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A Sanctions Policy Short on Smarts

by N. KASHANI and M. SADRA

12 Nov 2010 05:387 Comments

Economic pressure campaign on Iran creates unintended victims in the U.S.

Arrest_101108.jpg[ opinion ] The most important question facing foreign policy analysts concerned with U.S.-Iran relations is whether U.S. sanctions are "working." And the way analysts answer that question ultimately turns on their opinion about what the primary U.S. objective should be: to delay Iran's nuclear ambitions, to pummel the Iranian economy, to promote human rights in the country, to spur some internal movement for reform, or address the elephant in the room -- regime change. Yet regardless of its uncertain objective and after several months of empty rhetoric, Obama's new sanctions policy on Iran is biting hard. But it is biting more than the Iranian government, its intended target; it is affecting average Iranians both in Iran and those residing in the United States.

Take the matter of Reza Banki, by all accounts a model U.S. citizen who immigrated to the United States as a teenager. He received two undergraduate degrees from UC Berkeley and a Ph.D. in chemical engineering from Princeton. He has worked for McKinsey, a prestigious consulting company, and was on track to attend a top MBA program in hopes of advancing biotechnology in the United States. Those dreams, however, are deferred -- perhaps indefinitely -- as Banki sits in a federal prison for transferring $6,000 to Iran. Worse yet, the transfer was not even for his own purposes. It was done as a favor to a family friend who needed to send money to relatives.

Remittances are a common occurrence worldwide -- annual U.S. remittances to Mexico, for instance, are over $20 billion, and there is even a substantial flow to Cuba, about $800 million a year. However, because Banki failed to obtain a license from the U.S. Department of Treasury to transfer this small sum, and instead used a money transferring system common in the Iranian American community called havaleh, he was indicted, prosecuted, and ultimately convicted.

Havaleh refers to a centuries-old practice of sending money across great distances. In practice, it is used mainly for family remittances. A havaleh transaction involves a domestic and foreign component. It starts with a sender in the United States who transfers money to a broker -- called a havalehdar -- who will accept dollars in his U.S. bank account. The havalehdar directs matching funds, in rials, to be disbursed to the recipient in Iran. No money crosses borders and the transfers take place largely outside the formal banking system.

In this widely publicized case, U.S. government prosecutors claimed they were indicting Banki to "prevent money from falling into dangerous hands." However, as the judge in the case impressed upon the jury, this case was not about terrorism. Indeed, the facts show that Banki's case was not about keeping illicit money from the hands of rogue terrorists, illegal (or even legal) arms dealers, or Iran's Revolutionary Guards. Rather, the case was fundamentally about the flawed nature of the U.S. sanctions policy and its enforcement.

Family remittances to Iran are not prohibited under U.S. law if they are undertaken through the conventional banking system. However, Banki used a havaleh primarily because sanctions have succeeded in isolating Iran from the international financial system. The problem is this: Because of U.S. pressure, almost no banks are willing to transfer money to, or receive money from, Iranian banks. The consequence is that now it is effectively impossible to transmit family remittances using authorized banking mechanisms because banks simply refuse to handle the transactions. In contrast to what zealous prosecutors initially intimated, Banki was not running a havaleh (and he couldn't have -- he received no fee for the transfer). Instead, the government sought to make an example of a 33-year-old U.S. citizen, hoping that his prosecution would slow such remittances by the Iranian American community. Thus, despite posing no threat to national security and there being no allegation that he was assisting the Iranian government (let alone Iran's nuclear ambitions), Banki was found guilty of violating export laws, sentenced to two-and-a-half years in jail, and ordered to forfeit $3.3 million.

The reality of the matter remains that Banki is one of the growing number of victims of U.S. sanctions policy who have absolutely no relationship with Iran's government. Moreover, he is a direct victim of U.S. foreign policy, insofar as the United States is targeting Iranians here and abroad for transfers that are not inherently illegal, but whose only approved method has been blocked by rhetoric and not law.

Prohibitions on money transfers have long been a component of the U.S. sanctions policy on Iran. Building on the groundwork of his predecessors, in 1995 President Bill Clinton issued an executive order that instituted a trade embargo which prohibited U.S. citizens from supplying goods, services, or technology to Iran or its government. Commercial money transfers were included in the prohibition.

