Showdown: US Treasury v. Iran's Central Bank

♠ Posted by Emmanuel in at 2/26/2008 12:06:00 AM
Here's more conflict escalation, American style. The US Treasury Department is in the process of gathering dirt on Iran's central bank, accusing it of facilitating the transactions of Iranian banks that have been sanctioned against by the US of A. Isolating Iran's central bank would be a major move by the US to choke off one of Iran's key remaining financial links to the rest of the world, though the US needs to gain the support of its allies. The US hopes to do so by linking Iranian financial activity to terrorist financing. This showdown will be an interesting one to watch. Unlike the US, most European countries are not as harsh in their treatment of the Islamic republic. From the Wall Street Journal:

The Treasury Department is gathering evidence it says shows that the central bank of Iran is helping other Iranian institutions elude U.S. economic sanctions, in what could be a prelude to penalties against the central bank.

The investigation, described by financial-intelligence officials in three countries, signals a potential escalation in the financial battle Washington is waging against Tehran. Beginning in 2006, the U.S. imposed sanctions against several of Iran's major private-sector banks, blacklisting them for allegedly supporting terrorism and Iran's nuclear-weapons program.

Now, financial-intelligence officials say the Iranian central bank, also known as Bank Markazi, is handling U.S.-dollar transactions for the blacklisted private banks, and is also helping them by backing their existing dollar-denominated letters of credit.

The impact of any American move to sanction the central bank would depend in large measure on the extent to which U.S. allies joined in the effort. To enlist such support, the U.S. would have to make a strong public case for action...

The central bank is the keystone of Iran's financial system and its principal remaining lifeline to the international banking system. U.S. sanctions against it could have a severe impact on Iranian trade if other nations in Europe and Asia choose to go along with them. That would intensify the economic pressures already facing Iran...

U.S. officials have begun trying to lay the groundwork for a move against the central bank in public statements and meetings with key allies. In a Feb. 8 speech, U.S. Deputy Treasury Secretary Robert Kimmitt asserted that Iranian banks are attempting to remove their names from transaction records when conducting business internationally.

"This practice, which makes it difficult, if not impossible, to determine the true parties in the transaction, is even used by Bank Markazi, Iran's central bank," Mr. Kimmitt alleged...

The U.S. has rarely sanctioned a foreign central bank, though the central bank of Iraq was included in sanctions it imposed on that country in the 1990s as it ratcheted up pressure on then Iraqi leader Saddam Hussein.

Unlike the independent Federal Reserve in the U.S., Iran's central bank is an arm of the Iranian regime and subject to political influence. Its Money and Credit Council includes the country's minister of intelligence.

Also unlike the Fed and many other central banks, Bank Markazi handles letters of credit and foreign-exchange transactions for private and state-owned companies. Because it isn't included in current American and U.N. sanctions, and has accounts with many of the major European banks, it is able to tap those banks' services on behalf of the banks the U.S. has punished with sanctions...

Under American laws, any institution that aids an entity covered by American financial sanctions is itself liable to penalties. In practice, however, officials acknowledge that getting international support for action may require them to make a more powerful case that the Iranian central bank actually aids sinister activity, such as funding terrorism.

Officials are aiming to lay that foundation as well. Between 2001 and 2006, Mr. Kimmitt alleged in his speech, Bank Saderat, an Iranian bank, "moved $50 million from the central bank of Iran through its subsidiary in London to its branch in Beirut to the benefit of Hezbollah front organizations in Lebanon that support acts of violence." Those remarks reiterated an allegation the U.S. Treasury first leveled in 2006.