U/S LEVEY PRESSES UAE ON IRAN SANCTIONS

S E C R E T ABU DHABI 001381


NOFORN

TREASURY FOR U/S LEVEY, A/S GARDNER, A/S O'BRIEN, DAS
GLASER, DAS MENDELSOHN
NSC FOR ABRAMS, ZARATE, ALLEN, RAMCHAND
STATE FOR NEA/IR, NEA/ARP
STATE FOR S/CT, EB/ESC/TFS, INL/C/CP
STATE FOR ISN
STATE FOR BURNS
CIA FOR OTI
NSA FOR FTM

E.O. 12958: DNG: CO 11/26/2032
TAGS: AE ECON IR KTFN PREL PTER
SUBJECT: U/S LEVEY PRESSES UAE ON IRAN SANCTIONS

Classified By: Abassador Olson for reasons 1.4 b and d.


1. (S) Summary. On 18 November 2008, Treasury Under
Secretary Stuart Levey and DCM Doug Greene (in Abu Dhabi)
and Paul Sutphin, the Consul General (in Dubai) discussed
with UAE counterparts recent U.S., international and UAE steps
to increase financial pressure on Iran. In particular,
Levey detailed measures targeting Islamic Republic of Iran
Shipping Lines (IRISL),including the need to inform
international insurance providers about the risks in
covering IRISL shipments. He noted the recent USG
indictment of the UAE-based Mayrow company and other
UAE-based companies identified as facilitators of
prohibited trade with Iran. Levey explained the purpose and
effect of the cancellation of Iran's U-turn license, namely
as a response to international consensus on the threat
posed by Iran's banking system as evidenced by FATF
advisories. He highlighted Emirates NBD as an outlier in
the UAE and the international financial community with
respect to its book of business with Iran. Levey shared
several SECRET REL and UNCLASS papers on IRISL, the
Central Bank of Iran, and companies worldwide facilitating
prohibited trade with Iran.


2. (S) UAEG officials listed measures quietly implemented
by the UAE targeting Iran, including advisories to UAE
banks, cutting back on licenses for Iranian businesses,
reducing the number of Iranian work and tourist visas, and
various cargo searches and interdictions. Levey met
in Abu Dhabi with Central Bank Governor Sultan al Suwaidi,
Minister of State for Financial Affairs Obaid al Tayer,
National Security Advisor and Director of the State Security
Department Sheikh Hazza bin Zayed al Nahyan; and in Dubai
with Central Bank Vice Chairman Dr. Omar bin Suleiman and
Dubai World Chairman Sultan bin Sulayem. End Summary.

THE HIDDEN WAR IN UAE
--------------


3. (S) U/S Levey encouraged the Central Bank Governor to
review the U.S. designation of, and FATF language on,
Islamic Republic of Iran Shipping Lines (IRISL). Levey asked
Suwaidi to tell UAE banks not to handle IRISL business,
explaining that banks handling letters of credit involving
IRISL shipments may be subjecting themselves to risks as
IRISL has a history of shipping nuclear and proliferation
related cargo in contravention of international sanctions.
Levey outlined IRISL measures to deceive counterparties and
creditors as to the true nature of its cargo and end users.
He advised that Iran employs front companies in Dubai to
obscure the true end users of shipped goods and to secure
trade finance.


4. (S) The Central Bank Governor promised to review
the material shared by Levey and consider an appropriate
response. Suwaidi encouraged the USG 1) to confront the
jurisdictions shipping the banned items, 2) to interdict
IRISL ships at sea, and 3) to ask the UAEG to close it ports
entirely to IRISL ships. (Note: The Governor's suggestion
that the UAEG close it ports to IRISL ships was offered to
distract from pressure on the Central Bank. End note.)


5. (S/NF) Suwaidi reminded Levey of the unique political
and security threats the UAE faces with regard to Iran.
Levey encouraged the Governor to take appropriate steps to
protect the integrity of the UAE's financial system in line
with international and multilateral measures against Iran.
Suwaidi confirmed that the UAE has been tightening up on
Iran 'step by step.' He pointed to recent press reporting
cataloguing Iranian troubles with UAE banks as proof
positive. Referencing a recent New York Times Magazine
article on Treasury's Iran sanctions, Suwaidi stated that
'there is a hidden war going on in the UAE,' in contrast to
U/S Levey's 'overt war.'


6. (S) The Governor assessed that Iranian banks are 'not
healthy' due to the global financial crisis. He stated that
Iranian bank balance sheets have been shrinking for some
time, and that as interbank lending declined in the UAE, no
UAE banks placed deposits with Melli or Saderat branches in
the UAE. However, the Governor noted that Iranian banks had
already reduced their reliance on foreign deposits and
lending prior to the tightening of international credit
markets.


7. (S) Abdulrahim al Awadi, head of AML/CTF portfolio for
the Central Bank, informed Levey that Iran has reached out
to the MENAFATF seeking membership in the regional body. Al
Awadi stressed that the UAE and the MENAFATF do not
welcome Iran's participation and ask for U.S. support in
dodging Iran's overtures.


