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

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 greater 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



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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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