Will the Treasury Department Go After Iran’s Banking Friends?

Seven Republican senators are demanding that the Obama administration take tougher measures to punish banks still doing business in Iran, and they are threatening to stall the nomination of a top Treasury Department official unless they get their way.

The dispute between the White House and Congress revolves around implementation of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of 2010, the wide-ranging law signed into law last year. The Treasury Department issued a draft rule last week that lays out how it intends to implement a key provision of the law, which deals with Iran's banking partners in countries around the world. And that rule raised the ire of seven GOP senators, who expected Treasury to enforce the law much more stringently.

The key provision, section 104(e), directs the administration to punish any international financial institutions still doing business with Iran by cutting them off from the U.S. financial system.

“We were extremely unhappy with the draft rule to implement section 104(e) of CISADA publish by the Treasury Department last week,” wrote Sens. Jon Kyl (R-AZ), Mark Kirk (R-IL), Roger Wicker (R-MS), David Vitter (R-LA), Jerry Moran (R-KS), Mike Crapo (R-ID), and Mike Johanns (R-NE), in a previously unreported letter sent Tuesday, and obtained by The Cable.

The letter was addressed to David Cohen, the acting undersecretary for terrorism and financial intelligence at the Treasury Department. Cohen took over for Stuart Levey, the previous sanctions chief at Treasury, who moved on to the Council on Foreign Relations last month after more than 4 years on the job.

The senators are threatening to hold up Cohen's nomination if their demands regarding enforcement of the sanctions provisions aren't met. Cohen had his confirmation hearing before the Senate Banking Committee on Tuesday and, afterwards, Kirk sent Treasury a list of follow-up questions he says must be answered before he'll allow Cohen's nomination to move forward.

“The acting undersecretary's response to our letter and questions for the record will weigh heavily in any confirmation decision,” Kirk told The Cable.

Kirk also identified 44 international financial institutions servicing Iranian banks and 18 U.S. institutions that are working with those who do business inside Iran. He got this list from a 2010 report entitled “Iran's Dirty Banking”, which sourced the information to the Banker's Almanac.

Kirk wants Treasury to require all U.S. banks to certify that any foreign banks they deal with aren't dealing with Iran. He also wants those foreign banks to certify that any banks they are dealing with aren't doing business with Iran. But Treasury's current plan calls for banks to provide such information only if and when the Obama administration asks for it.

“The object is to make sure we are doing anything and everything we can to drive Iranian business out of our banking system and this is how to do it,” one senior GOP senate aide said.

“Large American banks and foreign banks that are operating here have not been hauled before Congress and have not been forced to tell the people and shareholders why they have not complied with the law,” said another senior GOP aide.

Specifically, the aide said that the senators who signed the letter want Treasury to publish a final rule on implementation of the provision that requires audits of all banks' interactions with Iran on an ongoing basis. If that happens, the Cohen nomination can go through.

All of the senators who signed the letter, except for Kyl, are on the banking committee.

In his Tuesday testimony, Cohen defended the Treasury Department's efforts to tighten the noose around Iran's banking sector, including the passing of U.N. Security Council Resolution 1929 and subsequent successful efforts to convince European and northeast Asian countries to drop their Iranian banking ties.

Since 2006, Treasury has sanctioned 20 Iranian state-owned banks involved in facilitating Iran's nuclear program for penalties, and officials have traveled the world to try to convince foreign governments to take similar actions.

Cohen also said that sanctions against foreign owned banks that are working with Iran aren't necessarily the best tool in all cases, and indicated that there are more penalty decisions coming soon, such as the designation of more third country banks.

“The first best option is to get them to stop. Our second best option is to apply sanctions. And without getting too much into the details of any particular investigation that we're conducting, I can tell you that we are, I would say, close to a decision point on several institutions,” he testified.

Matthew Levitt, a former deputy assistant secretary for intelligence and analysis at the Treasury Department and now a senior fellow at the Washington Institute for Near East Policy, said that Treasury was not against congressionally mandated sanctions, but believes they should only be used after all efforts to persuade foreign banks to shape up fail.

“What you have here is a struggle between two branches of government trying to get the same job done, but using two different paths to the same end,” he said. “In some instances, it may be, you will get more compliance if you don't hit them with the hammer.”

Levitt also defended the Treasury's efforts to put pressure on Iran's financial activities. “It's almost silly for anyone to claim the Treasury Department has been soft on Iran,” he said.