The Risk Professional: UK action against Iran's banks

The Anti Money Laundering Network said today that the UK Treasury's instruction to all UK credit and financial institutions will have a wider impact on Iran and its banks than those previously imposed by the USA.

The USA's sanctions depend on the use by Iranian banks of the US dollar. However, Iran's central bank simply advised Iranian banks to use alternative currencies such as the Euro.

And while US sanctions applied, through the correspondent banking network, to the world's banks if they did business with Iranian banks in US dollars, trade in other currencies conducted outside the USA was not affected.

The European Union imposed sanctions against Iranian banks several months ago but those sanctions did not amount to a total ban on transactions.

The Financial Action Task Force, closely related to the OECD and, therefore the G20 (etc.) last month warned that all dealings with Iranian banks should be subject to "counter-measures" due to shortcomings in Iran's counter-money laundering laws and regulations. That, too, did not amount to an outright ban.

But the UK's total ban, effective from 15:00 hrs GMT on 21 November 2011 was literally immediate.

As a result, "UK credit and financial institutions are prohibited from entering into transactions or business relationships with these entities and continuing existing transactions and business relationships with them, unless licensed to do so by HM Treasury," says a HM Treasury statement.

The Anti Money Laundering Network, in a statement issued today, says that the ban will have a greater impact than the USA's earlier action.

"Bluntly, after the global financial crisis, there were only four genuinely global full service banks. Of them, two (HSBC and Standard Chartered) are UK head-quartered and, across their global networks, subject to the Order of the UK Treasury. The third, Santander, is Spanish head-quartered but has extensive UK interests. And while some of Santander's UK operations are regulated under "passporting" provisions under EU law, its UK retail banks are subject to UK sanctions laws. The fourth, Citbank, is subject to US regulation but, insofar as the UK operations are concerned - including its trade finance division - subject to UK sanctions laws. However, due to the effect of OFAC, Citi is already barred from the Iranian banking sector.

"The nett effect of the UK Treasury's announcement is to lock Iran's banks - and their customers - out of retail and commercial banking for these major banks."

In addition to HSBC and Standard Chartered's retail operations, the ban applies to the investment and wealth management arms of UK financial institutions and of all foreign institutions operating in the UK. Barclays is one of the world's leaders in these areas. RBS and Lloyds also operate internationally but on a much smaller scale and both have made or are about to make significant cuts in their offshore operations.

Nigel Morris-Cotterill, Head, The Anti Money Laundering Network said "the ban is extremely far-reaching. Taking effect, as it did, at 15:00 hours yesterday might have seemed a good idea in London. But it will have caused a major headache for banks which have subsidiaries and branches in time zones that are ahead of GMT. The management of those subsidiaries and branches will have come into work today to be faced with the sudden suspension of accounts and, depending on technology and law, having to lock those accounts locally as their primary priority. For those in the USA, that is behind GMT, they had almost an entire working day to come to terms with the Order."

The knock-on effect is amplified by the current information requirement under SWIFT. All SWIFT instructions now include much more information than previously, in part to help identify and ensure reporting of so-called "stripping" - the use of incomplete or false information in the non-operative parts of the instruction to evade compulsory transaction reporting.

The immediacy of the Order is clear from the timetable published in the Regulation:

"The Financial Restrictions (Iran) Order 2011

Made - - - -at 11.15 a.m. on 21st November 2011Laid before Parliament at 2.00 p.m. on 21st November 2011Coming into force - - at 3.00 p.m. on 21st November 2011"

The ban will have an immediate effect on all of those doing business with Iranian suppliers or customers: it prevents all transactions involving Iranian banks. Therefore payments cannot be made to nor received from any party using an Iranian bank. It also locks Iranian banks out of dealings with UK banks, anywhere in the world, in any currency.

There are several "general licences" says HM Treasury:

Any person affected by the restrictions can apply for a licence from HM Treasury (contact details below) exempting a transaction or business relationship from the requirements. The Treasury has also issued six general licences. A full explanation of the general licences can be found in the notice on the restrictions.General Licence 1: transactions for or related to humanitarian activities or purposes, including the export of medical equipment or foodstuffs and the provision of healthcare, under €40,000General Licence 2: transactions for or related to personal remittances (that is, payments between persons acting in a non-commercial, private capacity, the payments not being made in the course of a business), under €40,000General Licence 3: transactions in relation to the provision of insurance which is permitted under Article 26(2) and (3) of EU Regulation 961/2010 against IranGeneral Licence 4: holding of asset-frozen Iranian banks’ accountsGeneral Licence 5: holding accounts of non-frozen Iranian banksGeneral Licence 6: completion of payments to or from Iranian banks in progress at the time of the Direction coming into force

The Order is subject to a sunset provision expiring on 21 November 2011. There is no specific provision for renewal but similarly there is no bar to the making of a replacement Order.

The following documents published by HM Treasury give more detail:

Regulation: http://www.hm-treasury.gov.uk/d/fin_restrictions_iran_order2011.pdf

Reasons: http://www.hm-treasury.gov.uk/d/written_ministerial_statement_comsec211111.pdf

Relationship to other sanctions: http://www.hm-treasury.gov.uk/d/fin_restrictions_iran_notice2011.pdf

The USA and Canada issued notices co-ordinated with the UK action. See www.BankingInsuranceSecurities.Com

The Anti Money Laundering Network is at www.antimoneylaundering.net

----------Vortex Centrum Limited, publisher of ChiefOfficers.Net is part of The Anti Money Laundering Network group of companies.