No, there haven’t been any nuclear missiles launched, at least not yet. No mobilization of U.S. forces on Iran’s border. But on March 20, the United States launched the equivalent of an invasion of Iran, in the world of global finance.
On that date, the Financial Crimes Enforcement Network (FinCEN), issued a “financial advisory” dealing with Iran. FinCEN, a little-known bureau within the US Treasury Department warned the world’s banks that if they do business with Iran, they do so at their financial peril.
But the FinCEN advisory was no less an act of war, albeit undeclared, than an outright invasion of Iranian territory. In its advisory, FinCEN states that the entire Iranian banking system—including the Iranian central bank—represents an imminent risk to the international financial system.
FinCEN bases this assessment in part on a creative interpretation of United Nations Security Council Resolution (UNSC) 1803 (passed on March 3, 2008). In case you missed it, CR 1803 calls on member states “to exercise vigilance over the activities of financial institutions in their territories with all banks domiciled in Iran, and their branches and subsidiaries abroad.”
But the coup-de-gras for Iran came courtesy of another obscure agency, this one housed in Paris within the spacious bowels of the Organization for Economic Cooperation and Development (OECD). This agency’s name is the Financial Action Task Force (FATF). On February 28, it issued a statement reiterating its concern about continuing deficiencies in Iran’s anti-money laundering and terrorist financing laws.
CR 1803 and the FATF’s mild rebuke are a far cry from stating the Iranian banking system is a dire threat to the world economy, as FinCEN now states. But that threat assessment is now official U.S. policy.
And if a bank with substantial connections to the United States carries out the transactions, they risk retaliation under the draconian sanctions authorized in Section 311 of the USA PATRIOT Act. Section 311 allows the United States to freeze the U.S. assets of any foreign bank deemed to have correspondent banking or other substantial relationships with specific banks FinCEN identifies.
To predict what might happen next, we need look no further than the experience of North Korea, which FinCEN listed as an imminent threat to the global financial system in September 2005. In North Korea’s case, FinCEN published a “finding” alleging that its government used Banco Delta Asia (BDA), a small bank in Macau, to launder profits from drug trafficking and counterfeiting. This put the world on notice that FinCEN could begin freezing the U.S. “correspondent accounts” of any bank dealing with BDA. This draconian sanction is authorized in Section 311 of the USA PATRIOT Act and essentially prevents blacklisted banks from dealing in U.S. dollars.
BDA customers reacted predictably: they withdrew assets in droves. This forced BDA to freeze North Korean funds on deposit. Subsequently, banks worldwide began terminating business relationships with North Korean clients.
From the Bush administration’s viewpoint, the strategy worked. North Korea became increasingly isolated from the global financial system. That gave the United States enough leverage to force North Korea to shut down its nuclear industry, which had produced at least one crude atomic bomb In 2007, North Korea signed two agreements promising to dismantle its nuclear weapons program. It is now doing so, under U.S. supervision.
It appears that the Bush administration, acting through FinCEN, will follow a similar strategy with Iran. If FinCEN issues a “finding” like the one it published on North Korea, the U.S. Treasury can begin grabbing the U.S. assets of Iranian banks, or of any bank doing business with Iran. All Treasury needs to do so is to prevail in a secret civil forfeiture hearing in which the targeted bank has no right to participate.
The two banks named in the U.N. order—Bank Melli and Bank Saderat—Iran’s two largest banks, will probably be the first ones blacklisted. Iran’s central bank, Bank Markazi, is also a likely target. Whatever “special measures” the Bush administration decides to apply will be posted on FinCEN’s Web site.
The Bush administration’s intentions are clear. It intends to shut down Iran’s international banking links until the country ends its own nuclear program, which is clearly more ambitious than the one now being dismantled in North Korea.
To make the sanctions even more effective, the administration is trying to convince Germany, Japan, and China—three of Iran’s key trading partners—to enforce them as well. It’s counting on banks in those countries, and others to be named later, to essentially cut off all financial relations with Iran.
If it works, count on seeing this strategy applied against other countries with which the United States has diplomatic disputes. Indeed, it’s a key part of presidential candidate John McCain’s proposed international relations policy, as described in a recent issue of the influential journal Foreign Affairs.
What could go wrong with America’s effort to isolate Iran from the global finance system? Lots. Soaring oil prices and a further slump in the U.S. dollar are the likely results of this policy.
Iran’s Revolutionary Guards have made detailed plans to close the strategically vital Strait of Hormuz if Iran is attacked militarily. Through this strait between the Gulf of Oman and the Persian Gulf flows about 20% of global oil production; around 16 million barrels every day.
America’s attack on Iran’s financial system is no less real, and just as devastating, as a military attack. If the financial sanctions I described in the first two parts of this article begin to have a serious effect on Iran’s economy, could Iran close the Strait of Hormuz? It almost certainly could, although it remains to be seen if it will.
If the strait is closed, for whatever reason, oil prices will soar. Some experts predict oil could reach $200/barrel.
Since oil is priced in U.S. dollars, those higher prices will be felt most in the United States. That would be a catastrophe for the already reeling U.S. economy. But the pain would be felt worldwide, leading to political pressure on the United States to reverse its sanctions.
Even if Iran doesn’t to the Strait of Hormuz, severing its international banking relationships will disrupt transport and payment for the 2.5 million barrels it exports daily. That’s about 3% of global oil production. That will put further upward pressure on oil prices.
America’s nuclear strike on Iran’s financial system also poses a risk to the U.S. dollar. Since oil is priced in U.S. dollars, oil prices and the dollar have a nearly perfect negative correlation: as oil prices rise, the dollar usually falls in value. If oil prices go to $200/barrel, the dollar will almost certainly fall beyond its all-time lows of a few weeks ago.
Another threat to the dollar is that the global financial system is beginning to insulate itself against further declines in its value. Many countries in Asia and the Mideast are selling their reserves of dollars and replacing them with foreign currencies and gold. There are serious discussions of pricing oil in euros, or even gold.
When the United States applies financial sanctions that make it more difficult to deal in dollars, it only exacerbates this trend. Despite the apparent cooperation of Europe, Japan, and China in enforcing financial sanctions against Iran, this unity may not last long, particularly if oil prices soar toward $200/barrel.
If the United States begins confiscating the U.S. correspondent accounts not only of Iranian banks, but of foreign banks that deal with Iran, some banks may consider disconnecting from the U.S. banking system altogether. That won’t be easy, since the U.S. dollar still serves as the world’s “reserve currency.” But it may be possible using clearing systems in other currencies or even with an electronic version of the Malaysian gold dinar. Former Malaysian Prime Minister Tun Dr Mahathir Mohamad has even proposed for Islamic countries to use the gold dinar as an alternative to the U.S. dollar in global trade and for reserves in central banks.
The U.S. dollar has rebounded from its all-time lows of a few weeks ago. But it’s still on a precipice. Blowback from America’s declaration of financial war on Iran is only one more act that could launch it over the cliff.
Copyright © 2008 by Mark Nestmann
Update: Since I publish this post, the U.S. war on Iran has escalated steadily. For a summary of current sanctions against Iran, click here.
(An earlier version of this post was published by The Sovereign Society. It was inspired by an article in the Asia Times.)
