IRAN: EU EXPLAINS 1803 NEXT STEPS TO A/S O,BRIEN,

S E C R E T SECTION 01 OF 06 BRUSSELS 000894

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STATE FOR NEA/IR, ISN/RA, EUR/ERA, EEB/ESC/TFS, S/CT, IO,
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TREASURY FOR TFFC, TFI

E.O. 12958: DECL: 06/11/2018
TAGS: EFIN ETTC ETRD KTFN PREL PARM PINR PTER KNNP
AORC, TRGY, SNAR, KCRM, UNSC, EUN, IR
SUBJECT: IRAN: EU EXPLAINS 1803 NEXT STEPS TO A/S O,BRIEN,
TREASURY

Classified By: USEU EconMinCouns Peter Chase for reasons 1.4 (b),(d),
(e).


1. (S//NF) SUMMARY: U.S. Treasury Assistant Secretary for
Terrorist Financing Patrick O'Brien met senior EU and Member
State representatives on May 14 and 15 to stress the
importance of EU action on sanctions against Iran. EU
interlocutors explained the current EU implementation status
for UNSCR 1803 and additional related autonomous EU measures.
Resistance to quick action remains. They said that
elaboration of the UNSCR 1803 concept of "vigilance" will
take time due to Member State concerns regarding setting
precedents, economic impact, and perceived linkages to
pending legal challenges related to terrorist financing
sanctions. Preliminary recommendations being considered by
the EU include defining vigilance for the financial sector as
"enhanced due diligence." EU Council action to finalize even
previously agreed designations has been delayed, pending EU
CFSP High Rep Solana's trip to Iran where he will deliver the
P5 1 renewed offer. Tensions are evident both among the EU-3
and between the EU-3 and other EU Member States. The EU-3
faces a "philosophical reluctance" to go beyond UNSCRs. EU
representatives raised concerns that pending U.S. legislation
would only pit us against each other and help Iran. END
SUMMARY.


2. (S//NF) In meeting with EU officials and Member State
diplomats, A/S O'Brien stressed the following points:

-- The USG is committed to the double track approach; strong
sanctions are having an impact and forcing debate within the
regime, which may be effective in enticing Iran to accept the
diplomatic offers.

-- The EU's pending action to autonomously designate Bank
Melli is important. He also underscored the importance of
preventing "the next Melli" through robust interpretation of
"vigilance" regarding state-owned Iranian banks operating in
Europe. Treasury's main focus is on UNSCR 1803 para 10,
which calls on countries to be vigilant to all Iranian banks.
Financial measures must be targeted, dynamic, and flexible
to account for new realities as the Iranian regime adjusts to
existing sanctions. The Financial Action Task Force (FATF)
statements on Iran's deficient anti-money laundering and
counterterrorism finance (AML/CFT) regime further indicate
multilateral consensus that Iran poses a threat to the
international financial sector.

-- EU leadership has an impact beyond Europe. Other
governments, particularly in the Gulf, "won't go beyond" EU
actions. Thus the EU should set the gold standard for how
the world's leading financial centers approach "vigilance"
and other sanctions issues.

-- Iran is increasingly dependent on the euro, so EU actions
have important implications. The EU should harness momentum
fromthe recent consensus on additional autonomousdesignations to seize this important opportunity for EU
leadership.

-- Pressure is building within the U.S. Congress to go beyond
existing sanctions frameworks. Critics in Congress are
considering secondary sanctions regimes aimed at banks that
facilitate intermediation for companies from
sanctions-targeted countries. Treasury and State are making
the case that U.S. partners are working to implement UNSCRs,
so quick and expansive action by Europe could impact the
political debate in the United States as well.

-- The United States stands ready to play a constructive role
for aiding EU action as appropriate.

