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Passed to the Telegraph by WikiLeaks 9:30PM GMT 02 Feb 2011

Ref ID: 08LONDON1597

Date: 6/10/2008 15:26

Origin: Embassy London

Classification: SECRET//NOFORN

Destination: 08LONDON1170|08LONDON1577|08STATE60442



S E C R E T SECTION 01 OF 03 LONDON 001597 NOFORN SIPDIS E.O. 12958: DECL: 06/10/2018 TAGS: EFIN, KTFN, ECON, MNUC, IR, UK SUBJECT: (S) UK MEASURES TO STEM BANK MELLI'S ASSET FLIGHT REF: A. STATE 60442 B. LONDON 1577 C. LONDON 1170 Classified By: Mark Tokola, E/MinCouns for Reasons 1.4 B & D

1.(S/NF) Summary: The British government (HMG) has tightened regulatory measures against Bank Melli in advance of EU sanctions. Specifically, the Financial Services Authority has told Melli it must set aside an amount (percent of retail deposits) above its reserve requirements, in order to be prepared to unwind its business in a way that protects investors. Until sanctions are in place, there is no lever under British law to prevent other money returning to Tehran. End Summary

2.(S/NF) The British Financial Services Authority (FSA), a quasi-independent regulatory body, is in charge of regulating UK banks, including the London-based Iranian subsidiaries of Banks Sepah, Saderat, Melli, Mellat and others. Philip Robinson, Director of Financial Crime and Intelligence Division, FSA, told us on June 4 that he has instructed his team and related British intelligence agencies to go out and "turn over every stone" to obtain any information they can showing linkages between WMD proliferation, terrorist activities and the Iranian banks. He claims his main challenges are two-fold: HMG is not able to use intercepts from UK services in court (U.S.-obtained intercepts are admissible if the USG agrees to declassify large parts); and the London-based subsidiaries, aware of UK scrutiny, are keeping themselves as clean as possible. Patrick Guthrie and Pete Maydon, of HM Treasury's Asset Freezing Unit, in separate conversations, told us HMT and FSA are exploring all their options to ramp up pressure o
n the Iranian banks and to prevent asset flight.

Freezing Bank Melli's Assets --------------------------------------

3.(S/NF) Britain is ahead of Europe in freezing Melli's assets, Robinson told us. HMG and FSA want Melli London to maintain its funds here, rather than repatriate them to Tehran. FSA created a supervisory reason to approach Melli ahead of the EU asset freeze in order to ensure sufficient operating cash is on hand to protect depositors. This amount - agreed to between Melli and FSA - (and which Robinson would not disclose) is much greater than the reserve requirements. If Melli does not maintain that amount - to be used to "wind down" the bank's operations if and when sanctions come into play - then FSA can close down the bank. Robinson claimed the UK and France have created similar regimes.

4.(S/NF) However, HMG is disadvantaged in that there is nothing in its law (the Financial Services Market Act) to prohibit Melli from making payments back to Tehran in anticipation of sanctions. In this case, once the FSA has given Melli a number that it must keep aside to protect its balance sheet, the rest could be sent back to Tehran. Robinson also admitted that since Melli London has only BPS 3 million in retail deposits, the amount it must keep on hand will be small (as compared to the German Melli with Euros 70 M in retail deposits. Robinson also said Melli London had BPS 1.2 billion on its overall balance sheet.)

5.(S/NF) A senior official at the FSA (please protect) also told us that Melli wrote Javier Solana, EU High Commissioner for Common Security and Foreign Policy, to complain there were no grounds to sanction Melli London because the bank was not itself in breach of UN obligations. Melli informed the FSA that they want to keep a presence open in London even when the Tehran parent is designated and therefore shut off from transactions with the London branch.

