Wisconsin Project Interview with Skip Fischer on Financial Sanctions and Iran

Interview Series
October 3, 2006

Publication Type: 

  • Interviews and Podcasts

On October 3, 2006, the Wisconsin Project's IranWatch.org web site spoke with Dr. Skip Fischer, a professional staff member on the Senate Committee on Banking, Housing, and Urban Affairs. Dr. Fischer described the measures that now exist in the United States for sanctioning Iran and the prospect of expanding those sanctions internationally with the support of U.S. allies. Thanks to the dominance of the U.S. dollar in the global economy, he assessed that the United States will continue to play a key role in imposing financial sanctions on Iran. He also evaluated the importance of China, whose rapid economic growth may one day allow it to challenge the influence of the United States in imposing such sanctions.

The following is an edited transcript of our conversation.

Iran Watch (IW): What is the United States doing on its own against Iran and Iranian banks linked to proliferation or terrorism financing?

Skip Fischer (SF): The United States is already doing much of what it can do. We do a lot through both the WMD proliferation sanctions [within the Arms Export Control Act] and through executive orders, such as executive order 13382, which allows for the blocking and freezing of assets. These are basic sanctions that you apply both domestically and internationally. Then there's the recent Iran Freedom Support Act, which codifies existing sanctions that had been previously laid out in executive orders. Iran has also been designated as a terrorist supporting nation, and it is one of the principal targets of terrorist financing policies and programs.

Now, if the government blocks financial institutions in the United States from doing business with certain foreign institutions, for instance Iranian institutions, it makes it very difficult if not impossible for those foreign institutions to process their dollar transactions. Because the U.S. dollar remains the dominant worldwide currency, it gives us a degree of leverage that is out of proportion with our economic standing. We are the biggest single national economy besides the European Union, as a bloc. But the influence of the dollar in the global economy gives us far greater latitude than our corresponding economic importance, because transactions involving the U.S. dollar generally have to go through the United States.

IW: How are banking sanctions applied? Can they be applied gradually, with milder sanctions tried first and pressure ratcheted up slowly?

SF: It's hard to ratchet up or incrementally impose banking sanctions. You're either going to impose them or you're not. For instance, it's hard to set a dollar value threshold, or some limit above which you refuse to deal with a foreign financial institution.

IW: Could the United States have an impact, on its own, by sanctioning additional Iranian banks in the way it recently sanctioned Bank Saderat, by cutting it out of the U.S. financial system entirely, including barring "U-turn" transactions and previously exempted or licensed transactions? Or might there be only a short-term benefit from doing so unilaterally?

SF: To a degree, the United States does need the support of other major banking states, but only to the degree in which transactions are conducted or not conducted using U.S. dollars. If the U.S. dollar is used, then we can play in that sandbox.

IW: Could there be a risk to overusing unilateral banking sanctions? Might the U.S. dollar lose its predominant status to the euro, for instance?

SF: That's always a concern. I'm not a prognosticator of what is going to happen with currency exchanges ten years down the road. But right now, too much of the global economy is intertwined with the United States to expect countries to bypass the dollar and work exclusively with the euro. If countries are unwilling to accept the cost of not doing business with Iran, they're even more unwilling to accept the cost of not doing business with the United States. That's due to the strength of the dollar and to the importance of U.S. markets and of access to our financial institutions. And look at the euro zone today. Because its membership has increased, it now has more difficulty maintaining internal compliance, in terms of budget balances and so on. It has grown to such an extent that it is unlikely to have the influence necessary to replace the dollar. For now, given the situation in Europe, and as long as China is not there yet, you can't circumvent U.S. financial institutions and maintain the same level of activity.

IW: What would be the best way to convince allies to go along with the U.S. sanctions policy?

SF: If you hold out the threat of sanctions against a Swiss bank or a German bank that does business with Iran, that threat will influence the bank's approach to its clientele. In other words, you would be asking the foreign bank to choose between its banking relationship with the United States and its relationship with Iran. Fortunately, reputation continues to be very important to financial institutions. That's a non-tangible that we can continue to use for a certain degree of leverage.

In most instances, financial institutions don't want to give up access to their U.S. correspondent accounts. They maintain relationships with U.S. financial institutions or have branches in the United States that fall under our anti-money laundering and anti-terror financing regulations. What are these foreign institutions willing to give up for the sake of continuing business with an Iran? They're generally not willing to give up a presence in New York.
Fortunately, for now, foreign banks still consider their relationship with the United States as sufficiently important that they are willing to approach relationships with Iran gingerly. But there's no question that a lot of the world continues to view business with Iran as business-and business is good. When the Banking Committee had a hearing on the Iran-Libya Sanctions Act (ILSA) a month or two ago, I received an e-mail from an organization that sponsors conferences around the world on trade and business. The organization was preparing a conference in London on how to do more and better business with Iran. The attendance list for this event included top international financial services corporations, and the Embassy of Iran. If this is going on in England-our closest ally, especially with regard to terrorism and Iraq, what does this tell you about the culture globally when it comes to abiding by U.S. policy or U.S. sanctions towards Iran? We still have a long way to go. You could argue that we should be putting the hammer down harder, but that's easy to sit here in this room and say; it's a little bit harder if you're the government and you actually have to deal on a daily basis with other friendly governments.

