IRAN/FINANCE: TREASURY A/S COHEN URGES MORE

C O N F I D E N T I A L SECTION 01 OF 04 ISTANBUL 000428 SIPDIS LONDON FOR MURRAY; BERLIN FOR ROSENSTOCK-STILLER; BAKU FOR MCCRENSKY; BAGHDAD FOR POPAL AND HUBAH; ASHGABAT FOR TANGBORN; DUBAI FOR IRPO E.O. 12958: DECL: 11/18/2029 TAGS: EFIN ECON ETRD PREL TU IR SUBJECT: IRAN/FINANCE: TREASURY A/S COHEN URGES MORE TURKISH BANKING VIGILANCE ON IRAN REF: (A) ISTANBUL 399 (B) ISTANBUL 394 (C) ISTANBUL 22 Classified By: ConGen Istanbul Deputy Principal Officer Win Dayton; Rea son 1.5 (d) ¶1. (C) Summary: Treasury A/S Cohen met October 19 in Istanbul with representatives from Turkey's two largest banking associations, including eight leading Turkish banks. A/S Cohen urged Turkish banks to adopt the most stringent compliance and enforcement standards to give the international financial community full confidence in Turkey's financial system. Such steps should include widening Turkey's legal definition of terrorism to include terrorist acts committed against non-Turkish targets, and taking effective measures to protect the Turkish financial system from risks posed by Iran's banking system. A/S Cohen raised USG concerns about Iran's Bank Mellat, which operates in Turkey. Several Turkish banks said they have no contact with Iranian banks, while others took onboard A/S Cohen's caution that continued interaction with Iranian banks will pose reputational risk, especially if the international community's efforts to engage Iran on its nuclear program do not succeed. Comment: Turkey's desire to see Istanbul become a global financial center offers significant leverage for pressing the GoT and Turkish banks on Iran. A/S Cohen's visit was a helpful, well-timed use of that leverage. End Summary and comment. ¶2. (SBU) Treasury A/S Cohen and senior advisors Chris Burdick and Elizabeth Rosenberg, accompanied by ConGen Istanbul Pol-Econ "Iran Watcher" and economic FSN, met in Istanbul October 19 with the Participation Banks Association and separately with the Banks Association of Turkey. Participation Banks Meeting: No Iran Contacts -------------- ¶3. (SBU) A/S Cohen explained to Participation Banks Association Chairman Yunus Nacar (CEO of Turkiye Finans Bank),Board member Unal Kabaca (Asya Participation Bank CEO) and Secretary-General Osman Akyuz that the USG values close engagement with Turkey on financial issues and is eager to discuss the Turkish financial system's approach to anti-money laundering and combating terrorism financing (AML/CTF). Our interlocutors represented Turkey's four "participation banks" (comment: a euphemism for Sharia-compliant banking): Albaraka Turk Bank, Bank Asiya, Turkiye Finans Bank, and Kuveyt Turk Bank. Three are majority-owned by banks in Saudi Arabia, Kuwait, and Dubai, and one is majority-Turkish owned. A/S Cohen told the bankers that the USG recognizes that the Turkish financial system is stable, well-regulated, and becoming an important part of the international financial system. Noting that the 35-member Financial Action Task Force (FATF),including Turkey, held a plenary session October 14-16, A/S Cohen pointed to the FATF Chairman's Statement's call on member states to implement effective counter-measures to protect against risks that Iran poses to the integrity of the international financial system. ¶4. (SBU) Our interlocutors explained that "participation banks" have been active in Turkey for about 25 years. The banks see their role as getting unregistered savings into the financial system. "We work hard both to combat black money and to attract unregistered white money." The representatives insisted that Turkey's participation banks do not issue loans to any customers with whom they are not familiar and work closely with MASAK, Turkey's financial intelligence unit, to report suspicious transactions. Nacar added that "participation banks" approach banking not exclusively as a for-profit business, but also as a community service. "We apply our values to banking; for example we do not issue loans to companies involved in gambling, alcohol sales, or weapons. We only look for clean, ethical banking opportunities." Akyuz explained that every participation bank has established a compliance office led by an officer who reports directly to the Board of Directors independently of the bank's president or other officials. The compliance officer may report concerns directly to MASAK without going through the bank's hierarchy. Our interlocutors stated that the participation banks have no correspondent banking relationship with any banks suspected of insufficient AML/CTF protections in place. The bankers further described some of the extensive documentary and reporting requirements that are legally necessary when initiating new loans or transactions. ¶5. (SBU) A/S Cohen asked how the participation banks treat the US Treasury Department's OFAC-controlled list of sanctioned entities. According to Nacar, the participation ISTANBUL 00000428 002 OF 004 banks rely on a list provided by the BRSA, the Turkish banking regulator, which does not include all of the entities on OFAC's list. However, the participation banks pay attention to the OFAC list and subject all possible transactions to a "soft filter" software program that includes the OFAC and EU lists. A/S Cohen noted that the USG takes seriously the process of adding entities or individuals to the OFAC list, noting that three senior PKK leaders were recently added. A/S Cohen urged the participation banks to incorporate the OFAC list more directly into the banks' screening software, a step that would build greater international confidence in Turkey's banking sector. The