Treasury Department Pressures Iran

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From 'Miami Herald': The Bush administration Thursday ratcheted up the financial pressure on Iran by revoking an exemption that gave Iranian banks access to the U.S. financial system, but it stopped short of blacklisting the Islamic Republic's central bank. The announcement coincided with the fall in oil prices, which has hurt Iran's economy and put political pressure on President Mahmoud Ahmadinejad, who faces elections next June. Ahmadinejad on Thursday sent congratulations to President-elect Barack Obama, the first time an Iranian leader has done so since Iran's 1979 Islamic Revolution.

In an effort to derail Iran's suspected nuclear weapons program, the administration already had invoked U.S. law and United Nations resolutions to blacklist five large Iranian state-owned banks. The action, however, still allowed Iran access to the U.S. banking system through third-country transactions. This exception was called a "U-turn" provision because it allowed Iran to do business in dollars in the U.S. banking system through third countries that send the money back to Tehran, as if making a U-turn across traffic.

On Thursday, Stuart Levey, the undersecretary of the Treasury for terrorism and financial intelligence, said in effect that the Treasury would erect a "No U-turn" sign. "Iran was using the existence of the U-turn exemption to hoodwink foreign banks into handling transactions for them," Levey told reporters in a news conference. "They would say, 'Please handle this for us; don't mention there is any Iranian involvement,' and they were able to argue to financial institutions abroad that it was okay to do this because of the U-turn exemption, and therefore what the U.S. financial institution on the other end of the transaction didn't know wouldn't hurt anybody." Now, he said, foreign financial institutions will know that their U.S. subsidiaries cannot conduct any business in the United States on behalf of Iran.

Earlier this year, when oil prices surged past $140 a barrel, scrapping the exemption would have been risky it could have sent prices even higher. Now with a global financial crisis at hand and oil trading at just over $60 a barrel, Iran has less room to retaliate. Levey insisted that oil prices had nothing do with the action and acknowledged that the amount of money involved in U-turn transactions was "relatively small." He wouldn't offer even a ballpark figure, nor would he stipulate what U.S.-based foreign bank subsidiaries might be affected by Thursday's action.

U.S. banks have long avoided doing business with Iran because of the risk it poses to their reputation, so the action likely is intended to isolate Iran from European and Asian banks, said a U.S. banker familiar with financial sanctions. The banker spoke on the condition of anonymity because he wasn't authorized to discuss bank policies publicly. There was no immediate reaction from European governments, who were informed only Thursday morning that the new sanctions would be announced. U.S. officials claim that the tightening of sanctions is squeezing Iran's economy and making life uncomfortable for Ahmadinejad. They don't rule out further steps - including targeting Iran's central bank - during the 74 days that President Bush remains in office.

Thursday's actions prevent U-turn transactions not just by the blacklisted banks but also by any Iranian bank, including the central bank, which the Treasury thinks has been helping Iranian banks mask their international transactions. But taking that next step and trying to shut Iran's central bank out of the global financial system appears unlikely. "The central bank gets into a lot more complicated issues," said Matthew Levitt, a former deputy assistant secretary for intelligence at Treasury. "One of the things I think the Treasury Department does well is to weigh very carefully the potential anticipated and unanticipated consequences of their actions."

With the international financial system in crisis, it's not a good time to try to blacklist central banks, said Levitt, now a senior fellow at the Washington Institute for Near East Policy, a policy research organization. President-elect Barack Obama pledged during the campaign to continue putting economic pressure on Iran, even as he's promised to engage in direct diplomacy with Iranian leaders. Obama spokeswoman Wendy Morigi said in an e-mail Thursday that there'd be no comment on the Treasury move. Levey confirmed that the Obama team hadn't been consulted.