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EU-Level Implementation: Action Thus Far
--------------


3. (S//NF) EU representatives explained several of the
EU-level implementation measures related to UNSCR 1803
requirements. According to Stephane Chardon, Sanctions
Administrator, European Commission's DG External Relations
(RELEX):

-- additional designations under the assets freeze (UNSCR
1803 OP 7) were annexed "immediately" (March 13, Commission
Regulation 219/2008) by further amending the existing EU Iran
sanctions package (Council Regulation (EC) No. 423/2007, as
amended);

-- additional dual use items banned under 1803 were already
covered by the previous EU list which "had gone the extra
mile" after UNSCR 1747 was issued;

-- the EU has reached consensus in principle on the new list
of additional persons and entities to be targeted
autonomously; these will be added to the existing
Regulation's annex once SG/HR Solana's request to hold on the
draft Common Position has been lifted (COMMENT: According to
the Council Secretariat, High Rep Solana requested that the
EU postpone action on pending designations (including Bank
Melli) until after his return from Iran to deliver the P5 1
renewed offer. Thus the earliest foreseeable opportunity
for action would now be at the June 16-17 General Affairs and
External Relations Council (GAERC). END COMMENT.);

-- implementation of UNSCR 1803 provisions on "vigilance" for
cargo inspections, export credits, and financial
institutions' activities are "still being discussed."
Additional 1803 measures would change in "magnitude and
scope" from the existing EU measures. Consequently, a new
Common Position must be drafted (normally by the Council
Secretariat on behalf of the EU Presidency) and agreed
unanimously, followed by an implementing Regulation (drafted
by the Commission for Council approval).


4. (S//NF) Emma Udwin, Member of Commissioner
Ferrero-Waldner's Cabinet, expressed similar views, noting
that the EU had acted immediately to freeze any assets within
the EU of entities designated under UNSCR 1803 and that
dual-use sanctions had been in place within the EU for quite
some time. The remaining issues for discussion, therefore,
were (i) how to incorporate new entities and (ii) how to move
forward with additional EU measures that might address export
credits, cargo inspections, and Iranian banks in Europe.


5. (S//NF) All interlocutors stressed the importance of
distinguishing between implementation of UNSCRs and
autonomous sanctions, underscoring that UNSCR implementation
is easier to accomplish. All noted that a designation of
Bank Melli would be considered an autonomous sanction,
not/not an implementation of UNSCR 1803's vigilance
requirement.

--------------
Issues Surrounding "Vigilance" Implementation
--------------


6. (S//NF) A/S O'Brien stressed the importance of
implementing a strong interpretation of the "vigilance"
requirement in UNSCR 1803. He acknowledged that
comprehensive and decades-old U.S. economic sanctions against
Iran mean that the U.S. is already in compliance with UNSCR
1803's "vigilance" obligation, but he expects that the FATF
will continue discussions regarding UNSCR 1803 and the
vigilance question. USEU Treasury Attache noted that FATF is
one of the few international bodies in which the European
Commission holds full membership; it would be appropriate for

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the Commission to play a greater leadership role vis-a-vis
the rest of the EU with this in mind.


7. (S//NF) EU interlocutors signaled a lengthy EU process
for deciding how to implement 1803 vigilance measures at the
EU-wide level. Renata Cvelbar-Bek, Slovenia's EU Presidency
chair of the Council's main sanctions working group (External
Relations or RELEX Counselors),said further measures would
take time because of the Council's reluctance to set
precedents. She confirmed the lack of EU political consensus
on adopting an expansive or narrow ("robust or strict")
interpretation of 1803 obligations. Nonetheless, the pending
EU designation of Bank Melli would be a precedent-setting
first step. Formal EU discussions on 1803 were suspended, but
informal consultations are well underway. "If even 55
percent of the Member States favor a robust interpretation,
it would be easier for the Presidency to present a proposal,"
she lamented. Separately, French RELEX Counselor Christophe
Parisot said France expects discussions on EU implementation
of UNSCR 1803 or additional autonomous measures will not
begin until
its EU Presidency, as significant Member State resistance
remains. He noted that despite the recent consensus on
additional designations, "it would be quite good if Italy
moved." Commission sanctions staffer Albertus Straver noted
that "Even the UK, a leading EU Member State pushing for
farther reaching EU action than 1803, does not yet see
clearly how to approach 'vigilance.'"


8. (S//NF) Chardon noted technical difficulties in defining
vigilance and requested U.S. guidance on how UNSCR 1803 was
implemented in the United States. Chardon said DG RELEX had
convened an internal Commission expert Inter-Service Group on
Iran; DG Internal Market and Services (DG MARKT) should take
a leading role for defining "vigilance," as DG RELEX has "no
clue" what the EU should do in this uncharted sanctions
territory.

