TREASURY UNDER SECRETARY LEVEY DISCUSSES NEXT STEPS AGAINST IRAN WITH GERMAN OFFICIALS

S E C R E T SECTION 01 OF 04 BERLIN 001450



SIPDIS



NOFORN



STATE FOR ISN, EUR, NEA/IR

TREASURY FOR U/S LEVEY

SIPDIS



E.O. 12958: DECL: 07/25/2032

TAGS: ECON, EFIN, PARM, PREL, GM, IR

SUBJECT: TREASURY UNDER SECRETARY LEVEY DISCUSSES NEXT

STEPS AGAINST IRAN WITH GERMAN OFFICIALS



Classified By: Ambassador William R. Timken, Jr., for reasons 1.4 (b) a

nd (d).



1. (S) Summary: Treasury Under Secretary for Terrorism and

Financial Intelligence Stuart Levey and Assistant Secretary

of State for International Security and Nonproliferation John

C. Rood presented to German officials July 11 and 12 in

Berlin the USG case for listing Iran's Islamic Revolutionary

Guard Corps (IRGC) and its "special operations" arm, the Qods

Force (QF),in the next UNSC resolution on Iran for violating

mandates of UNSCRs 1737 and 1747. U/S Levey also briefed the

German officials on the activities of Iran's Bank Melli and

Bank Mellat in support of the IRGC and QF and the rationale

for sanctioning them too. U/S Levey and A/S Rood also

signaled that the U.S. is considering additional designations

under U.S. domestic authorities related to Iranian support

for terrorism. German reaction included grudging

acknowledgment of the IRGC's and QF's violations of UNSCRs

1737 and 1747 and arguments for focusing on nuclear and

missile activities of Iran as opposed to these violations of

UNSCRs and support for terrorism. Nevertheless, the German

Government expressed no negative reaction to potential U.S.

action against Iranian entities for their support for

terrorism, nor did the Germans disagree with the importance

or legitimacy of acting against Iran for its support for

terrorism. German Ministry of Economics and Technology

officials raised concerns about the effects of halting export

credits and said actions against Iranian banks could lead to

a de-facto trade embargo. Officials in other ministries

echoed their objections.



2. (S) Summary continued: In sum, German officials argued

that: 1) the IRGC, including QF, should not be sanctioned in

its entirety in the next UNSC resolution, because not all of

its activities (e.g., owning and operating legitimate

business enterprises like grocery stores) violate UNSCR

sanctions; 2) the USG should provide proof acceptable in a

court of law that the IRGC is violating UNSCRs 1737 and 1747;

3) sanctioning Banks Melli and Mellat could lead to a

de-facto trade embargo on Iran; 4) if export credits were

banned in the next UNSCR, Iranian debtors might default on

their debts to German creditors, compelling the German

Government to bear the burden of paying upwards of 5 billion

euros in credit insurance indemnities to German debt holders;

5) German exporters to Iran are already losing business to

foreign competitors that are not so particular about Iran's

defiance of the UN; and 6) if actions against Iran are too

strong, then the Iranian Government will be able to garner

more support from the population. Despite the criticisms,

the German officials in all the meetings agreed that the

German Government shares the USG goal of preventing Iran from

developing a nuclear weapon and said they would discuss the

USG proposals internally and with their EU3 partners. End

summary.



3. (S) U/S Levey, A/S Rood and a joint Treasury/State

delegation met with senior officials at the Federal

Chancellery, the Ministry of Finance, the Federal Foreign

Office, and the Ministry of Economics and Technology. The

Ambassador participated in the meetings at the Federal

Chancellery and Ministry of Finance.



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German Skepticism Over Sanctioning IRGC, Bank Melli

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4. (S//NF) U/S Levey and A/S Rood briefed German government

officials on the Islamic Revolutionary Guard Corps (IRGC) and

Qods Force (QF) violations of UN Security Council Mandates.

U/S Levey and A/S Rood pointed out that UNSCR 1737 sanctioned

the leaders of the IRGC; therefore, all entities owned and

controlled by the designated individuals -- including the

IRCG, the QF, and their affiliated companies -- should also

be sanctioned. U/S Levey also shared information linking the

IRGC and the Qods Force to their banks of choice, Bank Melli,

Bank Mellat, and the Central Bank of Iran, suggesting that

the UN should designate one of these banks in the next round

of measures.



