Financial Restrictions (Iran) Order 2011
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Lord Sassoon
That the Grand Committee do consider the Financial Restrictions (Iran) Order 2011.
Relevant documents: 34th Report from the Joint Committee on Statutory Instruments.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this financial restrictions measure against the Iranian banking sector was introduced on 21 November by my right honourable friend the Chancellor of the Exchequer. The Treasury laid the Financial Restrictions (Iran) Order 2011 before Parliament under its powers in Schedule 7 to the Counter-Terrorism Act 2008. The order contains restrictions requiring UK credit and financial institutions to cease business relationships and transactions with all banks incorporated in Iran, including their branches and subsidiaries wherever they are located, and with the Central Bank of Iran.
I would like to turn first to the rationale for the order. The restriction contained in the order responds to the risk to the national interests of the UK caused by activity in Iran that facilitates the development or production of nuclear weapons. The Government have had serious concerns about Iran’s nuclear activities for some time, and these concerns are shared by the international community. The 18 November board of governors report of the International Atomic Energy Agency, which is the UN body charged with monitoring Iran’s activities, provided further evidence that Iran’s nuclear programme was being used for non-civilian applications. In particular, the report sets out the IAEA’s concerns about,
“possible military dimensions to Iran’s nuclear programme”.
The case for UK action is underlined by the urgent call from the Financial Action Task Force—the FATF—which noted its particular and exceptional concern about Iran’s failure to address the risk of terrorist financing and the serious threat that this poses to the integrity of the international financial system. Other countries share our concerns in respect of Iran. These include the US and Canada, both of which implemented further restrictive measures against Iran on 21 November. The EU also has financial sanctions in place, including further asset-freezing measures against 180 Iranian individuals and entities agreed at the beginning of this month, and is considering future measures to implement.
The Government introduced the Financial Restrictions (Iran) Order 2011 to respond rapidly to further evidence of the risks posed by Iran’s nuclear development programme. Iranian banks play an important role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes, and many Iranian banks have been sanctioned by the UN and EU for their role in Iran’s proliferation-sensitive activities. Given the UK’s important position as a global financial centre, the UK restrictions will have a major impact on the options available to Iranian banks. This will make it more difficult for Iranian banks to use the international financial system in support of proliferation-sensitive activities. The action also protects the UK financial sector from the risk of unwittingly being used to facilitate activities which support Iran’s nuclear and ballistic missile programmes.
I will now explain the specifics of the order. The order was made under Schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with powers to impose a range of financial restrictions in response to certain risks to the UK’s national interests. The powers enable the Treasury to respond to proliferation risks, as we have in this case, and to money-laundering and terrorist financing risks, or where the FATF calls for countermeasures.
Shortly after the restrictions came into effect on 21 November, the Treasury published a series of documents on its public website. These alerted the financial sector to the restrictions and provided guidance on their implementation. These documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system.
In addition, the Treasury worked with the Financial Services Authority, HM Revenue and Customs, and the Export Control Organisation to publicise the restrictions and provide information to firms on the requirements. The documents published by the Treasury on 21 November included six general licences exempting specific activities from the restrictions. These general licences enable credit and financial institutions with existing business relationships or transactions with the entities concerned to manage the cessation of business in an orderly way. They permit them to provide financial services for humanitarian purposes and personal remittances between individuals here and in Iran.
Further licences, whether general or individual, may be granted by the Treasury to manage the impact of the requirements on third parties. Companies affected by the restrictions can apply for a licence of exemption and we are particularly minded to grant licences where UK companies are owed money under existing contracts. This approach is similar to that used in other sanctions.
Firms already have in place procedures and systems to meet obligations relating to financial sanctions and anti-money laundering. They help to minimise the burden of complying with these restrictions. It is expected that compliance costs for the sector as a whole will be moderate, although any institution with significant business relationships with an Iranian bank will face larger costs. Supervision of the financial sector’s compliance with these restrictions will form part of the existing supervisory regime of the Financial Services Authority, HM Revenue and Customs, the Office of Fair Trading and the Department of Enterprise, Trade and Investment Northern Ireland.
Let me conclude by emphasising that this order was issued by the Government to respond to the severe risk that Iran’s nuclear activities posed to the UK’s national interests. This is a strong measure, but it is necessary. Iran’s proliferation-sensitive activities are a serious and ongoing concern for the UK and the international community as a whole. It is vital that we continue to take steps to increase pressure on the Iranian regime and to encourage Iran back to the negotiating table to find a diplomatic solution. For these reasons, I commend the order to the Committee.
