TRANSCRIPT: FPI Conference Call on Implications of Granting Iran Access to U.S. Financial Market

April 7, 2016
 
FPI Conference Call: Implications of Granting Iran Access to U.S. Financial Market
 
Featuring 
 
Mark Dubowitz (Executive Director, Foundation for Defense of Democracies)
 
Eric Lorber (Senior Associate, Financial Integrity Network)
 
Moderated by Tzvi Kahn (Senior Policy Analyst, Foreign Policy Initiative)
 
----

TZVI KAHN: Hi everyone. We’ll get started now. My name is Tzvi Kahn. I’m a senior policy analyst at the Foreign Policy Initiative, and I’ll be moderating this morning’s call. According to the program, Dr. David Adesnik, FPI’s policy director, was scheduled to moderate this call, but unfortunately he is out sick, so I’ll be filling in for him today. Let me just get started with the ground rules. I’ll just note that the call is being recorded and is on the record. It will be posted on the Web afterward. The call will be muted for its entirety. If you would like to submit a question during the call, please email it to estern@foreignpolicyi.org. Our speakers will speak for about five to ten minutes each, after which we will open up the floor to those questions.

Let’s get right into this. We’re gathering here this morning in the wake of recent plans — announcements, signals — that the Obama administration will provide significant new sanctions relief for Iran, including access to the U.S. financial system, which raises a number of important questions and concerns. To explore the implications of this possible new policy, I am pleased to introduce two distinguished experts on this issue, Eric Lorber and Mark Dubowitz.

Eric Lorber is a senior associate at the Financial Integrity Network, where he advises financial institutions on issues related to economic sanctions, anti-money laundering and regulatory compliance. He’s also an adjunct fellow at the Center for a New American Security and a senior advisor at the Center for Sanctions and Illicit Finance at the Foundation for Defense of Democracies. Previously, he was an associate at Gibson, Dunn & Crutcher, where he specifically focused on client compliance with economic sanctions and embargo regulations. He brought to that role his experience as serving the Treasury Department’s Office of Foreign Assets Control (OFAC) and Office of Terrorist Financing and Financial Crime (TFFC).

Eric will begin the conversation by describing the context and significance of this issue, after which I’ll introduce Mark. So Eric, the floor is yours.

ERIC LORBER: Fantastic. Thanks so much, Tzvi, and thanks for everyone on the call for joining us today, and for FPI for organizing, and of course for Mark for participating and always being at the forefront of these issues. As you said, we’ve seen over the past week that there’s been a lot of frankly unexpected movement on Iran sanctions questions, both with the dollarized transactions discussion and also Secretary Lew’s speech on the future of economic statecraft last week at Carnegie. I thought I’d briefly touch on four topics related to the question of dollarization, both to provide, as you said, a bit of context, and also to address some of the concerns that exist around providing Iran with access to U.S. dollars. And then of course I’ll be happy to address any follow-up questions during the Q&A, and I’ll also be happy to address any of the pending legislation that we’ve seen, including the Rubio-Kirk bill, which was I think announced yesterday.

So the first topic I want to touch on is why providing dollar access, even offshore dollar access, to Iran would help the Iranian economy. And so as we know, based on sanctions relief most non-U.S. business activities are generally now allowed in Iran, but companies looking to do business there can’t find global banks to bank their business. The question is of course why are these banks so risk averse, and the answer is that frankly they’ve been hit heavily before with fines.

And perhaps most interestingly here, those fines turned on this dollar-clearing issue, so under U.S. law foreign entities can’t cause a U.S. person to violate U.S. sanctions, so the major bank fines, such as with BNP, were instances where these Western European banks hid identifying information for transactions that were cleared through U.S. financial institutions. So in other words foreign banks conducting U-turn transactions caused U.S. banks to violate U.S. sanctions by having them unknowingly process funds from sanctions parties.

This is really an important point, because this was the basis of liability, and the jurisdictional hook that the U.S. regulators used to impose these billions of dollars’ worth of fines on these financial institutions. And as a result, these Western banks who have been dinged on this before really have no desire to reenter Iranian markets or bank on behalf of Iranian clients. I will note that I represent a number of these banks, and I have seen a lot of their internal policies. And, in effect, Iran for them is a no-go zone regardless of the JCPOA’s successful implementation or not.

I will say as an aside to this, as a matter of law and as it currently stands, I do think it’s an open question whether a dollarized transaction that doesn’t actually touch the U.S. financial system would violate current U.S. sanctions post-Implementation Day. So I think that such transactions could actually be permissible under U.S. law, but even if they are, because it’s such a gray area, the banks are so risk-averse that they’re not willing to go in and provide transactions or financing. It’s just too risky for them given this gray context. And this is what actually makes it difficult for these non-financial companies to do business in Iran.

So these companies would go to the European banks for financing, for trade, and for currency exchanges, and oftentimes what would happen, and what is happening, is that the banks would just say simply, “Listen, we know that the transaction might not necessarily be in dollars right now, but it could be converted into dollars at some point, and we just don’t want any part of that.” So they’re not following through on banking any of the business that’s being presented to them. And I think that what the administration thinks is that allowing or signaling to these banks that dollarized transactions are actually OK, though again probably not through the U.S. financial system, as administration officials keep saying — it’s a way to assure these banks that it’s OK to do business again with clients who are doing business in Iran consistent with the JCPOA. So that’s kind of the broader context.

