FINANCE MINISTRY VIEWS ON EUROPEAN-IRANIAN

S E C R E T SECTION 01 OF 02 BERLIN 000796 NOFORN SIPDIS, P, T, E, ISN, NEA, EUR, EEB TREASURY FOR EDDY AND KOHLER LONDON FOR GAYLE, PARIS FOR JORDAN, ROME FOR ROSENSTOCK-SILLER E.O. 12958: DECL: 06/16/2018 TAGS: EFIN ECON KNNP PARM PGOV PREL MNUC IR GM SUBJECT: FINANCE MINISTRY VIEWS ON EUROPEAN-IRANIAN COMMERCIAL BANK, UNSCR 1803, AND BANK MELLI REF: A. BERLIN 211 ¶B. DUSSELDORF 3 ¶C. STATE 29098 ¶D. BERLIN 433 ¶E. BERLIN 664 BERLIN 00000796 001.2 OF 002 Classified By: EMIN Robert A. Pollard for reasons 1.4 (b) and (d). ¶1. (S/NF) SUMMARY: A German Finance Ministry official confirmed that the Hamburg-based, Iranian-owned European-Iranian Commercial Bank (EIHB) had recently opened a branch in Tehran. The German Government cannot prevent German banks from establishing foreign branches, but can intervene if the branch's activity endangers the assets of depositors or creditors. Although EIHB is subject to greater German Government oversight, the lack of an MOU between Germany and Iran leaves BaFin with no authority to conduct site visits to the Tehran branch. According to the official, work toward an EU Common Position to implement UNSCR 1803 has been hindered by UK opposition to a German proposal to extend Financial Action Task Force (FATF) terrorism finance and money laundering measures to proliferation finance. END SUMMARY. GERMANY HAS LITTLE LEVERAGE OVER EIHB'S TEHRAN BRANCH ¶2. (S) Emboffs met June 13 with Finance Ministry Director for Terrorism Finance and Money Laundering Michael Findeisen (PLEASE STRICTLY PROTECT THROUGHOUT) to discuss reports that the Hamburg-based, wholly Iranian-owned European-Iranian Commercial Bank (Europaeisch-Iranische Handelsbank AG, or EIHB) had established a branch in Tehran. Findeisen confirmed that EIHB had opened a branch (vice subsidiary) in Tehran and explained that, under German law, the branch is considered "completely integrated" into the parent bank and is therefore subject to the parent's oversight. Findeisen said the Finance Ministry had been aware since 2006 that EIHB was considering opening a branch in Tehran but had dismissed the possibility given the (unspecified) difficulties posed by Iranian banking laws. Recent changes to Iranian laws, Findeisen suggested, had made it possible for EIHB to open a Tehran branch. ¶3. (C) Findeisen reiterated what he and officials from the Federal Financial Supervisory Authority (BaFin) have repeatedly told us -- EIHB and other Iranian banks have been subject to much greater scrutiny since the passage of UNSCRs 1747 and 1803. BaFin has imposed additional reporting requirements and scheduled additional supervisory meetings and visits in order to ensure that Iranian banks are not interfering with or circumventing UN and EU sanctions (see also refs A and B). ¶4. (S) Regarding the new EIHB branch in Tehran, Findeisen said that under Germany's Banking Act, German banks have a reporting obligation, but are not required to seek the government's permission to open a branch. Neither the Finance Ministry nor BaFin have a supervisory instrument to stop banks from opening foreign branches. BaFin can only intervene if the branch's activity endangers the assets of depositors or creditors. German regulators, Findeisen said, "had to accept it, even though it's politically not the right time." In response to a question, Findeisen said that the lack of an MOU between Germany and Iran leaves BaFin with no authority to conduct site visits to the Tehran branch. ¶5. (S) In response to a question, Findeisen confirmed that the German Government's "fit and proper" tests apply to shareholders in banks. He noted that Germany had strengthened the related legal instruments in 2002 and stated that German requirements are stricter than the related EU directive. Findeisen confirmed there have been cases where proposed shareholders have not been accepted, noting that shareholders have to prove that the assets to be invested were legitimately obtained. Findeisen noted that Bank Mellat owns "only a minority share" in EIHB, but when pressed, stated the Finance Ministry and BaFin would consider undertaking a "fit and proper" review if presented with evidence that Mellat's assets were derived from proliferation-related activities. EconOff noted that Germany had previously received information on Bank Mellat's involvement in proliferation transfers (ref D). (COMMENT: BERLIN 00000796 002.2 OF 002 As reported in ref E, Finance and Economics Ministry officials -- Findeisen included -- responded to ref D demarche with a request for more explicit evidence that Bank Mellat had knowingly facilitated Iran's proliferation activities with the intent to evade UN sanctions. Additional information would underscore the need for another "fit and proper" review. END COMMENT.) ¶6. (C) Findeisen noted that most German banks are no longer involved in Iran. Banks that had been present, particularly Commerzbank, Deutsche Bank, and Dresdner Bank, have since curtailed their exposure because of the increased risk and associated costs of doing business, as well as concerns about jeopardizing their access to the U.S. financial system. Because Bank Saderat has been "stigmatized" and measures put in place to prevent Bank Melli asset flight (ref F),"the only relevant channel," for Iran-related financial transactions in Germany, Findeisen claimed, is EIHB. The other mechanism for moving money between Germany and Iran is via banks in third countries, most notably Italy and Japan, whose banks have "more intensive relationships" with Iran. GERMANY FAVORS ROBUST IMPLEMENTATION OF UNSCR 1803 ¶7. (S/NF) Turning to delays in formulating an EU Common Position for the implementation of UNSCR 1803, Findeisen said the primary obstacle has been difficulties in finding a common solution on the EU level. In this regard, Findeisen claimed, Germany's "stricter and more proactive" proposal on proliferation finance, which is reportedly backed by France and Italy, has been blocked by the UK. Findeisen said the German proposal "uses the FATF approach," and aims to put in place "harmonized measures" to counteract proliferation finance. Specifically, Findeisen explained, the German proposal would extend FATF measures on terrorism finance and money laundering to proliferation finance, establishing requirements to report any suspicious transactions to national financial intelligence units (FIUs). Findeisen noted that this is currently the only legal basis under German law to share information on suspicious transactions with other countries. ¶8. (S/NF) Findeisen noted that, in contrast, the UK proposal permits each EU member state to designate a national competent authority of its choosing to collect, retain, and share information on proliferation finance. Findeisen speculated that the UK proposal was motivated by budgetary and personnel concerns, acknowledging that FIUs in EU member states would face significantly increased workloads at a time when resources are already stretched thin. Still, Findeisen asserted, the UK proposal would require member states to establish new protocols on information exchange. He pointed out that the necessary expertise only exists in each country's FIU and not in intelligence units. Findeisen expressed hope that the USG would voice its support for the German proposal on the margins of the June 16-20 FATF meetings. PREVENTING ASSET FLIGHT FROM BANK MELLI ¶9. (S) Emboffs expressed appreciation for Germany's proactive measures to prevent asset flight from Bank Melli's Hamburg branch (ref F). Findeisen noted that the Finance Ministry's main concern is to protect Bank Melli Hamburg's depositors, most of which are German, not Iranian. Findeisen noted that Bank Melli Hamburg's role in financial transfers between Germany and Iran has been minimal. He argued that Iranian investors tend to focus on the British market because of the higher interest rates available in LONDON (as much as one percent above German rates). TIMKEN JR