5. (S) In the first meeting, Jens Weidmann, Chancellery

Minister Director of the Department for Economic, Financial,

and Labor Policy, set the tone for the skepticism that

followed in every other meeting. He questioned the rationale

for sanctioning the IRGC at the UN in its entirety when not



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all of its activities violated UNSCRs 1737 and 1747.

Weidmann also asked the USG to provide evidence to the UN

that Bank Melli and Bank Mellat were involved in WMD

proliferation-related financing. Otherwise, he said, to

sanction them would amount to a trade embargo, which Germany

does not support. Using the analogies of organized

crime-affiliated companies or charitable organizations

supporting terrorists, U/S Levey pointed out that the legal

response in these cases is often to shut down the

organizations entirely -- even though some of their activity

might be legitimate. Christoph Heusgen, Chancellery Minister

Director of the Department for Foreign and Security Policy,

acknowledged that the IRGC should be considered for sanctions

because of its oversight of Iran's ballistic missile program,

but cautioned that Russia might be difficult to convince. As

an example of Russia's skepticism, Heusgen observed that

Russian experts did not agree with the U.S. assessments of

the potential range of Iran's Musudan IRBM.



6. (S) At the Finance Ministry, State Secretary Thomas Mirow

made a plea for the negotiators to consider carefully the

consequences of designating another Iranian bank in the next

UNSC resolution. Mirow echoed Weidmann's view that

sanctioning another Iranian bank would be tantamount to a

full embargo because of the impact that such a designation

would have on the business world's view of Iran. He said the

German Embassy in Iran has observed that financial sanctions

are having an impact and the Iranians are clearly concerned

about what lies ahead, but stressed that targeted measures

remain the most effective.



7. (S) In the Federal Foreign Office, Minister Director Fritz

Groening, Commissioner of the Federal Government for Arms

Control and Disarmament, questioned the rationale behind IRGC

support to the Taliban. According to German government

analysis, Groening said, the Iranian Government had no

interest in helping the Taliban. NEA/I Director Barbara Leaf

suggested that the Iranian Government supported the Taliban

via the IRGC in the calculation that U.S. troops in the

region would be too occupied in Afghanistan and also in Iraq

to act militarily against Iran, which Groening acknowledged

as a possibility. He suggested that the German Federal

Intelligence Service (BND) discuss the issue with U.S.

counterparts.



8. (S) Hellmut Hoffmann, office director of the Federal

Foreign Office's Division of Disarmament and Arms Control

Basic Issues, Security Policy, and WMD Nonproliferation,

questioned the rationale for including Bank Melli on the next

UNSCR Annex. He asked whether the USG proposed sanctioning

Bank Melli for financing WMD proliferation activities or for

financing the IRGC. Groening said he expected some Iranian

bank to be listed in the next UNSC resolution on Iran, partly

because the USG had earlier signaled its intention to include

one. Not to exclude a bank on the next resolution would be

interpreted by the Iranian Government as a lack of cohesive

will in the UNSC, Groening added.



9. (S) Hoffmann raised another issue concerning sanctions on

Iranian entities. After citing a German Federal Chancellery

report of 30 new Iranian front companies being formed to

procure WMD materials after the passage of UNSCR 1737, he

asked how the USG would deal with the IRGC if it could form

new front companies so readily. U/S Levey responded that

although the international community could not prevent the

formation of Iranian front companies, it could target the

financing system that Iran uses for missile-related

procurement, i.e., imposing sanctions on Bank Melli, for

instance.



10. (S) In the meeting at the Economics Ministry, Ursina

Krumpholz, office director of the Foreign Trade Law and Law

of the Sea Division, claimed that the U.S. information about

the IRGC's provision of arms to the Taliban and control over

Iran's ballistic missile program was insufficient to support

a designation in the next UNSCR. Krumpholz argued that the

UN should only designate those entities directly linked to

Iran's nuclear or missile programs.



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Concern that Sanctions Harm Germany's Economy

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11. (S) In every meeting, German officials voiced concerns



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over the impact of stronger sanctions on Iran on Germany's

economy. In the Chancellery, Weidmann made the point that

the German Government may be liable for 5 billion euros in

indemnities to German firms which received government-backed

export credit guarantees if the major Iranian banks are

unable to pay. Officials in the Economics Ministry, although

acknowledging that sanctions on Bank Sepah were effective

because they were carefully targeted, nonetheless complained

about the potential negative impact on the German economy.

Christoph Herfath of the Economics Ministry's Export Finance

and Export Credit Insurance Division, said that German

exporters use six major commercial banks in Iran to finance

bilateral trade. Since the designation of Bank Sepah, the

German firms that financed trade through Bank Sepah are

having difficulty collecting from their Iranian debtors.

