2, 2013.

(http://www.defenddemocracy.org/content/uploads/documents/Iran_Report_Final_2.pdf) Eli Lake, “Iran Spends Billions to Prop Up Assad,” Bloomberg, June 9, 2015.

(http://www.bloombergview.com/articles/2015-06-09/iran-spends-billions-to-prop-up-assad)

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SWIFT is the electronic bloodstream of the global financial system. It is a member-owned cooperative comprising the most powerful financial institutions in the world, which allows more than 10,800 financial companies worldwide to communicate securely. 51 By 2012, SWIFT represented one of Tehran's last entry points into the global financial system, as the United States and the European Union had sanctioned scores of banks, energy companies, and other entities under the control of the IRGC. In March 2012, SWIFT disconnected 15 major Iranian banks from its system in 2012 after coming under pressure from both the United States and the European Union.52 It was a substantial blow to Tehran since SWIFT was not only how Iran sold oil but how Iranian banks moved money. According to SWIFT’s annual review, Iranian financial institutions used SWIFT more than 2 million times in 2010. 53 These transactions, according to The Wall Street Journal, amounted to $35 billion in trade with Europe alone. 54 As a result of congressional legislation targeting SWIFT,55 EU regulators instructed SWIFT to remove specified Iranian banks from the SWIFT network.56 It was congressional pressure, and an unwillingness by Congress to accept arguments advanced by Obama Administration officials that such action would undercut the multilateral sanctions regime, which finally persuaded the Obama Administration and EU officials to act.

Today, the JCPOA explicitly calls for the lifting of sanctions on “[s]upply of specialized financial messaging services, including SWIFT, for persons and entities… including the Central Bank of Iran and Iranian financial institutions.” 57 EU will lift SWIFT sanctions for the Central Bank of Iran and all Iranian banks 58 originally banned from SWIFT.59 “Company Information,” SWIFT Website, accessed July 20, 2015.

(http://www.swift.com/about_swift/company_information/company_information?rdct=t&lang=en) SWIFT, Press Release, “SWIFT Instructed to Disconnect Sanctioned Iranian Banks Following EU Council Decision,” March 15, 2012. (http://www.swift.com/news/press_releases/SWIFT_disconnect_Iranian_banks) “Annual Review 2010,” SWIFT Website, accessed January 9, 2012, page 29.

http://www.swift.com/about_swift/publications/annual_reports/annual_review_2010/SWIFT_AR2010.pdf “Swift Sanctions on Iran,” The Wall Street Journal, February 1, 2012.

(http://online.wsj.com/news/articles/SB10001424052970203718504577178902535754464) Senator Robert Menendez, Press Release, “Menendez Hails Banking Committee Passage of Iran Sanctions Legislation,” February 2, 2012. (http://www.menendez.senate.gov/newsroom/press/menendez-hails-bankingcommittee-passage-of-iran-sanctions-legislation) “Payments System SWIFT to Expel Iranian Banks Saturday,” Reuters, March 15, 2012.



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