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Cablegate: Substantive Revision: Increasing Financial

VZCZCXYZ0007
OO RUEHWEB

DE RUEHC #5551 3311939
ZNR UUUUU ZZH
O 261931Z NOV 08
FM SECSTATE WASHDC
TO RUEHAD/AMEMBASSY ABU DHABI IMMEDIATE 0000
RUEHAK/AMEMBASSY ANKARA IMMEDIATE 0000
RUEHGB/AMEMBASSY BAGHDAD IMMEDIATE 0000
RUEHSW/AMEMBASSY BERN IMMEDIATE 0000
RUEHEG/AMEMBASSY CAIRO IMMEDIATE 0000
RUEHJA/AMEMBASSY JAKARTA IMMEDIATE 0000
RUEHKL/AMEMBASSY KUALA LUMPUR IMMEDIATE 0000
RUEHMS/AMEMBASSY MUSCAT IMMEDIATE 0000
RUEHNE/AMEMBASSY NEW DELHI IMMEDIATE 0000
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 0000
INFO RUEHRL/AMEMBASSY BERLIN IMMEDIATE 0000
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0000
RUEHFR/AMEMBASSY PARIS IMMEDIATE 0000
RUEHRO/AMEMBASSY ROME IMMEDIATE 0000
RUEHTV/AMEMBASSY TEL AVIV IMMEDIATE 0000

UNCLAS STATE 125551

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN KNNP MNUC IR GM
SUBJECT: SUBSTANTIVE REVISION: INCREASING FINANCIAL
PRESSURE ON IRAN

REF: A. A) BUCK-SAINT-ANDRE EMAIL
B. 11/21/08

1. (U) This is an action request. Please see paragraphs
three and four.

-------
SUMMARY
-------

2. (SBU) The United Kingdom, France, Germany, Italy, and
the U.S. (E4 1) have agreed to pursue additional national
measures to increase the pressure on Iran to end its
proliferation-sensitive nuclear activities and ensure
effective implementation of UNSC and EU sanctions. After
meeting on October 9, the EU4 1 identified Iran's deceptive
practices as a threat to the international financial sector
and a conduit for Iran's proliferation activities. The E4 1
agreed to a joint demarche as a way to inform governments
about the risks that Iran poses to the financial industries
in their jurisdictions. Posts are requested to coordinate
the delivery of the attached nonpaper to host governments
with the local representatives of the United Kingdom, France,
Germany, and Italy.


-------------------------
OBJECTIVES/ACTION REQUEST
-------------------------

3. (SBU) Washington requests Posts deliver the talking
points in paragraph 5 to appropriate host government
officials in the foreign and finance ministries, as well as
Central Banks, to host governments. To maximize the impact
of this demarche, delivery should be coordinated with the
local representatives of the United Kingdom, France, Germany,
and Italy. For Bern: Washington defers to Post with respect
to the logistics of this demarche and coordination with
French, German, Italian, and UK Posts in Bern; Washington,
however, concurs with Post suggestion in REF A that one of
the European likeminded would be best for scheduling the
meeting. For GCC posts: other GCC countries in addition to
Oman and the UAE will be approached by our EU4 partners.

4. (SBU) Posts are requested to deliver the non-paper in
paragraph 6 as a U.S. paper on Iran's deceptive financial
practices at the same time as the delivery of the talking
points in paragraph 4. Post should pursue the following
objectives:

-- Remind host governments that full implementation of UN
Security Council Resolutions (UNSCRs) concerning Iran by all
members of the international community is critical to
addressing the proliferation threat posed by Iran and that
many European countries and firms have determined that the
risk of doing business with Iran is too great and, as a
result, have reduced their business with Iran.

-- Note that Iran's use of front companies and other
deceptive practices in commercial and financial activities
makes it difficult to know who is involved in a transaction,
or the final end user or ultimate use of any goods.

-- Note that within the scope of UNSCR 1747, States are
required to take measures to prevent the provision to Iran of
any financial assistance, or services related to the transfer
of prohibited items.

-- Urge host governments to ensure that their financial
institutions do not provide services to any entities that are
engaged in proliferation-related activities, specifically
individuals and entities designated under UNSC resolutions
1737, 1747 or 1803, as well as those designated by the USG
under Executive Orders 13224 and 13382.

-- Call upon host governments to implement UNSCR 1803's call
for vigilance over the activities of their financial
institutions with Iranian banks, including by adopting
concrete financial vigilance measures, such as those adopted
by the European Union (Common position 2008/652/CFSP of 7
August 2008, Regulation 2008/1110/EC of 10 November 2008),
and/or those recommended by the Financial Action Task Force's
(FATF) in its October guidance on UNSCR 1803.

