farhad emam Farhad Emam
Publish Date : 01/15/2016

Financial Channels of Iran During the Sanctions

EXECUTIVE SUMMARY

Key terms

UCO Bank, Reserve Bank of India, Central Bank of UAE, Noor Islamic Bank, Bank of Kulun.

Summary

During the sanctions at least banks of four countries were involved in providing Iran with financial facilities: India, UAE, China and Turkey. Indian banks included UCO Bank branch in Kolkata, and Reserve Bank of India. The UAE channels comprised Central Bank of the United Arab Emirates and Noor Islamic Bank. The Chinese channel was composed of Bank of Kulun Co. Ltd. Finally, the Turkish channel included the Ankara-based Halkbank.

A. Indian channels

1. UCO Bank

The payment mechanism used on the Indian side, according to Reuters.com on June 19, 2014, included the following steps:

In the first step, India's Petroleum Ministry would instruct oil refiners to remit funds in rupees to the account of an Iranian bank with India's state-run UCO Bank.

UCO would then transfer the sum to the RBI for crediting to a new rupee account held by the UAE central bank.

Once this step was completed, the UAE central bank would make a payment in Dhirams to the Iranian central bank. On receipt of payment confirmation, the RBI would credit the UAE account at the Fed with an equivalent sum in dollars.

Simultaneously, the RBI would settle its Dollar purchases with the funds on the UAE rupee account at the Indian central bank…

India was settling 45 percent of Iranian oil payments by transferring rupees into Iran's account with UCO Bank, while the refiners held the remainder. Tehran was using the funds in UCO Bank to import goods from India.

Simply put, 45% of the debt-payment was through a payment channel that started with the UCO bank in India, and then went through the Reserve Bank of India (RBI), the UAE Central Bank, and finally the Central Bank of Iran (CBI). In other words, three central banks of India, UAE and Iran were involved in this money transfer.

Such a humongous operation needed careful legal planning in which the central banks of three countries needed to get into detailed arrangements that had to respect the requirements of international sanctions imposed on Iran. The process of establishing the legal and banking connections to carry out the above financing project was not divulged to the public.

Another interesting issue in this process was that the UCO Bank was only involved in oil-related transactions of Iran. In January 2014, Iran started negotiations with the RBI and the Indian government to open bank accounts in other Indian banks, as reported on the website of livemint.com on January 16, 2014:

Iran has requested the ministry of finance and the Reserve Bank of India to allow it open accounts in multiple banks to facilitate better non-oil trade between the two nations.

It was reported that only UCO Bank facilitated transactions with Iran and those were oil related. According to Iranian ambassador to India Gholam Reza Ansari, as the UCO Bank account dealt with only oil transactions, the Persian Gulf nation needed to open accounts in different banks for better non-oil trade between the two countries.

The process for the financial channeling of the remaining 45% used to go through the Halkbank until February 2013. This issue will be discussed later in this report.

2. Reserve Bank of India

We have already explained the role that RBI played in making arrangements for oil trade payments. But this was just part of the financial relationship between Iran and India. The website of in.rbth.com reported on October 24, 2014 on a new arrangement made between India and Russia concerning payment for Iranian oil:

As a way of skirting global sanctions on Iran, India may use Russia as an intermediary to make payments for Iranian oil, the Indian Express reported on its website. Under an oil swap mechanism, India would pay Russia for Iranian oil with the Russian Government assuming the risk of routing the funds to Iran, the paper said.

Citing sources, the paper said the arrangement could be part of a package deal on the defense and energy sectors. The Indian oil refiners deposited the payments for Iran in an Indian bank account and then Iran appropriated the money in back to back transactions in different currencies channeled through the Reserve Bank of India, according to the report.

B. UAE channels

1. Central Bank of the United Arab Emirates

Iran has established very strong ties with the Central Bank of the UAE during the last two decades. Further, the Central Bank of Iran has a bank account in the UAE. For this reason, the 13th and 14th instalments of the Iranian frozen assets were paid to this CBI account.