Lord Newby
My Lords, I thank the Minister for the clear introduction that he has given to this measure which seems, broadly speaking, to be proportionate. I have just one question. To what extent will Iranian banks be able to continue doing business here direct with companies as opposed to with UK financial sector bodies? I think that the Minister said that they will be able do that. If so, have the Government given any consideration to freezing the operations of Iranian banks so that they simply cannot do any business out of the UK?
Lord Sassoon
I am grateful to my noble friend Lord Newby and the noble Lord, Lord Tunnicliffe, for making this a short, constructive and to-the-point debate. I shall go straight into the questions that have been asked. First, on the question from my noble friend about the extent to which Iranian banks can still continue in this country to do direct business with companies or individuals, the answer is that the four Iranian banks in the UK are already subject to asset freezes. They cannot do any business at all in this country unless they get licensed by the Treasury, and of course licences are going to be issued only in very particular and limited circumstances. The prohibitions in respect of the UK are pretty watertight, and no UK company can, in effect, use a UK bank to deal directly or indirectly with an Iranian bank.
The noble Lord, Lord Tunnicliffe, asked what other countries are doing. As I said on 21 November when we brought forward the order, the US and Canada took further, similar measures. France, too, announced that it was going to take measures in the near future, particularly in relation to oil trading. The 27 member states of the EU designated 180 individuals and entities for asset-freezing at the beginning of this month, so there is already significant co-ordinated action. The Foreign and Commonwealth Office is working with our EU partners to consider a further round of strong sanctions measures, including targeting in the new year the Iranian oil and gas sector and the central bank, so there is ongoing work with many of our partners. Incidentally, 32 out of 35 countries on the IAEA board of governors supported the resolution of the IAEA in this respect.
The FATF is an international best-practice body. As I know because I chaired it for a year, members take its calls for action very seriously. Often, in my experience, those who are outside the EU and North America will take a bit longer to consider their response. The FATF has three plenary meetings a year and there is always follow-up to action taken since the previous meeting, so it does not let these things wither on the vine. Its next meeting will be approximately four months after the October meeting, at which it will take stock of progress.
The noble Lord also asked a question about the risk of leakage through other countries and what we are doing to avoid the risks which the impact assessment identifies. As I have already said, we are working with many Governments to make sure that they are aware of our concerns. I was in the Gulf during the week when this order came into effect. I had discussions with central bank governors and others there about what they were doing in response to the IAEA report. We talked to many countries. It is quite clear that the tightening sanctions have a significant effect on Iran’s economy and its ability to move money around, but I fully accept that we have to remain extremely vigilant and work with our partners to ensure that we make it as difficult as possible for it to move money in any way. It is ongoing business.
Lastly, on the penalty regime, I suggest that a two-year prison sentence should be a significant deterrent. The penalties in this order are equivalent to those in other, similar sanction regimes. We have not therefore broken any new ground and have followed precedent in this order. The financial institutions which are the subject of this order in the UK are obliged to have systems and controls in place to counter the risk that they might be used to further financial crime. The FSA, as the supervisor, has a statutory duty to monitor those whom it supervises for the purposes of securing compliance with the requirements of a direction. It can impose civil penalties under the Act. Although I should stress that this was under a different part of the UK asset-freezing and financial sanction regimes, it is worth pointing out that RBS was fined £5.6 million in 2010 for the failure to have adequate systems and controls in place to prevent breaches of UK financial sanctions, specifically in relation to Iran. Although that was, as I say, under a different part of the sanction regime, it indicates how seriously the FSA takes these issues.
In conclusion, I suggest that the IAEA’s latest report highlights the serious situation we have with Iran’s nuclear programme and its possible military dimensions. The FATF, as has been recognised, has made repeated calls for countries to take countermeasures to address the risk of money laundering and terrorist financing emanating from Iran. I hope your Lordships agree that the decision to issue this order is a proportionate and reasonable response to the threat of nuclear proliferation and that this action mitigates the risk of the UK financial system being used to facilitate proliferation-sensitive activities in Iran.
I thank noble Lords for their engagement with this issue and I hope that my answers to the important questions they have raised have been sufficient. I urge noble Lords to support me in this important matter.