Sanctions-scarred banks may hold back Iran's economic relief

Sanctions-scarred banks may hold back Iran's economic relief
Iranian women shop at the Sadaf shopping centre in the southern Iranian coastal city of Chabahar on May 13, 2015.

WASHINGTON/NEW YORK - Major banks wary of heavy US penalties will be reluctant to restore ties with Iran even if sanctions are lifted in a possible nuclear deal, bank executives and advisers say, likely denting Iran's ambition to attract foreign investment to revive its crippled economy.

After years of being frozen out of the global banking system and most trade with the West, Iran is eager for sanctions to be lifted so it can draw in foreign companies and attract investment to upgrade its long-neglected energy sector.

Yet without more bank financing and a means of transferring funds in and out of Iran, that commercial potential could remain largely untapped, stunting hopes for a post-agreement investment boom. Banks' reluctance to deal with Iran highlights the risk that its economy will not get quick relief, possibly eroding support for the nuclear deal among Tehran's leadership.

Lured by the world's fourth-largest oil reserves and second-largest natural gas reserves, oil majors such as Shell have expressed interest in entering Iran

Airlines and automakers are also interested, according to diplomatic sources and people close to the industries, eyeing Iran's 80 million population -- more than that of the combined six-nation Gulf Cooperation Council.

But about a dozen international banks, mostly European, have been stung by US penalties for sanctions-busting totaling nearly $14 billion since 2009, raising industry fears that the risk of engaging Iran would overshadow any gain.

Banks recently hit by penalties include BNP Paribas and Commerzbank while several others including Deutsche Bank, Societe Generale and Credit Agricole are under investigation, according to people familiar with the matter. BNP Paribas had to forfeit $8.9 billion.

"Given all the anti-money laundering issues, anyone who thinks they can go into Iran has got to be insane," an executive with a major US bank said, asking not to be identified given the sensitivity of the topic.

"There's just not enough business in Iran" to risk one payment causing a massive penalty, the executive added.

Under a framework agreement reached between six major powers and Tehran in April, Iran agreed to limit its sensitive nuclear activity in exchange for sanctions relief. Crucial details, including the timing of sanctions removal, still need to be worked out ahead of an end-June deadline for a final deal.

But the deal would only lift nuclear-related measures, leaving in place a host of mainly US sanctions related to human rights and Tehran's support of militant groups in the Middle East.

The US Treasury's designation of the entire Iranian financial sector as a "primary money laundering concern", alleging terrorism financing and pursuit of weapons of mass destruction, would likely remain. While that itself does not prohibit transactions, it would discourage banks from re-opening business with Iran, bankers and sanctions experts said.

Standard Chartered, among the few international banks with a license to operate in Iran, is not looking to go in, according to its spokeswoman, Julie Gibson.

In 2012, New York's financial regulator threatened to revoke Standard Chartered's state license, calling it a "rogue institution" that hid $250 billion in transactions tied to Iran. It ended up paying US and state authorities $667 million in fines that year for sanctions violations, and deferred prosecution agreements are still in effect.

BNP Paribas, JP Morgan, Barclays, Commerzbank, HSBC, Citigroup, and Credit Suisse declined to comment.

Deutsche Bank declined comment on the investigation as well as on how the bank would react if sanctions are lifted as part of the nuclear deal. A Credit Agricole spokeswoman said the investigation was ongoing but declined further comment. Lloyds Banking Group, ING Group, Unicredit, and Societe Generale did not respond to requests for comment.

Banks targeted by US authorities have generally been accused of knowingly moving millions of dollars through the US financial system on behalf of Iranian, Sudanese, and other entities subject to economic sanctions. The banks hid the transactions, in part by stripping wire information identifying sanctioned entities so they would not raise red flags.

Companies have already experienced difficulties operating in Iran due to banking problems.

MTN Group, a South African mobile phone operator, has struggled to get money from its Iran unit out of the country since 2012 due to sanctions.

It still has about $1 billion in accumulated dividends and a loan repayment stuck in the country.

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