U/S JEFFERY AND A/S O'BRIEN PRESS UK ON IRANIAN BANKS
Passed to the Telegraph by WikiLeaks 9:30PM GMT 02 Feb 2011
Ref ID: 08LONDON1586
Date: 6/9/2008 10:58
Origin: Embassy London
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S E C R E T SECTION 01 OF 04 LONDON 001586 NOFORN SIPDIS E.O. 12958: DECL: 05/21/2018 TAGS: EFIN, KTFN, ECON, IR, UK SUBJECT: U/S JEFFERY AND A/S O'BRIEN PRESS UK ON IRANIAN BANKS Classified By: Richard LeBaron, DCM, for reasons 1.4 B & D
1.(C) SUMMARY: State Under Secretary Reuben Jeffery and Treasury Assistant Secretary Patrick O'Brien met with UK banking regulators on May 15 to urge increased scrutiny and tougher actions against Iranian banks operating in London. O'Brien and State Acting Assistant Secretary Patricia McNerney also discussed U.S. and UK efforts on proliferation finance and Iran with HM Treasury and the Foreign and Commonwealth Office on May 16. O'Brien noted the positive effect that coordinated international pressure was having, but urged the UK to step into a leadership role so as to serve as a model for other governments considering action. O'Brien suggested that the UK look carefully at the parent institutions of Iranian banks operating in London as UK regulators consider the application of "fit and proper" requirements on Iranian subsidiaries in the UK. British officials described their regulatory and policy efforts, noting their shared goals of preventing a nuclear-armed Iran, but pointed to legal restrictions which limi
t their ability to act too aggressively. They also noted their fear of losing if challenged in court. END SUMMARY
2.(U) USG officials met on May 15-16 in London to discuss the Iranian banking sector's activities in the UK. State's Under Secretary for Economic, Energy and Agricultural Affairs, Reuben Jeffery, Treasury's Assistant Secretary for Terrorism Finance and Financial Crime, Patrick O'Brien, and DCM Richard LeBaron met with the Financial Services Authority's (FSA) Chief Executive Hector Sants and Director of Financial Crime and Intelligence Division Phil Robinson. Federal Reserve Board Governor Kevin Warsh also attended the FSA meeting. O'Brien, accompanied by Treasury's Colleen Eddy and Michelle Zager, also met separately with HM Treasury's (HMT) Stephen Pickford, Managing Director of Finance and International, Patrick Guthrie, Head of Asset Freezing, Pete Maydon, Deputy Asset Freezing, Andrew Kilpatrick, Head of Counter Terrorist Finance, Tom Neylan, Senior Policy Advisor Counter Terrorist Finance, and the Foreign Office's (FCO) Carl Newns, Director of Counter Terrorist Department, Andrew Wells, Head Pursue Team,
Counter Terrorism Department, and Stephen McCormick, Head of International Organizations Sanctions Team. O'Brien and McNerney, accompanied by Eddy, Zager, and State's Anthony Ruggiero, Matthew Gershwin, Jeffrey Harvey, Pam Tremont, Bart Barbessi and Mark Johnson held Proliferation Finance meetings with the Foreign Office's Paul Arkwright, Eleanor Petch and Isabella McRae, HM Treasury's Kilpatrick, Guthrie and Neylan, and Ministry of Defense's Catherine Simpson.
UK Financial Services Authority -------------------------------
3.(C) U/S Jeffery and A/S O'Brien described the progress made by the international community in putting financial pressure on those individuals and entities involved in Iran's nuclear and missile programs. Jeffery noted that the U.S. and UK share the same goal of shutting down Iran's proliferation activities, and that our efforts are having a noticeable effect. O'Brien explained that Iran is using state-owned financial institutions - including Bank Sepah, Bank Melli and Bank Saderat - to facilitate its proliferation efforts and support for terrorism, and welcomed the EU's plan to designate Bank Melli. O'Brien applauded the private sector's voluntary risk-based analyses which have led them to go beyond legal requirements in avoiding doing business in Iran. These independent decisions are having a noticeable effect on Iran's ability to conduct business as usual, he said.