The second point is the question of how the administration is going to provide, or how it is thinking about providing, this relief. We don’t exactly know what this relief is going to look like. As I’m sure Mark will touch on, and he’ll explain, we’ve heard over the past couple of days a wide range of potential options — everything from a general license issued by the Treasury Department to a potential statement of guidance saying these activities are permissible under U.S. law, et cetera. So it’s a significant amount of gray area here, too, and frankly I think the administration might have gotten a little bit ahead of itself last week when it began, or officials in the administration began, saying that some type of proposal was a done deal. Now it seems there’s a lot more debate even within the administration, as you’ve seen over the past couple of days with public statements both by Undersecretary of State for Political Affairs Tom Shannon before [the] Senate Foreign Relations [Committee], I think it was, on Tuesday, but then also apparently what Undersecretary of the Treasury for Terrorism Financing Adam Szubin has told Senator Bob Corker.

So there’s again an open question as to what this relief could potentially look like. I think one very clear option, and one option which I think might be particularly likely, is the issuance of a general license. So as just a bit of background, I’m sure many on this call know, but a general license provides broad authority for entities, either U.S. or foreign, to conduct basically a class of transactions. And I think in this case a general license would be issued that would do a couple things. One is it would permit U.S. banks the ability to provide dollars for an offshore clearing facility overseen by a foreign government or a foreign bank. And then when transmitting payments between Iranian companies and non-U.S. companies, foreign financial institutions would be able to use this offshore clearing facility to convert the transactions that they were doing into dollars.

And as we’ve heard from an AP story I guess at the end of last week, such a license would have a couple of restrictions with it. There could be no Iranian banks involved in the transactions. There could be no Iranian rials entering into the transactions at the dollar clearing facility itself, and the payment would not start or end with U.S. dollars. So I just gave you a whole bunch of fairly complicated legal terms, but let me sort of walk through an example to give you a sense of how this would work.

So say for example you had a Swiss automobile manufacturer selling cars to Iran, and their European bank would receive payments from an Iranian company in rials. That European bank would then exchange those rials with euros, and then at the offshore dollar clearing facility would exchange those euros for dollars. So that’s where the dollar hit happens. The bank would then change those dollars internally into Swiss francs and transmit those francs to the Swiss automobile manufacturer. And so this conversion would allow the bank to conduct at least part of the exchange in dollars, which is preferable because the dollar is a stable currency with less fluctuation and risk.

Now again this is just one proposed mechanism. We’ve heard that there are others under consideration. I will say that it is likely that any general license that OFAC would consider issuing would probably have the language that all transactions done in dollars should be done consistent with the sanctions relief provided in the JCPOA. I wouldn’t expect a broad general license to allow all dollarized transactions with Iranian institutions, but rather you would expect it to be just consistent with the JCPOA.

The third point I want to make is I think it’s evident that the administration has long considered these offshore dollarized activities to be permissible under U.S. law and has always had this sort of option in their back pocket to provide this dollarized access outside the U.S. financial system. And there are two reasons I think that. The first reason is if you look at the statements made by Secretary Lew and Acting Undersecretary Szubin in July and August of last year, when they were basically selling the deal. I’ll give you a quote from Adam Szubin’s statement. He said, “No Iranian banks can access the U.S. financial system, not to open an account, not to purchase a security, and not even to execute a dollarized transaction where a split second’s worth of business is done in a New York clearing bank.”

It’s an interesting comment, because what it specifically leaves out is that there could be a dollar clearing transaction done outside of a New York bank or outside of the United States, which would in effect mean that the United States might not actually have jurisdiction to impose sanctions over that transaction. It’s a very carefully worded phrase, and frankly it’s backed up by the FAQs which were issued on Implementation Day. As a bit of reference, the FAQs are basically how OFAC tells companies what is and isn’t permissible. And they for the most part have legally instructive value. And FAQ C. 7. on this point is really interesting. So it says, “After Implementation Day, are foreign financial institutions allowed to clear U.S. dollar transactions involving Iranian persons?” And the answer written by OFAC is, “After Implementation Day, foreign financial institutions need to continue to ensure that they do not clear U.S. dollar-denominated transactions involving Iran through U.S. financial institutions,” et cetera, et cetera.

And so the choice of this language is very telling. It makes it clear that it can’t be done through a U.S. financial institution, but it leaves open the possibility that it can be done outside of a U.S. financial institution or outside the U.S. financial system itself. And this is definitely not a mistake. I mean, after having been at OFAC and seeing how the sausage was made, they’re very clever lawyers there, they’re very smart people. They would definitely have known that this would leave open the possibility of dollarized transactions outside of the U.S. financial system. So I think the administration either views dollarized transactions outside the U.S. as being completely legal, and that it sort of had this clarification option in its back pocket as something it was thinking about doing probably since July and August of last year and certainly since Implementation Day.

The fourth point I want to make, and the last point, is that providing access to the dollar I think would seriously undermine U.S. coercive leverage on Iran on other issues, not necessarily the nuclear program. And so it’s basically a point that hasn’t really been appreciated, that by giving Iran the ability to do dollarized transactions, which I don’t think was included in the original agreement, we undercut coercive leverage. So giving Iran access to U.S. dollars I think is a significant concession. I think a lot of people do recognize that, and it allows Iran to do a lot of activities it couldn’t otherwise do.

Access to the U.S. financial system, access to dollarized transactions, is a significant coercive tool that we have in our toolkit. And if we allow it to be basically given away without concessions on Iran’s ballistic missile program or its support for terrorism, I think we’re losing a lot, and we’re giving up something in effect for nothing.

And let me explain sort of how this works, sort of a hypothetical example, and why providing this dollarized access could actually really undercut our coercive leverage moving forward. So let’s say that we give Iran access to U.S. dollars, there’s a general license that’s issued allowing them access, and six months down the road Iran engages in a wide range of missile tests. And so we want to pull their access to U.S. dollars as a way to punish them for these activities and change their behavior. If we do that, Iran is going to say that the dollar access was granted as part of the nuclear agreement, as evidenced by the fact that the U.S., when it was saying that it needed to fulfill its obligations under the JCPOA, provided this general license. So Iran will basically say that if the United States tries to cut this dollarized access off, that’s a violation of the JCPOA, and they will walk away, or they’ll take countermeasures, et cetera.

