Financial Restrictions (Iran) Order 2012

Lord Newby Excerpts

Tuesday 11th December 2012 Grand Committee

Moved by

[Lord Newby]

That the Grand Committee do report to the House that it has considered the Financial Restrictions (Iran) Order 2012.

Relevant document: 12th Report from the Joint Committee on Statutory Instruments

[Lord Newby]

My Lords, the Treasury laid the Financial Restrictions (Iran) Order 2012 before Parliament on 20 November under the powers of Schedule 7 to the Counter-Terrorism Act 2008. The order contains a direction 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 the Central Bank of Iran.

The direction came into force on 21 November 2012 and is in the same terms as that contained in the Financial Restrictions (Iran) Order 2011. The Treasury considers that the conditions required to give a direction under the Act are met. I propose to set out the reasons for this action and provide details of the restrictions and what their impacts are, including what measures have been undertaken to ensure that the UK financial sector can comply.

On the rationale for the order, the Government are clear that activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the United Kingdom. The order was given in response to this risk. The Government continue to have serious concerns about Iran’s proliferation-sensitive activities and these concerns are shared by the international community.

Recent reports of the board of governors of the International Atomic Energy Agency, the UN body charged with monitoring Iran’s activities, reported evidence of Iran’s nuclear programme being used for non-civilian purposes. A report issued on 16 November this year set out the agency’s concerns about the,

“possible existence in Iran of undisclosed nuclear related activities involving military related organisations, including activities related to the development of a nuclear payload for a missile”.

Information available to the International Atomic Energy Agency in 2012 further corroborated analysis indicating that Iran has carried out activities that are relevant to the development of a nuclear explosive device.

A statement issued by the IAEA to its board of governors on 29 November 2012 raised a further concern, setting out that Iran is not co-operating with an investigation into its nuclear activities. The Government view this with the utmost concern.

In response to the November IAEA report, the board issued a resolution stressing that due to a lack of co-operation from Iran it was unable to,

“conclude that all nuclear material in Iran is in peaceful activities”.

Despite intensive efforts throughout 2012 by the IAEA to seek to resolve issues relating to Iran’s nuclear programme this has been without concrete results. The board urged Iran to abide by its international obligations and called on Iran to engage seriously on the nuclear issue. These are concerns of the most serious nature, with far-reaching consequences for the UK’s interests.

The case for UK action is underlined by continued calls from the Financial Action Task Force—the global standard-setting body for combating money-laundering and the financing of terrorism—for countries to apply effective countermeasures to protect their financial sectors from money laundering and financing terrorism risks emanating from Iran. These calls were renewed with urgency on 19 October 2012 and noted FATF’s particular and exceptional concern about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system. The FATF has not expressed such serious and ongoing concerns about any other country.

It is clear, therefore, that activities in Iran pose a threat to UK interests and in particular a threat to the UK financial system. Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes, as companies carrying out proliferation activities will typically require banking services. Many Iranian banks have been sanctioned by the UN and EU for their role in Iran’s proliferation-sensitive activities. Unfortunately, experience under existing financial sanctions demonstrates that targeting individual Iranian banks is not sufficient. Once one bank is targeted, a new one can simply step into its place.

Over the past year the Financial Restrictions (Iran) Order 2011 restricted the options available to Iranian banks in accessing the global financial system by removing the option of utilising the UK, which is an important global financial centre.

The 2012 order will ensure that the Iranian banking sector continues to have its access to the UK financial system restricted. This will make it more difficult for Iranian banks to utilise the international financial system in support of proliferation-sensitive activities. This 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.

This action is in line with the Government’s dual-track strategy of pressure and engagement with Iran. The aim of the pressure track is to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. It is also in line with action taken by the UK’s international partners. The US, Canada and the EU have all implemented new financial sanctions against Iran in the last year.

Importantly, the EU has announced steps to mirror the UK’s action. The UK strongly supports the decision made by the EU in October 2012 that announced its intention to implement a prohibition on financial transactions between EU credit and financial institutions and Iranian banks. This will see the key elements of the UK order mirrored throughout the EU. When this EU-wide prohibition enters into force, Ministers will review whether it is appropriate to have both the EU and UK prohibitions in place.

I would now like to explain the specifics of the order. Like the 2011 order, this order was made under Schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with the power to give a range of directions to UK credit and financial institutions in response to certain risks to the UK’s national interests. The power under Schedule 7 enables the Treasury to respond to proliferation risks, as we have done in this case, as well as money-laundering and terrorist-financing risks, or where the FATF calls for countermeasures.

The restrictions apply requirements to persons operating in the UK financial sector, which includes FSA-authorised firms, credit institutions, money service businesses and insurers. Firms are required to establish whether any current or future business relationships or transactions are affected, and to take steps to comply with the requirements of the restrictions. Although the restrictions are only given to the financial sector, they will continue to make it difficult for other companies to trade with Iran.

The UK Government actively discourage trade with Iran. The value of UK trade with Iran has declined by 39% in the period between November last year, when the 2011 order was introduced, and September 2012, when the most recent figures became available, compared to exports in the same period in the previous year. Companies affected by the restrictions can apply to the Treasury for a licence of exemption. We will examine each licence application on a case-by-case basis. The restrictions contained in the order sit alongside the existing sanctions measures imposed against Iran by the UN and the EU. However, the restriction goes further than current existing sanctions, because it prohibits certain activities that would otherwise be permitted under those sanctions.

I will now provide some further information on the operation of the restrictions. The order was laid in Parliament on 20 November, and came into force on 21 November. The Treasury published a series of documents on its public website that notify the financial sector about the restrictions and provide detailed guidance on their implementation. These documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system.

