May 26, 2016 | Policy Brief

How Iran Taints the Dollar

May 26, 2016 | Policy Brief

How Iran Taints the Dollar

For the past two months, a debate has raged between the Obama administration and Congress over whether last summer’s nuclear deal provides Tehran access to dollars outside of the U.S. financial system. In a hearing of the House Foreign Affairs Committee on Wednesday, Chairman Ed Royce was able to finally reveal Treasury’s thinking on the matter.

In his testimony, Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin clarified that Treasury believes offshore dollar clearing to be beyond U.S. jurisdiction. Therefore, foreign financial institutions can conduct offshore dollar-clearing operations for Iran without fear of U.S. sanctions. “Every foreign bank in the world has U.S. dollars in their possession,” he said. “Our sanctions do not extend to those dollar bills, and foreign actors aren’t under our jurisdiction if they choose to give those to any actor, including an Iranian actor.”

In statements to Congress, administration officials have emphasized that Iran remains excluded from the U.S. financial system. Still, the administration has considered allowing Tehran access to dollars for some time. When the nuclear deal went into effect in January – on so-called Implementation Day – Treasury’s carefully crafted Guidance noted, “[F]oreign financial institutions need to continue to ensure they do not clear U.S. dollar-denominated transactions involving Iran through U.S. financial institutions” (emphasis added). The clear implication is that clearing outside of U.S. financial institutions is permissible.

Now, the administration is seeking to assure foreign financial institutions that they can do business in dollars on behalf of Iranian clients as long as those activities are permitted under the deal and do not touch the U.S. financial system. Still, Treasury’s clarification may not actually elucidate as much as it hopes.

First, asserting that the United States does not have jurisdiction simply because the transactions are offshore oversimplifies the nature of international currency flows. At some point, greenbacks used abroad will circulate through the U.S. The key question is: After an Iranian transaction, how long must those dollars remain outside the U.S. before they are no longer tainted? The answer remains unclear, both to financial institutions and U.S. regulators themselves. Global banks – particularly those fined in the past for sanctions violations – are unlikely to facilitate these transactions for fear of finding themselves on the wrong side of enforcement actions.

Second, Treasury’s determination that dollarization does not create U.S. jurisdiction is no guarantee that other agencies will take the same approach. As seen over the past decade, other federal and state agencies like the Department of Justice, Securities and Exchange Commission, and New York Department of Financial Services have all played significant roles in providing sanctions interpretation and guidance. Concern that other regulators or law-enforcement agencies may view things differently than Treasury will likely chill any enthusiasm for processing offshore dollarized transactions.

Furthermore, offshore dollar clearing – even if clearly outside of Treasury’s declared scope of jurisdiction – would raise U.S. correspondent banking access risks for any foreign institutions engaged in such activity. U.S. banks would likely be unwilling to maintain correspondent accounts for such institutions, pressuring them against engaging in dollar clearing, even if technically permissible under U.S. law.

In his attempt to clarify the legal ambiguity surrounding offshore dollar clearing, Acting Under Secretary Szubin did so in a way that favors Iran. Given the administration’s commitment to the nuclear deal, his wording was likely intended to ensure that the Iranians are convinced that Washington is abiding by its terms. Still, the administration could have offered an explanation – one still within the deal’s parameters – that would have put more pressure on Tehran to stop financing illicit activities and improve its transparency. While the administration’s choice is understandable politically, it also takes U.S. coercive measures to counter much of Iran’s malign behavior off the table.

Eric B. Lorber is a senior advisor at the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance, and a senior associate at the Financial Integrity Network. Find him on Twitter: @ELforeignpolicy


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