So by giving dollar access as part of the nuclear agreement, and with no concessions, we actually no longer have the coercive leverage necessary to impact Iran’s other nefarious activities in the region. And that’s a real issue that I don’t think has been properly understood. In effect, by giving dollarized access now, the administration is going to potentially hamstring itself to impose coercive measures related to Iran’s other activities moving forward.

And so just in closing, I’ll say that I think the administration is basically trying to thread a needle. They want to provide the relief that they think is promised under the JCPOA. But at the same time I think they’re going to have to make sure that they don’t undermine U.S. coercive leverage against a rogue regime. And as an editorial comment, I think this is a very hard thing to do, and I’m doubtful that the administration is going to be able to achieve it. So with that I’ll flip it over to you, Mark, and I look forward to your comments.

TZVI KAHN: Eric, thank you so much. It’s now my pleasure to introduce Mark Dubowitz, who is the executive director of the Foundation for Defense of Democracies, where he leads projects on Iran, sanctions and nonproliferation. Mark also heads FDD’s Center on Sanctions and Illicit Finance, and co-leads the Iran Task Force. Mark is extremely well-known on Capitol Hill, where he has appeared some 19 times to provide testimony. When he is not advising the administration and Congress, Mark teaches courses on sanctions and international negotiations at the University of Toronto’s Munk School of Global Affairs. Mark will discuss the current policy debate surrounding the issue, and with that, Mark, the floor is yours.

MARK DUBOWITZ: Great, thanks so much Tzvi, and thank you, Elaine and FPI for organizing this — and Eric, thank you for, really, a fabulous explanation. I actually was taking furious notes and learned a great deal from you. Let me touch on some other aspects of this, in terms of a broader strategic context, because I think it’s always worth understanding how Iran sees it, and why Iran wants this.

But first a little bit of history, that many of you are aware of and that certainly Eric played a role in, and that is, how were these financial sanctions put in place in the first place, and why were they put in place? And what was Treasury and OFAC’s mission over the past at least decade? And that was a mission that was very much articulated by undersecretaries of the Treasury, secretaries of the Treasury, going back to 2005, 2006, which is that these financial sanctions were not being put in place because of Iran’s nuclear program.

These sanctions were being put in place because the Iranian financial sector represented a threat to the integrity of the global financial system. And years of roadshows led by Stuart Levey and David Cohen and Adam Szubin, and others, went abroad to talk to international banks, and said, Iran represents a unique threat to your bank and to the integrity of the financial system. And that threat is on the basis of its proliferation financing, nuclear financing, missile financing, but also terror financing, money laundering, and sanctions evasion. And the administration’s put in place laws and findings that very much reflected what international bodies like the Financial Action Task Force, this sort of “financial U.N.,” which is an intergovernmental agency that regulates markets and protects financial integrity, had been issuing warnings on for years. And that is Iran, again, represents a severe illicit financial threat.

Those warnings were concretized in findings and U.S. law, including the 2008 U-turn prohibition that Eric talked about, where a U-turn transition through the U.S. financial system was prohibited. Again, there was a 2011 finding under the USA PATRIOT ACT, which found Iran’s entire financial sector — in fact, the entire jurisdiction of Iran — as a jurisdiction of primary money-laundering concern. Financial institutions, many financial institutions, were designated, again not just because of the nuclear program, but because of the missile program, because of their involvement in money laundering. The Central Bank of Iran, actually, was designated, and statutorily designated, because of a multi-fold threat. Nuclear financing, but — again — missile financing, terror financing, money-laundering, and sanctions evasion.

So you have an almost 10-year history, both in executive branch action, in statute, and in a message — a narrative — to the international financial community that Iran is a bad financial actor. So Iran today is considered to be a financial pariah, considered to be financially radioactive, which is exactly what Eric was talking about. I mean, this is why global financial institutions are reluctant to do business with Iran despite the fact that nuclear sanctions have been suspended or lifted under the JCPOA.

Because the reality is, when they look at Iran, they see a country whose economy in the key strategic sectors that they care about are dominated by the Revolutionary Guards, which are still designated under U.S. law and is still involved in a series of malign activities. They look at Iran, and they worry about Iran’s missile activity and terrorism activity, the fact that Iran continues to take U.S. hostages, that it’s involved in supporting designated Shiite militias in Iraq, that it’s involved in supporting the Houthi rebels in Yemen, and that it’s been providing significant support to Bashar Assad’s slaughter of the Syrian people.

So when they look at Iran today, the nuclear deal has been one element of that, but they are looking at Iran as a continuing threat, and specifically a country that has a decades-long rap sheet of financial crimes. Okay, so that’s the context.

Now, from Iran’s perspective, how does Iran actually get itself out from under that? How do they make themselves less financially radioactive? Because they’re still on the Financial Action Task Force blacklist. As recently as February, the Financial Action Task Force issued yet another warning about the illicit financial risks that Iran poses, and there’s a deep reluctance on the part of these European financial institutions, as Eric said, to go back in Iran, to do this business, and expose themselves to these illicit financial risks and money-laundering operations.

It’s worth remembering that BNP Paribas, which was hit with the biggest fine for its role in sanctions evasion and money laundering, not only was penalized almost $9 billion, but had its dollar-clearing operations suspended. So when you’re a global bank, that is the death knell for you, and these banks are very concerned about going back into Iran as a result of Iran’s almost unique role — I would put North Korea with it as well — as an illicit financial actor.

