Identifier
Created
Classification
Origin
08LONDON1597
2008-06-10 15:26:00
SECRET//NOFORN
Embassy London
Cable title:  

(S) UK MEASURES TO STEM BANK MELLI'S ASSET FLIGHT

Tags:  ECON EFIN IR KTFN MNUC UK 
pdf how-to read a cable
VZCZCXRO5631
PP RUEHBC RUEHDE RUEHDIR RUEHFL RUEHKUK RUEHKW RUEHLA RUEHROV
DE RUEHLO #1597/01 1621526
ZNY SSSSS ZZH
P 101526Z JUN 08
FM AMEMBASSY LONDON
TO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 8892
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCNIRA/IRAN COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUCNDT/USMISSION USUN NEW YORK PRIORITY 1204
S E C R E T SECTION 01 OF 03 LONDON 001597 

NOFORN
SIPDIS

E.O. 12958: DECL: 06/10/2018
TAGS: EFIN, KTFN, ECON, MNUC, IR, UK
SUBJECT: (S) UK MEASURES TO STEM BANK MELLI'S ASSET FLIGHT

REF: A. STATE 60442
B. LONDON 1577
C. LONDON 1170

Classified By: Mark Tokola, E/MinCouns for Reasons 1.4 B & D

S E C R E T SECTION 01 OF 03 LONDON 001597

NOFORN
SIPDIS

E.O. 12958: DECL: 06/10/2018
TAGS: EFIN, KTFN, ECON, MNUC, IR, UK
SUBJECT: (S) UK MEASURES TO STEM BANK MELLI'S ASSET FLIGHT

REF: A. STATE 60442
B. LONDON 1577
C. LONDON 1170

Classified By: Mark Tokola, E/MinCouns for Reasons 1.4 B & D

1. (S/NF) Summary: The British government (HMG) has
tightened regulatory measures against Bank Melli in advance
of EU sanctions. Specifically, the Financial Services
Authority has told Melli it must set aside an amount (percent
of retail deposits) above its reserve requirements, in order
to be prepared to unwind its business in a way that protects
investors. Until sanctions are in place, there is no lever
under British law to prevent other money returning to Tehran.
End Summary

2. (S/NF) The British Financial Services Authority (FSA),a
quasi-independent regulatory body, is in charge of regulating
UK banks, including the London-based Iranian subsidiaries of
Banks Sepah, Saderat, Melli, Mellat and others. Philip
Robinson, Director of Financial Crime and Intelligence
Division, FSA, told us on June 4 that he has instructed his
team and related British intelligence agencies to go out and
"turn over every stone" to obtain any information they can
showing linkages between WMD proliferation, terrorist
activities and the Iranian banks. He claims his main
challenges are two-fold: HMG is not able to use intercepts
from UK services in court (U.S.-obtained intercepts are
admissible if the USG agrees to declassify large parts); and
the London-based subsidiaries, aware of UK scrutiny, are
keeping themselves as clean as possible. Patrick Guthrie and
Pete Maydon, of HM Treasury's Asset Freezing Unit, in
separate conversations, told us HMT and FSA are exploring all
their options to ramp up pressure on the Iranian banks and to
prevent asset flight.

Freezing Bank Melli's Assets
--------------

3. (S/NF) Britain is ahead of Europe in freezing Melli's
assets, Robinson told us. HMG and FSA want Melli London to
maintain its funds here, rather than repatriate them to
Tehran. FSA created a supervisory reason to approach Melli
ahead of the EU asset freeze in order to ensure sufficient
operating cash is on hand to protect depositors. This amount
- agreed to between Melli and FSA - (and which Robinson would
not disclose) is much gr
eater than the reserve requirements.
If Melli does not maintain that amount - to be used to "wind
down" the bank's operations if and when sanctions come into
play - then FSA can close down the bank. Robinson claimed
the UK and France have created similar regimes.

4. (S/NF) However, HMG is disadvantaged in that there is
nothing in its law (the Financial Services Market Act) to
prohibit Melli from making payments back to Tehran in
anticipation of sanctions. In this case, once the FSA has
given Melli a number that it must keep aside to protect its
balance sheet, the rest could be sent back to Tehran.
Robinson also admitted that since Melli London has only BPS 3
million in retail deposits, the amount it must keep on hand
will be small (as compared to the German Melli with Euros 70
M in retail deposits. Robinson also said Melli London had
BPS 1.2 billion on its overall balance sheet.)

5. (S/NF) A senior official at the FSA (please protect) also
told us that Melli wrote Javier Solana, EU High Commissioner
for Common Security and Foreign Policy, to complain there
were no grounds to sanction Melli London because the bank was
not itself in breach of UN obligations. Melli informed the
FSA that they want to keep a presence open in London even
when the Tehran parent is designated and therefore shut off
from transactions with the London branch.

