Sanctions Reach Extra-Legal Level, Questions Remain on Effectiveness

U.S. sanctions on Iran have reached an extra-legal level. While both U.S. unilateral and UN Security Council sanctions clearly have not deterred the Iranian government from pursuing its nuclear program, they are having a frustrating effect not only on Iranians, but also for internationals working inside of Iran and those working on civilian diplomacy. As the U.S. intensifies its sanctions campaign against Iran, it is important to more closely examine who is really being affected by the sanctions as well as the overall effectiveness of such sanctions.

U.S. Treasury Department Deputy Secretary Stuart Levey has been on a campaign, meeting face-to-face with allies to encourage them to squeeze Iran. Last week, Levey testified at a Senate Finance Committee hearing and singled Iran as the “biggest problem” with respect to sponsoring terrorism and weapons of mass destruction proliferation. He told the Committee that while most other countries to do not have a financial designation system to target entities as the U.S. has done with Iran, “Nonetheless, U.S. designations in this area gain worldwide recognition, particularly among financial institutions. My colleagues and I have traveled worldwide explaining our actions to, and sharing information with, foreign government officials and private sector representatives to help them understand the nature of the threat. The result is that our actions jeopardize designated proliferators’ access to the international financial system and put their commercial partners on notice of the threat they pose. Those who continue to do business with them do so at the risk of tainting their reputations or even being designated themselves.”

Stuart Levey also noted in his testimony before that Senate Finance Committee that Iranian banks now request that other financial institutions take their names off of transactions when processing them in the international financial system. Following the passage of UN Security Council Resolution 1803, the Treasury Department’s Financial Crimes Enforcement Network issued an advisory on March 20 to U.S. banks warning them of the risks of doing business with Iran and identifying Iranian state-owned and private banks and their branches and subsidiaries abroad. Over the past few years, the U.S. has so targeted the following banks in Iran: Bank Saderat, Bank Sepah, Bank Melli, and Bank Mellat.

Last year, Deutsche Bank became the last German bank to announce its departure from Iran. French banks BNP Paribas and the Calyon unit of Crédit Agricole also stopped offering letters of credit. In January 2008, Ahli United Bank in Bahrain suspended business with Iran. Meanwhile, banks that do continue to process transactions for Iran, primarily banks based in Dubai, charge per-transaction fees upwards of 25-30%, essentially extorting money from regular Iranians trying to do business in a global market.

The British bank HSBC no longer accepts new clients in Iran and recently sent a letter to clients stating that they have “decided to formally suspend all U.S. dollar banking activity involving Iranian residents.” Former Financial Times Correspondent Gareth Smyth shared a letter he received from the bank. Smyth writes, “This, says HSBC, is a ‘result of the latest UN sanctions.’ But later in the letter, the bank says: ‘We hope you will understand that HSBC Bank International is required to comply with the laws and regulations of all jurisdictions. This includes the provision of financial and /or other services to any persons or entities which [sic] may be subject to US sanctions.’”According to Smyth, his account is offshore UK, and any dollars in it have never been in Iran and the letter was sent to his address in London, where he is registered to vote and paying taxes. Smyth says the good news for him in the letter is that “if you are not living an working in Iran anymore, these sanctions are not applicable to you...” However, Smyth says the letter states that the bank “demands confirmation from a lawyer, embassy official or actuary” that he no longer lives in the Axis of Evil.

In addition to banking issues, the sanctions also affect visa processes. While I cannot fully disclose all details at the moment, a U.S. nongovernmental organization that does not receive funding from the State Department’s so-called program to promote democracy in Iran recently had to find a lawyer to help wade through restrictions under the Office of Foreign Assets Control. The U.S. nongovernmental organization is bringing and hosting several Iranians in the U.S. as part of a cultural and professional exchange program.

The U.S. organization can pay directly for airline tickets not purchased through Iranian airlines and also pay directly for accommodation and other travel expenses incurred in the U.S. However, the U.S. nongovernmental organization would also like to reimburse the Iranians for the rather hefty expenses incurred in obtaining their visas, primarily in travel to and from Dubai, where the U.S. consulate is located. The U.S. nongovernmental organization now must work with a lawyer to petition the Office of Foreign Assets Control to get an exemption to reimburse the expenses incurred during the visa process.
This process certainly raises issues and hurdles nongovernmental organizations face to conduct cultural exchanges that benefit relations between the U.S and Iran, particularly in the absence of official channels of communication. Several organizations who do receive the State Department “democracy promotion” funding told me that they are waived from such OFAC restrictions.

