Economy, Business And Markets

Crunch Time for Iranian Banks

Finance Desk
Crunch Time for Iranian Banks
Crunch Time for Iranian Banks

American comedian Bob Hope once said “A bank is a place that will lend you money if you can prove that you don’t need it.” The maxim might have then been a tad cynical, but after the 2008 financial crisis exposed the irresponsibility and greed of bankers, anger toward lending institutions became the new norm.

But after 2008 the public and regulators alike saw the need for sweeping reforms to prevent future disasters. When the dust settled, some bankers faced harsh cash penalties and some found themselves behind prison bars. Amid all this, one thing was certain: the epic disaster had triggered the dawn of a new era for the banking sector.

Iranian banks were mostly untouched by the crisis that shook the pillars of the global economy — due largely to their isolation from global business, thanks to the crippling nuclear-related sanctions.

Years of isolation from global finance—including expulsion from SIWFT global interbank network in 2012—has made Iranian banks more eager than ever to go back to business as usual once the sanctions are removed. The landmark agreement that was signed between Iran and major world powers in July is expected to take effect in early 2016, leaving Iranian banks with a few months to demonstrate that they can deliver when it comes to international banking standards.

To spur lenders into action, the World Business Organization of Iran Chamber of Commerce organized a one-day conference last week to discuss ways that can help Iranian banks to rise up to the occasion. The event which was attended by representatives of nearly all Iranian banks as well as experts from the Central Bank of Iran. Keynote speakers were Hossein Hamedani and Paul Garbutt, both financial experts and partners at the UK-based Grant Thornton UK LLP.

The Financial Tribune was given exclusive access to the closed-door gathering.

  Bite of Sanctions

The meeting opened with an appraisal of the sanctions that have dogged the banking industry for more than a decade. Mohammad Reza Meskarian, CEO of the UK-based Persia International Bank broached the topic by giving a firsthand account of his bank’s ordeal during the extended restrictions.

He talked about the heavy fines that British and European lenders were subject to for breaching U-turn transactions requirements with Iranian banks.

 Under the sanctions regime and up until 2008, banks in the US in some circumstances were allowed the so-called U-turns with Iranian financial institutions. U-turn transactions are money moved for Iranian clients among non-Iranian foreign banks such as in Britain and the Middle East and cleared through the US, but which neither started nor ended in the United States.

But after 2008, these U-turn transactions were banned by US regulators, on grounds that they have been abused. “European banks have paid a total of $ 15 billion in settlement agreement with American regulators for violating the sanctions regime against Iran and in some cases—like the Standard Chartered—they have had to pay extra fines,” said Meskarian.    

Standard Chartered is facing further heavy fines and possible criminal prosecution over alleged breaches of US sanctions against Iran by America’s Department of Justice (DoJ) over allegations it violated the terms of a 2012 settlement. Three years ago it paid $667million (£439m) in penalties to US watchdogs after admitting to deliberately disguising transactions that could have broken US sanctions against Iran and other states. Under a deferred prosecution agreement (DPA) signed at the time, the bank said it had ceased trading with Iranian clients in 2007.

For this very reason, Meskarian indicated, no banks dare to restart transactions with Iran unless a green light is shown by the US. “Even a yellow light would do the trick,” he told the conferees in a sort of humorical sense.

 To Hell and Back

Hossein Hamedani urged banks to upgrade their standards by embracing new banking rules. Nowhere would that be more important, he said, than the area of anti-money laundering rules. Drawing lessons from the 2008 financial crisis, where British banks were forced by regulators to pay hundreds of millions of pounds in fines, Hamedani traced their downfall to “irresponsibility” and “risk-taking.”  

“But finally they had to face the music … by having a journey to hell and back, “ he said, comparing the banks’ situation to a tide when it recedes one can see more clearly than ever what has been left behind. However, the tide, in Hamedani ‘s metaphor stands for money.

From interest rate rigging to foreign exchange rate rigging, banks’ unscrupulousness, prompted central banks to tighten their oversight on lenders.    

 Once Bitten, Twice Shy

Given the prohibitive fines that banks faced in the past, they are now very cautious about flouting rules, including their transactions with Iran. One of the first initiatives that Iranian banks are expected to launch after sanctions relief is to set up correspondent banks in western nations -- banks that conduct business transactions, accept deposits and gather documents on behalf of other financial institutions.

Since correspondent banks would be responsible for every action of the original bank, trust and transparency would be of fundamental importance in such partnerships.  

But when it comes to international ratings of transparency, Iran as a country does not enjoy repute, which may make foreign banks think twice before expanding partnership with their Iranian counterparts.    

“Although western banks are eager to invest in Iran and its lucrative market, they are at the same time under pressure from their governments to stick with the rules,” Hamedani noted.

The second issue has to do with “anti money-laundering” laws which have undergone sweeping changes in recent years in Europe and America. Iranian banks need to pull themselves together in this area as well since they have fallen behind the verifiable anti money-laundering laws in recent years.

The third issue which post-sanctions trade with Iran would entail is the vagueness of US laws regarding partnership with Iranian banks. Since some US sanctions unrelated to the nuclear program would stay, the concern of banks is how far they can go in their transactions with Iranian banks without violating some long-standing bans.

“Based on terms of the nuclear deal (Joint Comprehensive Plan of Action), American banks cannot yet interact with Iran in the US currency. In addition, US companies cannot trade with Iran except in aviation and auto industry where these companies can transact in euro,” said Hamedani.

Paul Garbutt said during his comments that the ambiguity of US laws vis-a-vis Iran was rather intentional so that trade with Iran would not become all that easy.

 The Road Ahead  

Despite many odds being stacked against Iranian banks, plenty of hope remains for them. But first and foremost, they will have to embrace some tough reforms and possibly spend big money to reemerge as modern, efficient banks.

The Central Bank of Iran and the Economy Ministry has made banking reforms a top priority and the Iranian Parliament Majlis is expected to pass laws to expedite the process in the near future.  

Iran has close cooperation with the IMF whose latest report released last week had many bright spots for the Iranian economy. But Iran has also to do its part and improve legislation, especially those dealing with money laundering.

According to Hamedani, Iranians based in Europe and America are also doing their best to introduce the positive side(s) of doing business with Iran. He urged banks to establish a task force to prepare a checklist of what measures they should take in order to brace themselves for the removal of sanctions which is expected by the coming spring.

“Iranian banks are good at financing trade and forex transactions but they need to raise their game in this area, too,” Hamedani recommended.