The relationship between the Central Bank of the UAE and the Iranian banks became even warmer and closer recently. According to trend.az on December 22, 2014:

Bank Melli of Iran and the Central Bank of the United Arab Emirates (UAE) have agreed to boost bilateral ties.

The agreement was reached during a meeting between the Managing Director of BMI Abdolnaser Hemmati and UAE Central Bank Governor Mubarak Al Mansouri in Abu Dhabi, Iran's Fars news agency reported.

2. Noor Islamic Bank

According to Reuters on February 29, 2012:

The U.S. government has forced Dubai-based Noor Islamic Bank to stop channeling billions of dollars from Iranian oil sales through its accounts, part of Western measures to curb Tehran's disputed nuclear program.

It is also added on the website of Khaleejtimes.com on March 1, 2012 that:

A spokesman for the Dubai-based Noor Islamic Bank said, “As a UAE bank, we comply with all UAE Central Bank directives and regulations. We are in close contact with our trading partners in those countries that have imposed sanctions and we do not foresee any difficulties going ahead.”

C. Turkish channels

1. Ankara-based Halkbank

Livemint.com reported on January 16, 2014 that:

India had since July 2011 paid in Euros to clear 55% of its purchases of Iranian oil through Ankara-based Halkbank. The remaining 45% due amount was remitted in rupees in accounts Iranian Oil Company opened in Kolkata-based UCO Bank. Tougher sanctions blocked the payments in euro through Turkey from 6 February last year but the rupee payments for 45% of the purchases continued through UCO Bank.

Reuters.com shed more light on the sanctions imposed on Turkey by reporting on February 15, 2013 that:

A provision of U.S. sanctions, made law last summer and implemented from February 6, effectively tightens control on sales of precious metals to Iran and prevents Halkbank from processing oil payments by other countries back to Tehran, bankers said.

"Halkbank can only accept payments for Turkish oil and gas purchases and Iran is only allowed to buy food, medicine and industrial products with that money," one senior Turkish banker told Reuters.

Role of the Halkbank in financial channeling to Iran needs to be considered and analyzed in a separate report. Recent developments have taken the Turkey-Iran relationship to a different level that adds to the complexity of the financial channeling issues as far as these two neighboring countries are concerned.

D. Chinese channels

1. Bank of Kunlun Co. Ltd.

According to Reuters.com on November 18, 2014:

The U.S. Treasury sanctioned Kunlun in 2012 for conducting business with Iran and transferring money to an entity linked to Iran's Revolutionary Guards, but there was no mention then of any link to the Quds.


GOOD TO KNOW

To learn more about the issues mentioned in this Legal Report, you may read the following texts. If after reading this Legal Report and the following texts, you still have questions that call for detailed responses, you may send them to us by clicking on “Our Services” button and following the procedure explained there.

RELEVANT LEGAL NEWS:

1. Law in Iran Legal News: Sace Signs Agreements with Iranian Private Banks, Friday, January 1, 2016.

2. Law in Iran Legal News: Delhi and Tehran to Host Each Other’s Bank Branches, Friday, December 31, 2015.

3. Law in Iran Legal News: Iran-Azerbaijan Joint Bank, Monday, August 24, 2015.

4. Law in Iran Legal News: Foreign banks in Iranian FTZs, Wednesday, July 29, 2015.

5. Law in Iran Legal News: Iran-Russia Joint Bank, Wednesday, January 28, 2015

RELEVANT LEGAL REPORT:

1. Law in Iran Legal Report No. 6: International Banking Operations in Iran, Sunday, September 6, 2015.

2. Law in Iran Legal Report No. 16: International Banking Partnership of Iran and India, Friday, January 1, 2016.

RELEVANT BOOKLET:

Law in Iran Booklet No. 6: International Banking in Iran, Sunday, September 6, 2015.

RELEVANT BOOK:

Farhad Emam, International Banking Laws and Regulations (Chapter on Iran), OCEANA, 2000.

 

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