March 16 (Bloomberg) -- One of Iran’s most important links to the world financial system will be severed as part of a campaign to pressure the country's leaders to abandon any ambitions to develop nuclear weapons.
The Society for Worldwide Interbank Financial Telecommunication, known as Swift, the dominant messaging service for international financial transactions, said yesterday it will halt service for about 24 Iranian lenders sanctioned by the European Union, including the central bank.
The cutoff, effective from 4 p.m. London time (noon New York time) on March 17, is a response to EU regulations issued yesterday that ban financial-messaging services for entities subject to an EU asset freeze.
“This EU decision forces Swift to take action,” Lázaro Campos, chief executive of La Hulpe, Belgium-based Swift, a cooperative of 10,000 member banks and organizations in 210 countries, said in a statement. “Disconnecting banks is an extraordinary and unprecedented step for Swift. It is a direct result of international and multilateral action to intensify financial sanctions against Iran.”
David Cohen, U.S. undersecretary of Treasury for terrorism and financial intelligence, said in a statement that Swift’s decision “reflects the growing international consensus that substantially increased pressure is needed to convince the Iranian regime to address the international community’s concerns about its illicit nuclear activities.”
Analysts said Swift’s move will complicate Iran’s ability to make and receive payments, including for its sales of crude oil, which account for more than half of the Iranian government’s revenues, according to the U.S. Energy Information Administration and the International Monetary Fund.
“Booting Iranian banks out of Swift will impact oil payments at the margin, but the big impact will be on what Iran buys rather than what it sells,” Trevor Houser, an energy analyst and partner at Rhodium Group, a New York-based economic research firm, said in an interview yesterday.
Houser said Iran probably will “find workarounds for large, strategically important and government-facilitated oil payments. But small Iranian businesses that rely on interbank electronic transfers to pay for everything from food to electronics imports are going to have a hard time buying from abroad.”
Iran is the second-largest producer in the Organization of Petroleum Exporting Countries.
Oil fell for the third time in four days on reports that President Barack Obama discussed a release from the U.S. Strategic Petroleum Reserve with U.K. Prime Minister David Cameron. Crude oil for April delivery declined 32 cents to $105.11 a barrel on the New York Mercantile Exchange. It was the lowest settlement since March 6. Futures are up 6.4 percent this year.
In January, U.S. lawmakers proposed legislation targeting Swift and its board, whose chairman is Yawar Shah of Citigroup Inc. and deputy chairman is Stephan Zimmermann of UBS AG, if it continued to provide services to sanctioned Iranian banks.
Senator Roger Wicker, a Mississippi Republican and co-sponsor of the Senate legislation, said in an interview yesterday he is encouraged by the actions taken by the EU and Swift yesterday.
“Without access to Swift, the ability of these banks to move money through electronic transfers will be significantly curtailed, moving us all one step closer to blocking terror-financing and proliferation-supporting institutions from the global financial system,” he said. “It is my hope that continued pressure from not only the U.S., but the entire international community will further hinder the Iranian regime’s efforts to advance its nuclear program.”
Mark Dubowitz, a sanctions specialist in Washington who advised U.S. lawmakers on the Swift legislation, said yesterday’s decision, if strictly implemented, could limit the ability of Iran’s banks “to move billions of dollars in financial transactions, and put immense pressure on Iran’s leaders to reconsider their policies.”
In its 39 years, Swift has never expelled an institution. Swift transmits an average of 17 million financial messages a day, facilitating trillions of dollars in cross-border payments, officials said. According to its annual report, 19 Iranian member banks and 25 financial institutions sent and received 2 million messages through Swift in 2010.
Swift’s unprecedented action, Dubowitz said in an interview, underscores “the growing political isolation of Iran as it becomes the first country to be expelled from what is the financial equivalent of the United Nations.”
Swift authorities said last month they were prepared to comply with any new EU regulations that compelled them to halt services for EU-sanctioned Iranian entities. Swift’s general counsel Blanche Petre made a trip to Washington to discuss the issue with aides to U.S. lawmakers.
Representative Brad Sherman, a California Democrat who co-sponsored House legislation proposing sanctions on Swift, said yesterday’s action is “a positive step, but we need to cut off all Iranian banks from the international system.”
“Sooner or later, the EU will feel compelled by Iranian intransigence to apply this and similar measures to all of Iran’s banks, not just the central bank and the designated banks,” Sherman said in an interview.
Legislation that Sherman introduced last week would punish those who facilitate transactions and financial messaging services for any Iranian bank, not just those sanctioned for illicit activities by the U.S. or the EU. Sherman said he expects Senator Mark Kirk, an Illinois Republican, to propose a similar measure in the Senate.
Swift said yesterday that it complies with all relevant sanctions and regulations of the jurisdictions in which it operates, which includes the U.S.
Yesterday’s action is one of dozens of new measures adopted since November by the U.S. and the EU in an effort to squeeze Iran’s economy and compel its leaders to abandon any illicit aspects of the country’s nuclear program.
U.S., European and Israeli officials have accused Iran of seeking the capability to build a nuclear weapon. United Nations atomic inspectors, in a report released Nov. 8, raised questions about possible military dimensions of Iran’s program. Iran says its program is solely for civilian energy and medical research.
Catherine Ashton, the EU’s foreign policy chief, said last week that world powers are ready to resume negotiations with Iran to address the international community’s concerns about the Persian Gulf country’s nuclear program.
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