Dollarizing the Ayatollahs

The bruising battle between the president and Congress surrounding the Iran nuclear deal is over. The Joint Comprehensive Plan of Action, despite its many troubling flaws, is already being implemented. Yet now another nasty battle is brewing.

Even as Washington prepared to release an estimated $100 billion in restricted Iranian oil assets and paved the way for Tehran to regain access to the Swift network (Society for Worldwide Interbank Financial Telecommunication)—allowing it to transfer funds across the global electronic banking system—the Obama administration vowed that the Islamic Republic would never get the ultimate prize: access to the U.S. financial system or dollar transactions.

Treasury Secretary Jacob Lew was adamant during a congressional grilling last July. “Iranian banks will not be able to clear U.S. dollars through New York,” he told the Senate Foreign Relations Committee, or “hold correspondent account relationships with U.S. financial institutions, or enter into financing arrangements with U.S. banks.”

Yet as Rep. Ed Royce (R., Calif.) noted in a March 22 letter to the White House, Mr. Lew, during a Financial Services Committee hearing earlier that day, “appeared to leave the door open” to Iran getting access to the U.S. financial system. Mr. Royce reminded Mr. Lew of what he said last year, then said he had “received reports from the administration that it is now considering providing Iran with access to the U.S. financial systems.” He repeatedly pressed Mr. Lew: “Specifically, are you considering permitting Iranian banks to clear transactions in dollars with U.S. banks or foreign financial institutions including offshore clearing houses?”

Mr. Lew avoided a direct answer, instead stating that the administration continues to explore ways “to make sure Iran gets relief” from sanctions. With this non-answer, Congress is getting ready for a fight.

It’s not hard to understand why. The Financial Action Task Force, a global antiterrorism finance body, maintains a severe warning about Iranian financial practices. Last month it warned that Iran’s “failure to address the risk of terrorist financing” poses a “serious threat . . . to the integrity of the international financial system.” The Treasury Department also recognizes the danger, in 2011 labeling the Islamic Republic a “jurisdiction of primary money laundering concern.” That finding, which remains in place, cites Iran’s “support for terrorism,” and “illicit and deceptive financial activities.”

What explains this possible reversal? Most likely, Iran demanded it. Secretary of StateJohn Kerry and Foggy Bottom, always fearful that Tehran will walk away from the nuclear deal, may be ready to comply.

Don’t expect the White House to admit this; the administration is more likely to offer a feeble claim that its ability to oversee Iranian dollar transactions could yield better intelligence.

In 2008, however, the Treasury Department banned U.S. financial institutions from processing “U-turns”—temporary dollar transactions between non-U.S. banks and Iranian banks. Treasury determined that the risks simply outweighed the intelligence benefits. Four years later Treasury pushed to ban several Iranian banks, including the central bank, from the Swift messaging system. The threat to the integrity of the global financial system from Iranian banks, it again determined, was too grave, despite the intelligence that could be gathered.

The administration might claim that Treasury could capture dollar-denominated assets when Iran violates the nuclear agreement or uses the greenback to finance terrorism or ballistic missiles. This wouldn’t be realistic. Iran knows the U.S. can freeze transactions that are even temporarily converted to dollars, making it unlikely that they would hold registered dollar accounts in sufficient quantities in banks where U.S. authorities have reach. If anything, they will keep their dollar holdings in offshore accounts or in pallets of cash. If the regime contemplates a nuclear violation or gets wind of new sanctions, it would dump whatever traceable dollar assets it holds.

We may also hear via the administration that we need to provide economic incentives for Tehran to comply with the nuclear deal. Yet during last summer’s debate, administration officials claimed that denying Iran access to the dollar and the U.S. financial system would provide Washington with leverage after the deal was done. Why throw away that leverage in exchange for no new concessions?

The Europeans are permitting Iranian banks to rejoin Swift. That’s their decision. But until Congress can get the intelligence community to verify that Iranian banks have stopped financing terrorist groups such as Hezbollah and Hamas—not to mention money laundering and other financial crimes—you can bet that Congress will oppose Iran’s access to the U.S. financial system.

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