-------------- --
Other Obstacles: Context of Terrorist Financing
Legal Challenges
-------------- --


9. (S//NF) On financial sanctions, several interlocutors
noted the EU Commission, Council Secretariat, and Member
States are watching closely EU and national court proceedings
and decisions related to terrorist financing sanctions.
Although "there are no legal challenges yet" to the Iran
sanctions, Albertus Straver (please protect),Sanctions
Administrator, Commission DG RELEX predicted that someone
would be "tempted if big commercial interests are at stake."
He criticized that the Council has "taken its time"
discussing UNSCR 1803 implementation, and credited the
Commission for clarifying to EU Member States that para 10
was aimed at "ALL Iranian banks," not just Banks Melli and
Saderat. The EU lacks "much precedent" for legislative
measures against proliferation finance, as the current
AML/CFT regime does not include provisions covering
proliferation finance.

--------------
Economic Interests, the Euro, Security, and
EU Leadership
--------------


10. (S//NF) Economic interests are impeding EU unity in
moving forward quickly to take additional action. Emma
Udwin, Member of Commissioner Ferrero-Waldner's Cabinet,
stressed the importance of "effective and efficient
implementation. Here in Brussels, this means keeping the
EU-3 in line with the rest of Europe." She noted that EU
Member States "need to feel a full sense of ownership for
what is implemented." If it appears the EU is "caving in to

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the United States or Brussels," Member States will not follow
through on robust implementation, regardless of what is
agreed. The Commission welcomed the enhanced offer to Iran
and hopes Iran will "see the light." The EU's trade volume
with Iran has fallen since the UN sanctions; "others such as
China and Turkey are moving in to take up the slack."
European businesses are pressuring EU decision-makers not to
enact additional sanctions on Iran. Massoulie noted Dubai in
particular seems to have benefited from tighter sanctions.
Commission Crisis Platform Director and Deputy Political
Director Richard Wright explained some Member States' "huge
sensitivities" against additional EU action, given their
strong commercial ties to Iran. The UK and France have been
the most prominent in pushing the sanctions process forward;
others are more cautious.


11. (S//NF) O'Brien explained that the USG is engaged in
active outreach to the private sector and governments in Asia
and the Gulf on Iran. Treasury is seeing some encouraging
signs of hesitance by key players in the Gulf and in Asia to
capitalize on the business opportunities presented by
European and U.S. measures against Iran. The UAE has quietly
reached out to its financial sector, and the international
market has tightened letters of credit. He noted that other
governments look to the EU as the minimum standard for
implementing restrictive measures, thus, additional vigorous
EU action is essential. Furthermore, Iran cannot adequately
substitute European technology and expertise, which are
essential to key Iranian infrastructure projects, such as
natural gas extraction. Iran has moved out of dollar and
into euro-based transactions; the regime's dependency on this
currency should not be underestimated. O'Brien said the
United States would welcome the EU's joining our outreach to
regional actors to stress the importance of taking action.
EU interlocutors seemed relieved to learn about U.S. outreach
efforts to China and others, and took the point that the EU
was setting a model for other country's decisions. Massoulie
said outreach to China, Asia, and other eastern actors could
help respond to the legitimate concerns being raised by the
EU business community.

--------------
Sanctions Skepticism, Evidence of Impact?
--------------


12. (S//NF) Cvelbar-Bek explained that political discussions
on how far to go with Iran sanctions are tied up in general
concerns about how far the EU should go with autonomous
sanctions, most recently regarding Burma. If the EU acts
without the rest of the UN, will there really be an effect?
Won't the targeted country just switch its business to
another state? How will it affect the local and civilian
population?


13. (S//NF) On the impact of sanctions on Iran, O'Brien
explained that foreign direct investment has decreased. Iran
is struggling to finance infrastructure projects and is
increasingly isolated from the international financial
system. Iran's cost of doing business is rising because of
increased political and commercial risk. Debate is taking
place in Iran, with key politicians and departing ministers
speaking out about the impact of the regime's economic
troubles and mismanagement. Though most of Iran's economic
troubles are most appropriately attributed to the
government's own mismanagement, sanctions targeting specific
institutions are also having a dissuasive impact on behavior.