IW: So the approach should be more cooperative than threatening?

SF: Optimally, we'd like to go to our allies with a smile on our face and our hand out in friendship and say, "Hey, let's work together." But a big chunk of the world doesn't always ascribe U.S. policy, usually for its own commercial reasons. We can sit here in the United States and look at nuclear cooperation with Iran; to us, it seems pretty self-evident that this is a questionable line of activity. But it just isn't for a lot of the rest of the world. It's taken every bit of diplomatic skill to get other countries to even approach serious consideration of sanctions.

So, you have to do your best to ensure that other financial institutions and the rest of the world view this problem the same way we do. Otherwise sanctions won't be pursued with the same vehemence. Treasury and State go around the world trying to inform financial institutions and governments about the importance of sanctions. And I would say some countries have come a long way since September 11.

IW: What countries would you need in an ideal coalition, in order to impose effective banking sanctions? Obviously, you would need the European Union, Switzerland and Japan. And how important is the energy dependence of some countries, like Japan, in forming this coalition?

SF: It's difficult to try and maintain a sanctions regime on an oil-rich country. If you look globally at the oil situation, you want to be sympathetic to a country that imports greater than 90 percent of its oil, if not 100 percent of its oil, like Japan, a friendly country. The global supply is not an issue right now, but at any given time, if the stars are in alignment for it to be a problem, you want to be able to throw a lifeline to a country like Japan.

IW: What about China? How important is China's cooperation?

SF: China's cooperation is extremely important. But we're running into a huge problem with regard to countries like Iran and China. Today, you've got a cash-rich Iran and a cash-rich China. As a cash-rich country, China has developed a degree of influence that it never had before because it now has money to throw around. China is willing to reach out to all kinds of regimes and sign large contracts with them-whether it's Venezuela or Iran. It's important to understand the impact of economic growth on global politics and the ability to maintain a sanctions regime. That ability is greatly weakened with high oil prices for Iran and a booming economy for China. Sanctions are about money, about cash flows, and about what influence the United States can have on controlling those cash flows, when countries like Iran and China are becoming wealthy and are willing to set up financial institutions for the purpose of circumventing sanctions.

For now, fortunately, there are few institutions that are willing to give up doing business with an American bank or with the U.S. government.

IW: Without China, would financial sanctions have an impact?

SF: There's no question that a sanctions regime that has the imprimatur of the U.N. Security Council carries more weight than a U.S.-led, non-U.N. Security Council sanctions regime would. Still, a U.S.-led, non-Security Council sanctions regime would be effective, because of the strength of the economies and the technological industries of those countries in the coalition. In other words, if the United States and the European Union and Japan agree to stop selling certain items to Iran or to deny Iranian banks the ability to process transactions through their banks, that's going to carry a lot of weight. Because for everything I said about the power of the Chinese economy these days, you're not going to get very far if you're solely reliant on it.

IW: What if the United States led the G7, for instance, in blocking U-turns and other transactions with additional Iranian banks? Couldn't Iran just redirect all those transactions to Hong Kong or some other banking center?

SF: Well, it could try. But look at what we did with the Macau Bank-Banco Delta Asia. North Korea was using this Macau-based institution to launder money. The United States has the ability to designate a foreign financial institution to be of "a primary money laundering concern" and to sanction it. We did so with Banco Delta and pretty much put it out of business. And for as long as the U.S. dollar remains the principle currency for international transactions, we will have considerable influence there. That's why North Korea resorts to counterfeiting. It has to manufacture its own U.S. dollars because it can't get them any other way.

These sanctions have more impact in North Korea because the country is desperately poor. Iran, thanks to the price of oil, is swimming in cash. And it has the second largest oil reserves in the world, which will continue to give it a certain degree of influence. There is only so much that the United States can do about that. But we can make it more difficult for Iran to function.

IW: By raising the cost and difficulty to Iran of doing business?

SF: Yes, you can minimize what Iran is able to do, minimize the revenue that goes through Iran, minimize the number of transactions. The odds of having an air-tight regime are pretty slim, but a leaky system is better than no system at all, because it does put some restraints on Iran's freedom of movement.

For instance, look at ILSA. ILSA has been considered largely symbolic, but the symbolism is more significant than a lot of people realize. Billions of dollars of contracts with Iran remain outstanding-contracts that have been signed and are waiting to be implemented. The existence of ILSA and other sanctions, along with the threat of military action against Iran, gave those sanctions a greater importance than they might have had, especially considering that they were never actually imposed.

We know for a fact that Iran's energy sector has suffered considerably because of the existence of ILSA, which has increased the risk of doing business in Iran. In the last year that risk grew, due to the threat of U.N. sanctions and the threat of possible military action. As a result, foreign financial institutions have been backing away from Iran.

