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Treasury Prepares to Take Dollarized Transactions with Iran Offshore

Treasury Prepares to Take Dollarized Transactions with Iran Offshore


31st March 2016 - FDD Policy Brief

In a potential move that is raising concern among many in Congress, the Treasury Department is considering lifting a longstanding ban on Iranian access to dollar transactions, according to news reports. This move – designed to incentivize business between Iran and non-U.S. financial institutions concerned about remaining U.S. sanctions – appears to be a response to Iran’s frustrations over the lack of international investment after it signed the Joint Comprehensive Plan of Action.

Among Treasury’s options is issuing a general license permitting offshore dollar clearing for transactions involving Iran, a variation on what was permitted prior to November 2008 when Iran was allowed to conduct “U-turn” transactions – transactions that start and end in foreign banks but briefly transit the U.S. financial system to be converted into dollars. Given that Treasury’s guidance about sanctions relief under the JCPOA specifically says that U-turn transactions remain prohibited – and administration officials testified before Congress that Iran would not have direct access to the U.S. financial system – the administration is looking offshore.

Indeed, Treasury now appears poised to permit U.S. banks to provide dollars for an offshore clearing facility overseen by a foreign government or foreign bank. When transmitting payments between Iranian companies and non-U.S. companies, the foreign financial institution would use this offshore clearing facility to convert the transaction into dollars. According to unnamed administration officials, the license would permit such transactions as long as: 1) no Iranian banks are involved in the transactions; 2) no Iranian rials enter into the transaction at the dollar clearing facility; and 3) the payment does not start or end with U.S. dollars.

For example, a Swiss automobile manufacturer selling cars to Iran would have a European bank receive payment from an Iranian company in rials. The bank would then exchange those rials with euros and then swap the euros for dollars at the offshore clearing facility. The bank would subsequently exchange those dollars for Swiss francs and transmit those francs to the Swiss automobile manufacturer. This conversion would allow the European bank to conduct at least part of the exchange in dollars, which is preferable because the dollar is a stable currency with less fluctuations and less risk.

The general license would likely shield U.S. banks from liability for providing dollars to the offshore clearing facility, as those U.S. financial institutions could otherwise be liable under U.S. law for indirectly providing services to Iranian persons. Further, the general license would likely permit foreign financial institutions to conduct transactions in dollars received via the facility so long as those transactions are consistent with the relief provided under the JCPOA. Foreign financial institutions would, of course, still be on the hook to avoid transactions with entities under U.S. sanctions or are owned or controlled by a sanctioned entity.

The pervasive influence of sanctioned parties – including the Islamic Revolutionary Guard Corps – throughout Iran’s economy means that this due diligence will be critical to ensure that foreign companies and foreign banks are not complicit in Iran’s terror finance or other illicit financial activities in which Iranian entities regularly engage. So, while foreign financial institutions may soon be allowed to conduct dollarized transactions for clients doing business in Iran, significant compliance risks will remain.

In the meantime, while the administration will argue it is keeping its promise to prevent Iran from accessing the U.S. financial system, this dollar clearing mechanism will give the Islamic republic many of the benefits such access would provide.

Eric B. Lorber is a senior advisor at the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance, and a senior associate at the Financial Integrity Network. Find him on Twitter: @ELforeignpolicy

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congress, iran, policy-brief, sanctions-relief