ECB faces US pressure over Iran

©Bloomberg

The US Congress is preparing new Iran sanctions legislation that would target the European Central Bank’s system for settling cross-border bank payments.

The proposed bill is part of a package of measures designed to pressure the ECB to do more to prevent Iranian companies and banks from using the Target2 payments system to conduct transactions involving euros.

The legislation, which could be introduced next week, is aimed at closing loopholes to earlier financial sanctions which the US Congress has imposed on Iran over the past 18 months to slow its nuclear programme.

Previous sanctions have made it extremely hard for Iran to conduct cross-border oil business in US dollars, but have been less successful at closing off business in other currencies.

Imposing sanctions on Iran has been one of the few subjects that has enjoyed bipartisan support in Congress at a time of intense partisan division in Washington.

However, by focusing on the ECB, Congress could risk undermining the close co-operation with the EU which has been the cornerstone of the recent push to tighten sanctions on Iran. The EU introduced an embargo on Iranian oil imports last year, which has been a central element in the growing international pressure on Iran.

According to congressional aides, the legislation could seek to impose penalties on financial institutions that conduct transactions using Target2 that ultimately benefit Iranian entities.

“Legislation that focuses on the ECB is obviously a big step, but this is a way of getting the ECB to make sure Iran is not using its payment system,” said one congressional aide involved in drafting the new bill.

The ECB said it already complied with EU sanctions against Iran. “The ECB ensures that no illegitimate transactions are cleared in Target2,” the bank said. “But any sanctions are EU sanctions and not an ECB competence.”

Banks participating in Target2 must have at least one branch in the European Economic Area and are thus subject to EU laws, including EU regulations forbidding transactions with a range of Iranian companies, institutions and people.

Mark Dubowitz, executive director of the think-tank Foundation for Defense of Democracies and an expert on Iran sanctions, says that Iranian banks and companies had accumulated large volumes of euros in overseas bank accounts. While some had assumed they were frozen by previous sanctions, he said, they had realised there was a potential way around the restrictions by exchanging the euros for other local currencies where Iran does business – transactions which at some stage would be likely to use the Target2 system.

“Iranian companies have moved to retake control of their euros and convert them into local currencies, which can be used for trade with Asia,” he says. “There is an opportunity to move quickly to deny them access to euro assets.”

The initial 2011 US sanctions legislation aimed at squeezing Iran’s oil trade from the international financial system was sponsored by Republican senator Mark Kirk and Democrat Robert Menendez and passed by 100-0. The new draft legislation is being led in the Senate by Mr Kirk, congressional aides said.

Last year, Congress introduced legislation that threatened sanctions on Swift, the Belgium-based international messaging network between banks which facilitates payments, before Swift said it would exclude Iranian banks from its system.

Some senators are looking at other measures to put more pressure on the ECB, including raising the issue with Jack Lew, the nominee to be Treasury secretary, who is meeting senators this week, and potentially linking it to forthcoming bilateral trade negotiations with the EU.

Some senators have suggested they would link support for the trade talks to a greater commitment from the ECB to police Iranian use of the Target2 system.