-- Call upon host governments to prevent the opening of new
branches and subsidiaries of Iranian banks.

-- Encourage host governments to warn their financial
institutions about the risks of doing business with Iran,
such as the Iranian regime using its state-owned firms to
support proliferation-related activities. The Iranian
state-owned banks also use deceptive financial practices to
support this illicit activity.

--------------
TALKING POINTS
--------------

5. (SBU) BEGIN TALKING POINTS

-- Full implementation of UN Security Council Resolutions
(UNSCRs) concerning Iran by all members of the international
community is critical to addressing the threat posed by Iran.
UNSCR 1737 (2006) requires States to take measures to
prevent the provision to Iran of any financial assistance or
services (including brokering) related to the transfer,
manufacture, or use of prohibited items. UNSCR 1747 (2007)
calls upon States and international financial institutions
not to enter into new commitments for providing financial
assistance to the Government of Iran, except for humanitarian
and developmental purposes. UNSCR 1803 (2008) calls on States
to exercise vigilance over the activities of financial
institutions in their territories with all banks domiciled in
Iran and in providing financial support for trade with Iran,
including insurance, in order to avoid contributing to Iran's
nuclear and missile programs. Finally, UNSCRs 1737, 1747 and
1803 require States to freeze the assets of and ensure that
no economic resources are provided by their nationals or from
their territories to individuals or entities designated
pursuant to these resolutions for their involvement in Iran's
nuclear or ballistic missile programs.

-- We have been discussing with the international banking
sector the importance of implementation of the Iran-related
UNSCRs, as this sector is vulnerable to the risk of
unwittingly facilitating Iranian proliferation activities. We
draw your attention to the reputational risk involved as well
as the existing penalties in case of illicit activities.

-- Financial vigilance measures are extremely important to
defend against such risks. Key examples of measures targeted
specifically against proliferation finance and Iran,
including the EU Common position 2008/652/CFSP of 7 August
2008, Regulation 2008/1110/EC of 10 November 2008, and FATF
guidance on implementation of financial measures contained in
1803.

-- We are concerned that the financial sector is being
exploited and used to facilitate activities prohibited by the
UN, or that Iranian entities designated by the UN are using
deceptive practices to evade sanctions or mask other
activities of concern.

-- To avoid providing financial services prohibited by the UN
Security Council, we ask that you encourage your financial
institutions to review among other things, services they may
provide to Iranian companies and projects in Iran, as well as
correspondent banking relationships with Iranian banks and
financial institutions controlled by Iranian entities (cf. in
the EU: Common position 2008/652/CFSP of 7 August 2008,
Regulation 2008/1110/EC of 10 November 2008).

END TALKING POINTS

---------
NON-PAPER
---------

6. (SBU) BEGIN NON-PAPER

Iran has a history of using deceptive techniques to evade
sanctions, including by obscuring the involvement of
designated Iranian entities in transactions or accounts.

-- Using non-UNSC sanctioned entities: Entities not
currently subject to UN sanctions have acted on behalf of
UNSC-designated entities.

-- Leading up to the adoption of UN Security Council
Resolution 1747 (March 2007), which requires States to freeze
assets of Iran's Bank Sepah, the Central Bank of Iran abused
its relationships with reputable financial institutions to
shield Bank Sepah's assets from the impact of impending
sanctions.

-- Other Iranian banks also helped Bank Sepah evade sanctions
subsequent to its Security Council designation. Following
Bank Sepah's designation, Bank Melli took precautions not to
identify Bank Sepah in transactions.

-- We have information indicating that Bank Mellat has
facilitated the movement of millions of dollars for Iran's
nuclear program since at least 2003.

-- Use of front companies: Entities associated with Iran's
nuclear and missile programs utilize an extensive network of
front companies to conceal the true ownership of funds and
end-use of commercial goods. The UN Security Council
designated several entities in UNSCRs 1737, 1747, and 1803
explicitly because of their role as front companies in
support of Iran's nuclear or missile programs.

-- Through its front companies, the U.S.-designated Islamic
Revolutionary Guard Corps (IRGC) is involved in a diverse
array of activities, including petroleum production and major
construction projects across Iran.

-- These front companies enable the regime to obtain dual-use
technology and materials from suppliers that would not
typically ship to designated entities.

-- Mizan Machine Manufacturing Group is one of several front
companies utilized by Iran's Aerospace Industries
Organization (AIO) in commercial transactions. In
particular, Mizan Machine Manufacturing Group has been used
by AIO to acquire sensitive material for Iran's ballistic
missile program. It has also acted on behalf of the Shahid
Hemmat Industrial Group (SHIG), a subordinate entity of the
AIO, which is listed in UNSCR 1737 for its direct role in
advancing Iran's ballistic missile program.