Now, the Iranian strategy is to legitimize themselves as a responsible financial actor, and what could be the best way to do that than to get the United States government to effectively greenlight the greenback? To say to the global financial community, the world’s most important currency, the U.S. dollar, which represents something like 87% of global trade and 60-70% of foreign exchange reserves, the currency that everyone needs in order to do oil trades and financial activities and foreign direct investment — we are going to greenlight the greenback, and in greenlighting the greenback we’re going to start to send a message that the Iranian financial sector is not as severe an illicit financial threat as decades of policy has underscored.

And that’s the way Iran will play it. By getting that most valuable concession, they will then, in my view, work with the Europeans and Asians — who are very interested in, obviously, getting back into Iran — they will put pressure on the Financial Action Task Force; they will try to water down the severe warnings; they will try to make the case that they should no longer be on the blacklist, but at least at a minimum just moved to the gray list. There will be a lot of pressure to overturn the U-turn transaction, to lift the 311 finding. Because Iran’s strategy is not simply to get a dollarized transaction through this complex mechanism that Eric described. Their broader strategy is to be legitimized as a global financial actor, and to come out of the penalty box, as it were.

Now, how do we know this is their strategy? Because this is exactly the strategy they followed on the nuclear side. Iran, on the nuclear side, was under multiple U.N. Security Council resolutions. There were multiple IAEA reports talking about Iran’s role as an illicit nuclear actor. The Iranians were facing punishing economic sanctions as a result. They had been isolated politically, and isolated financially. And they had to find a way out of that, and the JCPOA was exactly that kind of deal.

It was a deal that effectively got the United States and the international community to acknowledge that, over time, as the restrictions on their program sunset, they can emerge not only with an industrial-sized nuclear program, with near-zero nuclear breakout and easier advanced-centrifuge clandestine sneak-out, but it will be a nuclear program that will be legitimate and will be recognized internationally. And it’ll be considered to be NPT-compliant. And they will do all of that without admitting to the fact that they were engaged in weaponization activities in the past, without admitting, or without committing, that they will turn the corner on a decades-long rap-sheet of nuclear mendacity.

And it’s been a very successful deal for them so far. So they can engage in a whole host of malign activities on the non-nuclear side, but their nuclear program will increasingly expand, and will be afforded the international legitimacy that they believe they need in order to get to the next stage of their nuclear ambitions. So, what they did on the nuclear side, they’re looking to do on the financial side, and we have to be very, very careful in not getting consumed by this sort of technical nature of what the U.S. Treasury Department is describing — not to get consumed by this notion that, somehow, because it’s not touching the U.S. financial system, in this offshore dollar clearing operation, that that somehow is okay, and that somehow should be legitimate, and somehow that should be legal.

Because what the Iranians are doing is much more strategic than that. In getting the greenlighting of the greenback in an offshore dollar clearing facility, they’re setting the stage for the next steps, where they can begin to erode coercive leverage on the one hand, and they begin to legitimize themselves as a quote-unquote “responsible” financial actor without doing anything to actually demonstrate that they’ve turned the corner on the money laundering, and the threat finance, and financing of terror concerns that the international community has.

So I just wanted to underscore that — look at it from an Iranian perspective, look at what the Iranian strategy is, and we have to be very diligent about ensuring that we don’t give up these concessions to Iran.

Now let me make a second point, which is that had Iran realized, I think, the power of U.S. secondary sanctions, and the existing overhang of risk that is deterring these global financial actors from going back into Iran, you would have thought the Iranians, in that lengthy JCPOA, would have negotiated an explicit commitment from the administration to greenlight the greenback. You would’ve gone through — I’m sure many of you did — the detailed provisions in the JCPOA, and you would’ve found a provision which explicitly required the United States Treasury Department to provide an offshore dollar clearing mechanism through which dollarized transactions could take place.

Well, there’s no such provision, to the best of my knowledge, in the JCPOA. Now, if Iran did not negotiate that, then Iran needs to negotiate that, and the administration should not be providing a unilateral concession without any reciprocity from the Iranians. Particularly at a time where since the JCPOA has been reached, rather than being a more responsible global actor, Iran has become an even less responsible global actor. On missile tests, on support for terrorism, on firing rockets at U.S. carriers, on hostages, on continued support for terrorism, on a massive escalation in human rights abuses, the Iranians — as the president himself has even acknowledged — are in violation of at least the spirit of the agreement, if not certainly the letter of U.N. Security Council Resolution 2231, that continues to be the guiding resolution mandating that the Iranians, for example, don’t engage in long-range ballistic missile tests.

The fact that we would offer a unilateral concession to Iran, especially one with such far-reaching consequences, especially one that actually allows Iranians to leverage our currency in order to not only conduct business, but to legitimize themselves as a responsible financial actor, seems to me to be a mistake. We should require that if Iranians want access to the U.S. dollar, then they’ve got to start to address all of the other non-nuclear malign activities that many of us are concerned about. And, indeed, concerns that the administration promised in congressional testimony last summer that they were going to address, that they were going to enforce, and that they were going to use the power of non-nuclear sanctions in order to ensure that Iran does not use the nuclear deal in order to expand on these other areas of malign activities.

Instead, we’re seeing reports of the opposite. The administration trying to figure out what I would call a bait-and-switch, which is we’re not going to give Iran quote-unquote “access” to the U.S. financial system, but we’re going to give Iran all the benefits of dollarized transactions with respect to commercial trade and with respect to this legitimization which I’ve talked about. Again, a big mistake to be at this time, when we should be cracking down on Iran’s missile activity, terrorism activity, human rights abuses, it’s a big mistake to actually give up this concession, lose that course of leverage, and permit Iran to benefit from a gray area, as Eric talked about, when we should be clarifying that any new concessions should be linked to significant concessions from the Iranians on the other side. And let me stop there.

