September 26, 2016

Since the partial lifting of sanctions on January 16, 2016 (‘Implementation Day’), banking hurdles have proved to be one of the most challenging obstacles to trade with Iran. Nevertheless, Iranian banks are working hard to rejoin the international banking community.

Last week, ten bankers within Tejarat Bank, one of the largest Iranian banks, visited the Netherlands to take a class in compliance and European banking. This was reported in“Het Financieele Dagblad,” the largest Dutch financial newspaper.

This was the first time since the lifting of Iran’s near total economic isolation from the world that a delegation of Iranian bankers have visited the Netherlands for a compliance course, according to the Dutch paper. The ten bankers, six women and four men, wanted to know how European banks handle compliance, most namely: how they conduct client due diligence and transaction monitoring, as well as how they report suspicious transactions that may indicate money laundering and terrorist financing.

Since Implementation Day, Iranian businesses and financial institutions have sought a greater connectionwith European countries. However, the lack of recognizable compliance structures at Iranian banks and unclear sanctions lawsdeter foreign banks, especially the larger ones,from doing business with them as any missteps could lead to large fines and substantial reputational risks. For European compliance departments,keeping in line with anti-money laundering regulations and sanctions laws remains paramount.

“Iranian banks have come quite a long way”

Despite ongoing European hesitations, Bank Tejarat has already comequite a long way with regard toimproving compliance structures. Ali Mehrpour, head of the international division at Tejarat, told the Dutch newspaper:“Until recently, foreign banks thought we knew nothing about compliance and other important international standards. But most Iranian banks have made progress in this respect. It only takes some time to implement everything,” he says. Though small compared to the number of compliance personnel working at European banks, the Dutch newspaper says that Bank Tejarat consists of 23,000 employees and some 60 compliance officers who keep an eye on clients and employees to make sure they adhere to international rules and standards. This makes them the fifth largest bank in Iran.

Committee

Compliance departments at Iranian banks use a widely spread regional escalation system, spearheaded by a compliance committee. This system is based on the British compliance model, which includes aso-called Money Laundering Reporting Officer. A Money Laundering Reporting Officer is an employee of the bank who is responsible for reporting potential money laundering through the bank to the authorities. European banks often use a model with a so called “Compliance Officer,” an employee with a broader mandate to comply not only with money laundering laws but also with other laws. “If you want to connect to Western European banks, it does not matter if you have a Money Laundering Reporting Officer or a Compliance Officer. It is more important that the responsible person has short reporting lines to, or sits directly on the board,” says Gert Demmink, from Philip Sidney, a compliance consultancy.

Many European banks also embrace the principle that compliance should be an intrinsic part of business at all levels.“Responsibility for compliance with the sanctions and money laundering laws should not lie solely within the compliance department. Business managers themselves should be responsible for customer due diligence and vetting of clients,” says Mr. Demmink.

Industry standards

“It is also important for Iranian banks to embrace industry principles such as the standards for correspondent banking,” says Mr. Demmink. Correspondent banking is an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion.“No bankcan do international payments without a correspondent account,” he adds.

Desire to join the international banking community

Apart from improving their compliance structures, there are other signs that Iran’s banks want to be connected with the international financial system.According to USSanctions.com, Bank Melli and Bank Sepah, two large Iranian banks,have rejected business relating to the country’s Islamic Revolutionary Guard Corps (IRGC).Farhad R. Alavi, US attorney and administrator of USSanctions.com, says that the two Iranian banks apparently did not want to do business with IRGC because of its listing on the US Treasury’s enemy list, or so-called“Specially Designated Nationals (SDNs)” list.This watchlist contains thousands of terrorists, criminals and other entities and individuals that US persons are prohibited from doing business with. Many non-US banks do not want to do business with SDN-listed entities even if their own laws allow it.

Germany

Another tell-tale sign of Iranian banks approaching the West, is their recent decisions to open branches in Europe. The Iranian banks, Parsian Bank, Middle East Bank and Sina Bank, will each open branches in Munich, Germany. The German state of Bavaria has reportedly authorized these three Iranian lenders to open branches in the regions’s capital in 2017.

“Due to the cold feet of the large traditional banks, there is an opportunity for non-sanctioned Iranian and smaller European banks to facilitate transactions with Iran”, says Martijn Feldbrugge, Director of Business and Sanctions Consulting Netherlandswho is based in Munich.

US Sanctions

It is not surprising that Iranian banks’ approach to the West starts in Europe. The US still maintains most sanctions against Iran, and has a reputation of rigidly enforcing its sanctions laws. Several corporations and financial institutions have learned this the hard way. They have paid large settlements or penalties as a result of actions by the Department of Justice and other US regulators for violation of US sanctions against Iran, Cuba and other sanctioned countries.

Bringing it all together

Despite efforts made by Iran to comply with international standards and court Western banks, what matters most to banks is whether the money to be made by transactions with Iran is worth the risks involved. If there is a large profit to be made, as is many times the case in trades involving Iranian goods, Western banks may be swayed to take on the risks.

On the other hand, even if the risks of doing business exceed any associated profits, large multinational companies who want do to business with Iran still have other options beyond a cautious European or US correspondent bank. Companies can approach Asian or other less-wary international banks with a view to doing business. These banks may not impose such strict rules as the West and are less likely to shy away from conducting transactions involving Iran.

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