As the U.S. moves to reimpose sanctions on Iran, German Chancellor Angela Merkel is working behind the scenes to undermine the effort. How President Trump responds could determine whether his strategy to put maximum pressure on the Islamic Republic will succeed or fail.
During briefings in Washington, German officials have indicated their goal: to ensure that Iran remains connected to the Swift system—formally called the Society for Worldwide Interbank Financial Telecommunication—that facilitates global financial transactions. By protecting Iran’s access to the Swift network, Germany hopes to preserve Europe’s ability to pay for Iranian oil, and receive payment for European exports, in contravention of U.S. sanctions. The Germans know that any maximum-pressure campaign against Iran cannot succeed if Iran remains connected to Swift.
Last month, in light of “U.S. sanctions which could target EU entities active in oil transactions with Iran,” the European Commission encouraged European Union members to explore the idea of sending direct payments to the Central Bank of Iran. Access to the Swift network makes this possible. If such a payment were transmitted, the U.S. could designate the European country’s central bank as a violator of sanctions, blocking its access to dollars and isolating it from the international financial system. German leaders are betting the Treasury Department would not take the economic risk of doing so.
German leaders may not have considered, however, the American alternatives. Treasury could designate individual central-bank officials as sanctions violators, freezing their U.S.-based assets and denying them entry to the country. Or other U.S. law-enforcement and regulatory bodies could take action. For example, federal prosecutors from the Southern District of New York, as well as prosecutors from the Manhattan District Attorney’s Office, have imposed serious penalties against European banks for facilitating illicit Iran-related financial activities. New York State’s Department of Financial Services could pursue similar action.
If a European central bank became a channel for payments to Iran, the risk is that other countries—China, Russia, India—would adopt a similar approach to evading U.S. sanctions. The Trump administration’s strategy to put pressure on the Iranian regime would slowly unravel.
The solution is to cut off Iran’s access to the Swift network. The Treasury Department has given Swift until Nov. 4 to disconnect Iran’s central bank and other Iranian financial institutions that are under sanctions for illicit activities. This action is perfectly appropriate. Swift’s corporate rules prohibit its users from engaging in “conduct which is not in line with generally accepted business conduct principles.” In the case of Iran, flagrant examples include financing the Assad regime in Syria, subsidizing terrorism through the Quds Force, building ballistic missiles, and abusing human rights.
Since Swift provides the financial-messaging service for the European Central Bank’s Target2 settlement platform, ECB regulations should apply here as well. The ECB’s terms and conditions for Target2 require users to comply with all obligations to prevent money laundering, terrorism financing and nuclear proliferation. If Iranian banks are under sanctions for these activities, they should not be allowed to clear euro transactions.
In 2012, facing pressure from Congress, Swift asked the EU to issue a regulation ordering it to disconnect Iranian banks. The EU obliged but rescinded the order in 2015, as reconnection to Swift was a key concession of the Iran nuclear deal. This time around, Swift won’t have the face-saving luxury of an EU order, since Germany would block any such initiative. So what else can the Trump administration do to force Swift’s hand?
Swift is a cooperative, and its board is made up of banks from around the world. That gives the Treasury Department enormous leverage. Under American law, the Treasury can impose sanctions on Swift’s staff, officials and directors. That could include freezing their personal assets and restricting their travel to the U.S. The U.S. could cut off their employers from the American financial system. The Trump administration could create legal trouble for the two American banks represented on Swift’s board, Citigroup and JP Morgan .
Swift operates under the laws of Belgium, and the National Bank of Belgium is responsible for its daily oversight. The Treasury could declare either of them an entity of money-laundering concern. Unless Belgian officials order Swift to disconnect designated Iranian banks, the U.S. could hold them personally responsible for aiding and abetting the evasion of sanctions.
Such steps may seem draconian. But Mr. Trump’s strategy to put maximum pressure on Iran depends on the robust enforcement of sanctions. As such, the U.S. has no choice but to move aggressively against noncompliance—in Berlin, in Brussels and around the world.
Mark Dubowitz is the chief executive officer of the Foundation for Defense of Democracies. Follow Mark on Twitter @mdubowitz. Richard Goldberg is a senior adviser at the Foundation for Defense of Democracies. Follow him on Twitter @rich_goldberg. Follow the Foundation for Defense of Democracies on Twitter @FDD. FDD is a Washington-based nonpartisan research institute focusing on national security and foreign policy.