WASHINGTON – The United States has no jurisdiction over foreign banks engaging with Iran in US dollars, but will continue to bar the country from directly accessing the American financial system, a senior Treasury Department official said on Wednesday.
Testifying on Capitol Hill, Under Secretary Adam Szubin said that foreign banks and persons are free to exchange with Iran in whatever currencies they possess. The US, he said, has never had the ability to prevent such transactions, so long as these organizations are not US-based.
Iran seeks access to its offshore accounts that have been frozen under nuclear sanctions, and have now been released under the Joint Comprehensive Plan of Action nuclear agreement reached last year.
But Iran has come across difficulty accessing this money – much less new streams of revenue – since much of it is held in banks from Oman to South Korea that typically transact in US dollars.
In many cases, Iran’s access to its own frozen funds requires brief dollarization, raising concern by some in Washington that Iran is indirectly accessing the valuable currency. But addressing the House Foreign Affairs Committee, Szubin insisted that access to the dollar is limited to individual conversions.
“Our primary sanctions in the US control what US actors can do and what they cannot do. It governs the conduct of US actors anywhere they reside in the world,” Szubin said. “Our sanctions, on the other hand, do not control the actions of non-US persons, whether or not the currency they’re using is the dollar, the euro, the pound or the yen.
“So to be very specific, every foreign bank in the world has US dollars in their possession. It is, thankfully, the international currency of choice for international trade,” he continued. “Our sanctions don’t extend to those dollar bills, and foreign actors aren’t under our jurisdiction if they choose to give those to any actor, including an Iranian actor.”
Szubin was answering a question by the committee’s chairman, Congressman Ed Royce of California, who asked whether the process allowed Iran access to “large-scale dollar-denominated transactions” or offshore dollar- clearing facilities.
Matthew Levitt, director of the Stein Program on Counterterrorism and Intelligence at the Washington Institute for Near East Policy, said the answer to Royce’s question is no.
“There’s nothing that’s going to facilitate future transactions,” Levitt said. “As Iran tries to get access to its own currency, there’s no further mechanism that allows Iran international access to the dollar.”
Levitt noted that so-called “U-turn transactions”– a loophole which once allowed Iranian banks to quickly access the US financial system through international exchanges – remain prohibited.
“Under the JCPOA, like it or not, Iran was promised certain money – and much of it was access to its own money. It’s having a hard time accessing those funds because it’s having a hard time converting that money to the rial,” Levitt continued. “And in order for Iran to get those funds, those countries are going to convert that money through dollars into the rial.”
Beyond simply accessing its own funds, Iranian media reported in recent weeks that the government of President Hassan Rouhani is lobbying for greater access to dollarized international transactions.
Treasury Secretary Jack Lew has repeatedly said the US will not allow any of Iran’s banking to traverse the US financial system.
But “it misses the point to say that greenbacks are floating in the global financial system forever,” says Mark Dubowitz, executive director of the Foundation for Defense of Democracies and an expert on sanctions policy.
“They have been put in the system by US banks and, at some point, they will circulate through the US, whether it is in a few days, months, or even a year. So they will implicate US jurisdiction.”
Dubowitz argues that legislation could restrict Iran’s access to the dollar further than it is already restricted – and that the Obama administration, protective of the nuclear deal, is simply reluctant to do so.
“Iran did not negotiate these dollarized concessions as part of the JCPOA, so any legislation to block these transactions would be outside of the ambit of the nuclear agreement,” Dubowitz said.
“Dollarized legislation would be considered to be non-nuclear sanctions since they target Iran’s illicit activities relating to missiles, terrorism, regional destabilization and the money laundering and illicit finance underpinning these activities.”
The Financial Action Task Force on Money Laundering, also known as FATF, still designates Iran as a “high risk” location for investors – a label frustrating Tehran, which had hoped for a surge in business activity after the nuclear deal was clinched.
While direct investment has been slower than anticipated, Stephen Mull, Washington’s envoy to the Iran deal implementation, told the hearing Wednesday he has received a “flood of requests” from businesses asking how to proceed with new investments.
US officials, including Secretary of State John Kerry, have directly engaged with European business leaders to encourage them that Iran is open for business – to a point. The Obama administration says it will continue to enforce existing sanctions law on Iran related to its support for terrorism, human rights abuses and its ballistic missile program, all of which was unaffected by the letter of the nuclear accord.
The State Department recently sent a letter to all US governors outlining how they must comply with the nuclear deal, and suggesting new legislation pass on the local level to reflect the new relationship. US officials declined to say whether the federal government is willing to take legal action against states for failing to comply with the agreement.