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Cablegate: Iraq,S Licensing of Bank Melli Branches

VZCZCXRO4538
OO RUEHBC RUEHDE RUEHDIR RUEHKUK RUEHTRO
DE RUEHC #5821/01 3141440
ZNR UUUUU ZZH
O 101434Z NOV 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD IMMEDIATE 9513
INFO IRAN COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 03 STATE 115821

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: KNNP MNUC IR GM XF ZP ZR XG XT IZ
SUBJECT: IRAQ,S LICENSING OF BANK MELLI BRANCHES

REF: A. A. STATE 75291
B. B. BAGHDAD 2075
C. C. STATE 43381
D. D. 08 BAGHDAD 02156
E. E. 08 STATE 063693

1. (U) This is an action request. Please see paragraph
three.

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

2. (SBU) Recent press reports have noted that Iran is
actively working to expand its banking relationships with its
Middle Eastern neighbors. Iraq has been one focus for
Iranian banks, and the Government of Iraq has granted a
license for Bank Melli to open branches in Basra, Karbala,
and Irbil. The U.S. has demarched Iraq several times
regarding Iran's banking presence in Iraq (REFTEL), but the
Government of Iraq continues to allow the banks to expand
their presence. At a time when responsible states and banks
are decreasing their economic dealings with Iran, allowing
Iranian banks subject to international sanctions to expand
their operations in Iraq is not a prudent step. Their
presence may represent a threat to Iraq's security, given
Iran's history of using its banks to move funds
internationally to support terrorist organizations and WMD
proliferation. Moreover, allowing sanctioned Iranian banks
to expand their presence in Iraq represents a reputational
risk to Iraq's banking system at the same time
that the Government of Iraq is attempting to attract foreign
investment to help rebuild the country. The U.S. urges Iraq
to reconsider the licenses for any US-designated banks,
especially Bank Melli's Baghdad branch and its planned
branches in Basra, Karbala and Irbil, or at a minimum, to
subject Bank Melli operations in Iraq to appropriate
vigilance.

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

3. (SBU) Washington requests Post deliver the talking points
and non-paper in paragraph 4 to appropriate host government
officials in the Prime Minister's office. Post should pursue
the following objectives:

-- Remind the GOI that the continued operation of Bank Melli
and other Iranian banks in Iraq could threaten the integrity
of the Iraqi banking system, could provide Iran a conduit to
circumvent UN sanctions, and could cause Iraq to violate UN
sanctions itself.

-- Remind the GOI that the U.S. and the E.U. have imposed
sanctions on Bank Melli, including freezing Bank Melli
assets, and that many countries and banks continue to reduce
their business with Bank Melli and all Iranian banks given
the risk of their involvement in illicit conduct.

-- Highlight to the GOI that if it allows Bank Melli to
expand its operations in its jurisdiction, those branches
would be subject to designation and asset freeze by the U.S.
as well.

-- Reinforce the Financial Action Task Force's October 2009
warning that Iran's lack of engagement and failure to address
its lack of anti-money laundering /combating the financing of
terrorism (AML/CFT) controls represents a serious threat to
the integrity of the international financial system. The
FATF's October 2009 statement is its seventh one on Iran.

-- Remind the GOI that Iran's Islamic Revolutionary Guards
Corps (IRGC) and IRGC-Qods Force, who channel funds to
militant groups that target and kill Coalition and Iraqi
forces and innocent Iraqi civilians, have used Bank Melli and
other Iranian banks to move funds internationally. Bank
Melli used deceptive banking practices to obscure its
involvement from the international banking system by
requesting that its name be removed from financial
transactions when handling financial transactions on behalf
of the IRGC.

-- Educate the GOI on the reputational risk that the presence
of Bank Melli in Iraq poses for U.S., European and Asian
banks considering doing business in Iraq.


STATE 00115821 002 OF 003


-- Remind the GOI that allowing Bank Melli and other Iranian
banks to operate in Iraq undermines its efforts to attract
foreign capital to contribute to the rebuilding and
development of Iraq.

-- Remind the GOI that UNSCR 1803 calls on all states to
exercise vigilance over the activities of financial
institutions in their territories with all banks domiciled in
Iran, including, in particular, Bank Melli, and that it is in
Iraq's own interest to do so strongly and not minimally.

-- Emphasize that Iranian state-owned banks have a history of
using deceptive financial practices to support illicit
activity.

-- Offer U.S. advice and assistance in implementing
supervision and controls.

-----------------------
BACKGROUND AND NONPAPER
-----------------------

4. BEGIN NON-PAPER

-- (U) Recent press reports have noted that Iran is
actively working to expand its banking relationships with
neighboring states, as many international banks have decided
to end their financial connections to Iran due to the risk of
financing proliferation-related activities. Iraq has been
one focus for expanding Iranian bank branches. Bank Melli
has had a branch in Baghdad since 2007, and the Government of
Iraq has granted a license for Bank Melli to open additional
branches in Basra, Karbala, and Irbil. Despite several
demarches warning of the risks of expanded financial
relationships with Iran in the past 18 months (REFTEL), your
government granted the license and Bank Melli is taking steps
toward opening the new branches. The licensing and continued
operation of Bank Melli branches in Iraq threatens the
integrity of the Iraqi banking system, and could provide Iran
a conduit to circumvent UN sanctions.