More recently, the U.S. government has blacklisted Iranian government banks and several private banks for their alleged participation in Iran's nuclear program. In its drive to further isolate the Iranian banking sector, Stuart Levey of the U.S. Treasury Department and Secretary of State Hillary Clinton have spent the past few years traveling the globe encouraging international banking executives -- otherwise outside of U.S. jurisdiction -- to stop doing business with Iran. As a result, in September and October 2010, countries which had historically maintained deep financial and trade ties to Iran, such as Malaysia and the United Arab Emirates, began severing relationships with Iranian banks. Because of this and several high-profile prosecutions or settlements with international financial institutions, including Lloyds, Credit Suisse, and Barclays, banks have simply ceased processing money transfers with Iran altogether. Although U.S. sanctions as written appear to allow for transactions with several private Iranian banks, there is a degree of ambiguity in the language, and so international banks refuse to do business even with those private institutions, daunted by the rhetoric from U.S. officials.

Bank managers in Dubai have repeatedly called upon the U.S. Treasury Department to clarify its sanctions laws. However, the ambiguity provides an in terrorem effect that the U.S. government finds a convenient deterrent. Not surprisingly, there has been no clarification. Thus, from the banks' perspective, the indeterminacy and cost of the sanctions compliance risk is too high to bear. As a result, in their effort to stamp out commercial transactions with Iran, the U.S. Treasury Department has also effectively closed off the only legal route for families to transfer money to and from the country, thereby forcing individuals like Banki and countless other Iranians worldwide to rely on informal remittance mechanisms. Such actions unquestionably run afoul of U.S. law, but are family remittances supporting weapons proliferation or the Iranian government? Most certainly not.

Banki's situation is an extreme, but still very real by-product of our misguided sanctions policy -- a policy that increasingly resembles our five-decade-long embargo of Cuba. And he is far from the only unintended victim. Since President Barack Obama signed the new sanctions bill in July, private companies have stopped providing important services to Iranians, including Iranian Americans -- services, in some cases, that have furthered U.S. foreign policy interests. For example:

* Numerous U.S. banks now refuse to open checking and savings accounts for Iranians in the country, be they visa holders or even lawful permanent residents.

* Some employers are requiring background checks and prior approval from the Treasury Department before hiring individuals either born in or who have some nexus with Iran, regardless of citizenship status.

* The Educational Testing Service, the company that provides standardized English and graduate entrance examinations to foreign graduate students, temporarily halted operations in Iran because its private bank refused to process payments from Iranian students.

* YouTube, which played a central part in distributing footage from the post-election protests in 2009, decided to bar Iranians from its documentary experiment Life in a Day because of sanctions concerns.

The goal of sanctions was never, at least explicitly, to target the Iranian people, let alone the Iranian diaspora. The economic sanctions were set up with the understanding that there are approximately one million Iranian Americans residing in the United States, and that regardless of a long-running governmental spat and resultant commercial economic embargoes, the practicalities of life dictate that money will need to be transferred to settle estates or to provide assistance to family members.

Accordingly, our laws allow for remittances involving noncommercial transfers, among family members in the United States and Iran, and undertaken within the banking system. However, this obviously breaks down when there are no banks willing to receive wire transfers from even the nonsanctioned, private Iranian banks. As noted by Richard Newcomb, former director of the Office of Foreign Assets Control (OFAC), the division of the Treasury Department responsible for sanctions implementation, the "'crippling sanctions' that Secretary of State Clinton spoke about recently in referring to what Iran would face were it not to give up its pursuit of weapons of mass destruction was directed at the Government of Iran and its leader, Mahmoud Ahmadinejad, not Reza Banki, the Iranian people or the Iranian expat[riot] community in the U.S."

Indeed, Iranian Americans are exemplary spokespeople for U.S. foreign policy and democratic ideals. The majority are immigrants who arrived in the United States during the past 30 years. They maintain deep ties with family and friends in Iran. Placing unnecessary pressures on Iranian Americans and creating unintended hardships may not only close that vital line of communication, but also create negative impressions regarding U.S. support for democracy in Iran. These negative hardships were acutely borne out by an amicus brief filed on Banki's behalf by the Iranian American Bar Association, which argues that "prosecutions such as Mr. Banki's are a source of alienation and fear among Iranian Americans." According to Newcomb, "It was always understood that there was a dual goal and purpose [to sanctions] -- to bring as much economic pressure as possible to bear on the intended target without causing unintended hardship and suffering on the civilian population, the very people whose support and assistance the U.S. and the international community will need if and when a successor government emerges."

