Standard outburst in uncharted waters

So a US regulator in NY that you have probably never heard of is kicking up a fuss about Iranians, or rather about Standard Chartered, the London-based but Asian-focussed bank that operates in Iran.  Now Iran isn't everybody's favourite nation, particularly Israel (which views Iran as the root of most if not all evil), and the United States (which for the last 33 years has waged an economic war on the state with a comprehensive range of economic sanctions).  The US rules pretty much prohibit US citizens and corporations from doing any business with Iran, with limited humanitarian exceptions (medicines and the like).

But the rest of the world doesn't quite see it the same way.  The EU is quite happy to permit business relations with Iran.  The French designed and managed the construction of the Imam Khomenei International Airport.  The Germans sell them machine tools, as do the Japanese and both countries sell their cars.  The Chinese buy Iranian oil, but they also built the Tehran subway.  Australia sells them wheat, New Zealand sells them lamb and Argentina sells them soya.  Meanwhile Iran sells the rest of the world its oil, Persian carpets and .. pistachios.  Chances are the next bag of pistachios you buy in the shops (assuming you are not reading this in the US) will be contributing to the Rafsanjani family fortune.

All of these goods and services have to be paid for, and in all likelihood the non-Iranian buyer or seller will want to pay or be paid in dollars. And that is where it gets tricky, because in theory all dollar denominated payments (unless they are between accounts at the same bank) would have to be made through the correspondent banking system in New York.

For those who don't know what correspondent banking is, instead of the tens of thousands of banks in the world maintaining accounts with each other on the off chance that the Third National Bank of Kurdistan should want to send $25,000 to Banco Comercial de Patagonia, smaller and even quite large banks keep accounts at a few large money centre banks and use those banks (correspondent banks) to operate payments to other coresspondent banks in the same country/city who forward the payment to the account of the recipient or his bank.  Which means that if anybody is sending dollar payments to or from Iran, they are likely to go through New York at some point, at which point the US authorities might get a bit touchy.

Now arguably, nobody in the US is doing any business with Iran, simply with the people who are moving money to or from Iran, but that doesn't seem to cut much ice with Benjamin Lawsky, the Superintendent of Financial Services in New York.  Mr Lawsky, who as you might expect from his name is a Friend of Israel, who thinks that such business transactions are just plain evil.  "How much of this $285 billion has been used to fund terrorism?", he asks. 

At a rough guess, I would say pretty much none of it. Terrorism doesn't require much funding, Mr Lawsky.  Just ask your fellow citizens at Noraid.  And most terrorist funding in Iran comes not from the government, but from the Islamic foundations ("bonyads") that own vast swathes of the Iranian economy.  They don't need to send money to Hizbollah in dollars because I doubt Hizbollah has a checking account with Citi on 5th Avenue in NY.  Wherever their terror cells are located, chances are the local currency will be dirhams, riyals, pounds or euros, not dollars, so no need to trouble Uncle Sam's end of the SWIFT network.

Meanwhile, Mr Lawsky's accusations may be rebounding on him.  There have been reports that the censuring of Standard Chartered on Monday by the New York state regulator surprised not only the bank’s executives but also stunned officials at the federal agencies investigating the bank, the Treasury and Justice Departments and the Federal Reserve. Some of the Treasury officials had reportedly concluded that while Standard Chartered’s handling of Iranian transactions might have been questionable, they were not necessarily illegal.  The trading with Iran occurred with non-US entities, which is why Mr Lawsky accusations have nothing to do with OFAC regulations, but the catch all charge of money laundering and false accounting.  Whether or not these apply will depend on the facts, but since the money seems to have got through to the right place, it sounds as though any mention of an Iranian bank would have been superfluous, and the fact that a particular transfer was connected to Iranian business but that the Iranian business was not actually involved in a particular leg of a transaction suggests that the transactions were perfectly compliant under the law as it existed at the time.

And if SCB want to structure dollar payments so they don't pass through the US, it is so easy to avoid doing so:  If Iranian client with $100 million on deposit at SCB wants to make a $100 million payments they buy $100 million of euros from SCB, and send that amount to the account of the intended recipient at their bank.  The payment is cleared through the euro clearing system outside the US.  Simultaneously SCB and the other bank enter into a $/€ FX deal for $100 million face value at the same rate and the other bank does the same with the end client.  Net result, Iran moves $100 million to client, and the US is none the wiser because all they see is an FX deal between 2 non-US banks.