IRAN - GERMAN FINANCE MINISTRY SUPPORTS LISTING BANK MELLI, BUT REMAINS SKEPTICAL

S E C R E T BERLIN 000211



SIPDIS



SIPDIS, P, T, E, NEA, ISN, EUR, EEB



E.O. 12958: DECL: 02/19/2018

TAGS: KNNP, MNUC, PARM, EFIN, ETRD, ECON, PREL, IR, EU, GM

SUBJECT: IRAN - GERMAN FINANCE MINISTRY SUPPORTS LISTING

BANK MELLI, BUT REMAINS SKEPTICAL



REF: A. STATE 5584

B. STATE 14230

C. DUSSELDORF 3

D. 07 BERLIN 2256 AND PREVIOUS



Classified By: EMIN Robert A. Pollard for reasons

1.4 (b) and (d).



1. (S) SUMMARY: German Finance Ministry officials continue

to express doubt that listing Bank Melli as part of EU

autonomous sanctions against Iran will have a significant

practical effect on Iran's proliferation-related activity.

Nonetheless, they acknowledge the importance of sending a

strong political message to Iran. Finance Ministry officials

expressed concern that designating Bank Melli might somehow

trigger a new liquidity crisis in Germany, especially if the

credit crunch and sub-prime crisis persist -- a prospect that

we consider to be highly remote. German officials insist

they are closely monitoring the activities of the

Hamburg-based, Iranian-owned European-Iranian Commercial Bank

(EIHB). In early February, the Finance Ministry, Federal

Financial Supervisory Authority (BaFin),and German banking

associations circulated "concrete" guidance stating that the

October 2007 FATF statement legally obligates German banks to

implement stringent due diligence procedures for all business

involving Iranian customers or Iran-related

payments/financing. END SUMMARY.



MINISTRY RELUCTANTLY SUPPORTS LISTING MELLI ...

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2. (S) Finance Ministry Director for Terrorism Finance and

Money Laundering Michael Findeisen told EconOff and POLOFF

(Iran Watcher) February 19 that the Finance Ministry and

Economics Ministry had both tried (unsuccessfully) to

convince the Chancellery and MFA not to support the inclusion

of Bank Melli in a post-UNSCR round of EU autonomous

sanctions. Findeisen said the fact that the Chancellery and

MFA ultimately won out is an indication that Germany views

containing Iran's nuclear weapons program as a foreign policy

priority that trumps economic concerns. The German decision

to support listing Bank Melli is motivated by a desire to put

political pressure on Iran, notwithstanding the Finance

Ministry's assessment that designating Bank Melli will have

little effect on the financing of Iran's nuclear weapons and

missile programs. Findeisen explained that Bank Melli's

German branch does not play a major role in financial

transfers between Germany and Iran. He expressed

appreciation for ref A information providing additional

detail on Bank Melli's involvement in Iranian

proliferation-related activities.



... BUT CONCERNED ABOUT LIQUIDITY PROBLEMS

--------------



3. (S) Findeisen said German government economists and

financial experts are concerned about the potential for

liquidity problems following the announcement of EU

autonomous sanctions, particularly since the EU's designation

of Bank Melli will cover both new and existing contracts.

(NOTE: We believe Findeisen exaggerated the danger of a

liquidity problem; if the Finance Ministry really feared that

action against Bank Melli could trigger a financial crisis,

Finance Minister Steinbrueck himself would have weighed in.

END NOTE.) Findeisen said deposits in Bank Melli's German

branch total more than EUR 100 million (approx. USD 150

million). Even though most bank deposits are insured, the

designation of Bank Melli could hurt German depositors,

especially if the sub-prime crisis and credit crunch persist.



4. (S) One of the main reasons for concern, Findeisen said,

is that a large share of Bank Melli depositors are small

towns and local communities attracted by Bank Melli's high

interest rates. Findeisen said German supervisors had not

observed any shifting of funds, despite recent German press

reports hinting that Bank Melli would be included among the

EU designations. Indeed, Findeisen said, the number of Bank

Melli depositors appears to be growing. Findeisen speculated

that most of Bank Melli's depositors are "unpolitical

persons," who do not follow international affairs closely.



BANK SEPAH - NO ACTIVE BUSINESS IN GERMANY

--------------



5. (S) In response to a question, Findeisen said that Bank

Sepah has "no active banking business" in Germany. Although

most of Bank Sepah's employees were dismissed in the wake of

UNSCR 1747, Findeisen said, Sepah's managers will not close

the branch because they remain optimistic about the prospects



for a solution. They are willing to withstand significant,

long-term losses because they do not want to lose their

banking license or return to Iran. Most of Bank Sepah's

managers have been in Germany for 20-30 years and are, as a

result, "fully integrated." Findeisen described Bank Melli

and Bank Sepah managers as "realistic, non-political"

pragmatists, who are sympathetic to the Bazaaris and

staunchly critical of Ahmadinejad.



GERMAN AUTHORITIES CONTINUE TO MONITOR EIHB

--------------



6. (S) Findeisen dismissed press reports claiming that the

Hamburg-based European-Iranian Commercial Bank

(Europaeische-Iranische Handelsbank AG, or EIHB) -- a German

bank wholly owned by Iranian interests, including Bank Mellat

-- plans to open a branch office in Tehran. Findeisen said

he had heard that EIHB plans to transform its representative

office in Kish Island into a branch office, but said the bank

had not yet made a decision on whether to open a branch in

Tehran. Findeisen said German bank supervisors and Federal

Financial Supervisory Authority (BaFin) regulators remain in

"permanent contact" with EIHB officials, conducting regular

on-site inspections and "looking deeply" into the bank's

activities, far more than BaFin does with other foreign banks

(see also ref C).



7. (S) Although EIHB is owned by Iranian banks, with the bulk

of its capital coming from Iran, EIHB is subject to German

licensing requirements and German banking law. In addition,

Findeisen said, EIHB's board members are all German citizens

or permanent residents and, as such, motivated to be "very

transparent" with German financial regulators. Findeisen

expressed hope that the United States would not extend

sanctions to EIHB, pointing out that German citizens have

hundreds of millions of euros on deposit with EIHB.



FATF - MINISTRY GIVES BANKS "CONCRETE" GUIDANCE

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8. (C) Turning to the October 2007 Financial Action Task

Force (FATF) statement warning of the risks of doing business

with Iranian banks, Findeisen said the Finance Ministry had

convinced the German banking associations to provide

concrete, precise guidance on the subject to their member

banks. The text, which was negotiated among the Finance

Ministry, BaFin, and banking associations and finalized in

early February, is intended to provide an explanation of the

FATF's "political decision," i.e., to inform German banks

that they are legally obligated -- in line with FATF guidance

and UNSCRs 1737 and 1747 -- to implement stringent due

diligence procedures for all business involving Iranian

customers or Iran-related payments/financing.



9. (C) From the Finance Ministry's perspective, Findeisen

said, it was not sufficient simply to explain the FATF

statement to German banks, most of which are medium-sized

credit unions and banks and thus "too distant" from the FATF.

Findeisen said he was surprised that neither the German

banking associations nor their member banks opposed the

Finance Ministry initiative. He speculated that German banks

were motivated in large part by a desire to maintain access

to the U.S. financial system. Findeisen agreed the FATF

statement seems to be having a similar effect in other

countries, including the UAE.



TIMKEN JR