Banks will help ensure Iran keeps promises on nukes

In a speech before the UN General Assembly on September 28, Iran’s President Hassan Rouhani heralded the Joint Comprehensive Plan of Action as a new chapter in Iran’s relations with the rest of the world.

After a heated and largely politicized national debate, Congress is set to move forward with nuclear agreement. This treaty limits Iran’s nuclear enrichment capabilities over the next decade in exchange for sanctions relief.

Financial sanctions helped bring Iran to the negotiating table. But sanctions also have another use. They have made possible the US monitoring of transactions that may be related to Iran’s covert purchase of restricted items. Iran’s exile from global banking meant that the rest of the world’s banks could easily watch for suspicious transactions involving Iran.

Now after more than a decade of near financial isolation, Iran is set to rejoin the global economy. Trade and commerce will exponentially increase. How will this affect our ability to monitor financial transactions related to proliferation?

As scholars who study nuclear nonproliferation and financial monitoring, we believe that reconnecting to the global banking system will make it harder for Iran to covertly trade in nuclear goods – not easier.

Financial vigilance

After 9/11, US policymakers set about to leverage the US dollar’s dominance in international trade to fight terrorism.

The strategy included a number of tools, including freezing terrorists’ assets, requiring greater scrutiny of transactions and prohibiting entities from using US banks and investment services.

Building on this success, the Department of the Treasury adopted similar methods to stem the illegal trade in dual-use items – goods and services that have both commercial and military applications.

Since 2003, the United States has refined its arsenal of financial tools to dismantle networks that buy and sell dual-use goods. These tools rely both on strict rules about reporting, Iran’s isolation, and the stature of the United States in the global financial system.

Networks that trade in dual-use goods and services need the formal banking system to make payments to suppliers. For regulatory and enforcement agencies, this provides an opportunity to detect and disrupt these illegal activities. But, this process relies on banks' vigilance in spotting transactions that may be related to proliferation.

This is done in two ways. First, banks can monitor for transactions by entities known to have affiliations with Iran’s ballistic missile or nuclear programs. The Department of Treasury is responsible for maintaining a list of these entities.

Second, banks can monitor for transactions that appear related to Weapons of Mass Destruction.

Pressure on US banks to stop these transactions is tremendous. Failing to detect transactions in violation of sanctions regulations could result in stiff penalties, or worse, exile from the US banking system.

In 2014, French bank BNP Paribas admitted to violating US sanctions against Sudan, Cuba and Iran.Pierre Albouy/REUTERS

In 2014, for example, the US levied a record-setting US$9 billion fine against French bank BNP Paribas after the bank failed to stop transactions that were in violation of Iranian, Cuban and Sudanese sanctions.

These tools can also isolate rogue banks. In 2007, the Department of the Treasury used provisions under the US Patriot Act to cut off Banco Delta Asia, a small private bank in Macau, from accessing the US banking system. Banco Delta Asia was responsible for assisting the North Korean regime with laundering proceeds tied to drug trafficking and managing accounts linked to the proliferation of weapons of mass destruction (WMD). As result, Banco Delta Asia became a global pariah. No bank wanted its business.

What changes under the new agreement?

Under the Iran deal, all of the UN sanctions and most of the US and EU sanctions will be lifted once Iran implements, and the International Atomic Energy Agency verifies, promises it made under the Joint Comprehensive Plan of Action.

Lifting sanctions paves the way for Iran to reconnect to the global economy. Interest in new trade and investment opportunities with Iran is high. At a two-day seminar starting September 24, in Geneva, Switzerland, the Europe-Iran Forum held its second event this year to discuss challenges with finance and investment in a post-sanctions world. Phillippe Delleur, president of French multinational energy company Alstom Internaitonal, was among the impressive list of speakers. So was Gholamali Kamyab, the vice governor of the Central Bank of Iran.

Critics of the agreement fret that once sanctions go away networks could hide procurement of dual-use goods in high volumes of trade and commerce.

This is partially true. When it comes to monitoring for proliferation-related financing, the JCPOA is not clear. Although prior UN resolutions sought to prevent the provision of financial services to Iran, the new agreement does not clarify the type and scope of information Iran must provide to the UN. This leaves banks in the dark in terms of how financial records should be handled.

On the other hand, Iran’s reconnection to the global banking system can potentially increase financial transparency. Iran’s financial isolation forced much of its economy to use alternative, less efficient financial payment methods. In many cases, these methods were subject to less regulatory oversight and scrutiny.

But as global trade and commerce with Iran begins to normalize, international banks’ need for financial transparency, from a regulatory perspective, will increase. This is good news for agencies responsible for detecting potential violations of the agreement.

Economic integration may also encourage Iran to adopt international anti-money laundering norms and standards. The Financial Action Task Force, which is the intergovernmental body responsible for setting policies to protect the integrity of the global financial system, continues to cite serious concerns about gaps in Iran’s anti-money laundering laws. Until Iran addresses these issues, banks will take a cautious approach handling Iranian transactions.

Also, many of Iran’s trading partners belong to the Egmont Group, an informal network of financial intelligence units that act as a clearinghouse for the receipt and analysis of suspicious transactions reports. This means, for example, that if a German bank files a suspicious report on an Iranian transaction, that report can be made available to US law enforcement or intelligence agencies.

Challenges remain

Compared to countering terrorist financing, establishing international norms on countering proliferation financing have been slow to catch on.

A 2012 study by Nikos Passas on the implementation of UN resolution 1540 found that UN members states varied considerably in their approach to financial vigilance. The resolution calls upon member states to establish controls on providing funds and services, such as financing to nonstate actors seeking WMDs. As a result, global implementation of tools to prevent proliferation financing has lagged compared to other types of financial vigilance.

Reconnecting Iran to the global banking system may increase transparency, but banks still need to know what they are looking for. How exactly are proliferation-related financial transactions any different than normal trade and commerce? The answer is they are not very different at all.

This can be problematic given the volume of daily global transactions. Since January 2015, for example, the Society for Worldwide Interbank Financial Telecommunications, which is the world’s largest communications system for the financial sector, processed over four billion messages – almost 50% of these are payment related.

The solution? Banks need better guidance to be truly effective at monitoring for transactions related to proliferation. This is no easy task. Building public-private information sharing relationships is a good place to start, but common legal frameworks, standard interpretations of international resolutions, and political support are also needed.

Nikos Passas has received funding from the EU Commission and served as Team Leader for a study into financial vigilance and proliferation of WMD control in 2009.

Aaron Arnold does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.