As debate swirls about whether new international sanctions
against North Korea will be effective, the Bush administration appears to
have made some headway in using new American legal tools to cut off both
North Korea and Iran from the international financial system. The American
campaign to use its own financial regulations to put pressure on North Korea
and Iran has been a mix of implicit threats backed by explicit action,
American officials and banking experts say. Over the last year, American
officials have met with many private banks overseas to warn them of the risk
of doing business with certain Iranian and North Korean trading companies
and businesses that the United States says have been tied to terrorist
groups or to the spread of nuclear materials. One of the main unspoken
messages of the visits, experts say, is that the United States government
may eventually bar American banks from working with financial institutions
doing business with groups tied to terrorism. This campaign of pressure has
been backed up by specific actions. The most notable was when the United
States last month barred American banks from facilitating certain
transactions, including the sale of oil, for a leading Iranian bank with
reputed ties to terrorist groups. As a result of the American campaign,
banking officials and experts say that some foreign banks are cutting ties
with North Korea and Iran. But while achieving some unilateral success in
economically punishing North Korea and Iran for their nuclear ambitions,
some experts say the moves against Iran, at least, could damage American
economic interests if that country switched to currencies other than the
dollar for its large oil trades. The United States had turned to unilateral
action in part out of frustration that its efforts to mobilize international
sanctions had run into trouble. That frustration might remain if the United
Nations sanctions against North Korea, passed Saturday, prove not to be as
effective as the United States hopes. Most experts acknowledge that a
globally cooperative effort would be much more effective than the American
unilateral efforts, but that the United States can inflict some pain with
the creative use of the reach of its own laws and pressure. The ban on
American transactions with the Iranian bank, Bank Saderat, means that it
will no longer be able to obtain American dollars for its dealings with any
other bank in the world. Bank Saderat is one of Iran's half-dozen largest
banks. The technical term for the banned activity is a "U-turn
transaction." Such a transaction permits, for example, Iran to sell oil to a
German customer, who in turn directs a European bank to deposit dollars
obtained from an American bank into an Iranian bank account located in
Europe. The phrase "U-turn" applies because the funds are transferred to a
United States bank and instantly turned back as dollars to a European bank.
Many American banking officials predict that, in coming months, the United
States will ban American bank involvement in transactions involving the
other leading banks in Iran. That is because there is a widespread
assumption among bankers that all of Iran's state-owned banks engage in the
same activities as Bank Saderat. The likely result is that Iran will have
difficulty selling its oil for dollars, the international medium of exchange
for all oil sales. "This is a pretty dramatic uptick of pressure from the
United States," said Judith Lee, a law partner specializing in economic
sanctions at Gibson, Dunn & Crutcher in Washington. "It is going to create
significant difficulties for European banks and European countries."
American officials decline to say whether the move against Bank Saderat
would apply to other Iranian banks. Stuart Levey, under secretary of the
Treasury for terrorism and financial intelligence, said recently that in the
last two years the United States had "learned a number of lessons about how
best to use financial tools to apply financial pressure" on countries like
Iran and North Korea. In the last year, Levey has traveled to several
countries in Europe to exert pressure on Iran and to Singapore, China,
Macao, Hong Kong, Vietnam and South Korea to press banks to break their ties
with North Korea. The message was reinforced a year ago when the United
States barred financial transactions with a bank in Macao, Banco Delta Asia,
which officials said was involved in North Korean nuclear dealings, money
laundering and counterfeiting. Last month, citing news media reports, Levey
said that at least two dozen financial institutions overseas had curtailed
or suspended business with North Korea. China, for instance, froze the
accounts of North Korea in a Macao branch of the Bank of China and also
cracked down on the circulation of counterfeit American dollars in China
near the North Korean border. The administration hopes that could set a
pattern for the future, American officials said. "We have no reason to
believe that China will not continue to protect their financial system from
abuse," a Treasury official said Sunday. As for Iran, several European
banks, including Credit Suisse and UBS in Switzerland, HSBC in Britain and
ABN Amro in the Netherlands, have announced curbs on dealings with Iranian
banks and businesses. "We are seeing a whole series of banks not doing
business with Iran, restricting the flow of funds into Iran significantly,"
said Edward Morse, chief energy economist at Lehman Brothers. Last month,
Treasury Secretary Henry Paulson Jr. suggested at an international meeting
in Singapore that banks around the world should stop doing business with
more than 30 Iranian companies and government enterprises that American
intelligence had linked to various illicit activities. Evidence that
American moves against Iran might be having an effect came at the same
meeting, when Ebrahim Sheibany, the Iranian central bank governor, told a
local paper at an international financial meeting that Iran would have "no
choice" but to shift its sale of oil away from the dollar and to the euro or
Asian currencies. Whether that shift away from dollars could have the
unintended effect of hurting the United States is a matter of debate. Some
experts say there is a danger that if Iran does shift currencies, it could
weaken the standing of the dollar as a reserve currency, forcing the United
States to raise interest rates to attract dollar purchasers. "This is a
step where the end result could clearly weaken the dollar," said John
Heimann, an investment banker and former comptroller of the currency in the
Carter administration. "What has to be considered is whether or not we are
shooting ourselves in the foot."