participation bank representatives replied that such a request would be easier to address if it were submitted officially through Turkish government channels. Nacar added that the banks' responsibilities do not end with screening transactions. "We report anything suspicious. We report any transaction of 50,000 Turkish Lira. We are vigilant." Note: Turkish law requires that all transactions of this size must be reported. ¶6. (SBU) A/S Cohen noted that the FATF was reviewing Turkey's financial system, including Turkey's legal definition of terrorism, which criminalizes acts of terrorism committed against the Turkish state or Turkish citizens (anywhere) but does not address acts committed against non-Turkish citizens, even in Turkey. A/S Cohen described this as a vulnerability in Turkey's AML/CTF regime and offered support for the FATF's recommendation to Turkey that it broaden the scope of its CTF laws. Nacar replied that the participation banks would support strengthening Turkey's CTF laws, but "there may be a reciprocity issue, with some European countries that do not criminalize terrorist acts against Turkey." ¶7. (SBU) A/S Cohen raised the USG's specific concerns about Iranian Bank Mellat's operation in Turkey, including its subsidiary branch office in Istanbul. He explained the USG and P5 1's dual track strategy, including current efforts at engagement with Iran on the nuclear issue. If that process fails, however, A/S Cohen warned that the international community may seek significantly tougher measures to compel Iran to comply with its UNSC obligations, which may include raising pressure on Iranian banks. Kabaca confirmed that Turkey's participation banks do not have any banking relationship with Bank Mellat or any other Iranian banks. He acknowledged that some participation banks had been approached by Iranian banks seeking cooperation, and had declined to do so. He added that in addition to the threat they may pose to AML/CTF regimes, Iran's banks do not follow most international banking standards or practices and thus even if they fell into line with FATF standards on AML/CTF, Iranian banks would still be difficult partners for Turkish banks. Moreover, the participation banks' Gulf owners would also object on political grounds to those banks cooperating with Iranian banks, the bankers' reps told us. The Banks Association: Complying with Turkish Laws -------------- -------------- ¶8. (SBU) A/S Cohen told the Banks Association of Turkey (BAT) -- including Secretary General Ekrem Keskin and Senior Analyst Emre Innan, as well as representatives from Turk Ekonomi Bank (TEB),Citibank, Ziraat Bank, Deniz Bank, Fortis Bank, and Is Bank -- that the USG notes Turkey's desire to expand Istanbul's role as a global and regional banking center, but that such a role for the Turkish financial system requires the highest standards of compliance and enforcement. The USG joins the FATF in encouraging the Turkish financial system to exercise the greatest possible vigilance over its banking relationships with states or entities that pose AML/CTF risks. SG Keskin assured A/S Cohen that Turkey's financial system is healthy and robust, and committed to protecting against financial vulnerabilities while implementing Turkish and international legal obligations. Keskin agreed that in addition to full compliance with laws, banks must also be aware of the need to protect their reputations and avoid creating the perception of risk. According to Keskin, this is why BAT's member banks established a Task Force which works closely with BRSA and MASAK to ensure compliance with national and international obligations, provide compliance training, and monitor potential risks and vulnerabilities which could affect Turkish banking operations. ¶9. (SBU) TEB's representative explained that Turkey has taken dramatic steps to strengthen its financial center against such risks, especially since September 11, 2001. ISTANBUL 00000428 003 OF 004 Turkey's Anti-Money-Laundering law ("Law 5549"),along with the Turkish penal code and several regulations on AML and "knowing your customer" established by MASAK, govern Turkey's legal efforts against AML and CTF. The BAT and its members collaborate with the GoT to ensure that Turkish banking laws meet international standards. Current laws require that all banks "know your customer" by collecting detailed information about them before entering into transactions, and also require that all banks train and certify independent compliance officers. Most Turkish banks rely on filtering software to vet their transactions with potential customers, and report any suspicious customers or transactions to MASAK. However, several bank representatives explained that Turkish law does not require Turkish banks specifically to draw from OFAC's list, though many banks (especially those with US or foreign ownership, like Citi and Fortis) take the extra step of doing so. All of our BAT interlocutors agreed that reputational risk is a compelling concern, and furthermore that failure on the part of Turkish Banks to meet FATF recommendations could trigger potential credit risk as well. ¶10. (SBU) Underscoring the banks' concerns about reputational risk, A/S Cohen urged the banks to work with BRSA to strengthen Turkey's legal approach to CTF, specifically by widening the definition of terrorism to encompass acts of terrorism committed anywhere in the world, not just against Turkish citizens. Keskin agreed that a wider definition of terrorism would help protect the Turkish baking system and pledged to raise the issue with the BRSA. ¶11. (SBU) A/S Cohen then raised USG concerns about Bank