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Cotton Questions Witnesses About the Risk of Doing Business in Iran and Iran's Sanctions Relief Windfall

May 24, 2016

Contact: Caroline Rabbitt (202) 224-2353

In case you missed it- Today, during a Senate Banking Committee hearing Senator Tom Cotton (R-Arkansas) questioned the Honorable Juan C. Zarate, Chairman of the Financial Integrity Network and Mr. Mark Dubowitz, Executive Director of the Foundation for Defense of Democracies, about the amount of sanctions relief Iran will receive under the JCPOA and the risk for private entities should they conduct business in Iran. A full transcript of their exchange can be found below. Additionally, click here to watch a video of their exchange. 

Q&A with the Honorable Juan C. Zarate, Chairman, Financial Integrity Network

Q: Did you read Mr. Levey's Wall Street Journal op-ed a couple of weeks ago, in the aftermath of John Kerry traveling around Europe and acting as the Iranian Chamber of Commerce President?

A: I did read the op-ed, sir

Q: He said in that op-ed "Washington is pushing non-U.S. banks to do what it is still illegal for American banks to do." Do you agree with that statement?

A: Based on press reports, and what I've read, yes.

Q: Could you elaborate on what Mr. Levey might have meant? What is Washington pushing non-US banks to do that U.S. banks cannot do?

A: I think the concern was-based on the meetings the Secretary of State was having, in addition to some of the roadshows that had been deployed on behalf of the US government-there have been messages sent to European Banks that there are no longer major restrictions on doing business in Iran and that they can manage the risks of doing business with, or in, Iran.

Q: A nearby article the same day suggested that Secretary Kerry was not successful in persuading those European banks to do such business. And Mr. Levey concluded his op-ed by saying "our decisions will be driven by the financial crime risks in the underlying conduct for these regions, HSBC has no intention of doing any new business involving Iran. Governments can lift sanctions but the private sector is still responsible for managing its own risk and no doubt will be held accountable if it falls short." Do you agree that private actors face genuine risk of being held accountable for doing what the current administration is encouraging them to do?

A: Absolutely Senator. As part of my private practice I work with banks like HSBC and others dealing with the regulatory and real risks in the sanctions and financial crime environment. They worry every day that not only are they going to be second guessed, but that they will be fined billions of dollars and that their access to US markets will be put at risk if they do not manage their risk. There is a sense in the private sector that there are mixed messages coming from the U.S: strict adherence to U.S. norms, values, and laws and then a push to deal with what is an inherently risky jurisdiction in Iran, at a time when those expectations are higher than ever before. 2016 presents heightened risk for banks to do business in a financially risky environments, not less risk.

Q: You say mixed messages... so not just risks that a future administration or a future congress may view the matter differently, but actually different messages from different parts of the United States government, at this very moment.

A: Absolutely, and not just the U.S. government, but also state and local authorities and regulators. New York authorities have placed some of the most stringent and heavy enforcement actions against U.S. and European banks. So banks are very worried about not just what the US Treasury says, or the State Department says, but also what New York and other regulators have to say about this. In addition, there is the real risk that what banks have to worry about, which is transparency and accountability, is absolutely absent in the Iranian market. So the promotion of banking and any commercial activity in that environment is completely anathema to the message that the U.S. government has been sending internationally for the last 15 years.

Q: So these banks and for that matter other companies that might wish to do business with Iran, in your professional judgement, face grave financial, legal, political, and reputational risks?

A: Enormous risks. In fact, heightened risks after implementation day as opposed to less risk.

Q: Would you counsel any responsible member of a board of directors or corporate general counsel for such banks to accept those risks when the world may look very differently in seven months?

A: I would not because the sanctions environment is confused, the risk of Iranian cheating is high, the realities of Iranian lack of transparency, corruption, financial crime, and money laundering is incredibly high, and the inability for banks to actually understand who their customers are, who their counter-parties are, at a time when we are putting out new regulations-just this month-with respect to understanding beneficial ownership and shell companies-especially in the wake of the Panama Papers-is an incredibly risky proposition to go into Iran at this point.

Q&A with Mr. Mark Dubowitz, Executive Director, Foundation for Defense of Democracies

Q: One question about the total value of sanctions relief that Iran can expect to receive under the JCPOA. The President himself has suggested that it could be as high as $150 billion, Secretary Kerry and other administration officials say it could be as low as $3-5 billon. Other administration officials have accused members of congress of lying by going with figures closer to the president's own figure than with Secretary Kerry's figure. What would you estimate, based on your calculations, is the total amount of sanctions relief that Iran can expect to receive under the JCPOA?

A: In terms of restricted oil escrow assets and frozen assets that are returned, they will have access to $100 billion. Of which they will have about $50 billion in liquid assets and the remaining $45 billion to pay off their debts. But Senator, as you know, if I give you $100 and you pocket $55 and you take $45 to pay off your credit card, the net benefit to you that you have to report to the IRS is $100. So that's the net benefit from the frozen assets. In addition Iran is going to receive hundreds of billions of dollars of additional sanctions relief based on oil exports, petrochemical exports, the expansion of its auto sector, and already Iran is predicted to have GDP growth of 3-4 percent. Inflation has gone down from 40 percent to about 11 percent. So Iran has actually already received a significant economic windfall from both the JCPOA and the interim agreement numbering in the hundreds of billions of dollars in terms of its macroeconomic stability and recovery.

Q: But from the JCPOA itself, somewhere in the neighborhood of $100 billon?

A: $100 billion in the access to frozen assets and restricted oil funds.

Q: And of course additional benefits of economical growth since the JCPOA and Obama Administration has brought 6% growth to Iran and while leaving us with 2% growth.