TZVI KAHN: Mark, thank you so much, and Eric as well, for those really insightful presentations. I’m just going to jump straight into the Q&A, and one of the first questions we’ve received pertain — is sort of a “devil’s advocate”-type question. Which is to say that, might it not be the case that if the JCPOA itself actually requires such concessions? Namely, in paragraph 24 of the agreement, it states that “If at any time following Implementation Day, if Iran believes that any other nuclear-related sanctions or restrictive measure [of the E3/EU+3 ] is preventing the full implementation of the sanctions lifted as specified in this JCPOA, the JCPOA participant in question will consult with Iran with a view to resolving the issue and, if they concur that lifting of the sanction or restrictive measure is appropriate, the JCPOA participant in question will take appropriate action.”

This passage from the JCPOA could, according to this theory, be interpreted as one that really would require the United States to take whatever steps are necessary to lift sanctions if it’s clear that the steps taken to date have been inadequate, or have not been giving Iran the relief that it has been expecting. Mark, I’ll start with you. Is there anything to this argument? Is there really any basis on which to say that the United States has an obligation to really — to take the extra measure step forward to help Iran get the relief it was expecting?

MARK DUBOWITZ: Well, I would argue no, and for a few reasons. I mean, the first is, you know, you can interpret a number of these provisions as being open-ended, that effectively if the Iranians could use that provision, they could use a provision that says that the United States and Europe shall do nothing to interfere with the normalization of trade and commercial relations with Iran — that’s another provision of the JCPOA. If you were to use that provision, then we wouldn’t be able to even impose non-nuclear sanctions, because non-nuclear sanctions, as we’re discovering, clearly interfere with the normalization of trade and commercial relations with Iran, because they are deterring global financial institutions from going back into Iran. So that would be, from an Iranian perspective, that would be a violation of that provision.

The provision referenced in the question — I mean, again, what we’re talking about here are not nuclear sanctions. The nuclear sanctions have been suspended or lifted. What we’re talking about is the fact that Iran’s non-nuclear activity, the terror financing, the missile financing, the money laundering, those financial crimes are deterring global financial institutions from going back in because Iran remains a jurisdiction of primary money laundering concern; because Iran is under multiple FATF warnings; because Iran is on the FATF black list. And so sure, that’s exactly my argument. If I’m Iran, and I will use what I would argue are these open-ended provisions, to argue that the United States should be lifting the 311; that Iran should no longer be a jurisdiction of money laundering concern; that the United States should be allowing a U-turn transaction, because that is interfering with the normalization of trade and commercial relations; that the United States should be agreeing to, with the Europeans and the Asians, to remove Iran from the FATF black list, water down FATF warnings, and doing everything possible to remove, effectively, the architecture of non-nuclear sanctions.

So that provision could be interpreted that way, but if I’m the United States, I will argue that what has not been explicitly committed to is not by definition permitted. Iranians are being very legalistic in how they’re interpreting the JCPOA with respect to the letter. Obviously, with respect to the spirit, they have been in violation of the spirit of the agreement, as the president has said, so there’s no reason that we need to be — go beyond the letter of the agreement, and in trying to honor the so-called “spirit” of the agreement, go much further than we need to, and particularly at a time where Iran is in such violation of the spirit of the agreement, as President Obama has explicitly underscored.

TZVI KAHN: Thanks so much, Mark. Eric, did you have anything you wanted to add?

ERIC LORBER: Yeah, I would like to weigh in on that, too. I think, actually, I agree with Mark’s comment, and I think that perhaps the more compelling “devil’s advocate” argument comes from paragraph 26 of the JCPOA. The language there, I’ll read it quickly and then talk about it, is, “The United States will make best efforts in good faith to sustain this JCPOA and to prevent interference with the realisation of the full benefit by Iran of the sanctions lifting specified in Annex II.” So I think that there are two points on this.

The first point was Mark’s point from earlier, that there was no specific negotiated component related to offshore dollar clearing or dollarized transactions in the Annex to the JCPOA. And one would have thought, again, that given that it’s such an important issue, if Iran had wanted that, and was willing to give up concessions for that, that would have been included in the agreement. The second thing with this statement, though, is that the statement is about providing Iran the benefit of the sanctions lifting. Now, the benefit of the sanctions lifting, I would argue, is simply allowing companies that are interested in going back into Iran the opportunity to go back into Iran.

The benefit is not pushing companies to go back into Iran, or incentivizing companies to go back into Iran, and that’s a key difference, because with a dollarized transaction, if you’re providing an offshore clearing facility, for example, for dollarized transactions, in that sense you’re actually incentivizing companies to go back in. It’s not simply saying, “Hey, companies, look: It’s legal for you to enjoy — to reenter the Iranian market, and we’re not going to push you. But we’re going to tell you that the benefits of the sanctions are that it is now — or that of the sanctions lifting — are that these activities are now legal.”

There’s a distinction between that, and then going forward and saying, “No no no no, companies, you should go back in, and we’re going to make it easier for you to go back in.” So I think from a legalistic perspective, there’s a good case against that counter-argument that was raised in the question.

TZVI KAHN: Thanks so much, Eric. For our next question, we’re going to take a look at the role of Congress here. And Eric, I guess we can start with you this time. Certainly yesterday, Senators Rubio and Kirk introduced legislation that would seek to restrict what the administration wants to do. Can you discuss these efforts a little bit, and maybe tell us in your own words what you think Congress can and should be doing at this moment?