4.(C) On the other hand, O'Brien explained that the USG is hearing from public and private sectors around the world that governments are unwilling to get out ahead of Europe in their interpretation of UN and Financial Action Task Force (FATF)-related obligations as they consider additional domestic measures against Iranian banks. In the Persian Gulf, particularly the UAE, officials point to their proximity to Iran as a reason why they can not take a harder line on Iranian banks than the Europeans. With four Iranian banks continuing to operate in London, O'Brien said that Middle East and Asian countries are not likely to take any action on its Iranian banks unless London moves first. If the UK acted publicly, the U.S. would be willing to take that message to the Middle East and Asia to press for similar action in other jurisdictions.
5.(C) Sants assured that the FSA takes UNSCR implementation very seriously and has instituted an intense supervisory LONDON 00001586 002 OF 004 regime over the Iranian banks, but the FSA would need direct evidence of specific actions taken by the London-based individuals and institutions in order to take additional action against them. Sants said, however, that the FSA cannot reveal the full extent of its actions to the public.
6.(C) Robinson explained further how the burden rests upon the bank applicant to prove it is a fit and proper entity when applying for a license, but that the burden shifts to the FSA and HMT to prove otherwise once a license has been granted. The UK has taken all the evidence provided by the U.S. and applied it as far as it can legally, but does not have sufficient evidence that it can put in front of a tribunal in taking further action against Sepah. O'Brien acknowledged the independent legal status of the subsidiaries, but urged that the parent's actions should be relevant to the "fit and proper" analysis applied to a wholly-owned subsidiary. O'Brien pointed out that at the time of the UN designation of Bank Sepah, the parent and the London subsidiary shared the same CEO. O'Brien encouraged the FSA to review whether, in light of the UNSCRs, the parent banks are "fit and proper" enough to maintain subsidiaries in the UK. Robinson said the FSA has "pushed the boundaries" of what it can do in looking at the p
arent entities in Tehran, but must prove "intent" of the person transferring the money. All the Iranian banks are "keeping their noses clean" in the UK, explained Robinson, and the FSA can only address actions of the London-based subsidiary.
7.(C) Robinson observed that Iran had been effectively cut off from both the USD and the pound sterling, and suggested that the U.S. explore with the EU the possibility of limiting Iran's use of the euro by removing its access to the European Central Bank's settlement mechanism (known as "TARGET"). He also mentioned that it might be possible to go after Saderat based on that bank's links to Hizbollah if the UK were to designate Hizbollah as a terrorist organization. O'Brien stressed that the USG believes there is sufficient evidence of intent on the part of Sepah, evidenced by its direction to correspondents to remove its name from transactions, and noted that the subsidiary itself is designated under the UNSCRs.
Update from HM Treasury on UK Action against Iranian banks --------------------------------------------- -------------
8.(C/NF) O'Brien also raised the symbolic importance of publicizing UK action on Iranian banks with HM Treasury given views heard from Gulf countries. O'Brien commended European diplomatic leadership in garnering international consensus on financial sanctions, and encouraged more domestic actions - especially from the UK and France. He also prodded HMG to stake out a strong political position on the level of litigation risk they are willing to tolerate, and offered USG help in brainstorming or sharing U.S. experiences. O'Brien acknowledged that Europe may be worried about China and others stepping in to fill the void left by European companies, but noted that Iran cannot meet all of its critical infrastructure needs with second-tier technology and will continue to rely on European and other sources of advanced technology in key sectors of the economy (e.g., energy). Pickford expressed concern that the UK approach to oversight of Iranian banks was being misconstrued in the Gulf, and agreed to consider ways tha
t HM Treasury - if not the FSA - could publicize UK regulatory actions over Iranian banks in London.
9.(C/NF) O'Brien urged HMG to take the most robust possible interpretation in enforcing UNSCRs 1737, 1747, and 1803's paragraph 10 which calls for vigilance over all Iranian banks. Pickford assured that the UK would be vigorous in its implementation of 1803, but Kilpatrick cautioned that the UNSCR 1803 would not likely give the UK the room to remove operating licenses from Iranian banks in London. Pickford explained that the UK looked at whether it would be more advantageous if the London-based Iranian banks were branches rather than subsidiaries - as they are currently - and determined that under a branch system, it would be easier to prove the direct link between Tehran and London, but harder to prevent funds from flowing back to Tehran. For that reason they have decided to maintain the banks as subsidiaries. A branch would be easier to close up quickly, but there would be a greater risk that the money would flow back to Iran - although under the licensing regime that money should be frozen now.