By Steven R. Weisman The New York Times Published: October 16, 2006
against North Korea will be effective, the Bush administration appears to
have made some headway in using new American legal tools to cut off both
North Korea and Iran from the international financial system. The American
campaign to use its own financial regulations to put pressure on North Korea
and Iran has been a mix of implicit threats backed by explicit action,
American officials and banking experts say. Over the last year, American
officials have met with many private banks overseas to warn them of the risk
of doing business with certain Iranian and North Korean trading companies
and businesses that the United States says have been tied to terrorist
groups or to the spread of nuclear materials. One of the main unspoken
messages of the visits, experts say, is that the United States government
may eventually bar American banks from working with financial institutions
doing business with groups tied to terrorism. This campaign of pressure has
been backed up by specific actions. The most notable was when the United
States last month barred American banks from facilitating certain
transactions, including the sale of oil, for a leading Iranian bank with
reputed ties to terrorist groups. As a result of the American campaign,
banking officials and experts say that some foreign banks are cutting ties
with North Korea and Iran. But while achieving some unilateral success in
economically punishing North Korea and Iran for their nuclear ambitions,
some experts say the moves against Iran, at least, could damage American
economic interests if that country switched to currencies other than the
dollar for its large oil trades. The United States had turned to unilateral
action in part out of frustration that its efforts to mobilize international
sanctions had run into trouble. That frustration might remain if the United
Nations sanctions against North Korea, passed Saturday, prove not to be as
effective as the United States hopes. Most experts acknowledge that a
globally cooperative effort would be much more effective than the American
unilateral efforts, but that the United States can inflict some pain with
the creative use of the reach of its own laws and pressure. The ban on
American transactions with the Iranian bank, Bank Saderat, means that it
will no longer be able to obtain American dollars for its dealings with any
other bank in the world. Bank Saderat is one of Iran's half-dozen largest
banks. The technical term for the banned activity is a "U-turn
transaction." Such a transaction permits, for example, Iran to sell oil to a
German customer, who in turn directs a European bank to deposit dollars
obtained from an American bank into an Iranian bank account located in
Europe. The phrase "U-turn" applies because the funds are transferred to a
United States bank and instantly turned back as dollars to a European bank.
Many American banking officials predict that, in coming months, the United
States will ban American bank involvement in transactions involving the
other leading banks in Iran. That is because there is a widespread
assumption among bankers that all of Iran's state-owned banks engage in the
same activities as Bank Saderat. The likely result is that Iran will have
difficulty selling its oil for dollars, the international medium of exchange
for all oil sales. "This is a pretty dramatic uptick of pressure from the
United States," said Judith Lee, a law partner specializing in economic
sanctions at Gibson, Dunn & Crutcher in Washington. "It is going to create
significant difficulties for European banks and European countries."
American officials decline to say whether the move against Bank Saderat
would apply to other Iranian banks. Stuart Levey, under secretary of the
Treasury for terrorism and financial intelligence, said recently that in the
last two years the United States had "learned a number of lessons about how
best to use financial tools to apply financial pressure" on countries like
Iran and North Korea. In the last year, Levey has traveled to several
countries in Europe to exert pressure on Iran and to Singapore, China,
Macao, Hong Kong, Vietnam and South Korea to press banks to break their ties
with North Korea. The message was reinforced a year ago when the United
States barred financial transactions with a bank in Macao, Banco Delta Asia,
which officials said was involved in North Korean nuclear dealings, money
laundering and counterfeiting. Last month, citing news media reports, Levey
said that at least two dozen financial institutions overseas had curtailed
or suspended business with North Korea. China, for instance, froze the
accounts of North Korea in a Macao branch of the Bank of China and also
cracked down on the circulation of counterfeit American dollars in China
near the North Korean border. The administration hopes that could set a
pattern for the future, American officials said. "We have no reason to
believe that China will not continue to protect their financial system from
abuse," a Treasury official said Sunday. As for Iran, several European
banks, including Credit Suisse and UBS in Switzerland, HSBC in Britain and
ABN Amro in the Netherlands, have announced curbs on dealings with Iranian
banks and businesses. "We are seeing a whole series of banks not doing
business with Iran, restricting the flow of funds into Iran significantly,"
said Edward Morse, chief energy economist at Lehman Brothers. Last month,
Treasury Secretary Henry Paulson Jr. suggested at an international meeting
in Singapore that banks around the world should stop doing business with
more than 30 Iranian companies and government enterprises that American
intelligence had linked to various illicit activities. Evidence that
American moves against Iran might be having an effect came at the same
meeting, when Ebrahim Sheibany, the Iranian central bank governor, told a
local paper at an international financial meeting that Iran would have "no
choice" but to shift its sale of oil away from the dollar and to the euro or
Asian currencies. Whether that shift away from dollars could have the
unintended effect of hurting the United States is a matter of debate. Some
experts say there is a danger that if Iran does shift currencies, it could
weaken the standing of the dollar as a reserve currency, forcing the United
States to raise interest rates to attract dollar purchasers. "This is a
step where the end result could clearly weaken the dollar," said John
Heimann, an investment banker and former comptroller of the currency in the
Carter administration. "What has to be considered is whether or not we are
shooting ourselves in the foot."
By Steven R. Weisman The New York Times Published: October 16, 2006