ERIC LORBER: Absolutely, that’s a great question, thanks Tzvi, and I know Mark and I were talking about this earlier before we opened up the call. We’ve seen multiple legislative proposals coming through Congress, and the only one I’ve seen that has been publicly released thus far is the Rubio-Kirk bill. And I think there are sort of two questions that these bills, that these proposals, are trying to deal with, and each of them are hard to answer, and I think that sort of more work needs to be done in really hashing them out.

The first question is, what exactly is the legislative proposal going to prohibit? So if you look at the Rubio-Kirk bill, for example, it says in the first line, “The President shall not issue any license under the International Emergency Economic Powers Act that permits a person” XYZ — [the legislation] goes into basically making the argument that no general license can be issued for an offshore dollar clearing facility to do business with Iran for dollar clearing purposes. Now the issue there is that the language, “The President shall not issue any license,” is in fact fairly narrow. Because you could also see the administration come out and say, “Hey guys, we’re not going to issue a license, we’re going to issue a statement of clarification, or clarifying guidance, which says that these activities — dollarized clearing transactions that do not take place in the U.S. — are currently permissible under U.S. law.” So there needs to be more work, I think, done on defining the proper scope of these legislative proposals.

The second point I’ll make is that I’ve seen sort of different hooks for these legislative proposals. Things like Iran's support for terrorism, things like Iran's support for ballistic missiles, et cetera. And I think that, when thinking through these issues, as to what the purpose of preventing the dollarized clearing transaction mechanism is, that Congress should think through, as Mark said earlier, what exactly they’re trying to pressure Iran on. Obviously, there’s an impetus to prevent Iran from having this ability, but they should think through what impact this mechanism is going to have on Iran’s support for terrorism, or Iran’s support for ballistic missiles, and whichever one they think it might have the most impact on, that’s the one they should sort of hang the hook of the legislation on. So I’ll end with that comment.

TZVI KAHN: Thank you. Mark?

MARK DUBOWITZ: Yeah, I think that’s exactly right. I mean, I think, again, this is an opportunity for the administration not to fall into the trap of continuing to give away to Iran unilateral concessions, as I mentioned earlier, and to continue to allow the Iranians to sort of expand on the language of the JCPOA in these sort of open-ended paragraphs, where there’s no explicit commitment to Iran, but where the Iranians can argue — rather creatively — that the administration really should be in the business of giving Iran everything, because everything interferes with the normalization of trade and commercial relations with Iran, and everything stands as a barrier to international business.

We got to go back to the administration commitments that were made. The non-nuclear sanctions are not prohibited by the JCPOA — that indeed, the administration has said repeatedly that we need to have leverage in order to get Iran to stop supporting terrorism or firing long-range ballistic missiles. And I think there’s a real opportunity here to use the demand for dollarization as leverage to extract meaningful concessions, and do so in a way that recognizes that dollarization is an enormous concession, for the reasons that Eric and I have described, that it is not only to grease the wheels for European banks to go back into Iran, which in and of itself is an enormous concession, but that it is also to set in motion a pathway of legitimization for Iran back into the global financial community.

So given how big the concession is, we should be tying that concession to commitments by Iran to address these other areas of malign behavior. So for example on this license, if there is a license — I mean, I think that Congress should block this license entirely and have a mechanism of secondary sanctions against any global financial institution, or any financial institution at all, that engages in dollarized clearing, and then use that leverage to then go and demand from Iran that it now end its support for terrorism. And so as long as it is a state sponsor of terrorism, global financial entities will be prevented from dollarizing transactions, both because it will be a unilateral concession to Iran that still remains the leading state sponsor of terrorism, and B), because we, as decades of history have demonstrated, as I talked about earlier, we’re in the business of protecting the financial integrity of the global financial system. And so this is not only to protect us from the violence of terrorism, it’s to protect our global financial system from the financing of terrorism.

There is an opportunity for Congress to weigh in by prohibiting such a license, by mandating secondary sanctions against any foreign financial institution facilitating a dollarized transaction, and then to require that if such a license is going to be given through the president’s IEEPA power, that that license be tied to a certification from the administration that Iran is not engaged in financing terrorism or financing missiles. Indeed, I would throw in another requirement, which is that I would put a tax on any dollarized transaction where the proceeds from that tax were paid into the victims fund that Congress has established for victims of Iranian terrorism. There’s billions of dollars that the Iranians refuse to pay, that indeed they’re challenging in the Supreme Court of the United States, and yet we are going to greenlight the greenback, and permit billions and billions of dollars of dollarized transactions with our currency, when our victims of Iranian terrorism and others have not been fairly compensated? Again, that’s an opportunity for Congress to really exert some leverage.

TZVI KAHN: Thank you so much, Mark. Our next question is another “devil’s advocate”-type argument which is, and this refers to what Secretary Lew said a few days ago concerning the risk of sanctions overreach. According to Secretary Lew, if the United States were to be overly restrictive on sanctions, and were not to provide the kind of relief that Iran as well as much of the international community expected, it could have the adverse effect of undermining international confidence in the dollar itself, and spur other countries to start thinking about alternate forms of currency. Do you think there’s anything to this argument? Does the administration have any legitimate concerns when it comes to the idea of sanctions overreach? Mark, we’ll start with you, I suppose.

MARK DUBOWITZ: Look, I think again it’s worth getting back to first principles again. The first principles on this are why were these sanctions put in place in the first place? I mean, the sanctions, again, were put in place because of Iran’s illicit financial activities, and I think that we are actually in a much weaker place if we actually begin to politicize the sanctions. So let’s sort of go through these arguments again. There’s David Cohen in 2012 saying that the purpose of the sanctions is to protect the integrity of the U.S. and international financial system. There’s Treasury banning U turns. And again, noting that the purpose is to further protect the U.S. financial system from the threat of illicit finance posed by Iran and its banks.