The U.S. government should not stick its head in the sand and pretend that Iranians won't send remittances back to their relatives in Iran, or that parents or relatives won't ever need to send money to their loved ones here. Rather than criminalize remittances undertaken through informal means, as the law currently does, the government can shift its policy back toward a sensible recognition of reality by -- ironically enough -- taking a page from its Cuba policy. While the U.S. approach to Cuba is outdated in many ways, it does recognize the need for a remittance program: That sanctions system expressly includes a provision for the licensing of remittance providers that act as a legal means by which to send money to Cuba. The Treasury Department should either designate specific U.S. banks that are authorized to handle remittances to and from Iran, or alternatively, license specialized remittance providers that would operate under sufficient oversight to allay any concerns of sanctions busting. This pragmatic step would prevent innocent individuals, like Banki and other Iranian Americans, from being ensnared in the enmity between the U.S. and Iranian governments.

As recently as February, several gross incongruities between U.S. sanctions and its democracy promotion rhetoric were brought to the Treasury Department's attention -- most particularly, the prohibition over widely used Internet communications software. The Obama administration did the right thing by quickly moving to license Twitter, Facebook, and other information-sharing software tools for use in Iran.

Likewise, the U.S. government should move swiftly to bridge this gap in its sanctions policy. Without addressing this fundamental flaw, we risk alienating a domestic community that is vital to the success of U.S. policy concerning Iran, as well as the Iranian people generally. Reza Banki should not have been prosecuted by the Department of Justice. His imprisonment is now representative of a sanctions policy that needs to change before it seriously undermines the pursuit of U.S. foreign policy goals.

N. Kashani and M. Sadra are the pseudonyms of U.S.-based attorneys who are specialists in U.S. export laws regarding Iran.

Copyright © 2010 Tehran Bureau

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7 Comments

Yeah, let's keep pretending that Washington's sanctions is just aimed at IRGC. Yeah, let's just keep pretending that it's all a misunderstanding that Iranian people are being hurt by American foreign policy. Let's just keep pretending that. Okay? Washington cares about "Iranian people," it's just IRGC that are the "real," target of these sanctions. Let's just make beleieve.

Dah!!!!! / November 12, 2010 8:34 PM

Great article on the absurdities of sanctions. Sadly, this is only the beginning.

B / November 12, 2010 9:25 PM

Excellent article. Now the question is - how do you get it to someone in the State or Treasury Dept. that could understand the implications of their policy?

irani / November 12, 2010 9:25 PM

These politicians understand the implications of their actions but prefer the keep the hostilities alive to allow for the Hardliners in Iran to stay in power which in turn will help the Military Industrial Complex's need for a modern enemy that would justify thousands of Billions of dollars in arms manufacturing and marketing.

Ali / November 12, 2010 11:54 PM

It is high time for the Iranian-American community to recognize the injustice of unequal treatment accorded it by the US government, and to seek remedial recourse in US courts, and possibly in the United States Supreme Court. This country has laws and they are frequently, though imperfectly exercised. It is time that we as a community also take our heads out of the proverbial sand and recognize that as citizens, we have rights that are often trampled on by our own government.

Bobak / November 14, 2010 1:11 AM

With all due respect - and sympathy - a Berkeley and Princeton educated Doctor of Philosophy should have used his superior common sense to see the warning signs. Instead he chose to step into unknown and dangerous territory for a meagre $6,000 favour.

Pak / November 15, 2010 4:23 AM

I feel for the Iranian people who are trying to legally transfer personal remittances between Iran and the US, but most of the story regarding Mr. Banki was not told in this article.

Prosecutors said Mr. Banki operated the money-transfer business for the last four years, receiving about $4.7 million from companies and individuals in Slovenia, Russia, Sweden, the Philippines and the United States. The government said he received the funds with the understanding that an equivalent amount of Iranian currency would be sent to Iranian residents.

Meanwhile, Mr. Banki used some of the funds to make joint investments in the United States with an Iran-based co-conspirator, prosecutors said. The government said Mr. Banki bought a $2.4 million Manhattan condominium and made payments on his credit card accounts, including about $55,000 for a single month in the summer of 2007.

Given Mr. Banki's education and purported knowledge base, it should be obvious that this will not be tolerated given the sanctions in Iran and the Money Service Business licensing requirements in the US. Most of this could have been averted if Mr. Banki applied for a MSB license through FinCEN and transmitted the funds legally as opposed through Havaleh.

Looking forward to more guidance from OFAC for personal remittances, but meanwhile there are methods for transfers through the UAE that are being utilized today.

Preenan / November 19, 2010 1:16 AM