10.(C/NF) On the status of Bank Sepah, O'Brien noted that over a year has elapsed since Bank Sepah was sanctioned by LONDON 00001586 003 OF 004 the UN, which should be sufficient time to allow for legitimate parties to extract themselves from their business relationships. He called on the UK to intensify its reviews of reserve requirements and the fit and proper nature of the banks to see if additional pressure can be put to bear on Sepah and the others. Pickford said the UK was winding down Bank Sepah and trying to prevent money from going to Iran. Guthrie explained that the UK was licensing a small number of Bank Sepah's prior commitments to be fulfilled, but that HMT denied the majority of transactions. Both HMT and FSA confirmed that Sepah has enough deposits to keep it sufficiently capitalized, but HMT is not permitting Bank Sepah to acquire new deposits. Pickford noted that the recent "hiccups" in the Bank Sepah licensing process highlighted the need for the U.S. and UK to stay engaged from the beginnin
g of the process.
11.(S/NF) HMT's Guthrie observed that the culture at FSA has changed over the past six months. FSA previously stressed their political independence, but now seems to understand the full extent of the issue and is stepping up supervision in London. According to Guthrie, HMT is concerned about disclosure requirements, the strength and classified nature of the evidence being used, and the fit and proper status of the Iranian parent banks. FSA has reviewed the intelligence provided by the USG and has brought in Special Counsel to advise them, but are told that the Iranian parents do not exercise sufficient ownership and control over the London banks for the FSA to step in. Guthrie said the UK takes on board the criticism about being too legalistic, but needs to find a balance between protecting its legal framework while still viewing things from the big picture. HMT lawyers are reconsidering their approaches and should have an opinion on how aggressive HMT can be within a few weeks.
12.(C) On next steps, Pickford said that one approach is to push the envelope on what HMT and FSA can do to make life difficult for the banks. However, this runs the risk of giving those banks ammunition to use in court - which HMT fears could rule against them. Kilpatrick told O'Brien that FSA is certain they would be taken to court if they made any moves which were not airtight under current law and regulation. O'Brien suggested that, in countering Iranian complaints that they were being singled out, the UK should point to the UNSCRs and the two FATF jurisdictional warnings as evidence that Iran posed a unique risk, beyond just basic banking regulations.
U.S.-UK Proliferation Finance Dialogue --------------------------------------
13.(S/NF) During the May 16 meeting on proliferation finance, both the U.S. and the UK presented briefings to ensure each side had the most up-to-date information on Iranian proliferation finance activities. U.S. and UK participants also agreed to work together on several next steps: -- Continued and regularized information-sharing between intelligence, financial and diplomatic officials; -- Cooperation in FATF, including raising the profile of advisory notices so as to create a greater deterrent effect; -- Coordination with the French, Germans, Italians to try and move UNSCR 1803 implementation of measures forward; -- Expand the scope of 1803 measures and include greater participation from other nations; -- Look towards the next UNSCR utilizing evidence of financial displacement of activity; -- Increase diplomatic outreach and coordinate U.S./UK approach to Malaysia, UAE, Indonesia, Pakistan, etc. -- Hold a secure video conference before August in order to maintain the momentum on these issues.
Asset Freezing --------------
14.(C) Maydon explained that HMT's appeal to the High Court decision on asset-freezing would be heard in mid-June. HMT is preparing a contingency plan which will include legislative solutions, but they have not yet come up with the specifics. If they lose the case, HMG will have to move quickly to maintain the current freeze, perhaps by obtaining an interim order. The government is also looking at other authorities, such as stepping up police surveillance, Control Orders, or other - undefined - measures to prevent money from leaking out.
15.(U) This cable was cleared by U/S Jeffery and A/S LONDON 00001586 004 OF 004 O'Brien. Visit London's Classified Website: XXXXXXXXXXXX TUTTLE