We’ve sort of gone through the discussion on FATF, but I think it’s Transparency International [that] ranks Iran 130th out of 168 countries on its corruption perception index, and the anti-money-laundering index report that’s put out by the Basel Institute on Governance ranked Iran as the worst country in the world with regard to risk for money laundering and terror financing, and they’re using indicators from FATF, and the World Bank, and the World Economic Forum, and others. And then, once again, just to repeat this, in 2011, the U.S. Treasury Department — President Obama’s Treasury Department — under Section 311 finds that Iran is a jurisdiction of primary money laundering concern.

I think that there is a real mistake in decoupling the lifting of sanctions from a change in the behavior that prompted the sanctions in the first place. That really risks undermining the very arguments that make sanctions an effective tool of American national security policy. Sanctions work not when we impose sanctions on Iranian companies, but when foreign businesses stop doing business with Iran because they believe Treasury is using objective measures to determine really which entities pose illicit financial risks. And the real danger is when the international business community and financial community start to see Treasury’s actions as political rather than sort of merit-based maneuvers. I think that’s going to very much undermine sanctions as a credible instrument of coercive statecraft, and I think that they really will be damaged beyond repair if there is a perception that we are politicizing our sanctions.

Again, getting back to Secretary Lew’s comments, I think it’s critical to underscore that when we put these sanctions in place for a reason, we need to stay true to that reason. And the goal of the sanctions is to pressure bad actors to change their policy. That’s what Secretary Lew said. He said we must be prepared to provide relief from sanctions when we succeed. Well, that may be true, but we haven’t succeeded. We got a nuclear deal and nuclear sanctions were lifted, but we haven’t succeeded in addressing the multifold-threat finance risk that Iran represents. And until we do, and until Iran stops financing terrorism, stops financing missiles, and stops engaging in massive money laundering, I think it would be a big mistake to begin to use our greenback in ways that legitimize Iran as a responsible financial actor when clearly it is not.

TZVI KAHN: Thank you so much, Mark. Eric, did you have anything you’d like to add?

ERIC LORBER: Yeah, I would. So I agree with Secretary Lew’s statements in principle, and in theory, and indeed I’ve written on the risk of the over-reliance on sanctions as a tool of first resort in terms of incentivizing other countries to develop alternative payment systems and reliance on different currencies for transactions, et cetera. So I do think we are a fairly long way off from that becoming a serious reality just given the strength of the U.S. dollar, and of the stability of the U.S. dollar. And of course, as Mark said earlier, 85-87% of cross-border transactions are done in USD. So I think that that’s not an immediate threat. But I will say, though, is that I actually don’t think that this would be a good example of sanctions overreaching. So in this case, you have a deal which was struck between the United States and Iran and the EU/3+3, but that deal as we talked about didn’t include, explicitly, access to the U.S. dollar or access to U.S. financial institutions.

So if the Iranians, or if one I guess, were to argue that a deal was struck, and then the terms of the deal were basically broken by the United States, who continued to impose significant sanctions on Iran even after the deal, then yes, I think there is a pretty good argument there that there’s sanctions overreach going on, and that undermines our ability to garner international cooperation for powerful sanctions and impose sanctions going forward, but I don’t think that what’s happening here.

I rather see this as a situation where the U.S. and its partners struck a deal with Iran that deal did not include dollarized access, and now Iran after the deal is demanding that the United States provide them with dollarized access and the U.S. is considering in this case, obviously, doing it. So in that circumstance, I don’t think imposing sanctions — or preventing the provision of dollarized access, excuse me — would constitute an instance of sanctions overreach.

TZVI KAHN: Thank you so much, Eric. Our next question is concerning — let’s suppose the administration’s plans do move forward, and Iran receives the kind of relief that it’s looking for under this plan. Is this de facto, in effect, the end of the U.S. sanctions regime on Iran? And does the administration — will the United States have any leverage remaining in the future that it could use to punish Iran? And as part of that, more specifically, how would the next U.S. president, if he or she should so choose, act to unwind this kind of problem? Is there anything left that the United States would be able to do after this change in policy that could enable the United States to affect Iranian behavior? Mark, if you’d like to take a stab at that one first.

MARK DUBOWITZ: Sure, Tzvi, so I testified before Congress last summer and I talked about something that I termed the “nuclear snapback.” There was a lot of talk about America’s economic snapback, but the Iranian nuclear snapback is much more powerful. The Iranian nuclear snapback is Iran’s ability to continue to threaten to walk away from the deal and to reconstitute their nuclear program, and that the threats of the walk-away would be used by Iran to continue to extract more and more concessions, even after the deal was reached. In fact, for Ali Khamenei, Iran’s supreme leader, the JCPOA was not the end of negotiations, it was the beginning of the negotiations. So we’ve seen that, over the past almost 7-8 months, that he continues to give speeches demanding greater concessions, and indeed only a couple of weeks ago he gave a very specific speech calling out the U.S. Treasury Department for standing in the way of the reentry of European banks back into his country.

And so, understand that the Iranian nuclear snapback, this sort of sword of Damocles, will continue to hang over this president, the next president, the president after that, will be a very powerful instrument of coercive leverage. And they’ll use it to extract greater and greater concessions. I think the flipside of that is that, I really believe that dollarizing these transactions continues us down the path where we will end up with no U.S. secondary sanctions leverage.

