How to sever Iran's financial lifeline.
- By Mark Dubowitz<p> Mark Dubowitz is executive director of the Foundation for Defense of Democracies (FDD) and head of its Iran Energy Project. Jonathan Schanzer, a former terrorism analyst for the U.S. Treasury Department, is FDD's vice president for research. </p> , Jonathan SchanzerJonathan Schanzer is vice president for research at the Foundation for Defense of Democracies.
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, is a member-owned cooperative that provides some 10,000 financial institutions worldwide with the means to exchange secure electronic financial messages. If you’ve ever transferred funds from one bank account to another, you’ve probably used SWIFT’s ubiquitous secure messaging system. But on Feb. 2, the network will receive a different kind of message from the U.S. Congress: Stop facilitating Iranian financial transactions that violate U.S. and European laws.
The Senate Banking Committee is now hard at work on an amendment to new sanctions legislation making its way through Congress known as the Iran Sanctions, Accountability and Human Rights Act, filed by Sen. Robert Menendez (D-N.J.), and Sen. Roger Wicker (R-Miss.). Sen. Mark Kirk (R-Ill.), now recovering from a recent stroke, inspired the amendment, and in the spirit of bipartisanship, his colleagues are carrying it forward.
Based just outside Brussels and overseen by the National Bank of Belgium, SWIFT is the electronic bloodstream of the global financial system. It is composed of the most powerful financial institutions in the world. While other companies can enable secure financial transactions, SWIFT is the clear market leader. In other words, this legislation could have far-reaching ramifications.
Tehran uses SWIFT’s technology to conduct business with its trading partners, to sell its oil, to raise capital for its energy sector, to procure energy-related equipment and technology, and to buy and sell other goods and services. Indeed, 19 Iranian banks and 25 Iranian entities reportedly used SWIFT more than 2 million times in 2010. These transactions, the Wall Street Journal noted in a recent editorial, amounted to $35 billion in trade with Europe alone. And they almost certainly violate existing sanctions laws. Cutting off this source of cash could be hugely consequential for those who seek to peaceably halt the Islamic Republic from developing a nuclear weapon.
SWIFT represents one of Tehran’s last entry points into the world financial system. In recent years, the United States and the European Union have sanctioned scores of banks, energy companies, and other entities under the control of Iran’s Islamic Revolutionary Guard Corps (IRGC) — which Washington has designated a terrorist organization — for their connections to nuclear proliferation and terrorist activities. This includes banks like Mellat, Sepah, Saderat, Post, and the Central Bank of Iran.
Opponents of further Iran sanctions will argue that eliminating Iran’s access to SWIFT will destroy the Iranian economy. This was a common refrain during the legislative battle over Congress’s bid to sanction the Central Bank of Iran, the Treasury Department’s designation of 23 IRGC-controlled banks, and the 2010 congressional legislation imposing secondary sanctions on financial institutions that transact with the designated banks.
But even though this concern has not yet come to pass, it should not be dismissed out of hand. Like the Central Bank sanctions that President Barack Obama signed into law in December 2011, any new legislation should allow Iranian banks access to SWIFT to buy food, medicine, and medical devices. It should also allow Iran to sell some of its oil to mitigate the risk of a spike in global oil prices, as long as those sales meet guidelines on oil trades governed by existing U.S. law.
But for all of the warnings against sparking a humanitarian crisis in Iran, it’s important to remember that there’s an equally strong humanitarian justification for sanctions that deter the most dangerous state sponsor of worldwide terrorism from crossing the nuclear threshold. One can only imagine the humanitarian crises an Iranian nuclear strike could precipitate.
In today’s uncertain economy, some Wall Street purists may also find it unsettling that a system so vital to the global financial system could be denied to anyone — even the violent, repressive regime in Tehran. There are also concerns that SWIFT could become a political football in regional conflicts. China, for example, could use this precedent to agitate for the expulsion of Taiwanese banks from the SWIFT system. U.S. administration officials also may fear the rise of a SWIFT competitor that would cater to the needs of China and other countries and that would place less of a priority on preventing money laundering, nuclear proliferation, or terrorism finance.
These potentially troubling scenarios are not to be taken lightly. But they should not absolve SWIFT of its responsibility to abide by its own bylaws, which require that "its services should not be used to facilitate illegal activities" and that can prohibit access if a "user is subject to sanctions." Moreover, senior executives of the global financial institutions that form the board of SWIFT have the power to expel a user who "has adversely affected … SWIFT’s reputation, brand, or goodwill."
That is an authority that SWIFT’s executives should exercise if they are concerned about their reputations and that of this important cooperative. Indeed, SWIFT’s integrity and reliability have made it the unquestioned market leader over the years. Adhering to its own rules will only serve to reinforce the image of transparency it seeks to project.
SWIFT should also abide by local laws. As a SWIFT spokeswoman told the Wall Street Journal, "all decisions on the legitimacy of financial transactions under applicable regulations … rest with financial institutions and the competent international and national authorities." In the United States and the European Union, the laws are quite clear about the responsibilities of international institutions for dealing with a great many Iranian financial institutions.
The European Central Bank’s own guidelines are particularly specific about the grounds for denying access to Target2, the system that settles transactions in euros through the SWIFT gateway. These guidelines bar access to those engaged in "money laundering and the financing of terrorism, proliferation-sensitive nuclear activities and the development of nuclear weapons delivery systems." This language describes the Iranian regime to the letter.
The Obama administration has sought to persuade key legislators that it is better positioned to pursue this matter quietly. After all, it was former Treasury Undersecretary Stuart Levey who adopted this successful approach in persuading scores of financial institutions to terminate their ties to IRGC banks. And there may be some lingering sensitivities between SWIFT and the U.S. government that could complicate Washington’s reported reliance on SWIFT for important information.
But if the past few years have taught us anything, it is that sanctions against Iran often don’t move forward without congressional pressure and that legislation is useful leverage in persuading international companies, not to mention their governments, to pass and enforce their own sanctions. The Obama administration, for example, initially resisted sanctions against the Iranian Central Bank and various oil-market sanctions, but after legislators passed them into law, the administration embraced them with enthusiasm. The Central Bank sanctions, co-authored by Menendez and Kirk in December 2011, have had an immediate impact. In January, Europe imposed a voluntary embargo on Iranian oil — another factor that likely led to the Iranian rial dropping by 50 percent, forcing the regime to make painful budget choices.
There are reasonable concerns about SWIFT sanctions. With any luck, the looming congressional debate will address them and result in well-crafted legislation. Like its precedents, whatever new law emerges should be flexible in both design and application by providing the administration with the ability to issue waivers and exceptions.
An even better outcome would be for SWIFT’s board of directors to take action themselves. The smartest sanctions, after all, are those that encourage people to change course on their own.