-- (U) The United States and the European Union have
imposed sanctions on Bank Melli, to include a freeze of Bank
Melli's assets. Many financial institutions around the world
have reduced their business with Bank Melli and all other
Iranian banks given the risk of these banks participating in
proliferation-related transactions. If Iran uses Iraqi banks
as alternative conduits for transactions related to funding
terrorism or nuclear proliferation, this would damage the
international reputation of Iraq's banks and their ability to
expand their access to the international financial system.


-- (U) The UN Security Council unanimously adopted UNSCRs
1737 and 1747, which require UN Member States to apply
targeted sanctions to entities and individuals designated in
the resolutions for their involvement with Iran's
proliferation-sensitive nuclear activities or ballistic
missile program. Member States are required to prevent the
provision of financial assets or economic resources to
designated individuals/entities, and to freeze their assets
as well as those of entities "owned or controlled" by them or
persons/entities acting on their behalf (operative paragraph
12 of UNSCR 1737). Consistent with these obligations, UN
Member States should ensure that financial services provided
to Iranian banks are not used by designated
entities/individuals to circumvent the restrictions
unanimously adopted by the UNSC in UNSCRs 1737 and 1747.

-- (U) On October 11, 2009, the Financial Action Task Force
(FATF) issued another statement warning of the risk of doing
business with Iranian banks. The statement cautioned that
Iran's lack of engagement and failure to address its lack of
anti-money laundering /combating the financing of terrorism
(AML/CFT) controls represents a serious threat to the
integrity of the international financial system. FATF urged
all jurisdictions to advise their financial institutions to
give special attention to business relationships and
transactions with Iran, including Iranian companies and
financial institutions. FATF also called on members to take
into account ML/FT risks when considering requests by Iranian
financial institutions to open branches and subsidiaries in
their jurisdiction. If Iran does not take concrete steps to
address FATF's concerns, it will consider calling on its
members to strengthen countermeasures in February 2010.

-- (U) Bank Melli and other Iranian banks represent a
potential threat to the security of Iraq, as well as to the
international financial system. The IRGC and IRGC-Qods
Force, which have provided lethal support to militant groups
in Iraq, have sometimes used Bank Melli and other Iranian

STATE 00115821 003 OF 003


banks to deceptively move funds internationally. Bank Melli
and other Iranian banks might be used as a conduit for
funding militant activities that undermine Iraq's sovereignty
and stability.

-- (U) Moreover, the presence of Bank Melli and other
Iranian banks in Iraq will pose a significant reputational
risk to the Iraqi financial sector at a time when the GOI is
courting U.S., European and Asian banks to do business in
Iraq. The recent U.S.-Iraq Business and Investment
Conference that the Prime Minister attended highlighted the
significant contribution that foreign private investment can
have on Iraq's reconstruction and economic development.
However, the presence of Bank Melli and other Iranian banks
creates significant risks for U.S. and other international
banks considering entering into correspondent relationships
with Iraqi banks or opening branches in Iraq. Banks may be
subject to severe monetary penalties and risk damage to their
reputations as a result of transactions involving Bank Melli
or other Iranian banks.

-- As an example of these risks, in January 2009, the U.S.
Department of Justice and the Manhattan District Attorney's
Office imposed a $350 million penalty on Lloyds TSB Bank for
processing transactions involving Bank Melli and other
sanctioned Iranian banks. This action followed cases such as
an $80 million penalty on ABN AMRO Bank N.V. by U.S. federal
and state regulatory authorities, in which the violations
included transactions by its Dubai branch involving Bank
Melli. If the government of Iraq does not address the
concerns of international banks about the risks created by
Iranian banks and the ability of Iraq to police its own
financial system, then it will undermine its efforts to
attract foreign capital to contribute to the rebuilding and
development of Iraq.

-- (U) UNSCR 1803 calls on member states to exercise
vigilance over the activities of their financial institutions
with banks domiciled in Iran, in particular with Bank Melli
and Bank Saderat, to avoid transactions contributing to
nuclear proliferation. Beyond the requirements of UNSCR
1803, Iraq has its own interest in exercising vigilance over
Bank Melli and other Iranian banks. If the government of
Iraq continues to allow Bank Melli to operate in Iraq, then
at a minimum, it should focus appropriate supervisory
attention and controls on Bank Melli's operations. The
Government of Iraq should keep in mind that Iranian
state-owned banks have a history of using deceptive financial
practices to support illicit activity, and that the
operations of multiple branches in Irbil, Karbala and Basra
will be more difficult to subject to scrutiny.

-- (U) The United States urges your government and
institutions to reconsider the decision to grant Bank Melli
additional licenses to operate in Iraq and to exercise
increased vigilance regarding all activity between Iraqi and
Iranian financial institutions. The United States is willing
to provide advice and assistance in your government's efforts
to implement increased vigilance.

------------------
REPORTING DEADLINE
------------------

5. (U) Post 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
----------------

6. (U) Washington point of contact for follow-up information
is Kevin McGeehan, ISN/CPI, (202) 647-5408,
McGeehanKJ@state.sgov.gov.

7. (U) Department thanks Post for its assistance.
CLINTON

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