They may be still there on paper, but de facto they’ll be gone. And the reason for that is, once you give these concessions, I think as Eric alluded to, to Iran, it’s very difficult to take them away, because then Iran will cry foul, that those indeed are concessions linked to the JCPOA, they are therefore nuclear sanctions, and therefore we are violating the agreement by trying to re-impose nuclear sanctions.

So Iran is definitely going to play this, as Eric described, and try to characterize everything as a nuclear sanction, or a nuclear sanctions relief. I think on the side of our allies, I think the next president is going to be in a difficult position. If this president greenlights the greenback and authorizes dollarized transactions, how does the next president come into office and take that away? Our European and Asian allies will be furious if the next president comes into office and says, you know, as a result of Iran’s missile test and support for terrorism, we’re now revoking the general license that authorizes U.S. dollar transactions.

And so we are putting ourselves in a really bad predicament, where the ability for us to enforce even non-nuclear sanctions, again those sanctions that were explicitly promised by the administration as being not prohibited by the JCPOA, are getting increasingly undermined in their application and in their efficacy. And remember what the Iranians have said all along, even last year, the Iranians sent a letter to the U.N. saying that we will treat the imposition of sanctions, whether they are nuclear or non-nuclear, as a violation of the agreement. They have been telling us all along that they, at the end of the day, want to destroy the architecture of U.S. and global sanctions.

Their strategy is to treat all of these sanctions as the same. They make no distinction between nuclear and non-nuclear sanctions, and we’re seeing this example now play out in the case of dollarized transitions and the arguments being advanced by the Iranians and by others to try and justify, again, an unreciprocated unilateral concession not explicitly provided for in the JCPOA.

TZVI KAHN: Thanks so much, Mark. Eric, do you have anything you’d like to add?

ERIC LORBER: Yeah, I would like actually to build off that a little bit, taking it in a tiny bit of a different direction, which is that I think what’s really going to be important here in terms of whether or not the administration is actually able to do what it wants to do, in terms of incentivizing companies to go back into Iran, is really going to depend on the form that whatever they put out takes. So, for example, if they put out a simple statement of guidance saying that we don’t think offshore dollar transactions are prohibited, but it’s simply guidance, I think it is going to be unlikely that many of the banks that we work with are going to want to begin processing transactions for Iran, or on behalf of Iranian clients, or on behalf of European clients considering or doing business in Iran.

If they decide to go the route of issuing something like a general license, which is more expansive, I think there’s a higher likelihood of these financial institutions doing this banking, but I still don’t think it’s assured. I think you would maybe even need something more substantial than a general license. And what that would look like I’m not exactly sure, so I guess the point that I want to make with this is that the administration is trying to figure out a way to incentivize companies to go back into Iran, and quote-unquote “live up to its obligations under the JCPOA,” but most of the steps that frankly I’ve seen proposed, or most of the options on the table by the administration that I’ve seen, I’m not sure they’re going to have that intended impact. While they might hamstring our ability to employ coercive leverage moving forward, as Mark and I have discussed, it’s not clear that they are actually going to do what the administration thinks or wants them to do.

MARK DUBOWITZ: Yeah, and let me just say if I could, Tzvi, I’d just add to that quickly, because I detect a real schizophrenia in the administration between those on the one hand who believe in economic coercion and retaining tools of economic coercion, particularly on the non-nuclear side but also, obviously, on the nuclear snapback side, and those who believe in what I’d call economic seduction, which is the notion that somehow we can seduce the hard men of Iran through flooding their country with hundreds of billions of dollars opening them up to the global financial and economic community and will turn the hard men of Iran from committed revolutionaries into capitalists.

And I think that you can see it playing out, and I think Eric is touching on that — this sort of notion that on the one hand, we want to get business going, and you’ve got folks in the State Department out in Europe and in the Gulf, and really on a roadshow trying to convince these big banks to go back into Iran. And on the other hand you’ve got folks in Treasury Department and elsewhere in the administration who are really trying to hold the line to ensure that we don’t see the rapid unravelling of the entire sanctions regime so that we maintain coercive leverage on these areas of Iran’s malign activities and that we actually retain a powerful economic snapback to enforce the deal.

I detect that schizophrenia, I’m sure it translates into internal battles within the inner agency, but I’d almost prefer if we decided to be honest. I mean, let’s fully commit. If we really believe in economic seduction as a policy, then let’s seduce the hard men of Iran, and let’s open up their economy, and let’s flood them with hundreds of billions of dollars, and let’s see how it goes. But to somehow continue to thread the needle, as Eric called it, by using these kind of workarounds, and bait and switches, and highly technical mechanisms, which at the end of the day are creating a lot of concern and a lot of uncertainty, and are allowing Iran to do something that Iran has always wanted to do, which I described earlier, which is to legitimize itself as a quote-unquote “responsible nuclear and financial actor.”

So again, I think this is a sort of more political backdrop to this. Either you believe in economic seduction or you believe in economic coercion. And if you’re trying to thread the needle, then you need to be as legalistic as the Iranians in interpreting the JCPOA, and don’t allow these paragraphs that were cited earlier to become open-ended so that the Iranians could literally drive both a centrifuge through it and a Brink’s truck.

TZVI KAHN: Mark, thank you, and with that our time is up. I’d like to thank again both Mark and Eric for these really outstanding presentations. I know I certainly learned a lot. I certainly encourage everybody to continue to read their work at the Foundation for Defense of Democracies and the Financial Integrity Network. They’re really valuable and really necessary reading for anybody who wants to stay on top of these issues. So thank you both again for joining us, and with that the call has come to a close.

 
See also:

Mission Statement

The Foreign Policy Initiative seeks to promote an active U.S. foreign policy committed to robust support for democratic allies, human rights, a strong American military equipped to meet the challenges of the 21st century, and strengthening America’s global economic competitiveness.
Read More