The documents published on the Treasury website on 21 November included six general licences that exempt certain activities from the restrictions. These general licences permit credit and financial institutions to provide financial services for humanitarian purposes, and personal remittances between individuals here and in Iran. Where outstanding business relationships or transactions remain, they also permit credit and financial institutions to manage the cessation of business in an orderly and controlled way. A general licence will ensure that all the transactions or business relationships authorised under the 2011 order will continue to be licensed under the current order. The Treasury may grant further specific licences to manage the impact of the order on third parties. This approach is similar to that exercised under last year’s order.

As the direction is in the terms contained in the 2011 order, there are no additional requirements on financial sector firms as a result of this year’s order. Firms will already have in place procedures and systems to comply with the 2011 order and obligations relating to EU financial sanctions and anti-money-laundering measures. This should assist in minimising the burden of compliance with the restrictions. As a result of the 2011 order, since 21 November last year firms have been unable to undertake new transactions or business relationships with banks incorporated in Iran. The UK financial sector will need to continue to ensure that it does not undertake new transactions or enter into new business relationships with any bank incorporated in Iran, including the central bank, and branches or subsidiaries of banks incorporated in Iran. Supervision of the financial sector’s compliance with these restrictions will form part of the existing supervisory regime of the FSA and HMRC.

I conclude by emphasising that this direction was given by the Government to respond to the continuing and severe risk that Iran’s nuclear activities pose to the UK’s national interest. 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 encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. For these reasons, I commend the order to the House.

[Lord Tunnicliffe]

My Lords, I will speak very briefly. I thank the noble Lord for repeating this speech, which at least gave me the opportunity to read it beforehand. The key questions here are whether this order is necessary and whether it is effective. The speech refers to a report issued on 16 November to the board of governors of the International Atomic Energy Agency and I have taken the trouble to read through it. It is, as the noble Lord suggested, quite chilling in nature. There is the reference to potential missile capability, to which he has already alluded, but there is also reference to things that have happened in the past year, particularly at Parchin where,

“information provided to the Agency by Member States indicates that Iran constructed a large explosives containment vessel in which to conduct hydrodynamic experiments”.

I have a passing understanding of how to make a bomb, and the one thing you need is the uranium we all talk about; the other is very clever explosives to make the uranium go critical and create the bomb. The existence of this facility is indeed chilling since it is very difficult to believe that it had any non-military use.

Since then, there has been considerable activity during 2012 which seemed to be either trying to hide or dismantle the facility. As the report says:

“In light of the extensive activities that have been, and continue to be, undertaken by Iran at the aforementioned location on the Parchin site, when the Agency gains access to the location, its ability to conduct effective verification will have been seriously undermined. While the Agency continues to assess that it is necessary to have access to this location without further delay, it is essential that Iran also provide without further delay substantive answers to the Agency’s detailed questions regarding the Parchin site”.

I quote those parts of the report merely to emphasise that, in our support of this order, we are sensitive to the fact that the situation with Iran has sadly not improved over the past 12 months, and therefore the continuation of the order is essential.

In his speech, the Minister said words to the effect that the continuation of the order was in line with the Government’s dual-track strategy of pressure on, and engagement with, Iran. He said that the aim of the pressure track was to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. I wonder if the noble Lord has had any reports of any progress that has been made on the dual-track approach over the past year.

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There was also discussion about the penalty regime. In the past 12 months we have seen some unfortunate events in the banking sector. Have there been any known breaches of the order in the past 12 months? Have there been any prosecutions or warnings? Is there currently any FSA activity examining these areas about which it would be possible to tell us? Does the much publicised activity in today’s and yesterday’s news around fines and sanctions in the US effectively mean that some of the objectives of the order and of its predecessor are not being met? With those minor concerns, we on these Benches unreservedly support the new order.

[Lord Newby]

My Lords, I am extremely grateful to the noble Lord for his support of the order. I am not sure what to make of the fact that he knows how to make a nuclear bomb.

[Lord Tunnicliffe]

It is on the internet.

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[Lord Newby]

On balance perhaps I should be reassured rather than alarmed. The noble Lord asked about the dual track. What is happening is that on the one hand there is active diplomacy that is being led within the EU by the noble Baroness, Lady Ashton. Since April there have been four meetings between the international group and Iran to discuss its nuclear programme. The pressure has been on Iran to take concrete steps to build international confidence around its nuclear intentions. It is hoped that we will have another meeting. I think that it is fair to say that the meetings have not produced a satisfactory conclusion, but they are ongoing.

The other element of action against Iran definitely is bearing fruit. The economic sanctions seem to have brought the Iranians back to the negotiations that I have just described. Iran’s leaders are increasingly concerned about the prospect of instability driven by economic decline, caused by a combination of sanctions and economic mismanagement. Iran’s oil exports have dropped by about 1 million barrels a day, which in real terms means that almost £8 billion in revenue is being lost every quarter. We are talking about very serious amounts of funding.

On the question of leakage and whether other countries are trading with Iran, the pressure on Iran is tightening, not just from the EU and the US but more generally. We are trying to make sure, as far as we can, that the UK financial sector is not inadvertently used to facilitate proliferation-sensitive activities. Iran will not be able to channel funds through overseas subsidiaries of its banks, as those are also subject to the restrictions. We continue to use all our ongoing close contacts with international partners to ensure that Governments of other countries are aware of our concerns and of the risk that moneys intended to facilitate proliferation-sensitive activities might be channelled through their financial sector, having been denied access to ours.

Finally, the noble Lord asked whether any firms in the UK have been found to be in breach of the restrictions. I am pleased to be able to say that no firms were felt to be in breach of the requirements under the 2011 order and that none has been found in breach of the 2012 order. It is fair to say that there is pretty considerable support across the financial services sector for the line we are taking and considerable willingness to keep very much to the letter and the spirit of the order.

Motion agreed.