UK bans banking links to Iran over nuclear ‘threats’

All British credit and financial institutions had to cease trading with Iran’s banks from yesterday afternoon, following an announcement from Chancellor George Osborne.

“We believe the Iranian regime’s actions pose a significant threat to the UK’s national security and the international community,” he said. “Today’s announcement is a further step to preventing the regime from acquiring nuclear weapons.”

The move by the UK – the first use of new counter-terrorism powers to cut off an entire nation’s banking sector – is part of a wider international effort involving the US and Canada. It is likely to have an impact on UK banks, including Edinburgh-based Royal Bank of Scotland - which was fined last year for violating US regulations against Iran through business acquired with ABN Amro – and Lloyds Banking Group.

In January this year, RBS withdrew a bank account from the London bureau of the Iranian broadcaster Press TV. RBS last night declined to comment on the latest move.

Lloyds Banking Group was fined $350 million (£224m) just months earlier by the US authorities on similar charges that it faked records so that clients from sanctioned countries, including Iran, could do business within America. This was thought to have taken place in the years before the Lloyds TSB takeover of Bank of Scotland.

The bank was last night understood to be taking immediate steps to comply with the new ruling. “We are committed to running our business with the highest level of integrity and complying with our legal and regulatory obligations across the areas of our operation,” said a spokeswoman.

Diplomatic tensions were significantly raised last week by the latest assessment by the United Nations’ watchdog. The International Atomic Energy Agency (IAEA) concluded that some alleged undercover nuclear activities could only relate to weapons production.

Tehran angrily denies that its programme is designed to produced anything but civil nuclear fuel, but it faces mounting international pressure over concerns about nuclear weapons.

Foreign Secretary William Hague refused earlier to rule out possible military action in future if the stand-off continues.

Under the terms of the crackdown announced yesterday, all UK credit and financial institutions are required “to cease business relationships and transactions with all Iranian banks, including the Central Bank of Iran, and their branches and subsidiaries”.

The Treasury said banks played a “crucial role” in facilitating Iran’s nuclear programme and denying access to London would strike a blow at Tehran’s ambitions. However, it is believed that the sanctions will not target trade in Iranian oil.

It would also prevent UK institutions being “unknowingly used by Iranian banks for proliferation-related transactions”, a spokesman said.

Mr Osborne said: “I have today taken action to impose further financial restrictions against Iran. This follows the International Atomic Energy Agency’s report uncovering evidence of Iran’s development of nuclear weapons technology.

“It is also a response to calls from the Financial Action Task Force for countries to strengthen safeguards to protect their financial sectors from money laundering and financing of terrorism risks emanating from Iran.”

Mr Hague said: “The IAEA’s report last week provided further credible and detailed evidence about the possible military dimensions of the Iranian nuclear programme. Today, we have responded resolutely by introducing a set of new sanctions that prohibit all business with Iranian banks.

“We have consistently made clear that until Iran engages meaningfully, it will find itself under increasing pressure from the international community. The swift and decisive action today co-ordinated with key international partners is a strong signal of determination to intensify this pressure.”

Henry Smith, Middle East analyst at the Control Risks consultancy in London, said the British move may not significantly affect Iran’s major oil customers. “It essentially delegitimises the country’s financial system but, in reality, it may not make that much practical difference,” he said.

The Chinese, Indians and others will continue to engage, while many western multinationals have already pulled out.”

The powers invoked by the Chancellor were introduced as part of the Counter-Terrorism Act 2008 and allow action where it has been called for by the Financial Action Task Force – an international body concerned with combating money laundering and the financing of terrorism. In a report last month, the FATF said there was “renewed urgency” behind its call for action against Iran because of its “failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system”.

In Washington, meanwhile, the Treasury department is planning to designate Iran as an area of “primary money laundering concern”, a move allowing it to take steps to isolate the Iranian financial sector further. However, it is thought unlikely that the US would cut off the Iranian banking system entirely, a move that could disrupt global energy markets and harm the US economic recovery.