Why Sanctions Against Iran Aren’t Working

It’s been nearly a year since the United States and its allies strengthened economic sanctions against Iran in an effort to force the Islamic Republic to abandon its nuclear weapons program. Thus far, these measures have yielded positive results. Yet problems remain.

Many banks around the world continue to do business with Iranian financial institutions that are complicit in supporting terrorist groups and spreading nuclear weapons. And branches of these designated banks continue to operate throughout some of the world’s financial capitals. Sanctions are a legitimately effective way to peacefully force Iran’s hand. But unless the international community cracks down on designated Iranian banks, the sanctions regime—however promising it may seem—will ultimately fail.

The reason that sanctions can work is simple: Iran needs money. Without hard currency, the country will find it far more difficult to support terrorist groups, incite violence, and develop nuclear weapons. Accordingly, the United Nations, the European Union, and the United States have taken steps to isolate Iranian banks that are suspected of funding such activities via the international financial system.

The United States in particular has cracked down hard. Thanks to recent legislation, all international banks operating in the states must choose between the American financial market and its Iranian counterpart. Banks that choose to do business with sanctioned Iranian institutions face serious punishment: The Justice Department can close down any branches they maintain on American soil or force a sale of all their US assets, among other things. Since 2006, the US has blacklisted 20 Iranian banks.

Elsewhere around the world, more than 80 financial institutions—including Credit Suisse and Deutsche Bank—have reportedly completely cut off or significantly reduced their relationship with the Islamic Republic. More specifically, major international financial institutions that once provided credit lines to Iran’s commodities industry have reportedly stopped. In particular, Iran is finding it increasingly difficult to get banks to process oil and gas payments, which represent about 80 percent of the Islamic Republic’s export revenue.

Unfortunately, many banks continue to do business with Tehran’s illicit financial industry, and this undermines the sanctions effort. Many of Iran’s designated banks, including those named by the United Nations and the European Union, have a number of branches in countries such as China, Russia, Italy, South Korea, France, Iraq, Lebanon, the United Arab Emirates, among others. Indeed, some of America’s closest allies have publicly claimed their support for sanctions, while at the same time, allowed the Iranian regime free access to hard currency and the international financial sector.

Quietly, European policymakers have said that designated branches can continue to operate in their jurisdictions as long as the transactions relate to contracts signed prior to the UN designation. No new business is allowed, not even “getting new phone lines.” Yet in practice, this loophole allows Iranian banks to maintain their business licenses in Europe, and continue to operate as they did before. In other words, as long as Iran signed a contract with a European company the day before UN sanctions were enacted, European officials are willing to look the other way.

Going forward, these policymakers need to close the loopholes that enable the branches of designated Iranian banks to provide illicit actors the means to conduct their activities, maintain their infrastructure and carry out their operations. Iran has yet to develop a nuclear weapon, but experts agree that sanctions have thus far only delayed their efforts, not subsumed their ambitions. Nuclear proliferation is one of the most serious public policy challenges we will face in the foreseeable future. Sanctions can still work, but the clock is ticking.