The New "Normal": Why the World's Banks Need to Rethink Iran

The New "Normal": Why the World's Banks Need to Rethink Iran

On Monday April 27th, legal proceedings began at Manchester Civil Justice Centre in the United Kingdom. Blackstone Solicitors, a small legal practice led by Emma Nawaz was challenging the banking behemoth Royal Bank of Scotland (RBS) in court. On behalf of her clients, Nawaz is claiming that RBS discriminated against people of Iranian heritage, whose bank accounts were closed in 2013.  The legal action was first filed in the same year, buthas taken nearly two years go to court. The case is expected to last 5 days.

The legal action is the latest in string of legal actions by Iranian individuals and companies, battling against the interference of sanctions. Normal citizens have been pit against a major financial firm, in a David versus Goliath scenario.  

As reported in the international press in 2013, and most recently in the Financial Tribune, the claimants allege that RBS breached Britain's much-vaunted Equality Act of 2010 in the course of closing accounts belonging to entire families. One of the claimants was a nine-year-old girl.

Emma Nawaz, the solicitor dealing with the case said, “The decision by RBS to close the bank accounts of customers connected to Iran is shocking and goes far beyond any reasonable interpretation of the sanctions rules."

She added that, “These are ordinary people who contribute to society and have become victims of racism by a high street bank simply for wanting to have a current account”.

In response, RBS' spokesperson said that they were required to comply with their legal and regulatory obligations and were unable to comment particular cases of individuals."

One might wonder why a bank such as RBS would even bother closing the accounts of these Iranians, most of whom were UK citizens with no commercial ties to Iran. What could the aforementioned “regulatory obligations” entail?

It is worth noting that in 2013, the same year when the Nawaz’ clients had there accounts closed, RBS was fined USD $100 million by American authorities for breaching sanctions on Iran, Burma, and Cuba among other countries.

Similar fines have been levied on banks such as HSBC ($1.9 billion in 2012) and Lloyds ($350 million in 2009). Both HSBC and Lloyds have similarly closed down the accounts of individuals with Iranian heritage.

And it is not just in the UK that Iranians have had bank accounts closed. Similar actions have been taken in Canada—where Iranian university student Arash Khodadadi had his account closed by CIBC—and also in the United Arab Emirates, where blanket policies affected the many Iranians who maintain accounts in Dubai.

Looking to these facts, a pattern emerges. Banks have been regularly curtailing the activities of everyday Iranians, even in the absence of definable regulatory issues. It has simply been easier for banks to close accounts than to prove to authorities that they are not in breach of sanctions.

While account closure policies have harmed Iranians outside of Iran, the risk aversion of banks has also caused harm to Iranians within Iran. Notably, banks remain reluctant to handle funds even for projects that are permissible under specific or general licenses. For example, the volume of humanitarian trade between the West and Iran is lower than would be expected because of a lack of “comfort” among banks about trade with Iran, even trade that is clearly legal.  

The implication is troubling. We would hope that the discrimination against Iranian clients should be coming to an end considering that the recent JCPOA agreement between Iran and the P5+1 world powers indicates an improving political climate. However the legacy of risk aversion may linger on for years to come, with a punitive impact on everyday Iranians.

The question is how banks will weigh the rewards and risks of engaging Iran as it approaches a “post-sanctions” era.  They will surely remain vigilant when it comes to rule breakers as sanctions are partially lifted. Yet at the same time, financial firms will surely be setting up small exploratory operations, “Iran Desks” to explore the possibilities of entering the Iranian market once again. 

If the nuclear deal does go-ahead by the June deadline, then Iran could expect an initial interest by a number of global banks and financial institutions. Firstly, given the risk aversion outlined above, it is highly unlikely that banks such as HSBC, RBS, Credit Suisse or any other of the major European or American players would enter the Iranian banking sector immediately after any agreement. At best, these banks may engage in humanitarian trade finance, but only if there is a high degree of confidence that they will not be stung by further fines.

To understand what might unfold in Iran, it is worth considering what has transpired in other “frontier markets.” Myanmar, with about one-fifth the gross domestic product of Iran, is the most recent example of what a post-sanctions environment is like.

Myanmar began its détente with the US in earnest in 2011. The easing of financial sanctions followed in 2013. This set the stage for foreign banks to increase their in-country activities. In October of 2014, three Japanese banks— Bank of Tokyo-Mitsubishi UFJ (BTMU), Sumitomo Mitsui Banking Corp and Mizuho Bank— were the first top-tier financial institutions to earn operating licenses for Myanmar. A further 6 banks from the Asia Pacific region won licenses, but none as large as the Japanese brand-name firms.

In April of this year, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation two banks that have been fined over sanctions breaches before, opened the first foreign bank branches in Myanmar.

These two banks are also notable in the case of Iran, which does significant oil trade with Japan and has continued to do so under the 2013 JPOA framework. This trade amounted to 172,154 barrels-per-day in 2014, with imports rising by 25% in the early months of 2015. Iran accepts payment for this oil in its accounts at Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation while also maintaining a sovereign account at Bank of Japan.

These two Japanese banks therefore represent financial institutions that have been stung by fines for sanctions non-compliance, and yet have been bold enough to enter into a post-sanctions market within the first 1-2 years of its opening. Importantly, these are also banks with significant exposure to the Iranian economy. American and European banks have not exhibited the same gusto for post-sanctions markets, nor do they have such a fundamental connection to Iran trade. Therefore, we might expect Japanese banks to lead the charge.

What is encouraging is that the Japanese financial sector is highly developed and well regulated, with standards in line with global best practices. If Japanese banks lead the way, they could offer the proof-of-concept for similarly operating American and European banks to follow into Iran.

Furthermore, Iran is unlike Myanmar in one key way. It has its own domestic financial industry, with significant regulations and a wide range of institutions.

The country currently boasts thousands of branches, ATM and EPOS systems based on an clearance and automated payment system called Shetab, and consumer tools like online banking. The public and private banking industry is currently going through a shakeup courtesy of the Central Bank of Iran in order to prepare for possible foreign competition.

There is no easy way to predict how an “end of sanctions” scenario will play out, but considering the extent of Iran’s banking industry development and the attractiveness of the market, the potential rewards are clear. But as the RBS episode shows, banks will need to fundamentally “rethink” Iran itself.  Hopefully somewhere in that process, everyday Iranians will start to find the world’s banks welcoming them once again. 



Photo Credit: Vahid Salemi, AP

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