A European living and working in Iran also recently shared an experience with me. An Iranian acquaintance of this person applied for an Australian visa which was paid for in cash in Tehran. The Australian Foreign Ministry had to reimburse the Iranian for the costs, but was unable to proceed with the refund because the Iranian only had a bank account with local Bank Melli. The Australian government is apparently not allowed to make payments to Iranian accounts (or to Bank Melli accounts).

The European agreed to provide their European bank account information to help out the Iranian in order to resolve what was a dead-end situation. The European wrote to the Australian Foreign Ministry Representative in charge of the case telling him that they agreed to go through the procedure only if he could guarantee that they were not violating the law and that they would never put themselves in trouble with the governments of Australia, the U.S. or the European of residence. The Australian Foreign Ministry Representative replied that it would not be a problem and the European was credited the amount to a bank account in Europe and then paid the sum to the Iranian in toumans.

The European also took the opportunity to remind the Australian Foreign Ministry of the preposterous nature of the whole story: why take money from people you can’t legally reimburse? Why is there no system in place to operate legal refunds to Iranian nationals in the field of visa applications (a standard and very regular procedure one would assume)? Why agree to the use of third parties on the sole basis that they are non-Iranian?

Sanctions and visa issues are also clearly having an effect on Iranians who would like to study abroad. In January, I posted a letter from the University of Twente in The Netherlands, which announced that it will no longer allow Iranian students to study at the university because it cannot “guarantee to Immigration Services (IND) that the Iranian applicant for a visa does not have access to certain specific scientific knowledge.”

Intense U.S. financial targeting of Iran begs the question of the effects it will have also on an already weakened U.S. economy if Iranians no longer base their currency or transactions on the U.S. dollar. Iran’s oil industry has already shifted from transacting deals in U.S. dollars. In October 2007, National Iranian Oil Co. executive Mohammad-Ali Khatibi, said that after two years of the shifting process, Iran uses the U.S. dollar in only 15 percent of its oil transactions, with 20 percent being carried out in Japanese yen and 65 percent in euros.

In a likely response to mounting financial pressure, on April 5, Iranian President Mahmoud Ahmadinejad proposed during a meeting with Organization of Petroleum Exporting Countries (OPEC) Secretary General Abdullah Salim al-Badri establishing a joint bank for OPEC. Ahmadinejad also urged OPEC states to adopt a single currency other than the U.S. dollar to transact oil deals, though such a proposal is unlikely to be adopted by other OPEC members.

Stuart Levey argued in his Senate Finance Committee Testimony that the U.S. sanctions strategy with regards to Iran has “provided valuable leverage in difficult diplomatic negotiations,” yet there is absolutely no evidence that such a strategy is working in terms of influencing the behavior of the government of Iran. Indeed, while this strategy may be successful in terms of demonstrating the ability of the U.S. government to mount pressure on banks, companies, European and other allies to enforce sanctions and exports laws, serious questions remain about their effectiveness in terms of influencing Iran. The U.S. Government Accountability Office concluded in its January 2008 report to Congress that there is not enough evidence on the effectiveness of sanctions and the relevant U.S. branches should “collect, analyze, and improve data on Iran sanctions and conduct a baseline assessment of the impact and use of the sanctions.”

Iran’s behavior has not changed in anyway. The only things that has changed is that the U.S. has made life more difficult for Iranians and as President George W. Bush correctly noted, the U.S. has sanctioned itself out of influence with Iran. President Bush referred to the efficacy of sanctions in 2004 when he explained why the U.S. had taken a backseat and left negotiations on Iran's nuclear program to Britain, France and Germany: “We're relying upon others, because we've sanctioned ourselves out of influence with Iran. In other words, we don't have much leverage with the Iranians right now, and we expect them to listen to those voices, and we're a part of the universal acclaim.”

If the U.S. wants to seriously resolve issues with Iran, it should employ a more holistic strategy that takes into account the psychological and political factors associated with Iran’s history of foreign interventions and its resistance to coercion by foreign powers. Such a strategy must also include direct, unconditional talks with Iran on a broad range of issues, which is far more likely to succeed than the sanctions and threats approach.