--------------
A Divided EU and Cracks Apparent in the EU-3
--------------


14. (S//NF) Udwin warned that the international coalition
must hold together. She noted that the EU-3 is not operating

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with an actual EU mandate, and are often not in line with the
rest of the Member States. The Commission's role is to make
proposals for implementation serving an EU consensus only:
"There are limits to how far we can push." Commission staff
work to make sure a proposal is ready at the first moment it
can be accepted unanimously. Massoulie noted that "most"
Member States accept the de facto EU-3 "when they act as
partners." If the EU-3 negotiates with the U.S., Russia, and
China, the other Member States always support this
multilateral effort as backing the UN Security Council. But
when the EU-3 tries to push for autonomous EU measures,
"there is NEVER an appetite." The EU-3 may make robust
arguments, but the pervasive belief remains that UNSC action
is necessary. Massoulie further warned that the previously
strong unity among the UK, France, and Germany has been
weakening since the beginning of 2008. Unity remains strong
only "between the UK and France. Now Germany's position is
slightly more nuanced, adding a new element of complexity."
O'Brien commended the EU for having made progress to work
past the issues raised by Italy, Spain, and others, and
stressed that for financial measures to be effective, some
sacrifices must be made.

--------------
Prospects for French EU Presidency:
U.S. Lobbying, EU Unity, Next Steps
--------------


15. (S//NF) Meeting bilaterally with French representatives,
O'Brien asked whether France had any suggestions for how the
United States could be helpful in pushing for a vigorous EU
interpretation of UNSCR 1803. O'Brien noted that the USG had
shared thoughts with the UK and France regarding
implementation of paragraph 10 of UNSCR 1803, and expressed
hope that the three countries could agree on a plan that
could be presented to other countries and multilateral
organizations such as the FATF.


16. (S//NF) Speaking "frankly and honestly," French RELEX
Counselor Christophe Parisot cautioned that EU Member States
bristle when the U.S. appears to be inserting itself into EU
policy making. The U.S. could be helpful in "giving input
about how you do it and exchanging views on how you see
sanctions," including at the financial level, the U.S.
dynamics for controlling cash flows (as opposed to the static
EU freezing approach),and concrete measures taken to apply
UNSCR 1803. Parisot warned that if the EU-3 are not united
at this stage or are unable to propose concrete texts for
discussion, there is "no way" the other Member States will
favor a robust interpretation. He conceded that the lack of
unity was not very helpful, and that Germany has been
wavering. Getting the Melli designation right ASAP is
clearly key. Deputy PSC Ambassador Didier Chabert stressed
the importance of engaging Germany, Italy, and Spain.
Frederik Rogge, French counselor for the Middle East and
Gulf, added that EU Member States certainly will ask about
the "incentive and dialogue side" when discussing options for
further measures.

--------------
Comment
--------------


17. (S//NF) The EU process for implementing UNSCRs generally
and making autonomous designations specifically seems to be
losing momentum. The Commission seemed to register the
message that the U.S. and the EU should work toward a common
view on how to best interpret "vigilance" when implementing
UNSCR 1803. It is less clear whether all interlocutors
accepted the need to act urgently to overcome Member State
political and economic resistance, and whether the Commission
has either the ability or the authority to affect the debate.


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18. (S//NF) Defining best practices on "vigilance" in FATF
could be a useful avenue to trigger forward progress in
Europe. The USG should continue the proactive but low-key,
"behind the scenes" approach of engaging key allies (France,
UK) in sharing ideas for the EU's potential interpretation of
vigilance. USEU has shared liberally the 60-Day report with
various EU geographic and sanctions contacts (Commission,
Council Secretariat, Presidency, Member State) in hopes of
influencing EU institutional thinking on defining
"vigilance." If necessary, USEU will request additional
engagement from USG experts to clarify any questions arising
from the EU side about how to approach and implement
financial sanctions regimes.


19. (S//NF) The USG should ask the French how they plan to
use their Presidency to influence EU dynamics regarding
financial sanctions starting July 1. EU Presidencies are
traditionally somewhat constrained in promoting strong
national views at EU level, but this issue might be an
exception to that rule. On the margins of the May 21-22
U.S.-EU sanctions workshop, the French sanctions
representative told USEU that a final EU deal on the next
round of measures will require mainly a consensus among five
key members: UK, France, Germany, Italy, and Austria. The
rest would fall in line once these had areed, he predicted.
The USG should continue targeted outreach efforts with these
countries in mind. END COMMENT.


20. (U) A/S O'Brien has cleared this message.


21. (U) MINIMIZE CONSIDERED.

MURRAY
.