In the past two weeks, Congress has pressed Treasury Secretary Jack Lew to clarify whether the Obama administration intends to offer Iran access to the U.S. financial system or the ability to transact in dollars. Secretary Lew has refused to answer that question directly, but he previously committed to the Senate Foreign Relations Committee in July that the terms of the Joint Comprehensive Plan of Action (JCPOA) would not grant Iran access to the U.S. financial system.
Today, in his speech at the Carnegie Endowment for International Peace, Secretary Lew said: “Since Iran has kept its end of the deal, it is our responsibility to uphold ours, in both letter and spirit.”
Does this mean the administration's commitments to Congress have changed? Will the administration open up our financial system to Iran? Alternatively, will it maintain a prohibition on access to the U.S. financial system but permit offshore clearing for dollarized transactions through foreign large-value payment systems that can process dollar transactions without touching New York?
Either way, this reversal would have serious implications.
Building on the work of its predecessors, the Obama administration's sanctions policy was to deny Iran access to the U.S. financial system and to deny Iranian banks access to the U.S. dollar. For the past decade, the rationale has been clear: Iran's financial sector is a threat to the integrity of the global financial system and, in particular, to our system and currency. This was the basis of Treasury’s decision in 2008 to ban U.S. financial institutions from processing “U-turns” – temporary dollar transactions between non-U.S. banks and Iranian banks (codified in section 1245(c) of the FY2012 National Defense Authorization Act). It also underpinned Treasury’s section 311 USA Patriot Act 2011 finding that Iran, along with its entire financial sector, is a jurisdiction of primary money laundering concern – a finding also codified in section 1245 of the FY2012 NDAA.
U.S. policy can be summed up this way: We did not want bad Iranian banks touching our financial sector, and we did not want our dollar directly or indirectly touching theirs even through dollarized transactions. But the next president’s ability to target Iran's malign activities with non-nuclear sanctions will be much more difficult if billions of dollarized transactions are green lighted. The next administration won’t easily be able to reverse this once it is in motion, made even more difficult by inevitable European and Asian pushback.
Iran’s record of illicit finance has been the basis of several years of Financial Action Task Force (FATF) warnings. FATF, the global anti-money laundering and anti-terror finance standards body, regularly warns members that they should “apply effective counter-measures to protect their financial sectors” from illicit finance risks emanating from Iran. As recently as February 2016, FATF warned that Iran’s “failure to address the risk of terrorist financing” poses a “serious threat … to the integrity of the international financial system.” If the U.S. green lights the greenback, it will undermine FATF’s global standards.
Iran will use an American green lighting in order to water down FATF's illicit finance warnings. Step-by-step, Iran will legitimize itself in the global financial and business community without fundamentally changing its financial practices. Just as it went from nuclear pariah to nuclear partner under the JCPOA without admitting to its nuclear weaponization work, Tehran will use this same strategy of coupling a denial of wrongdoing with demands for more and more concessions.
If the Obama administration grants Iran access to the world’s most important currency, U.S. sanctions will be severely undermined without any reciprocity. Tehran will receive yet another significant and unilateral concession. And Washington will have lost critical leverage to target Iran’s terror finance, missile activities, destabilizing regional aggression, systemic human rights abuses, and the financial and military backing of the Assad regime.
Mark Dubowitz is executive director of the Foundation for Defense of Democracies where he focuses on Iran and directs FDD’s Center on Sanctions and Illicit Finance. Follow him on Twitter, Facebook, and LinkedIn.
Annie Fixler is a policy analyst at the Center on Sanctions and Illicit Finance. Find her on Twitter: @afixler