8. (S) Minister of State for Financial Affairs Obaid al
Tayer detailed the UAE's commitment to increasing pressure
on Iran in line with international consensus. He cautioned
U/S Levey on the risks of moving too fast, namely that
punitive measure are disproportionately affecting the
people of Iran who are more likely to rally around the
regime rather than confront it. Al Tayer stressed the need
not to alienate the Iranian people and not to hurt
legitimate traders who do not support the regime. He
underlined the UAE's common position with the U.S. that a
nuclear Iran cannot be accepted.


9. (S/NF) Al Tayer assured U/S Levey that the UAEG has been
straightforward with the USG on the Iran issue and that the
results are clearly visible. He expects that Iran's financial
sector will further deteriorate come 1st quarter 2009 as banks
continue to pull back on credit extended to Iran. Regarding
Bank Melli and Saderat branches in the UAE, he offered that
they were losing customers slowly and questioned whether
accelerating their decline through overt steps was in the best
interest of the U.S. Levey reminded al Tayer that Bank Melli's
operations in the UAE are part of the larger banking organization,
which is involved in substantial illicit conduct. Its presence
poses a threat to the integrity of the UAE's financial sector.
Al Tayer pointed to a recent announcement guarantying bank deposits
in the UAE financial system, and the UAEG's specific
decision to exclude Melli and Saderat from this confidence
measure. He speculated that the move was not lost on Iran
as other international banks, such as HSBC, Standard
Chartered and Citi, are covered by the insurance scheme.
(Note: Al Tayer is the first UAE finance official to
confirm Melli and Saderat's exclusion from the federal
deposit guarantee. Al Tayer heads the federal committee
convened to address the UAE's liquidity crisis. End note.)


10. (S) Levey advised that Emirates NBD needed to be highly
vigilant with respect to Iran. As Iran has access to fewer
and fewer banking outlets, the likelihood it will abuse its
remaining relationships has increased. Levey acknowledged
that the trend line with Emirates NBD is positive, but also
noted that it needs to move further, and encouraged the
Emirates to continue pushing.

CENTRAL BANK OVERHAUL IN THE WORKS
--------------


11. (S/NF) Newly appointed UAE Central Bank Vice-Governor
Dr. Omar bin Suleiman revealed to U/S Levey that he has
been personally charged with restructuring the UAE's
Central Bank. The undertaking will be overseen by Minister
of Presidential Affairs Sheikh Mansour bin Zayed al Nahyan
and UAE Prime Minister, Vice President and Ruler of Dubai
Sheikh Mohammed bin Rashid al Maktoum. The restructuring
team currently will sit in the Dubai International Financial
Centre (DIFC) and is likely to include consultants from
Boston Consulting Group and McKinsey. Dr. Omar hopes to have an
approved implementation plan within six months and expects
the execution phase to last roughly one year. The plan will
address banking, insurance and capital markets. (Note: Dr.
Omar is also the Governor of the DIFC, and his office is
located in this facility. End note.)


12. (S/NF) Dr. Omar shared that the UAE is currently
considering two possible models for its Central Bank: (a)
the UK model with a split FSA and BoE structure, or (b) a
unified entity housing independent bodies. He believes the
integrated model is better suited for the UAE's internal
political dynamics. Dr. Omar advised that he is evaluating
candidates to succeed the current Central Bank Governor,
who is expected to resign within two years. (Note: The
Central Bank Governor independently mentioned to Levey that
he would leave his post in the next two years. End note.)


13. (S/NF) Dr. Omar suggested that the revamped Central
Bank would be the single regulatory body overseeing all of
the UAE, and would reflect the best practices and
international standards embodied in the DIFC's Dubai
Financial Services Authority (DFSA). He added that his
vision is to export these standards and best practices
throughout the region. (Note: The UAE has not been shy
about its desire to host a GCC central bank, should GCC
monetary union come to fruition. Dr. Omar's vision supports
this position. End note.)


14. (S/NF) On the subject of Emirates NBD, Dr. Omar
recalled that in the late 1990's National Bank of Dubai
actively courted Iranian trade business and lobbied the
Government of Iran to this end. Dr. Omar said he had
participated in such delegations and speculated that NBD
management was in a difficult position due to this history.
(Note: MBR ordered the merger of Emirates Bank and National
Bank of Dubai in March 2007 to create Emirates NBD; neither
bank sought the tie up. While on paper the bank has one
leadership team and appears as a single entity, in practice
the two halves are known to be moving quite sluggishly
through the ongoing unification process, and both continue to
operate separate branches. End note.)


15. (S/NF) U/S Levey shared with Dr. Omar USG concerns
about IRISL and the specific risks of UAE banks financing
cargo carried on IRISL ships. Dr. Omar promised to review
the information carefully and discuss options with the
Central Bank Governor. He also informed U/S Levey that Iran
knows that the UAE has restrictions in place for Iran, and
has been approaching the UAE from 3rd countries in attempts to
evade these measures. Dr. Omar asked the USG to share any
intel it has on this point to aid the UAE's efforts. U/S
Levey put forth to Dr. Omar three specific asks for the UAE to: 1)
scrutinize the payment services that UAE banks are providing to
Iran, rather than just the Iranian deposits held by Emirati banks,
2) prohibit Emirati banks from providing letters of credit to
IRISL, and 3) continue to push Emirates NBD to cut back on the
services it provides to Iran. Dr. Omar responded positively
and indicated that he would make an effort to move forward on
these asks.


OLSON