Sanction Threat Prompts Big Firms to Cut Iran Ties

Glenn R.Simpson and John R. Wilke, The Wall Street Journal:

Some of the world's largest finance and energy companies are severing ties with Iran, amid U.S. probes into their compliance with American sanctions and as the possibility of U.N. action grows closer.

Banks UBS AG of Switzerland and ABN Amro Holding NV of the Netherlands disclosed in recent weeks that they have broken off work with Iran, following the lead of Houston energy-services company Halliburton Co. a year ago. All three are subjects of U.S. Justice Department inquiries into whether they violated sanctions laws, lawyers and others familiar with the inquiries say. Also under investigation but still doing business with Iran are HSBC Holdings PLC, Standard Chartered PLC and BNP Paribas, those people say.

Also pulling out of Iranian business in recent months, though not being investigated regarding compliance with sanctions, are Swiss bank Credit Suisse Group, energy firms Baker Hughes Inc., ConocoPhillips of Houston and BP PLC of London, Chicago insurance broker AON Corp. and industrial conglomerate General Electric Co. of Fairfield, Conn. READ MORE

The inquiries into sanctions compliance come as the U.S. won agreement from Russia and China, as well as France, Britain and Germany, to bring Iran before the United Nations Security Council, where international sanctions could ultimately be considered in response to Iran's decision this month to enrich uranium to advance its nuclear program. Any decision on what action to take within the U.N., though, could only happen after the head of the International Atomic Energy Agency reports to the Security Council in early March.

The agreement was sealed in the early morning hours today in London, after a four-hour dinner hosted by British Foreign Secretary Jack Straw that also included U.S. Secretary of State Condoleezza Rice and the foreign ministers of the other four countries. A senior U.S. official said the agreement to report Iran to the U.N. during an IAEA meeting later this week in Vienna was "the most decisive action taken in the international community for several years on Iran's nuclear program."

There was no agreement, however, on what action to take once the Iran matter is brought to the Security Council, the official said.

The moves to curtail their Iranian business by the Europe- and U.S.-based companies will make it harder for Iran to obtain some Western equipment and other goods. The pullbacks aren't likely to damage Iran's economy significantly unless more big companies follow suit, particularly from Asia, analysts say. "It is certainly symbolic, but it is not going to make a huge dent in Iran's pocketbook," said Karim Sadjadpour of International Crisis Group. Most of Iran's biggest foreign investors are from Russia, China, India and South Korea. He said strict U.S. enforcement of its sanctions law against big companies is recent. "In the past, they have been lax," he said.

Within Iran, at least two major Western companies -- one consumer-electronics manufacturer and one auto company -- also have postponed contracts aimed at building plants in Iran until at least April, said Tehran-based consultant Cyrus Razzaghi. He declined to name the clients involved.

"It is not a friendly investment environment considering the political risks and the seeming lack of interest by the government in attracting foreign investment," he said.

European businesses have been retreating particularly since Iranian President Mahmoud Ahmadinejad's statements last fall questioning whether the Holocaust occurred and calling for the destruction of Israel. "That hurt them in Europe incredibly," said sanctions expert Mike Beck, a researcher at the University of Georgia. "There are real financial and economic consequences for those kinds of actions, and this illustrates that."

Another incentive for firms to get out is coming from the U.S. Justice Department. Federal prosecutors have several wide-ranging sanctions inquiries under way, according to lawyers, executives and legal and securities filings, involving compliance with U.S. sanctions against Iran, Iraq, Libya, Sudan and Cuba.

They are investigating whether European banks that do heavy business in the Middle East and have branches in New York complied with U.S. sanctions on Iran and other countries, as well as with U.S. government prohibitions on specific individuals and companies designated by the Treasury Department as involved in terrorism or other illegal activity, people familiar with the matter said. The Justice Department declined to comment. Foreign banks can run afoul of U.S. sanctions laws if they use their U.S. offices or American employees to carry out transactions involving companies from Iran or other prohibited states, though there are technical exceptions.