Role of Iranian Banks

-- Transactions for proliferation entities: Iranian banks
process transactions for U.S. - and UNSC-designated entities.


-- We have information indicating that entities owned or
controlled by the IRGC or IRGC Qods Force use Bank Melli for
a variety of financial services. We have information
indicating that from 2002-2006, Bank Melli was used to send
at least $100 million to the Qods Force. The IRGC was
designated by the U.S. in October 2007 as an entity of
proliferation concern, and numerous IRGC entities and
individuals have been designated in Iran-related UNSCRs for
their involvement in Iran's nuclear or ballistic missile
programs. Bank Melli has been designated by the US and EU,
and was identified as being of potential concern in UNSCR
1803.

-- We have information indicating that Bank Mellat services
and maintains Atomic Energy Organization of Iran (AEOI)
accounts, mainly through AEOI's financial conduit Novin
Energy Company. Novin Energy Company was designated in UNSCR
1747.

-- Removing identifying information: Iranian state-owned
banks have requested that references to Iran be removed from
international transactions.

-- The Central Bank of Iran and Iranian commercial banks have
requested that their names be removed from global
transactions in order to make it more difficult for
intermediary financial institutions to determine the true
parties in the transactions.

-- When processing the transactions for the IRGC and IRGC
Qods Force, Bank Melli requested that its name be removed
from financial transactions.

Expanding Iran's global banking presence and financial
networks

As major banks worldwide withdraw or reduce their banking
ties to Iran, Tehran is looking to expand existing
relationships, establish new ones, and develop new techniques
to disguise its involvement in transactions.

-- New banking networks: Iran has recently attempted to
establish new branches of Iranian banks, joint banking
ventures, and private Iranian banks. Iran is attempting to
replace lost banking operations overseas and may judge that
U.S. and foreign actors are less likely to scrutinize banks
not directly owned by the Iranian government in order to
circumvent U.S., EU and UN sanctions. As a result, companies
that do business with Iranian banks may unwittingly
facilitate proliferation-related transactions.

-- In March 2008, the Export Development Bank of Iran
established a branch in Venezuela.

-- In June 2008, Iran and Venezuela agreed to establish a
joint bank.

-- The Germany-based Iranian-owned bank Europaisch Iranische
Handelsbank (EIHB) opened branches in Tehran and Kish Island
in June 2008.

-- In May 2008, Iran and Belarus signed a memorandum to raise
economic contacts, which included increasing banking ties.

New techniques: Designated entities are developing other
techniques to adapt their business practices to hide their
involvement in transactions.

-- The Islamic Republic of Iran Shipping Lines (IRISL) has
employed the use of generic terms to describe shipments so as
not to attract the attention of shipping authorities and
created and made use of cover entities to conduct official,
IRISL business.

-- For example, in 2007, IRISL transported a shipment of a
precursor chemical potentially destined for use in Iran's
missile program. The end user of the chemical was Parchin
Chemical Industries, an entity designated in UNSCR 1747 as a
subordinate of Iran's Defense Industries Organization (DIO).

In summary, Iran's failure to suspend its proliferation
sensitive nuclear activities in violation of UN Security
Council Resolution 1737, coupled with Iran's use of deceptive
financial practices to evade sanctions, puts responsible
financial institutions at risk of unwittingly facilitating
proliferation-related financial transactions or transactions
that are in violation of multilateral sanctions.

Recommended actions:

In order to protect their financial institutions, countries
should take steps to implement the Financial Action Task
Force's guidance for the implementation of UNSCR 1803's call
on States to exercise vigilance over activities of financial
institutions in their territories with banks domiciled in
Iran, and their branches and subsidiaries abroad.

As highlighted in this guidance, steps to increase vigilance
over these activities, should include requirements for
financial institutions to gather additional information when
conducting transactions involving Iranian banks and to
carefully review and re-assess their correspondent
relationships with Iranian financial institutions.

END NON-PAPER
------------------
REPORTING DEADLINE
------------------

7. (U) Posts should report results within seven business
days of receipt of this cable. Please slug replies for ISN,
T, TREASURY, and NEA. Please include SIPDIS in all replies.

----------------
POINT OF CONTACT
----------------

8. (U) Washington points of contact for follow-up
information are Anthony Ruggiero, ISN/CPI, (202) 647-5181,
ruggieroaj@state.sgov.gov and Kevin McGeehan, ISN/CPI, (202)
647-5408, McGeehanKJ@state.sgov.gov.

9. (U) Department thanks Post for its assistance.
RICE

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