FRANCE: U/S LEVEY DISCUSSES NEXT STEPS ON IRAN

C O N F I D E N T I A L SECTION 01 OF 02 PARIS 004653

SIPDIS

SIPDIS
DEPT FOR ISN/C, EEB/TSF NEA/IR

E.O. 19528: DECL:07/13/17
TAGS: EFIN KNNP PARM IR FR
SUBJECT: FRANCE: U/S LEVEY DISCUSSES NEXT STEPS ON IRAN

Classified by EMIN Seth Winnick for reasons 1.4 (b) and (d)


1. (C) Summary: In November 29 meetings with MFA, Finance Ministry
and French Central Bank officials, Treasury U/S Stuart Levey sought
an update on status of current French and EU measures against Iranian
entities and discussed further actions. The MFA Political Director
expressed frustration at German footdragging on EU actions. The
Treasury Director highlighted that protecting a bank's solvency was
the only legal basis for French banking officials to intervene, in
the absence of UN or EU decision. U/S Levey also briefed members of
the National Assembly on financial measures against entities involved
in terrorism and proliferation. End Summary.

MFA on Iran Sanctions Discussion in EU
--------------


2. (C) Political Director Gerard Araud reviewed France's "difficult"
dialogues on Iran sanctions with German and Austrian interlocutors
plus potentially positive signals from a Chinese official. He
confirmed that the November 30 EU General Affairs Council would
consider further sanctions actions against Iran, but that no tangible
EU action would likely take place before January. On a substantive
level, Germany is willing to designate the Iranian Bank Melli as
involved in proliferation and will consider adding Bank Saderat. On
a procedural level, however, the German government is insisting on
holding off on applying sanctions to newly listed entities until the
second half of January when either a new UN resolution is in place or
the UN channel is "clearly stalled." He said that the coalition
agreement in Germany reportedly made this necessary. (Later, Quai
and Elysee staff told Levey that SPD Finance Minister Steinbrueck had
staked out opposition to Iran sanctions as an issue on which to
differ from the Chancellor.) Araud complained that other countries
are "hiding behind" Germany. He said Austria is quite resistant to
additional measures, partly due to commercial interests (OMV) and
partly because of the personal rapport between Austrian Chancellor
Plessnik and IAEA Director Elbaradei. On the flip side, the Quai and
Elysee stressed that both the Italians and the Spanish would support
tougher sanctions.

UN Prospects
--------------


3. (C) On the UN-associated process, Araud said he believes that UN
sanctions will be achieved in January, but they will be weak ones.
He reported that his Chinese counterpart had referred to a possible
"grandfather clause" suggesting that the Chinese might accept
measures that applied to new transactions but not current ones. He
said he is looking to see how far China is willing to go in the P5
-plus-one meeting in Paris on December 1.

Prospects for French National Measures
--------------


4. (C) In France, Araud stated that the GOF has found that the lack
of specific law on proliferation hinders its efforts to close down
entities because of proliferation. The GOF is moving to close this
loophole but in the meantime is resorting to other means to stop
banking activity short of revoking bank licenses.

Finance Ministry Stresses EU Solutions
--------------


5. (C) Finance Ministry Director General Xavier Musca said France
prefers EU measures because the open borders within the EU make
national measures ineffective. He also drew clear distinctions
between the legal bases for acting to implement UN sanctions, or
EU-wide sanctions, on the one hand, and national action by banking
authorities on the other. That said, there is clearly the political
will to take further action against Iran. Musca said that the FATF
statement and guidance on Iran have been posted and GOF is looking at
whether any additional guidance is needed for its application in
France. Actions against additional Iranian entities in France would
draw from the Bank Sepah experience, with the difference that Bank
Melli and Bank Saderat are much more active in Paris and would
therefore be more complex and likely take even more time to wind
down. Musca explained that the only basis for Banking Commission to
take control is to protect creditors if market activities are putting
the bank's very survival in danger, although the application of a UN
Security Council resolution is a separate issue. However, Musca
conceded that one of the problems that arose with Bank Sepah was that
many innocent creditors were hurt when Sepah's Paris branch
transferred large portions of its holdings to other Iranian banks
just prior to the announcement of UN Sanctions.