The Justice Department is also investigating Halliburton for possible violation of sanctions against Iran, the company said in its securities filings, while Baker Hughes said it is the subject of a separate inquiry into possible bribery overseas. U.S. firms are generally prohibited from doing business with Iran, but there are exceptions, such as if they use offshore subsidiaries that are legally independent of the parent company.

Pressure on many companies has been growing since 2004, when the chairman of the Senate Finance Committee, Iowa Republican Charles Grassley, wrote the Treasury Department seeking an investigation into reports that GE, Halliburton and ConocoPhillips were doing business in Iran in possible violation of sanctions. Treasury is in charge of civil enforcement of such violations and refers possible criminal violations to the Justice Department.

Robert Werner, director of Treasury's Office of Foreign Assets Compliance, declined to comment on whether his office had referred any of the firms to the Justice Department for criminal investigation but said it is clear that firms need to beef up their compliance programs, which are "essential to ensuring comprehensive implementation of U.S. economic sanctions and ensuring that companies and individuals, either wittingly or unwittingly, don't facilitate prohibited transactions with embargoed countries."

The only bank publicly identified as a subject of the Justice Department probe is ABN Amro, which last month acknowledged improper transactions with Iran through its branch in Dubai, United Arab Emirates, and agreed to $80 million in fines for the violations and other lapses. But people familiar with the inquiry say it also involves other European banks that operate in the region and have recently had problems with U.S. regulators: UBS of Switzerland, HSBC and Standard Chartered of the United Kingdom and BNP Paribas of France. The four banks have previously come under investigation by U.S. bank regulators for possible money-laundering compliance lapses.

The Justice Department sanctions-compliance inquiry grew out of those cases, according to people close to the banks involved, and some of those banks that were being examined by regulators now also face Justice Department scrutiny.

Both UBS and Credit Suisse announced a week ago that they are reducing their exposure to Iran. UBS, which was fined $100 million in May 2004 by the Federal Reserve for illegal transactions with Iran, Libya, Cuba and Yugoslavia, said it is shedding all its existing customers in Iran. "The decision was taken after carefully weighing the costs, benefits and opportunities of doing business with Iran," a spokesman said. Credit Suisse -- which hasn't had any recent U.S. regulatory problems -- said it has stopped taking new business in both Iran and Syria. Spokesmen for the two banks said that the decision was based on risk analysis and that the banks haven't received any investigative demands from the U.S. government.

In June 2004, the Treasury Department's acting inspector general said in congressional testimony that his office discovered in a spot check that at least 17 major financial institutions operating in the U.S. weren't using software programs designed to help them comply with sanctions.

HSBC agreed to a settlement with U.S. regulators in 2003 regarding lapses in its money-laundering compliance programs. A spokesman for the bank in London declined to comment except to say that "no official notification or request has been received" from any government investigators. HSBC's Middle Eastern operations include an office in Tehran that acts as a liaison point for customers. The spokesman said the bank has no plans to close the office but that it will monitor developments closely.

Standard Chartered said it runs a franchise in Tehran for corporate and institutional clients, providing such services as trade finance and cash management. A spokesman said the bank will maintain the office. He declined further comment. In 2004, Standard Chartered reached an agreement with the Federal Reserve to improve the way its New York office complies with U.S. money-laundering laws.

In the case of BNP Paribas, the sanctions inquiry is related in part to the investigation into the U.N. oil-for-food program for Iraq as well as to a 2003-04 Federal Reserve investigation of the bank. In November 2004, The Wall Street Journal reported that the Federal Reserve had found "deficiencies" in BNP's money-laundering and correspondent-banking compliance practices but settled the matter administratively. A spokeswoman for the bank said she wasn't aware of the inquiry and that the bank has upgraded its compliance practices.

--David Crawford, Marc Champion, Edward Taylor and Carrick Mollenkamp contributed to this article.

Write to Glenn R. Simpson at glenn.simpson@wsj.com