U.S. puts the squeeze on financing in Iran and North Korea

Posted in United States | 16-Oct-06 | Author: Steven Weisman| Source: International Herald Tribune

Governor of the Central Bank of Iran (CBI) Ebrahim Sheibani.
WASHINGTON As debate swirls about whether new international sanctions against North Korea will be effective, the Bush administration appears to have made some headway in using new U.S. legal tools to cut off both North Korea and Iran from the international financial system.

The U.S. campaign to use its own financial regulations to pressure North Korea and Iran has been a mix of implicit threats backed by explicit action, U.S. officials and banking experts say.

Over the past year, U.S. officials have met with many private banks overseas to warn them of the risk of doing business with certain Iranian and North Korean trading companies and businesses that the United States alleges have been tied to terrorist groups or to the spread of nuclear materials.

One of the main unspoken messages of the visits, experts say, is that the U.S. government might eventually bar U.S. banks from working with financial institutions doing business with groups tied to terrorism.

This campaign of pressure has been backed up by specific actions.

The most notable was when the United States last month barred U.S. banks from facilitating certain transactions, including the sale of oil, for a leading Iranian bank with alleged ties to terrorist groups.

As a result of the U.S. campaign, banking officials and experts say, some foreign banks are cutting off ties to North Korea and Iran.

But while the unilateral moves are achieving some success in economically punishing North Korea and Iran for their nuclear ambitions, some experts say the ones against Iran, at least, could damage U.S. economic interests if that country switches to currencies other than the dollar for its large oil trades.

The United States had turned to unilateral action in part out of frustration that its efforts to mobilize international sanctions had run into trouble. That frustration might remain if the UN sanctions against North Korea, passed Saturday, prove not to be as effective as the United States hopes.

Most experts acknowledge that a globally cooperative effort would be much more effective than the U.S. unilateral efforts, but they say that the United States could inflict some pain with the creative use of the reach of its own laws and pressure.

The ban on U.S. transactions with the Iranian bank, Bank Saderat, means that it will no longer be able to obtain U.S. dollars for its dealings with any other bank in the world. Bank Saderat is one of Iran's half-dozen largest banks.

The technical term for the banned activity is a "U-turn transaction." Such a transaction permits, for example, Iran to sell oil to a German customer, who in turn directs a European bank to deposit dollars obtained from an U.S. bank into an Iranian bank account located in Europe. The phrase "U-turn" applies because the funds are transferred to a U.S. bank and instantly turned back as dollars to a European bank.

Many U.S. banking officials predict that, in coming months, the United States will ban U.S. bank involvement in transactions involving the other leading banks in Iran. That is because there is a widespread assumption among bankers that all of Iran's state-owned banks engage in the same activities as Bank Saderat.

The likely result is that Iran will have difficulty selling its oil for dollars, the international medium of exchange for all oil sales.

"This is a pretty dramatic uptick of pressure from the United States," said Judith Lee, a law partner specializing in economic sanctions at Gibson, Dunn & Crutcher in Washington. "It is going to create significant difficulties for European banks and European countries."

U.S. officials refuse to say whether the move against Bank Saderat would apply to other Iranian banks.

Stuart Levey, under secretary for terrorism and financial intelligence at the Treasury, said recently that in the past two years the United States had "learned a number of lessons about how best to use financial tools to apply financial pressure" on countries like Iran and North Korea.

In the past year, Levey has traveled to several countries in Europe to exert pressure on Iran and to Singapore, China, Macao, Hong Kong, Vietnam and South Korea to press banks to break their ties with North Korea.

The message was reinforced a year ago when the United States barred financial transactions with a bank in Macao, Banco Delta Asia, that officials said was involved in North Korean nuclear dealings, money laundering and counterfeiting.

Last month, citing news media reports, Levey said that at least two dozen financial institutions overseas had curtailed or suspended business with North Korea.

China, for instance, froze North Korean accounts in a Macao branch of the Bank of China and also cracked down on the circulation of counterfeit U.S. dollars in China near the North Korean border.

The Bush administration hopes that could set a pattern for the future, U.S. officials said. "We have no reason to believe that China will not continue to protect their financial system from abuse," a Treasury official said Sunday.

As for Iran, several European banks, including Credit Suisse and UBS in Switzerland, HSBC in Britain and ABN Amro in the Netherlands, have announced curbs on dealings with Iranian banks and businesses.

"We are seeing a whole series of banks not doing business with Iran, restricting the flow of funds into Iran significantly," said Edward Morse, chief energy economist at Lehman Brothers.

Last month, Treasury Secretary Henry Paulson Jr. suggested at an international meeting in Singapore that banks around the world should stop doing business with more than 30 Iranian companies and government enterprises that U.S. intelligence had linked to various illicit activities.

Evidence that U.S. moves against Iran might be having an effect came at the same meeting, when Ebrahim Sheibany, the Iranian central bank governor, told a local paper at an international financial meeting that Iran would have "no choice" but to shift its oil sales transactions away from the dollar and to the euro or Asian currencies.

Whether that shift away from dollars could have the unintended effect of hurting the United States is a matter of debate. Some experts say there is a danger that if Iran does shift currencies, it could weaken the standing of the dollar as a reserve currency, forcing the United States to raise interest rates to attract dollar purchasers.

"This is a step where the end result could clearly weaken the dollar," said John Heimann, an investment banker and former comptroller of the currency in the Carter administration. "What has to be considered is whether or not we are shooting ourselves in the foot."