Fit and Proper Standing of the Parent
--------------

6. (S/NF) We pressed both FSA and HMT to describe their
efforts to pursue Sepah London based on the "fit and proper"
status of its parent in Tehran. The FSA has the authority to
act in an emergency to revoke a license, but FSA and HMT
lawyers believe the emergency has to be related to breaches
of requirements laid out in banking regulations, and do not
apply to political or UN designations - regardless the nature
of the threat. HMT tells us they are pressing FSA hard to
interpret their regulations in the most aggressive manner,
but FSA pushes back saying the current law does not allow

LONDON 00001597 002 OF 003


them to go outside their purely regulatory framework. Of
primary concern to the FSA is that there is no appeal process
to a UN designation. Without this recourse, FSA lawyers say,
under UK law the regulators are not able to impose their own
punishments or reviews. FSA suggested that changes would
have to be made to their legal framework to allow UN
designations to be considered acceptable under UK law.
(Note: this issue is the subject of an HMT appeal to the UK
Court of Appeals on a terrorist finance case involving UN
designations, ref C. HMT has told us that there is currently
high-level support for stand-alone legislation to pursue WMD
and nuclear proliferators; thanks in large part to pressure
from the top-layers of the USG on HMG officials in the Bank
Sepah licensing case in early May. End note)

Melli Hong Kong
--------------

7. (S/NF) HMT and FSA are talking to the Melli Hong Kong
branch about the freeze there. HMT is confident they will be
able to maintain the freeze because it is a branch, as
opposed to Melli London which is a subsidiary, Maydon told us.

Public - and Quiet - Diplomacy
--------------

8. (S/NF) HMG will begin spreading the word to Bahrain and
others about the activities the UK is undertaking (especially
in Hong Kong). This will be a quiet government-to-government
campaign rather than a public statement, Maydon told us. HMG
is considering a public statement on its efforts, but is
constrained by potential legal repercussions if its
"aggressive fit and proper" reviews were to be announced.

Regulatory Tools Against Other Banks
-------------- -

9. (S/NF) The FSA has used a forensic accountant with an
intelligence background to review all banks who scrutinized
the Iranian banks more thoroughly than the others, Robinson
told us. From a strict regulatory point of view, they
discovered that Saderat and Persian International Plc. were
doing their own enhanced due-diligence, including checking
the bona fides of parties involved in Iran-based
transactions. Bank Sepah, however needed to develop a more
sophisticated due-diligence regime similar to other banks its
size. FSA, without the banks' knowledge, compared the banks'
books to intelligence reports and found no discrepancies,
Robinson told us. The FSA has not written the banks to let
them know they are in compliance because they do not want a
"clean bill of health" waved back in their faces.

10. (S/NF) Robinson complained that in the few cases of
suspicious activity his team is able to unearth suspicious
activity, they have to rely on an "analyst's leap" to cover a
gap. He gave an example of a transaction involving Saderat in
Ramallah passing money to unknown person X and then X
transferring it to Hamas. FSA believes X is a "knowing and
active" participant in the transaction, i.e., knows the funds
are going to Hamas. But unless that can be proved, FSA is
not able to take the case to court. FSA has not confronted
Saderat on the transaction because the agency is not able to
prove that Saderat has broken any rules, and FSA doesn't want
Saderat to have that moral (and potentially legal) victory.
Robinson noted that FSA would be in strong position to move
after Hezbollah if/when HMG designated the group.

Difficulties
--------------

11. (S/NF) Maydon told us that HMG is legally hamstrung until
sanctions against Melli and Saderat are actually in place.
HMT is studying the vigilance language in UNSCR 1803, but
because the resolution is non-binding, it doesn't give the
agency as much power as it needs. EU and U.S. public
statements in late May about going after Melli tipped the
bank off to the true status of negotiations and gave Melli a
head start, Maydon said.

Use of Classified Material
--------------

12. (S/NF) Sue Fisher, Liaison and Assessments Team Leader,
FSA, told us FSA is able to make internal decisions using
classified material, but if the case goes to a tribunal, the
agency would need to disclose everything. On terrorist

LONDON 00001597 003 OF 003


finance issues the current Counter Terrorism Bill (ref B, aka
the 42-day detention bill) includes language to allow the
court to create its own rules in deciding what information to
include or exclude, and whether to set up a Special Advocate
who could see the material on behalf of the entity. It is
unclear if this process would apply to WMD and nuclear
proliferators in addition to terrorist finance cases.

13. (S/NF) Comment: It is clear from our conversations at
FSA, HMT and FCO that high levels of the British government
are actively engaged on this issue. This is due primarily to
the flurry of USG phone calls and meetings in May with
decision-makers. Working level folks at HMT say that
although the tone was perceived by some senior officials as
heavy-handed at times, the message was effectively delivered
and heard, and there are now avenues open both within and
outside the government (i.e., private UK banks now see the
futility of getting waivers to deal with UN-designated Sepah)
to limit the ability of the Iranian banks to function
properly.
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