On Oct. 22, the Department of the Treasury levied financial sanctions against the Export Development Bank of Iran and three of its affiliates for their role in providing financial services to Iranian defense organizations suspected of involvement in Tehran’s nuclear and missile programs, effectively cutting them off from the U.S. financial system. Washington has increasingly relied on such financial restrictions to respond to and deter the financing of proliferation and, more broadly, to place pressure on countries of proliferation concern such as Iran. (See ACT, October 2008.)
Although the use of sanctions against entities suspected of involvement in proliferation is not new, the strategy of implementing targeted restrictions to cut off individuals and organizations from the international financial system has only been developed in recent years. Stuart Levey, undersecretary of the treasury for terrorism and financial intelligence, told the Senate Finance Committee April 1 that the “key difference” between the use of financial sanctions and more traditional sanctions “is the reaction of the private sector.” He explained that financial institutions have voluntarily cut off business with sanctioned entities and individuals out of “good corporate citizenship” and in order to protect their reputation, adding that “the end result is that the private sector actions voluntarily amplify the effectiveness of government-imposed measures.”
Indeed, one example of such voluntary financial isolation of targeted entities was Banco Delta Asia, in which financial institutions quickly severed ties with the bank and North Korea following U.S. sanctions for its illicit dealings with Pyongyang. (See ACT, April 2006.) However, as the administration has increasingly used such measures against Iran, it is not yet clear that these sanctions are having the desired impact in isolating Iranian entities from the international financial system and limiting Iran’s trade.
Executive Order 13382 Emerges as a Broad Tool
Until the last several years, these types of financial sanctions were generally used to target traditional financially oriented illicit activities, such as money laundering. After the Sept. 11, 2001, terrorist attacks, the United States increasingly began to employ such measures in response to national security concerns, including proliferation. Deputy Secretary of the Treasury Robert Kimmitt stated during a May 2007 speech to the Washington Institute for Near East Policy that since the September 2001 attacks, the roles of the Treasury Department and other finance ministries “have evolved…and the world of finance now plays a critical role in combating international security threats.”
The most common financial sanctions tool the United States has used to address proliferation is Executive Order 13382, issued by President George W. Bush in June 2005. Under the order, “all property and interests in property” of entities targeted for sanctions that are held by the United States or controlled by U.S. citizens are “blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt.” It also prohibits U.S. entities from carrying out any transactions with sanctioned persons and organizations.
The order provides broad authority to target a wide range of actors for direct or indirect participation in suspected proliferation activities. It grants authority not only to sanction entities that have engaged in the proliferation of nonconventional weapons, related materials, or the means to deliver them, but also to place financial restrictions against entities that are either owned or wholly controlled by sanctioned entities or that “attempted to provide, financial, material, technological or other support” for them. Therefore, once sanctions are placed on a given entity, other persons or organizations that do business with it are at risk of similar penalties.
In addition to providing such broad authority, U.S. officials have suggested that the financial sanctions provide a more streamlined mechanism to respond to proliferators. In a Sept. 19 e-mail to Arms Control Today, a former Department of State official wrote that executive order sanctions were procedurally easier to use than legislatively authorized sanctions “insofar as they didn’t involve the painful process of internal governmental argumentation and second-guessing about whether a legal standard set by Congress had been met.”
Although such sanctions may be easier to impose than congressionally mandated measures, there are interagency considerations to take into account. Matthew Levitt, former deputy assistant secretary of the treasury for intelligence and analysis, stated during a November 2007 address to the Carnegie Council that “there are all kinds of interagency equities” in the process of determining whether to sanction an entity. He noted that even when relevant U.S. agencies agree that a certain target meets the criteria for sanctions, diplomatic considerations or concerns about revealing intelligence sources and methods may lead to a sanction not being applied.
United States Builds List of Targets
At the time the order was issued in 2005, the Treasury Department immediately placed financial restrictions against eight organizations in Iran, North Korea, and Syria. Washington currently maintains sanctions under Executive Order 13382 against 114 individuals and organizations, including engineering firms, defense industries, banks, and trading companies. Nearly all of these entities are located in or controlled by firms based in China, Iran, North Korea, and Syria or are nationals of those countries.
Although the United States continues to sanction Russian firms for suspected contributions to Iran’s nonconventional weapons programs, it has not applied sanctions under Executive Order 13382 against any Russian entity.
Entities targeted under Executive Order 13382 remain subject to sanctions until the secretary of the treasury, in consultation with the secretary of state, determines that the sanctions may be lifted.
U.S. officials have argued that the success of such sanctions should not necessarily be measured in the amount of assets frozen, but rather the reaction by financial institutions to the sanctioned entities. In the case of Banco Delta Asia, for example, the value of the North Korean assets frozen only amounted to about $25 million. Nonetheless, it has been characterized as a success because banks shied away from North Korean business.
Even after the Banco Delta Asia funds were returned in 2007, Treasury officials continue to tout the success financial sanctions have had in isolating North Korea from the international financial system. Levey stated April 1 that “banks in China, Japan, Vietnam, Mongolia, Singapore, and across Europe decided that the risks associated with this business far outweighed any benefit.”
Iran appears to present a greater challenge due to its deeper integration into the international financial system. Although long-standing U.S. sanctions have largely cut off Iran from U.S. financial markets, Iran maintains a number of state-owned banks with branches in several countries, including in Europe, and Iranian entities have access to many key foreign financial institutions.