IW: At what point do you think countries whose support we need would agree to strong financial sanctions? Is there a threshold in terms of Iran's nuclear progress?

SF: This is where my cynicism is going to be most evident. Because of our energy consumption, as well as that of other countries, Iran will continue to wield influence out of proportion to its national strength. There is only so much we can do about that, particularly with regard to U.N. action. There are five veto-wielding, permanent members of the Security Council. To get all five of them to agree on a sanctions policy, in most instances, would require you to water down the policy so much that it's almost not useful. Certainly, if Iran were to detonate a nuclear weapon it would have a short-term impact. But look at what happened when India and Pakistan detonated a series of nuclear weapons. There was short-term impact, but that impact is now largely gone. There will always be some compelling reason to ease an economic sanctions regime imposed on an oil rich country. Still, a unilateral U.S. sanctions policy can have some effect, as it did with Libya. Of course Libya was an easier case because of Pan Am flight 103 and support in Europe for some measure of sanctions.

IW: In terms of financial sanctions and actions against banks, is the United States charting new territory?

SF: It's all pretty new. The laws and regulations have only recently been fully developed, through Title III of the Patriot Act. This was an effort to strengthen anti-money-laundering and to create anti-terror financing laws. But it's taken about five years to develop the necessary regulations that follow from this law.

So, banking sanctions are relatively new. There isn't a long case history that you can point to and say here's what worked. September 11 and the passage of the Patriot Act were really the starting points. So, most of what we're dealing with in this conversation has taken place within the last few years.

IW: Getting back to the mechanics. What steps would the coalition take to actually impose banking sanctions?

SF: You simply agree that you are going to terminate business with certain Iranian financial institutions. You simply stop doing business with them. You stop having correspondent accounts with them. You stop letting them legitimately trade in your currency, in this case maybe the dollar and the euro. By targeting a financial institution in this way, you're trying to isolate it. Such action is possible, conceptually; it's the politics that are very difficult.

Banking sanctions could have a rapid impact. But you'd have to, first, get them in place, which is easier said than done, and second, make sure it's a hardened, tight regime. Look at what happened with the UBS case a few years ago. UBS Bank of Switzerland, Switzerland's largest bank, used to participate in a program overseen by the Federal Reserve Bank of New York called the "Extended Currency Inventory Program." Roughly half a dozen foreign financial institutions in Europe and Asia maintain warehouses filled with hundreds of millions of brand-new U.S. dollars, still shrink-wrapped. The purpose of this is to ensure that there is a ready supply of U.S. dollars on a global basis, and to circulate new counterfeit-resistant currency. Around 2003, a handful of employees of UBS in Switzerland were providing hundreds of millions of these dollars to U.S. sanctioned countries-mainly Iran, but also the then Yugoslav government of Slobodan Milosevic, Cuba, and Libya. This was basically a massive foreign aid program for the very countries that the United States wished to isolate.

IW: UBS is one of a handful of foreign banks that have curtailed its relations with Iran-perhaps partly because some of them, like UBS, were fined by the United States, but some of them started doing so preemptively. So, if we fail in our diplomacy towards governments, might it be better to approach individual banks and try to get them to sign onto our policy of financially isolating Iran?

SF: The United States is already doing that, mostly through general anti-money laundering, anti-terrorism-financing programs. The Department of the Treasury's Office of Terrorism and Financial Intelligence and the State Department's Economic Bureau go out and work with foreign countries and foreign financial institutions through the FATF, the Financial Action Task Force. We work to establish global standards for banking operations, know your customer policies, and so on. When a customer comes into a bank, you have to verify that customer's identify before you allow them to open an account. If that customer starts making cash transactions that seem a little off, you must file a suspicious activity report. For any transaction above a certain threshold-in this country $10,000-a bank must file what is called a "Currency Transaction Report." Cross-border movements of cash can also be investigated.

IW: But how difficult is it for the government to control the activities of banks and their dealings with other financial institutions?

SF: Most banks fall under federal regulatory schemes of some sort. If a bank wants to benefit from federally insured deposits, it has to accept a certain regulatory regimen that can be economically and bureaucratically burdensome from its perspective. The U.S. government tries not to make is so burdensome as to impede the profitability of the business. It's a matter of striking the right balance: Allowing for a commercial enterprise to prosper without allowing it to sell whatever it wants to whomever it wants. The government wants banks to be profitable-they're a central component of the economy-but it has to impose certain burdens on them that can impede their freedom of action and their freedom of association. A sanctions regime can be particularly onerous on banks, because it affects their corresponding relationship with financial institutions in other countries.

Banks here complain that the requirements under the Bank Secrecy Act are too burdensome. For instance, the obligation to file currency transactions reports, though there is an exemption in current law. Banks say the exemption is too complicated. If we're going through this with our own banks on a regular basis, how much more difficult is it going to be convince France to go along with it?