Fit and Proper Standing of the Parent ---------------------------------------------

6.(S/NF) We pressed both FSA and HMT to describe their efforts to pursue Sepah London based on the "fit and proper" status of its parent in Tehran. The FSA has the authority to act in an emergency to revoke a license, but FSA and HMT lawyers believe the emergency has to be related to breaches of requirements laid out in banking regulations, and do not apply to political or UN designations - regardless the nature of the threat. HMT tells us they are pressing FSA hard to interpret their regulations in the most aggressive manner, but FSA pushes back saying the current law does not allow LONDON 00001597 002 OF 003 them to go outside their purely regulatory framework. Of primary concern to the FSA is that there is no appeal process to a UN designation. Without this recourse, FSA lawyers say, under UK law the regulators are not able to impose their own punishments or reviews. FSA suggested that changes would have to be made to their legal framework to allow UN designations to be considered acceptable under UK law.
(Note: this issue is the subject of an HMT appeal to the UK Court of Appeals on a terrorist finance case involving UN designations, ref C. HMT has told us that there is currently high-level support for stand-alone legislation to pursue WMD and nuclear proliferators; thanks in large part to pressure from the top-layers of the USG on HMG officials in the Bank Sepah licensing case in early May. End note)

Melli Hong Kong --------------------

7.(S/NF) HMT and FSA are talking to the Melli Hong Kong branch about the freeze there. HMT is confident they will be able to maintain the freeze because it is a branch, as opposed to Melli London which is a subsidiary, Maydon told us.

Public - and Quiet - Diplomacy --------------------------------------

8.(S/NF) HMG will begin spreading the word to Bahrain and others about the activities the UK is undertaking (especially in Hong Kong). This will be a quiet government-to-government campaign rather than a public statement, Maydon told us. HMG is considering a public statement on its efforts, but is constrained by potential legal repercussions if its "aggressive fit and proper" reviews were to be announced.

Regulatory Tools Against Other Banks --------------------------------------------- -

9.(S/NF) The FSA has used a forensic accountant with an intelligence background to review all banks who scrutinized the Iranian banks more thoroughly than the others, Robinson told us. From a strict regulatory point of view, they discovered that Saderat and Persian International Plc. were doing their own enhanced due-diligence, including checking the bona fides of parties involved in Iran-based transactions. Bank Sepah, however needed to develop a more sophisticated due-diligence regime similar to other banks its size. FSA, without the banks' knowledge, compared the banks' books to intelligence reports and found no discrepancies, Robinson told us. The FSA has not written the banks to let them know they are in compliance because they do not want a "clean bill of health" waved back in their faces.

10.(S/NF) Robinson complained that in the few cases of suspicious activity his team is able to unearth suspicious activity, they have to rely on an "analyst's leap" to cover a gap. He gave an example of a transaction involving Saderat in Ramallah passing money to unknown person X and then X transferring it to Hamas. FSA believes X is a "knowing and active" participant in the transaction, i.e., knows the funds are going to Hamas. But unless that can be proved, FSA is not able to take the case to court. FSA has not confronted Saderat on the transaction because the agency is not able to prove that Saderat has broken any rules, and FSA doesn't want Saderat to have that moral (and potentially legal) victory. Robinson noted that FSA would be in strong position to move after Hezbollah if/when HMG designated the group.

Difficulties -------------

11.(S/NF) Maydon told us that HMG is legally hamstrung until sanctions against Melli and Saderat are actually in place. HMT is studying the vigilance language in UNSCR 1803, but because the resolution is non-binding, it doesn't give the agency as much power as it needs. EU and U.S. public statements in late May about going after Melli tipped the bank off to the true status of negotiations and gave Melli a head start, Maydon said.

Use of Classified Material -------------------------------

12.(S/NF) Sue Fisher, Liaison and Assessments Team Leader, FSA, told us FSA is able to make internal decisions using classified material, but if the case goes to a tribunal, the agency would need to disclose everything. On terrorist LONDON 00001597 003 OF 003 finance issues the current Counter Terrorism Bill (ref B, aka the 42-day detention bill) includes language to allow the court to create its own rules in deciding what information to include or exclude, and whether to set up a Special Advocate who could see the material on behalf of the entity. It is unclear if this process would apply to WMD and nuclear proliferators in addition to terrorist finance cases.

13.(S/NF) Comment: It is clear from our conversations at FSA, HMT and FCO that high levels of the British government are actively engaged on this issue. This is due primarily to the flurry of USG phone calls and meetings in May with decision-makers. Working level folks at HMT say that although the tone was perceived by some senior officials as heavy-handed at times, the message was effectively delivered and heard, and there are now avenues open both within and outside the government (i.e., private UK banks now see the futility of getting waivers to deal with UN-designated Sepah) to limit the ability of the Iranian banks to function properly. Visit London's Classified Website: XXXXXXXXXXXX TUTTLE

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