6. (C) According to Musca, the Banking Commission is an independent
regulatory body and French banking law is geared to the preservation
of the banks themselves. The Banking Commission can inspect and look
closely at what is being done, but cannot forbid activity.(Note: By
statute, the Commission has the power to impose sanctions on credit

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institutions for failing to act on directives based in law (e.g.,
money laundering/terrorism finance laws). Possible sanctions include
prohibiting or limiting credit institutions' operations, suspending
or removing top managers and withdrawing the institution's license.
The Commission is chaired by the Governor of the French central bank
and Musca is one of the seven members in his role as Director-General
of the Treasury and Economic Policy. End Note)


7. (C) Given the public discourse about a possible designation of
Bank Melli as a proliferator, U/S Levey asked whether France should
take any action to prevent Bank Melli's Paris branch from moving
assets as Bank Sepah did. U/S Levey pointed out that France had used
an extraordinary authority to enter Bank Sepah prior to the adoption
of UNSCR 1747, but asset flight nonetheless occurred. If Melli's
Paris branch also took measures to preempt a UN designation, U/S
Levey posited that this would also constitute a threat to French
creditors; could French regulators act against Melli on this basis?
U/S Levey urged Musca to consider carefully the similarities between
the Sepah and Melli cases, and take any appropriate action to prevent
the Bank Sepah situation.

French Central Bank
--------------


8. (C) First Deputy Governor Jean-Paul Redouin told U/S Levey that
the Central Bank never had confidence in Iran Central Bank money
laundering controls so the FATF statement in October does not change
much with respect to the Bank of France's scrutiny over Iranian bank
operating in France. Iranian bank subsidiaries have always been
subject to Bank of France supervision on the basis of their presence
on French territory. Banking Commission SecGen Nouy added that site
visits to Iranian banks far outnumber visits to other banks in
France, and supervisory efforts couldn't be higher. Banking
Commission Legal Affairs Director Eduard Fernandez Bollo said that
the Commission had detected some situations where Iranian banks were
using their French branches to conduct business outside of France, a
practice they were watching closely. He also admitted that the
Iranian bank branches in France had been "underdeveloped for years,"
indicating that Iran is likely keeping them open for reasons other
than financial prudence..

9.(C) With respect to guidance issued to French banks on Iran,
Redouin said that all French banks with international operations are
expected to know and have its international operations policy comply
with OFAC. Nevertheless, the FATF statement on Iran may indicate the
need for more diligence, a question the Ministry of Finance is
currently examining. Nouy said that there needs to be more
transparency on bank transfers. A vote at SWIFT is anticipated in
January that would require banks to declare if the transfer is
effected on behalf of another entity and, if so, which one. Some
French banks are anticipating the outcome and are acting accordingly
already, he said.


10. (C) Regarding the supervision of Bank Sepah, Fernandez Bollo said
that approximately one-fifth of outstanding commitments have been
processed. The bank possesses enough resources to pay "ordinary
expenses" for a year but would need a cash (re)infusion to settle the
remaining four-fifths of commitments. Sepah's Tehran headquarters
has not transferred one cent to Bank Sepah Paris since sanctions were
imposed.

Deputies Want Action but also Continued Dialogue
-------------- ---


11. (C) National Assembly majority leader Jean-Francois Cope, from
President Sarkozy's center-right Union for a Popular Movement (UMP)
party, said that France would not accept Iran having nuclear weapons
capacity. However, he said it was important to distinguish between
the "crazy" president of Iran and the Iranian people, who to some
extent are willing "victims" of President Ahmedinedjad's nationalist,
Islamic propaganda. Cope posed questions regarding the effectiveness
of sanctions and took on board U/S Levey's point that carefully
targeted measures that had support of partner governments and the
private sector held out the best hope for success. Nevertheless, he
and another UMP colleague (Claude Goasguen who represents Paris' 14th
district) lamented that there was not enough action being taken to
prevent Iran's acquisition of nuclear arms.


12. (U) U/S Levey has cleared this cable.

Stapleton