Herfath argued that sanctioning other Iranian banks, such as

Melli or Mellat, would make it even more difficult for

Germans firms to collect their debts in Iran.



12. (S) Karl Brauner, Minister Director of the Economics

Ministry's Foreign Trade Policy Department, complained about

the "collateral damage" caused by the designation of Bank

Sepah. Brauner claimed that some German municipalities had

assets in Bank Sepah, and are now facing a budget crunch

because they had counted on those assets to fund municipal

projects. U/S Levey explained that UNSCR 1747 allows Bank

Sepah to fulfill prior contracts, so the municipalities may

be eligible to obtain their funds. Nevertheless, U/S Levey

agreed with the need to protect innocent third parties and

noted that the G-7 is working to resolve such issues before

negotiations begin on the next resolution.



13. (S) Officials in the Economics Ministry also expressed

concern that as German trade with Iran declines, so does

German influence. Michael Kruse, Deputy Minister Director of

the Export Finance, Investment, International Finance, and

Foreign Economic Cooperation Division, said German firms were

already losing contracts to competitors outside the EU,

notably in Russian and China. As an example, he said Iran

recently decided to purchase a petroleum refinery from China

instead of from Germany, and Iranian President Ahmadi-nejad

has instructed Iranian entities to buy from Russia and China.





14. (S) German officials also complained about the move

within the U.S. Congress to strengthen the Iran Sanctions Act

and to sanction companies in third countries that continue to

do business with Iran. Viktor Elbling, Commissioner for

Energy Policy, Globalization, and Sustainable Development in

the Federal Foreign Office, said the German public perceives

that the USG is trying to make the rest of the world pay the

same price that the U.S has paid since its 1979 trade embargo

on Iran. Krumpholz in the Economics Ministry argued that

German firms abide by UNSC resolutions and EU regulations,

which permit legitimate trade with Iran, but are not obliged

to follow U.S. law. Echoing these concerns, Groening in the

Federal Foreign Office cautioned that a U.S. initiative to

punish any firm in the EU for investing in Iran would harm

the international coalition on Iran and benefit the Iranian

Government.



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Admadi-nejad Willing To Exploit External Pressure

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15. (S) German officials expressed concern that more

stringent sanctions on Iran might play into the hands of the

Iranian leadership. According to Elbling in the Federal

Foreign Office, the German Embassy in Tehran reported

recently that Ahmadi-nejad expects stronger sanctions and

will use them to blame the West for the economic pinch that

Iranians feel. Groening suggested that the right amount of

pressure is the key to dealing with Iran; the UNSCR should

not give Tehran a pretext to abandon negotiations altogether

by being too harsh. Groening also asked whether the U.S. had

considered the Iranian public's perception of a designation

of the IRGC. The IRGC is considered by many Iranians,

according to Groening, as the savior of the country during

the Iran-Iraq war in the 1980s. To sanction the institution

that saved Iran from Iraq might turn the people further away

from the West.



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U.S. Concern over Continued German Business Ties with Iran



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16. (S) U/S Levey raised some concerns about German banks and

companies that continue to conduct business as usual in Iran.

At the Ministry of Finance, U/S Levey shared some

information about Commerzbank's continued ties to Iranian

banks. Mirow said he was in close contact with Commerzbank

CEO Klaus-Peter Mueller and would be sure to consider the

information carefully, but encouraged U/S Levey to pursue his

personal dialogue on Iran with Mueller as well. Mirow also

confirmed an Iranian press report that Deutsche Bank had

decided to cut off all business with Iran in all currencies,

and noted that Deutsche Bank's decision had created quite a

stir in Iran, according to the German Embassy in Tehran.



17. (S) At the Economics Ministry, U/S Levey asked about the

German Government's stance on Siemens' decision to pursue new

business with and expand investment in Iran. Kruse referred

only to a Siemens project to sell locomotives to Iran and

argued that the transaction is perfectly legal, since diesel

engines are not included on any sanctions list. U/S Levey

observed that Siemens' decision to support Iran's

infrastructure, given the current political context, is

unhelpful, but Kruse maintained that Siemens is fully

justified in continuing this kind of business with Iran.



18. (U) Post will report any additional German response

septel.



19. (U) This cable was coordinated with U/S Levey and A/S

Rood subsequent to the delegation's departure.

TIMKEN JR