Mellat in Turkey, noting that three recent FATF statements have called on members to protect against Iranian banks' AML/CTF deficiencies. The FATF has urged members including Turkey to exercise maximum vigilance in any transactions with the Iranian financial system and to take counter-measures to protect against AML/CTF risks resulting from banking cooperation with Iran. A/S Cohen said the USG believes the Iranian regime uses the Iranian Central Bank as well as state-owned and private banks to evade sanctions on designated Iranian banks. A/S Cohen noted that Bank Mellat is officially a member of the BAT, and that some Turkish banks maintain a correspondent banking relationship with Mellat (reftels). He noted that this creates a significant risk that Iran can abuse the Turkish financial system in violation of UNSC resolutions, and raises serious questions about whether Turkish banks should continue to have a banking relationship with Bank Mellat. Keskin asserted that the BAT listens carefully to the FATF statements and USG concerns, and has warned Turkish banks about these risks. ¶12. (SBU) The Ziraat bank representative pointed to the legal and policy differences between required UNSC sanctions on Iran's Bank Sepah, and USG banking sanctions and Executive Orders on additional Iranian banks (including Mellat) that are not necessarily identified in UNSC resolutions. He noted that Turkey considers Iran an important commercial partner, and indeed depends on bilateral trade with Iran. He cited a recent U.S. Congressional Research Service report on USG Iran sanctions, which reported that the USG was raising political pressure on European and other foreign banks to stop all interaction with Iran, and asked if this was the USG's goal vis-a-vis Turkey. A/S Cohen explained the differences between UNSC and USG sanctions on Iran's banks, and noted that USG officials meet regularly with banks in the EU and elsewhere to explain the serious risks involved in doing business with Iran's banks. A/S Cohen agreed that USG sanctions on Iran do not apply legally to Turkish citizens or banks, but Turkish banks should understand the legal basis behind the USG decision to sanction Iranian banks, including the use by those banks of deceptive practices intended to circumvent UNSC sanctions on Iran. Is Bank: Keeping Accounts for EDBI and Persia International -------------- -------------- ¶13. (SBU) following the meeting, Cohen held a pull-aside with the Is Bank representative, to caution that the Bankers Almanac online edition identifies Is Bank as having correspondent relationships with three Iranian banks: Bank Sepah, Persia International, and the Export Development Bank of Iran. In some cases, we know that Iranian banks report correspondent accounts that may have been closed or dormant. A/S Cohen urged Is Bank to be wary of any banking relationship with any Iranian banks given the difficulty in knowing whether those banks are involved in deceptive or inappropriate activities. The Is Bank representative said he was unaware of any Is Bank correspondent accounts with any ISTANBUL 00000428 004 OF 004 Iranian banks. ¶14. (C) On November 5, the Is Bank representative contacted ConGen Istanbul with further information. He informed us that: (1) Is Bank ended all correspondent relations with Bank Sepah on March 28, 2007, in response to UNSCR 1747's sanctions against the bank; (2) Is Bank continues to maintain a Euro account with the (USG-sanctioned) Export Development Bank of Iran (EDBI),via Is Bank's London branch. Is Bank uses that account "to carry out foreign exchange transactions for our Turkish resident clients for their import activities from Iran"; (3) Is Bank continues to have a correspondent relationship with Persia International Bank PLC, which is registered in the UK and under the control of the UK's banking authority. "We apply due diligence over our correspondent relationship in London with this bank, in line with UK regulations. Our branch in London strictly follows the rules and regulations in line with UN, EU, and HMG Treasury decisions related to Iranian banks." Comment -------------- ¶15. (C) The GoT and Turkish banks' shared desire to see the Istanbul-based Turkish financial system become a regional and even global financial center offers significant leverage for pressing our Turkish interlocutors to adopt the most stringent banking compliance and enforcement standards. A/S Cohen's visit, only one week after the FATF plenary, was a helpful, well-timed use of that leverage. Some Turkish banking interlocutors (such as state-owned Ziraat bank's compliance officer) still press back on the lack of any legal requirement by Turkey to adhere to USG sanctions or Executive Order proscriptions against Bank Mellat or other Iranian banks. But most of our Istanbul-based banking interlocutors appeared to accept the notion that maintaining a banking relationship with Mellat or other Iranian banks will likely lead to escalating reputational risk, especially if the P5 1's diplomatic engagement effort with Iran fails. As always, the most effective way of persuading Turkish banks and the GoT to end all financial relations with Iran's banks would be to provide concrete evidence that Iran's bank branches in Turkey are engaged in illegal or inappropriate activities, which would give Turkey a legal basis to take action. But barring that, continuing to shine a policy spotlight on the Turkey-Iran banking relationship, and tying it to FATF recommendations, as A/S Cohen's visit effectively did, is our next most effective means of pressure. End comment. ¶16. (U) Treasury A/S Cohen had cleared this cable. WIENER