The United States has placed financial restrictions on 92 Iranian entities under Executive Order 13382. In an Oct. 23 e-mail to Arms Control Today, David Asher, who formerly led the State Department’s Illicit Activities Initiative targeting North Korea’s illegal financial dealings, said that the financial sanctions against Iran were having a dramatic effect, noting the number of banks that have curtailed business with Iran. In the last several years, major international financial institutions such as Credit Suisse, Deutsche Bank, and HSBC have curtailed or halted their business with Iran. Asher asserted that because proliferators still rely on the global trading system, the sanctions “make life much harder for the proliferator or procurement agent,” regardless of whether they have had a persuasive effect on the regime itself.
The sanctions aimed at Iranian banks in particular appeared to have had a broader impact, according to an Aug. 14 International Monetary Fund report regarding Iran’s economy. The report observed that some of Iran’s state-owned banks were undercapitalized, stating that “UN and U.S. sanctions against certain Iranian institutions have created difficulties for trade financing and payments, discouraged foreign investment, and adversely affected” their profitability. Washington has placed nonproliferation sanctions on three of Iran’s largest banks: Bank Mellat, Bank Melli, and Bank Sepah. It has also targeted other banks for counterterrorism purposes.
In spite of this apparent impact, U.S. officials have recognized that such measures have to be adopted on a broad basis in order to severely limit access to financial markets by proliferators.
Making Financial Sanctions Multilateral
Since 2006, Treasury officials have engaged in an international campaign to convince foreign governments and financial institutions of the risks of engaging in financial transactions with entities that are suspected of financing proliferation, as well as other illicit activities such as terrorism. This outreach has been aimed at U.S. allies and other key states, such as China and Russia. In his April 1 testimony, Levey asserted that even governments that are not close political allies “share a common interest with us in keeping their financial sectors untainted by illicit conduct.”
In addition to the U.S. outreach effort, some multilateral bodies have considered how to use financial sanctions to address proliferation. For example, a June report by the Financial Action Task Force (FATF), an intergovernmental body designed to address illicit financing internationally, describes in detail the concerns regarding proliferation financing and identifies three particular uses for employing targeted financial sanctions against proliferation. These included limiting access to the global financial system by proliferators and depriving them of their assets, disrupting proliferation networks through the public exposure of involved persons and entities, and identifying proliferators, front companies, and other associates so that financial institutions may be able to detect and prevent proliferation financing.
Perhaps the clearest incorporation of financial sanctions in a multilateral forum is a series of UN Security Council resolutions in response to Iran’s and North Korea’s nuclear and missile programs. Since December 2006, the council has adopted three resolutions requiring that all states freeze the assets of 75 individuals and firms related to Iran’s nonconventional weapons programs, including Bank Sepah, Iran’s fifth-largest bank. Resolution 1718, adopted in October 2006, called on states to enact similar restrictions on entities involved in North Korea’s nuclear and missile programs, but the Security Council has not targeted any entities for such sanctions.
The UN sanctions have provided a means for ensuring that financial sanctions are applied on a broader basis. Although many countries have not yet taken such steps, the UN sanctions have been incorporated in EU legislation and have been implemented by key U.S. allies, such as Australia and Japan.
In spite of these multilateral efforts, the goal of broadening financial restrictions against Iran beyond the U.S. financial system have met some limitations. For example, Treasury Department Deputy Assistant Secretary for Terrorist Financing and Financial Crimes Daniel Glaser told two House subcommittees April 17 that although banks have increasingly halted their business with Iran conducted in dollars, they have continued to carry out business in other currencies. Tehran appears to have sought to take advantage of such a loophole by reducing its reliance on dollars. In December 2006, Iranian government spokesperson Gholam Hossein Elham declared that Iran was shifting its foreign currency reserves out of dollars and relying on euros for foreign exchange transactions.
As a result of increasing pressure from Europe, Iran has taken further steps since then to move its assets from European to Asian banks and converting other assets to gold and shares. (See ACT, July/August 2008.)
Other limitations relate to the lack of legal authorities for many other countries to impose the same types of financial sanctions that Washington can authorize under Executive Order 13382. A British diplomat told Arms Control Today in June that the European Union does not have the same legal authorities to levy financial sanctions as the United States. (See ACT, July/August 2008.) The EU has been largely dependent on UN resolutions to adopt a common sanctions strategy, although it has taken some steps to go beyond the sanctions required by the Security Council.
Beyond this reliance on UN measures, a German diplomat told Arms Control Today Oct. 22 that one of the key difficulties faced by European countries in applying financial sanctions is acquiring sufficient evidence that the entity is directly linked to proliferation. The diplomat pointed to the effort by Bank Melli, Iran’s largest bank, to seek legal action against the EU in July.
The EU sanctioned Bank Melli in June for its suspected involvement in proliferation financing by Iran, forcing it to close its offices in Hamburg, London, and Paris. (See ACT, July/August 2008.) A subsidiary of the bank filed a lawsuit against the EU in a London court in July, claiming that there was no legal basis for the sanctions. That court rejected the lawsuit, claiming that it must be decided by an EU court.
Moreover, even when such sanctions have increased the cost of doing business with Iran, that cost may not have risen to a level that will significantly deter trade. In the first half of the year, the volume of German trade with Iran has increased by about 14 percent, after a 16 percent decline in 2007. Germany maintains that one of the key factors behind this increase is the higher cost of doing business with Iran. This suggests, however, that many firms are willing to accept higher costs to keep their access to Iranian markets.