Why banks will continue to snub Iran post sanction-easing
The planned removal of some sanctions on Iran creates opportunities for transactional business, but reputational risks and compliance challenges mean the country will remain a no-go for international lenders.
The move by Western powers to ease sanctions on Iran – and expected to formally come into effect this weekend – has partially opened up the country to international finance, as have US moves to normalize relations with Cuba.
However, most lenders are unlikely to capitalize on pent-up demand for banking products amid an expectation of an uptick in trade – which beyond oil include plastics, extracted ores, and fruits and nuts – and domestic consumption in both countries.
In the case of Iran, European countries are paving the way to form economic partnerships.
EKF, the Danish export credit agency (ECA), pledged earlier this month to increase its work with Iran once the sanctions are lifted. The agency signed a cooperation agreement with the Iranian Ministry of Finance that will see it offer guarantees on loans and credit insurance once operations commence in the country.
Italy’s Sace has also signed an agreement, while the UK’s ECA UK Export Finance stated last year it was assessing the country’s creditworthiness.
International banks, however, are unlikely to offer their services. With restrictions still in place, they are reluctant to end up with a multi-million dollar fine. They are also reluctant to speak about their future plans.
Robert McKay, Accuity
Robert McKay, executive vice-president, product, at Accuity, explains that banks are cautious due to the level of complexity that is involved. The removal of Iranian sanctions relates to companies specifically in the industries of petrochemical exports, auto industry, gold and precious metals, and banking services. Many other companies are still under sanction. McKay explains that there is considerable room for confusion, especially between jurisdictions, adding: “The lifting of sanctions are inconsistently applied across the US, the UK and the EU. For example, 86% of the Iranian entities on the UK HM Treasury sanctions list are to be removed. In stark contrast, only 68% of the Iranian entities on the US OFAC [Office of Foreign Assets Control] sanctions list are removed.”
Banks will regularly use third-party compliance software to keep on the right side of sanctions. However, McKay cautions that banks should not be completely reliant on such provisions by third-parties given the liability for non-compliance falls on the lenders.
He also says that third-party providers are able to update legal and market changes easily, while the decision to facilitate a transaction ultimately falls to the bank itself.
“Making appropriate decisions upon any screened entity, however, can result in operational complexities," says McKay. "A reviewer of a potential screening match must be able to determine if the stopped transaction, for example, adheres to one of the remaining sanctions that had not be lifted or if there is some false-positive in the matching process.”
The issue of false-positives also creates the need for direct checking from the bank. One banker tells the story of how "Lebanon", a relatively common town name in the US, appeared in the address of one company, resulting in the latter being flagged repeatedly on the sanction screening list. The bank involved had to manually override the block on the transaction.
There is considerably greater impact on a bank when individuals are under sanction. Banks do not want to unnecessarily impede the banking transactions of non-sanctioned individuals, which can be especially difficult with common names.
To ensure they have ruled against the correct person, McKay says the compliance team needs to rigorously check the information collated through the know-your-customer process.
When banks are able to provide their services is also dependent on when the infrastructure becomes available. The return of Swift to Iran will mark a watershed moment for the payments community, and the messaging provider has announced it is prepared to operate again in the country.
Certain criteria, however, do need to be met first, including administrative checks, and technical and connectivity measures, before organizations can join the network. Some institutions will continue to be excluded due to remaining sanctions.
Enrico Camerinelli, senior analyst at Aite Group, says it will be interesting to see to what extent the Iranian banks choose to adopt Swift’s innovations, or if they will stick to the standard messaging systems.
Camerinelli adds: “I suspect that Iranian banks have had to cope with multiple problems during the embargo period, so they have been forced to run the business with basic home-made functionalities, while keeping a close eye on the latest technology developments.
“Not to say that they are ahead of other banks, but I expect they will certainly want now to catch up and ensure they have the latest and best of what banking technology offers.”
The Iranian banks will also need to readjust to working in a banking environment with far stricter international regulations than what they had previously been under. This could leave them waiting longer than expected to freely operating again, even if they are no longer impacted by sanctions.
Neal Dawson, head of anti-money laundering and sanctions at KPMG, says: "Over the period when Iranian banks were excluded from Swift and the correspondent banking network there was a marked increase in due diligence standards. Banks will need to do this to work out what they are prepared to do, and who they will work with. It will take time to get this in place."
When banks are able to provide their services is also dependent on when the infrastructure becomes available.
Clear understanding between the banks and their corporate customers looking to conduct business in newly accessible areas also needs to be reached. Corporates need to have a full understanding of the licensing issues and exporting controls that might still hinder their growth ambitions.
“The biggest catalyst, perhaps, are the banks’ corporate clients whose business operations and trading will take them into these previously sanctioned areas,” says McKay.
The move might primarily come from the markets which can easily conduct transactions in currencies other than US dollars. Says Dawson: "There is a potential for growth outside of the traditional US dollar markets which are still under sanctions. Sterling and euro banks will be looking to move back into the country over time, but it will not happen anytime soon."