Daniel Hudson, Nichola Peters and Jeremy Sher comment on HM Treasury’s (“HMT“) decision to reissue its direction to UK financial institutions to cease business with Iranian banks.

HMT today issued a new direction to all UK financial institutions, requiring them to cease all business with banks incorporated in Iran and their branches and subsidiaries, wherever located.  This direction includes the Central Bank of Iran.  The direction given today is the same as a direction given on 21 November 2011.  Herbert Smith Freehills LLP has previously produced a detailed briefing on these requirements.  Our briefing covers the application of the sanctions, the types of transactions affected and licensing arrangements.

In today’s announcement, the UK Government explained that it has extended these restrictions due to its ongoing concern regarding the Iranian government’s involvement in the development or production of nuclear weapons.  Further, the Financial Action Task Force has also indicated in October 2012 that it is “particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system“.   In a written statement put before Parliament yesterday, the Commercial Secretary, Lord Sassoon explained that:

Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes as companies carrying out proliferation activities will typically require banking services. Any Iranian bank is exposed to the risk of being used by proliferators in Iran’s nuclear and ballistic missile programmes. Experience under existing UN and EU financial sanctions against Iran demonstrates that targeting individual Iranian banks is not sufficient.  Once one bank is targeted, a new one can step into its place.

As they relate to an important global financial centre, UK restrictions have an impact on the options available to Iranian banks. This will continue to make it difficult for Iranian banks to utilise the international financial system in support of proliferation-sensitive activities. It will protect the UK financial sector from the risk of unwittingly being used to facilitate activities which support Iran’s nuclear and ballistic missile programmes. UK action of this nature signals to Iran and the international community that we consider this risk to be significant”.

Persons may be penalised under the Counter-Terrorism Act 2008 for non-compliance with this direction.  Such penalties can include civil penalties, fines or a prison term of up to two years.  Therefore UK financial institutions, in particular, should continue to exercise great caution when dealing with transactions which might have an Iranian connection.